A sell-off in gas utility stocks accelerated after the midpoint of 2023 as headwinds continued to batter the sector.
A basket of eight gas utility stocks selected by S&P Global Commodity Insights plunged 11.8% in the third quarter of 2023. The group once again underperfomed the broader utilities sector and the market at large, outpacing a 10.1% slump for the S&P 500 Utilities sector and a 3.7% slide for the S&P 500.
The utilities sector struggled for a second consecutive quarter, dragged lower by continually rising interest rates and a "somewhat resilient economy" that suppressed investor appetite for defensive stocks, Nasdaq IR Intelligence senior analyst Massud Ghaussy told Commodity Insights. Additionally, investors continued to focus on large-cap growth stocks and sold off shares of clean energy-focused companies, he said.
"Treasury yields continued to climb to extend one of the sharpest rises in real yields in modern history," Ghaussy said.
Utility stock inflows from long-only funds were muted during the latter part of the third quarter, according to Nasdaq Investor Flows data. Meanwhile, the sector got little support across investor classes to offset short trading or bets that stock prices will fall, Ghaussy said.
Pendulum swings for gas utilities
The Hennessy Gas Utility Fund has had more outflows than inflows in 2023, Hennessy Funds Chief Investment Officer Ryan Kelley said. This was a shift from 2022, when investors shed tech and growth stocks, and utilities outperformed other sectors, he said.
"I think we're in a period now where it's all about the macro," Kelley said. "With rates where they are, that certainly, on a relative basis, just makes gas utilities less attractive, even though most of them continue to have nice, strong dividends and continue to raise them year over year."
Over the long term, dividends generate about one-third of the total return from the Hennessy Gas Utility Fund and utility stocks in general, Kelley noted. However, with inflation remaining persistent in the near term, it could take longer to secure approval to pass costs on to ratepayers, potentially slowing dividend growth, he said.
Utilities now look inexpensive compared to other stocks, but they are still struggling to compete for capital against other low-risk, yield-oriented asset classes, Ghuassy said. The gap between utility dividend yields, which were sitting slightly above 3.5%, and the 30-year US Treasury at about 4.7% has only widened, meaning conditions for a sector sell-off remain in place, he said.
Stock price slide accelerates
Gas distributors came under renewed selling pressure at the end of the quarter, as rising bond yields broadly hammered stock prices. Meanwhile, NextEra Energy Partners rattled investors by lowering a key growth metric as high interest rates created financing hurdles for the limited partnership formed by utility operator NextEra Energy Inc. to house its clean energy projects.
The select gas utilities index is down 17.3% in 2023, compared to an 11.7% gain for the S&P 500.
Chesapeake Utilities Corp. led the gas utility group's third-quarter declines, with the stock turning sharply lower after the company announced it would purchase NextEra subsidiary Florida City Gas for $923 million, more than doubling its Florida gas distribution operations. Share prices typically fall after companies announce acquisitions.
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UGI Corp. posted another large quarterly stock price decline, despite a bump after the Pennsylvania-based gas distributor announced a strategic review focused on its troubled propane business.
Shares of New Jersey Resources Corp., Northwest Natural Holding Co., One Gas Inc. and Spire Inc. also saw double-digit percentage declines as selling accelerated at the end of the quarter. Only Atmos Energy Corp. and Southwest Gas Holdings Inc. avoided such steep losses.
Southwest Gas's relative share price performance within the group has steadily improved in 2023. The company reversed a long stretch of weak earnings and moved toward spinning off its utility infrastructure construction business. It had posted the group's worst performance in the second half of 2022.
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