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Gas Natural (EGAS) is a small-cap regulated natural gas utility focused on expansion into areas where gas has historically been underutilized. The company's service territory includes Montana, Wyoming, Ohio, Pennsylvania, North Carolina, and Maine. In addition, the company operates a gathering and interstate pipeline in Wyoming, and has interest in 160 natural gas wells. First quarter results were reported this week, and the company continues to grow income at a double digit rate.
Below is listed operating profit by utility area compared with 1st qtr 2010, along with year over year (y-o-y) growth:
By Segment and Service Area
The components of net income for 2011 and 2010 are:
Three Months Ended March 31,
($ in thousands)
2011
2010 % Y-O-Y
Natural Gas Operations
Energy West Montana (MT)
$
864
$
932 -7.2%
Energy West Wyoming (WY)
315
258 +22.1%
Frontier Natural Gas (NC)
663
644 +2.9%
Bangor Gas (ME)
868
491 +76.7%
Ohio Companies (OH)
1,549
1,407 +10.0%
Total Natural Gas Operations
$
4,259
$
3,732 +14.1%
Marketing & Production Operations
86
-79 N/A
Pipeline Operations
37
36 +2.0%
4,382
3,689 +18.7%
Corporate & Other
-107
-26
Consolidated Net Income
$
4,275
$
3,663 +16.7%
Gross income increased 18% y-o-y, with net income rising by 14%. Gross margins increased to 51% from 49% y-o-y. Driving this growth was an increase in natural gas volumes of 14.7%. While income was up, earnings per share declined to $0.52 from $0.62 in the corresponding quarter last year. Secondary offerings last year increased share count by 2.2 million shares to 8.4 million shares outstanding, diluting earnings per share.
On April 8, EGAS announced the acquisition of 140 miles of pipelines that stretch from Marion, OH., to Youngstown, OH., from Marathon Pipeline LLC, a subsidiary of Marathon Oil. The company’s indirect subsidiary, Spelman Pipeline Holdings, LLC will be the owner/operator of the pipeline. Spelman is a subsidiary of Lightning Pipeline, which is an intermediate holding company of Orwell Natural Gas, which is 100% owned by Gas Natural. In addition to the pipeline, 60 miles of right of way around Louisville, KY., and other assets in Cleveland, were also included in the purchase. The pipeline is currently dormant and had been used to transport gasoline and oil products.
The purchase price was $3.4 million in cash, and there will be an estimated $2.4 million in capital expenditures to recondition and to convert the pipeline to natural gas. It is anticipated the pipeline will be operational by the end of the year. This pipeline will help connect the eastern and western portions of EGAS’s Ohio service area. In addition, long range planning includes extending the line to accept natural gas from the Marcellus and Utica shale fields. The conversion of the pipeline to natural gas will aid in expanding new regulated service to areas that currently lack natural gas pipeline infrastructure.
While a seeming small acquisition, the price certainly is right. Including the cost to convert to natural gas, total investment by EGAS should be in the $5.8 million range. This compares very favorably with the cost to build a new pipeline, which is estimated at between $30,000 and $50,000 per mile per inch of pipeline diameter.
Gas Natural is the smallest publicly traded natural gas utility by market capitalization, and as such has a limited following on the Street. Institutional investors control only 13% of outstanding shares, and insiders, mainly Mr. Richard Osborne, CEO, own about 15%.
The current yield of 4.8% is above the average yield for gas utilities. The annual dividend of $0.54 is paid monthly. EGAS is trading at $11.32 a share for a forward 2011 PE ratio of 14 based on earning $0.80 per share, or about its growth rate. While not particularly undervalued at its current price, Gas Natural’s growth potential far outstrips its peers. A fair price target over the next two years should be in the $14 range for a total stock return of at least 16% annually.
Previous Gas Natural articles can be found here: and here.
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.
Source: Gas Natural: Smallest Gas Utility Growing by Leaps and Bounds