Investment Research Analyst Kevin Gioia recently attended the American Gas Association (AGA) Financial Forum. The AGA provides the financial community with the opportunity to meet with more than 120 senior executives from 43 energy utilities, including: combination gas/electric companies, natural gas distribution, transmission, and diversified companies. Over the course of the conference, many interesting concepts concerning the Energy Industry emerged that we would like to highlight:
Conversions from propane, heating oil, and natural gas continue to drive infrastructure investments. Recent lower oil and propane prices have not decreased the level of consumer interest for natural gas to heat their homes. This bodes well for utilities pursuing growth through natural gas distribution investments.
Long-term gas infrastructure upgrades continue to be the basis for many companies’ long-term capital budgets. There is still plenty of cast iron and bare steel in the ground, and it will take decades to replace these materials with PVC. Customers benefit from upgraded infrastructure projects which operate more efficiently and therefore at a lower cost to consumers.
M&A and Divestitures
M&A (mergers & acquisitions) continue to be another heavily pursued avenue for growth. Low interest rates are helping finance transactions. Companies with little customer growth or infrastructure upgrade plans feel that M&A represent their best chance for growth prospects. More recently, electrical utilities, who don’t have a long avenue for growth, have been buying gas utilities and some in the community are worried. This happened in the ‘90s and did not end well as Electric Operators were not able to allocate capital prudently amongst the two different businesses. Additionally, companies have completed a number of divestitures, mainly firms heavily linked to commodities such as Exploration and Production (E&Ps) or non-regulated businesses.
Mid-Stream investments are also another longer-term infrastructure opportunity. We have a lot of gas reserves in the United States and not enough pipeline infrastructures to transport them. Companies nearer to gas sources are investing heavily — this trend is likely to continue in the future with the pace of investments dictated by regulatory climates.