Gas Natural: Small Cap Roll-Up Utility Paying Monthly Dividends

Apr. 6.11 | About: Gas Natural (EGAS)
Gas Natural (EGAS - $11.68) announced their full-year, 2010 results and growth is still on the table. Although share count increased by 43% to 6.3 million shares, earnings per share before 2009’s positive tax credits were down only slightly at $0.92 a share. Annual dividends paid last year were $0.54 a share, and are paid monthly.
Gas Natural provides regulated natural gas service in Montana, Wyoming, Northern Ohio, Western Pennsylvania, Maine, and North Carolina. Gas Natural has increased their customer count to 63,000 through acquiring small, local gas utilities such as its Ohio purchases that added 25,000 customers. Management prefers to add geographic areas where natural gas market penetration is below the national average of over 50%.
Natural gas operations generated 95% of 2010 operating net income, with 3% from a gathering and interstate gas pipeline and 2% from natural gas marketing and production. Gas Natural has interest in over 100 wells in the West.
Driven by the Ohio acquisition made in Jan 2010, net income before the 2009 tax credit rose by 32%. Organic growth was strongest in the natural gas market of Maine and the propane oriented market in North Carolina, but these are two of their smaller assets.
Maine could offer an interesting growth platform as regulated natural gas prices can be set at parity with competitive heating oil. The higher margins potentially available could be used to fund an expansion of service. Maine’s natural gas market penetration for residential heating is less than 2%, creating the opportunity for steady growth. The Northeast has historically been a heating oil market, but natural gas has been making consistent inroads due to cost advantages.
In 2010, the company raised $18 million net through secondary offerings. After paying down $8 million in debt associated with the Ohio purchase, the company sits on $13 million in cash. In November, the company announced a refinancing of its $20 million current credit line, converting it to a single note payable in 2017 and adding a bit more to its cash position. This refinance should close shortly.
Market capitalization is currently $72 million and EGAS is one of the three smallest publicaly traded natural gas utilities. EGAS carries total liabilities of $64 million, with $25 million classified as long-term debt. After the pending refinance, long term debt will rise to about $44 million, and should be mostly offset by a decrease in short-term liabilities.
EGAS is covering about 35% of its $9 million in annual capital expenditure through operating cash flow. In 2010, operating cash flow was $6.7 million. However, after deducting $3.5 million in dividends due in 2011, there will be a shortfall funded by either a reduction in cash or more likely a bit higher debt.
Gas Natural pays a monthly dividend of $0.045 per share, or $0.54 annually, and represents a 61% payout ratio. Current share prices offer a 4.6% yield, above average for the regulated gas utility sector. EGAS does not offer a dividend reinvestment plan, but shares held at a broker should be eligible for their synthetic DRIP. Monthly reinvestments of dividends are a successful method of dollar cost averaging a position over time.
Share prices have been strong through the share dilution process of the last year. Share prices are up 13.3% over the past 12 months and 11.1% year to date. Even after major insider selling last year (the CEO reduced his personal holdings from 40% to about 13%) management owns about 15% of shares, which is high in the utility sector. Institutions own 13% of outstanding shares, which is quite low for the sector.
3-year EGAS chart with 50 day and 200 day moving averages (click to enlarge):
Click to enlarge
It shouldn’t be unreasonable to expect 10% earnings growth going forward, not including accretive acquisitions. Earnings per share could grow to the $1.10 to $1.20 range. Dividends might not be raised until the payout ratio falls to below 50%. If management continues to acquire small utilities that are accretive to earnings, share prices of $14 to $15 should also be a reasonable 12.5 times earnings. For long-term investors, annual total stock returns could conservatively be in the 14% to 16% range.
Investors looking for monthly dividends supported by a relatively low payout ratio, who are willing to accept the risk of a small-cap stock, should consider Gas Natural. As I wrote in an article last November, keep an eye on Gas Natural’s cash balance and earnings over the next few quarters. A growth spurt may be right around the corner. With a low share count, relatively strong share prices, and a bit of free cash, management is well positioned to make another acquisition, adding to its customer count and future earnings.
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.

Disclosure: I am long EGAS. Author has been a shareholder since 2008.