Stock Analysis & Ideas

ONE Gas: Offering Predictable Performance During Uncertain Times

Story Highlights

ONE Gas benefits from increased demand for natural gas, predictable growth in base rates, and gradual customer growth. Amid foreseeable performance variables, ONE Gas’s management has been able to provide investors with extremely specific earnings per share and dividend per share growth trajectories. Considering the confidence attached to the stock’s investment case, dividend-growth and value-conscious investors are likely to find ONE Gas stock fitting their portfolios.

ONE Gas, Inc. (OGS) is among the ten biggest publicly traded natural gas utilities in the United States by market capitalization, currently valued at ~$4.8 billion.

The Oklahoma-based company provides natural gas distribution services to roughly 2.3 million customers through 41,600 miles of distribution mains and 2,400 miles of transmission pipelines. The company has 51.4 billion cubic feet of natural gas storage capacity.

In Particular, ONE Gas is the most prominent natural gas distributor in Oklahoma and Kansas and the third-largest in Texas. The company’s market share in terms of customer count in each of these states stands at 88%, 72%, and 13%, respectively. ONE Gas’s customer base comprises residential, commercial, and transportation-related consumers in all three states.

I am bullish on the stock.

Robust Growth Visibility

During the ongoing environment of increased uncertainty, investors have been flocking toward energy stocks amid the elevated commodity levels resulting from a shaky macroeconomic outlook.

Being a natural gas utility, ONE Gas doesn’t directly benefit from the skyrocketing natural gas prices, as the company is just a distributor and has to buy the gas to be distributed itself.

What’s attractive about ONE Gas, however, is that its distribution rates are determined by the regulatory authorities of each state, which have to provide utility companies such as ONE Gas the opportunity to earn a fair and reasonable return on their investments.

Remarkably, the company currently offers one of the most precise medium-term growth visibility pathways I have encountered. Amid very predictable rate hikes approved by regulators, the company has been able to provide incredibly narrow guidance estimates when it comes to its future profitability and dividend growth prospects.

Thus, investors can find comfort in ONE Gas’s investment case, whose results should show no unwelcome surprises over the next several years.

Specifically, management expects base rate increases between 8% and 9% through 2026. Combined with a gradually growing customer base, predictable natural gas consumption patterns, and pre-determined CapEx requirements, management’s medium-term guidance includes annual earnings per share growth between 6% and 8% through this period.

Supplemental investments and acquisitions of smaller competitors could further boost earnings per share moving forward, but let’s not speculate. Following such narrow earnings per share growth trajectory, management has also guided for dividend increases that will range between a similar pace, that of between 6% and 8%, proving a rather predictable capital return outlook as well.

Few companies can provide guidance that is so specific for such an extended period of time. This makes ONE Gas one of the most reliable companies when it comes to the course of its medium-term performance and the medium-term potential of total shareholder returns. The resilience of ONE Gas’s performance was once again demonstrated in its latest results.

Resilient Results, Strong Guidance 

ONE Gas’s Q1-2022 results came in quite strong, with the company recording $971.5 million in revenues, suggesting growth of 55.4% year-over-year. Revenues were boosted by robust demand for natural gas, modest customer growth, and elevated rates.

While operating expenses did increase notably as well, revenue growth was greater, allowing for notable operating income expansion. Specifically, operating income came in at $140.8 million compared to $130.3 million in the prior-year period.

The increase was driven by a $15.1 million boost in rates, mainly in Texas and Oklahoma, a $2.4 million drop in bad debt expense, and a $2.6 million gain attributed primarily to net residential customer growth.

Consequently, EPS came in modestly stronger as well, expanding from $1.79 to $1.83 year-over-year. With management seeing the present positive momentum prevailing throughout the year, their prior guidance was reiterated. The company projects FY-2022 EPS to land between $3.96 and $4.20.

At the midpoint, it implies year-over-year EPS growth of 6%, falling within their medium-term EPS growth outlook. That said, the company has historically delivered results that are on the higher end of guidance. Thus, EPS growth could approach 7%, further matching management’s medium-term growth targets.

Wall Street’s Take

Turning to Wall Street, ONE Gas has a Moderate Buy consensus rating based on two Buys and two Holds assigned in the past three months.

At $91.25, the average ONE Gas stock forecast implies 3.7% upside potential.

The Takeaway 

During a trading environment filled with multiple uncertainties, ONE Gas appears positioned to deliver growing results at a very predictable pace, moving forward.

With EPS and DPS growth set to expand in the mid-to-high single digits, dividend-growth investors, especially, are likely to find the stock’s investment case quite enticing. The current yield of around 2.8% is not too hefty, but it should certainly notably contribute to investors’ total return prospects.

Shares are currently trading at a forward P/E of around 21.6 based on the stock’s current price levels and the midpoint of management’s EPS guidance.

This is not an inexpensive multiple considering that the company’s growth, though predictable, is rather limited, and we are also in a rising-rate environment. Still, investors are likely to continue to pay a modest premium for ONE Gas’s sturdy qualities.

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