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About the Industry
The shale revolution has substantially increased natural gas production. Its clean-burning nature has steadily boosted the demand for natural gas from all customer groups. Natural gas distribution pipelines are vital in delivering natural gas from intrastate and interstate transmission pipelines to consumers through small-diameter pipelines. The United States has 3,353 trillion cubic feet of natural gas and a natural gas pipeline network of 2.5 million miles is utilized to distribute gas to customers. Major concerns for the industry are aging infrastructure and rising investment costs required to upgrade and maintain the vast network of pipelines due to the hike in interest rates. Competition from other clean energy sources can lower the demand for natural gas and, consequently, for pipelines.
3 Key Trends Reshaping the Gas Distribution Industry
Increasing Competition From Other Clean Sources: Natural gas is facing tough competition from other clean energy sources. Courtesy of the usage of new technology, setting up utility-scale renewable energy projects is becoming much cheaper than before. Battery storage projects are directly addressing the intermittency of renewable sources and ensuring a reliable and stable supply of 24x7 clean energy. With renewables becoming more affordable and on-site generation minimizing reliance on long-distance gas pipeline infrastructure, investments in new pipelines face rising economic risks.
Aging Infrastructure Creates Challenges in Operations: The U.S. natural gas distribution industry continues to struggle with aging infrastructure, with many old pipelines still in operation, which are nearing the end of their effective service life. Even with ongoing upgrades and system expansion, millions of miles of pipelines still require maintenance, raising concerns about safety, methane leaks and overall system reliability. The leaks in pipelines are resulting in service disruptions, creating safety hazards and leading to higher maintenance costs.
Interest Rate Decline Is a Tailwind: To maintain, upgrade and expand operations, utilities approach capital markets for loans. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, adversely impacting utility operators. The U.S. Federal Reserve has gradually lowered the benchmark rate by 175 basis points, bringing down rates to a range of 3.50-3.75%. The Federal Reserve is expected to lower interest rates further in 2026. The capital-intensive domestic-focused utilities will benefit from the Fed’s decision to reduce interest rates. The drop in interest rates is a big positive for utility operators planning large investments in infrastructure upgrades.
Zacks Industry Rank Indicates Dull Near-Term Prospects
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The Zacks Utility Gas Distribution industry — a 14-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #149, which places it in the bottom 38% of the 243 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Since Dec. 31, 2024, earnings estimates for 2025 have moved down 7.7%.
Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.
Gas Distribution Industry Lags the S&P 500 and the Sector
The Gas Distribution industry has outperformed the Zacks S&P 500 composite and its sector over the past year. The stocks in this industry have gained 8.5% in the said time frame compared with the Utility sector’s growth of 14.5%. The Zacks S&P 500 composite has gained 16.1% in the same time frame.
Gas Distribution Industry Trading at a Discount
Since utility companies have a lot of debt on their balance sheets, the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio is commonly used to value them.
The industry is trading at a trailing 12-month EV/EBITDA of 10.35X compared with the Zacks S&P 500 composite’s 18.77X and the sector’s 15.27X.
Over the past five years, the industry has traded at a high of 12.41X and a low of 9.55X, with a median of 10.91X.
3 Gas Distribution Stocks to Add Amid Weakness in the Industry
All three natural gas distribution stocks mentioned below currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy invested $3.6 billion in fiscal 2025 and plans to invest $3.6 billion in fiscal 2026 to strengthen its infrastructure further and efficiently serve more customers. The company continues to replace old pipelines and provide reliable services to its expanding customer base.
The current dividend yield is 2.4% better than the Zacks S&P 500 composite’s yield of 1.41%. Long-term (three to five years) earnings growth is currently pegged at 7.98%. The Zacks Consensus Estimate for ATO’s fiscal 2026 and 2027 earnings has moved up 1.78% and 1.18%, respectively, over the past 60 days.
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Brookfield Infrastructure Corporation: This New York-based company supplies natural gas and electricity to its customers and frequently enters into agreements to pursue new growth opportunities. It signed a $5 billion deal with Bloom Energy to develop data center power solutions and formed a $20 billion partnership with Qai to support integrated AI facilities.
The current dividend yield is 3.68%. The Zacks Consensus Estimate for BIPC’s 2025 and 2026 earnings has moved up 156.09% and 258.43%, respectively, over the past 60 days.
Spire Inc.: This St. Louis, MO-based natural gas company continues to expand business organically via making systematic investments to expand infrastructure and advance through innovation. Spire invested $922 million in fiscal 2025 and plans to spend about $809 million in fiscal 2026 in the different regions it operates. The fiscal 2026 capital expenditure plan includes $535 million for Missouri, $170 million for Alabama, Gulf and Mississippi, $90 million for Tennessee and $14 million for Midstream.
The current dividend yield is 3.82%. Long-term earnings growth is currently pegged at 10.54%. The Zacks Consensus Estimate for SR’s fiscal 2026 and 2027 earnings has moved up 4.77% and 4.27%, respectively, over the past 60 days.
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This article originally published on Zacks Investment Research (zacks.com).
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