ONE Gas, Inc.

OGS Details

ONE Gas, Inc. (NYSE: OGS) is a natural gas distributor, primarily serving residential, commercial and transportation customers in Oklahoma, Kansas, and Texas.

Result Performance for the Quarter Ended 30 September 2021 – Q3FY21

• The net income stood at $20.3 million or $0.38 per diluted share in Q3FY21 versus $21.1 million or $0.39 per diluted share in Q3FY20, primarily led by new rates and customer growth.
• The Q3FY21 dividend of $0.58 per share, or $2.32 per share on an annualized basis, was announced on Nov. 1, 2021, payable on Dec. 1, 2021.
• Net margin increased $10.4 million YoY, primarily due to a rise of $7.0 million from new rates, mainly in Texas and Oklahoma, followed by $2.1 million in residential sales due to net customer growth in Oklahoma and Texas. In addition, an increase of $0.8 million due to higher sales volumes, net of weather normalization.

Source: Company Reports, Analysis by Kalkine Group

Recent Update

• On 23 November 2021, the company stated that it will participate in the Mizuho U.S. Utility Summit on 30 November 2021.
• On 15 November 2021, American Home Solutions, part of American Water’s Homeowner Services Group, declared that it has entered a contract with ONE Gas to offer an optional home warranty protection program to homeowners and renters in Texas and Oklahoma.

Outlook

The company expects net income and earnings per share to be in the ambit of $204-$209 million and $3.80-$3.90 per diluted share. Capital expenditures, including asset removal costs, is anticipated to be ~$540 million for 2021. Oklahoma Natural Gas filed a general rate case with the OCC on 28 May 2021. If the OCC approved this agreement as filed, Oklahoma Natural Gas' base rates would raise $15.3 million and provide a return on equity of 9.4% and a common equity ratio of 58.55%. Oklahoma Natural Gas would be required to file a rate case in 2027 based on a 12-month test year ending 31 December 2026.

Key Risks

The company is exposed to the risks of pipeline safety and system integrity laws and regulations that might require huge expenditures, a significant rise in operating costs, or substantial fines or penalties in the case of noncompliance. As a result, the availability of sufficient natural gas pipeline transportation and storage capacity and natural gas supply could decrease and impair the ability to meet customers’ natural gas requirements, and financial condition may be adversely impacted.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Stock Recommendation

The company has delivered a 6-month and one-year return of ~-0.41% and ~-1.65%, respectively. The stock is trading slightly higher than the average price of the 52-week low-high range at $62.52 - $81.90.

The stock has been valued using an EV/Sales multiple based relative valuation (on an illustrative basis), and the target price so arrived reflects a fall of low double-digit (in % terms). In addition, a slight discount has been applied to peer average EV/Sales multiple (NTM) (Peer Average), considering higher debt to equity of 1.74x in Q3FY21 versus the industry median of 1.19x and slowdown in asset turnover.

Considering the technical analysis, recent returns, risks associated, and current trading levels, we believe it is prudent to book profits in the stock. Thus, we give a “Sell” recommendation on the stock at the Current market price of $76.00 per share as of 21^st December 2021 (Time: 9:45 AM, NY, USA).

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

ONE Gas, Inc. (OGS) is a part of Kalkine’s Global Green Energy Report

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.