Gas prices in the US recently arrived a 14-year high as we hit ongoing inflation and the war in Ukraine. With these catalysts not likely to recede anytime soon, natural gas prices could remain high at levels not seen since 2008. Here are three stocks related to natural gas exploration, production and distribution, as well as the payment high dividends to the shareholders.
The No. 1: ONE Gas
ONE Gas Inc. (OGS) is one of the largest publicly traded natural gas utilities in the United States. The company provides natural gas distribution services to approximately 2.2 million customers. ONE Gas is the largest natural gas distributor in Oklahoma (with 88% market share) and Kansas (with 72% market share) and the third largest in Texas (with 13% market share). His clients are residential, commercial and transportation related in all three states. The company generates approximately $1.8 billion in annual revenue and is headquartered in Tulsa, Oklahoma.
The company is performing well in 2022, largely thanks to strong interest rate activity. In the most recent quarter, revenue was $429 million, up 35.9% year over year. Once again, demand for natural gas remained elevated while the company achieved customer growth, which, along with higher rates, resulted in improved performance.
Operating income was $58.6 million compared to $51.1 million in the same period last year due to a $14.4 million increase in interest rates and a $1.5 million increase in residential sales due to net customer growth in Oklahoma and Texas. These increases were partially offset by a $5.8 million increase in external service costs. Accordingly, EPS became slightly stronger, rising from $0.56 to $0.59 year-over-year.
Management sees its ongoing positive momentum continuing this year. The company reiterated its previous outlook, which calls for fiscal 2022 EPS between $3.96 and $4.20.
With a projected dividend payout ratio of around 61% for 2022, the dividend looks extremely safe. The company has rapidly increased its dividend since it began quarterly payments in 2014. Management is targeting annual dividend growth of between 6% and 8% through 2025. Shares currently yield 3.0%.
A Garden of Opportunity: Kinder Morgan
Kinder Morgan (KMI) is one of the largest energy companies in the US. It is engaged in the storage and transportation of oil and natural gas and other products. It owns or operates approximately 83,000 miles of pipelines and 144 terminals. Its pipelines carry natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and more. Kinder Morgan’s vehicles operate like a toll road, where the company receives a fee for its services, which generally avoids commodity price risk. About 90% of Kinder Morgan’s cash flow is fee-based.
Kinder Morgan has significant network and economies of scale competitive advantages as one of the largest energy companies in the US and the largest transporter of natural gas, transporting approximately 40% of the natural gas used in the US
In the second quarter of 2022, net income attributable to KMI was $635 million, compared to a net loss of $757 million in the prior period. Distributable cash flow increased to $1.18 billion from $1.03 billion in the prior period. Adjusted earnings rose to $621 million from $516 million year over year. Revenue rose a significant 63.5% to $5.15 billion year over year.
For fiscal 2022, Kinder Morgan continues to expect net income attributable to KMI of $2.5 billion and reports dividends of $1.11 per share, distributable cash flow of $4.7 billion and adjusted EBITDA and $7.2 billion and targets for the end of 2022 with a net debt to adjusted EBITDA ratio of 4.3x.
Kinder Morgan’s biggest growth drivers for the future are new pipeline and terminal projects. Natural gas is quickly replacing coal, which gives Kinder Morgan a significant advantage. The company plans to continue investing in development projects and joint ventures in 2022 and expects to fully fund it with internally generated cash flow without the need to access capital markets.
The current level of dividend payout appears to be safe. Kinder Morgan deleveraged and the company received a credit rating upgrade from Standard & Poor’s and Moody’s. The company increased its dividend by 1.9% in 2021, and analysts expect a dividend of $1.11 per share in 2022. Shares currently yield 5.8%.
Salute to National Fuel Gas
National Fuel Gas Co. (NFG) is a diversified energy company operating in five business segments: exploration and production, pipelines and storage, gathering, sharing and energy marketing. The company’s largest division is exploration and production.
In the most recent quarter, revenue of $502.6 million was up 27% year over year. Adjusted earnings per share were $1.17 for the quarter, up 24% year over year. Management expects full-year adjusted EPS to be in the range of $5.85 to $5.95 per share. Adjusted EPS for fiscal 2023 is expected to be in the range of $7.25 to $7.75 per share, which represents an increase of 27% from fiscal 2022.
The company is pursuing growth by increasing natural gas production and expanding its pipeline network. Thanks to record production and the multi-year high price of natural gas, the company posted record profits in 2021 and has now grown its earnings per share at an average annual rate of 5.6% over the past decade. Even better, thanks to the continued rise in the price of natural gas, the company is poised to post record profits in 2022.
National Fuel Gas’ competitive advantage is the combination of regulated and stable businesses (such as pipelines and utilities) with cyclical and potentially higher growth sectors (such as exploration and production).
With 51 years of consecutive dividend increases, National Fuel Gas qualifies to be a dividend king. The current dividend is safe with an expected 2022 payout ratio of just ~30%, which leaves plenty of room for the company’s long dividend growth streak to continue. Shares currently yield 2.5%.
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