Gas utility stocks suffer outflows as interest rates sideline large investors

Large investors were bigger sellers than buyers of gas utility stocks in the third quarter of 2023, reflecting a broader rout for the subsector.

Four out of eight gas utility operators selected by S&P Global Commodity Insights saw net inflows from institutional investors during the period, according to a review of 13F filings. But among those companies, buying was relatively tepid, while selling was more robust among gas utilities that saw net outflows.

Gas utility stocks struggled to compete for capital in 2023 as rising interest rates made the assets less attractive than other low-risk, dividend-yielding investments and created financing challenges for a subsector dependent on borrowing to fund capital projects.

"As per Nasdaq Investor Flows, long only inflows were muted especially during the latter half of the quarter as investors were sidelined during the sell-off," Nasdaq IR Intelligence senior analyst Massud Ghaussy told Commodity Insights at the end of the third quarter. "Flows from income, dividend, value and yield investors remained very limited."

Spire leads inflows, setting up stock price rebound

Spire Inc. was the only constituent that attracted net inflows greater than 1 million shares from institutional investors during the quarter. Large investors increased their collective stake in the St. Louis-based gas distributor by 2.2 million shares.

The third-quarter buying set up a rebound for Spire, which has gained 12% in the fourth quarter, outpacing its peers to become the group's third-best year-to-date performer.

Spire had trailed all but two of the constituents' year-to-date performance as of Sept. 29. At the end of the third quarter, Mizuho Securities USA analyst Gabriel Moreen upgraded the stock, saying "its relative underperformance seems overdone and valuation has reached attractive levels."

Northwest Natural Holding Co., which largely traded in line with Spire in the middle of 2023, garnered the group's second-largest net inflows in the third quarter: nearly 555,000 shares.

The third-largest net inflows — nearly 255,000 shares — went to large-cap gas utility operator Atmos Energy Corp., which typically sits near the top of the list and boasts the group's best year-to-date share performance.

Chesapeake Utilities Corp. also finished the third quarter in positive territory with net inflows of 163,000 shares, though it posted the group's worst quarterly stock price performance.

Gas utilities lose hedge fund backstop

The hedge funds that backstopped gas utility stocks in the second quarter did not provide much support during the following three months.

Israel Englander's Millennium Management LLC was the top buyer for both Chesapeake Utilities and New Jersey Resources Corp., which saw total net outflows of 1.9 million shares. But the hedge fund's largest third-quarter gas utility purchase was nearly 2.4 million shares of UGI Corp.

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UGI, by far the group's worst stock price performer in 2023, also counted Steven Cohen's Point72 Asset Management LP, D.E. Shaw & Co. LP, and energy- and utility-focused Covalis Capital LLP among its buyers. But the hedge fund purchases could not offset large outflows from investment giants such as State Street Global Advisors Inc. and BlackRock Inc.

UGI ended the quarter with total net outflows of nearly 1.1 million shares among institutional investors. Its stock is down 38.7% in 2023.

Southwest Gas Holdings Inc. posted the group's smallest net outflows — about 496,000 shares — despite Keith Meister's Corvex Management LP purchasing a net 1.4 million shares during the third quarter.

In October, Meister revealed a 5.8% stake in the company. He said he intended to push for changes at the Las Vegas-based gas distributor, where his mentor Carl Icahn has installed four board members to oversee the company's business optimization plan.

One Gas Inc. rounded out the group with net outflows of almost 1.1 million shares. The stock has lagged peers over the last six months with One Gas facing financing and earnings headwinds as it invests in growing service territories.

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