Company Overview: One Gas, Inc. (NYSE: OGS) is a regulated natural gas distributor in the US. The company delivers natural gas distribution services via its Kansas Gas Service, Oklahoma Gas Service and Texas Gas Service. The company serves commercial, residential and transportation customers.

­­­­­­OGS Details

Material Business Updates

Highlights on Emission Reduction Commitments: As published on 14 October 2021, OGS reported a 26.2% reduction in CO2e emissions for 2014 – 2020 tenure via the protection and replacement of distribution service lines and mains. A significant 70% of $515 million capital investment stood dedicated to replacement projects and system integration.

OGS Awarded as Safest Natural Gas Companies: As announced on 6 October 2021, OGS received American Gas Association Safety Achievement Award showcasing the company’s strong commitments towards vehicular safety and employee. The selection was warranted by the company’s safety statistical data of FY20.

Historical Financial Trend:

OGS illustrated consistent historical growth in gross profits despite the recent adverse effects of COVID-19. The Operating revenues have been growing sustainably since FY16 with the constant increase in ROE. As a result, operating revenues grew at a 1.8% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

Second Quarter FY21 Performance:

Figure 2: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 3: Annual Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~47.38% of the total shareholding. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. holds a maximum stake in the company at ~­­­10.60% and ~10.06%, respectively.

Figure 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Consistent growth in new residential customers and favourable rates has translated into long-term sustainable growth levels. In addition, the steady cost of purchased gas has delivered consistent growth in gross profit margin, exhibiting sustainable operating metrics across years.

Figure 5: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

US Energy Consumption: As per Lawrence Livermore National Laboratory’s data from 2005 to 2020, on average, the US has consumed circa 100 quads of energy each year. Since, 2005 natural gas has inclined considerably by 39%, replacing coal which has declined by 60%.

Competitive Advantage: OGS’ operating locations delivers supply proximity and, in turn, supports sustainability. OGS holds proximity to considerable natural gas reserves and well-developed transportation infrastructure, resulting in access to multiple supply points and lower transport costs.

Pipeline Replacement: OGS diverts focus on replacing vintage pipelines at an average of 244 miles per year, representing more than a 20-year investment runway. The program shall deliver improved distribution efficiency.

Guidance: OGS reaffirms its guidance of FY21 net income to stand in the range of US$198 million to US$210 million. Capital expenditure, including asset removal costs, is estimated at around US$540 million for FY21.

Key Risks:

Pipeline Safety and System Regulations: OGS is subject to Pipeline Safety Improvement Act, which mandates companies to deliver integrity assessments on pipeline segments. The Act increased penalties for violating federal pipelines.

Operational Hazards: Hazards associated with the natural gas distribution business amounts to high operating risk. Common expensive breakdowns include pipeline ruptures, leaks or failure of equipment or processes.

Valuation Methodology: EV/SALES Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

OGS has delivered 3-month and 6-month returns of ~-8.976% and ~-17.623%, respectively. The stock is trading below the average of the 52-week high price of US$82.40 and the 52-week low price of US$62.52, indicating an accumulation opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering OGS’s most competitive advantage in supply proximity and low transportation costs. For valuation, few peers like Atmos Energy Corp (NYSE: ATO), National Fuel Gas Co. (NYSE: NFG), Chesapeake Utilities Corp (NYSE: CPK) have been considered. Considering the broadening demand for natural gas, competitive advantage in supply proximity, steady growth prospects, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the closing price of $67.03, as of 19 October 2021, up by ~1.01%.

OGS Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.