Gas utility stock outlook for 2024 improves after Q4 2023 rally

Gas distributor stocks snapped a two-quarter losing streak in the final months of 2023, rebounding as inflation eased and bond yields backed off multiyear highs that crushed the utilities sector.

A basket of eight gas distributor stocks selected by S&P Global Commodity Insights was up 5.8% during the fourth quarter of 2023, trailing a 7.6% gain for the S&P 500 Utilities sector. The select gas utilities index still declined 9.1% in 2023, having posted steep losses in the middle months of the year.

The easing headwinds and attractive valuations for gas utilities put the subsector in a good position heading into 2024, market watchers said. However, the companies still face sector-specific challenges that could create winners and losers in the New Year, they said.

"With inflation and elevated interest rate environment mostly in the rear-view mirror, macro events are expected to play a lesser role in 2024," Nasdaq IR senior analyst Massud Ghaussy told Commodity Insights. "As a result, 2024 is expected to be the year of stock picking in the sector, with a focus on regulatory jurisdictions and equity financing needs as top of mind for investors."

Bleak outlook turns rosy

The outlook was bleak at the start of the fourth quarter. Equities were in freefall, battered by expectations that strong economic data would prompt the US Federal Reserve to keep interest rates high. In October 2023, the US 10-year Treasury yield breached 5% for the first time since 2007.

Making matters worse, NextEra Energy Partners rattled investors by lowering a key growth metric at the end of September 2023.

But signs of disinflation and a cooling labor market sparked a reversal in November 2023, boosting stocks and sending the 10-year Treasury yield spiraling back down to end the year at 3.8%.



"That's about as quick a 100-basis-point-plus move in rates as I feel like I've ever seen before," Reaves Asset Management CEO Jay Rhame told Commodity Insights. "Utilities have tended to be one of the two or three best-performing sectors from the time a rate hike cycle ends."

The market now expects the Fed to begin cutting rates in March, following 11 increases since 2022 aimed at taming inflation. The rate hike cycle contributed to utilities posting the worst performance among the S&P 500's 11 sectors in 2023.

Laggards make headway during rally

The gas utility subsector's worst performers were among the biggest gainers during the recent rally.

UGI Corp.'s stock price has surged 19.2% since US inflation data sparked a rally on Nov. 14, 2023. The gains accelerated after UGI announced a CEO transition following a tumultuous period for the mid-Atlantic gas distributor. The stock posted its first quarterly gain in a year but remained the group's worst performer in 2023.

Chesapeake Utilities Corp. and Northwest Natural Holding Co. were also big gainers during the rally but remained among the subsector's weakest 2023 performers.



Spire Inc. and New Jersey Resources Corp. saw strong gains during the rally and the full quarter, but their share prices remained firmly underwater in 2023.

The year's top performer, Atmos Energy Corp., posted the group's weakest gain since Nov. 14, 2023. The rally helped Southwest Gas Holdings Inc. log the select gas utility group's only other positive year-to-date performance.

Only One Gas Inc. ended the quarter in the red. The Tulsa, Okla.-based company recently issued disappointing earnings guidance, saying it would continue to absorb near-term costs to capture growth opportunities.

Valuations look attractive

Utility stock price valuations are now historically low, hovering around 14x to 15x price-to-earnings ratios, fund managers noted.

In 2023, eight technology stocks largely accounted for the S&P 500's performance through the first three quarters, fueled by speculative trading around artificial intelligence.

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A series of adverse regulatory outcomes for Illinois gas and electric utilities in December 2023 also created some drag on the sector's stock price rally, market watchers said.

Rhame called the Illinois Commerce Commission rulings "disastrous" but said it is normal for unfavorable rate cases to periodically shake confidence in the sector. He too saw 2024 as a year for stock picking.

"Whether or not we still have inflation, the memories of inflation, I think, last for a long time," he said. "Every rate increase is going to be scrutinized."