For gas utilities, 2023 at the midyear point has shaped up to be a tale of two quarters.
A basket of eight gas utility stocks selected by S&P Global Commodity Insights fell 5.3% in value in the second quarter, reversing a 10% rally during the prior six months. Just two of the eight stocks in the select gas utilities index posted a stock price gain during the second quarter. The group's stock performance in the quarter contributed to a 2.5% decline in value in the first half of 2023.
Meanwhile, the S&P 500 surged 8.3% in the second quarter on the strength of a small group of technology and chips stocks. The S&P 500 Utilities sector underperformed the broader market, but it posted a shallower 3.3% loss than the gas utilities basket.
Market shift
"Defensive sectors took a back seat in [the second quarter] as the economic backdrop improved," Nasdaq IR Intelligence senior analyst Massud Ghaussy told Commodity Insights. "Euphoria around artificial intelligence pumped mega cap growth stocks, and capital within equities shifted aggressively towards large cap growth stocks."
With inflation moderating, year-to-date stock performance reverted to the mean during the quarter, Ghaussy said. The tight jobs market and a decline in recession concerns allowed the US Federal Reserve to keep interest rates higher for longer, pushing up the US 10-year Treasury yield and creating stronger headwinds for the dividend-yielding utilities sector, he said.
The utility sector looked inexpensive compared to the S&P 500 during the quarter, but it remained pricey relative to other yield measures, Ghaussy said. The S&P 500 Utilities sector dividend yield remained below the US 30-year Treasury yield, an anomaly that has historically triggered a sell-off in the sector, Ghaussy said.
Different tracks
Atmos Energy Corp., the sole large cap stock in the select gas utilities index, fared best among the group during the quarter. However, Southwest Gas Holdings Inc. posted the largest stock price increase following its quarterly earnings report, gaining 14% between its May 9 release and the end of the quarter.
Southwest Gas posted its eighth straight year-over-year EPS decline, but it easily beat Wall Street's expectations for the first quarter of 2023. Among the eight gas utility operators, Southwest Gas saw the largest net stock purchases by institutional investors during the first quarter. Activist investor Carl Icahn, who pushed Southwest Gas to optimize its gas utility and sell midstream assets, led the buying.
At the opposite end of the spectrum, shares of UGI Corp. plunged after the company lowered its 2023 EPS guidance May 3, deepening its 2023 stock price decline. Shares were down 27.3% in the first half of the year.
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Ongoing headwinds in UGI's AmeriGas Inc. subsidiary have weighed on earnings, but executives said the propane delivery business remained a cash engine capable of underwriting gas utility and midstream growth.
Mizuho Securities USA analyst Gabriel Moreen saw few catalysts capable of quickly reversing AmeriGas' challenges, which in his view may have become entrenched structural issues. Rather than throwing off cash, AmeriGas was consuming corporate resources to ensure that the subsidiary remains in compliance with its debt covenants, Moreen said in a June 21 research note. That is likely to continue as AmeriGas aims to reverse customer attrition and take advantage of acquisition opportunities, he said.
New Jersey Resources Corp. swung to a steep stock price drop in the second quarter after posting the group's second-best performance in the prior quarter. Shares of first-quarter laggards Northwest Natural Holding Co. and Spire Inc. also fell precipitously in the second quarter, while One Gas Inc. and Chesapeake Utilities Corp. posted smaller stock price declines, maintaining a relative outperformance within the basket.
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