The Opportunities in Natural Gas Utilities

Richard Meyer from the American Gas Association and Hennessy Gas Utility Fund (GASFX/HGASX) Portfolio Manager Ryan Kelley recently provided insights into the natural gas industry as well as compelling investment opportunities in natural gas utilities.

March 2023
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Portfolio Manager

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Top Takeaways

 
•    The Russian war on Ukraine underscored the need for global energy security and alternative sources of natural gas; U.S. liquefied natural gas (LNG) became the new bedrock of European energy security.
     
•    Since 2016 when the U.S. first began exporting liquefied natural gas (LNG), volumes have risen to about 13% of total dry gas production. With this growth, the U.S. has become the world’s largest LNG exporter in 2022. Export capacity could increase to over 20 bcf/day after 2025.
     
•    Last year was a record year in natural gas production as U.S. volumes grew about 4%; growth in peak demand also rose, with nine records set during winter and summer peaks.
     
•    Despite certain state and city bans on natural gas, the number of new natural gas customers added was at a 16-year high in 2020, while over 1.5 million new residential customers were added in 2019-2021 due to natural gas’ affordability, reliability and resiliency.
     
•    For a cleaner energy future, we believe natural gas helps the U.S. meet its decarbonization goals by improving energy efficiency and reducing the environmental footprint through the use of better technology and renewable natural gas from biogenetic sources.

     
•    The Hennessy Gas Utility Fund holds companies involved in the distribution and delivery of natural gas: 30% are multi-utilities with both natural gas and electric, 25% are pipelines and LNG export energy companies, 15% are electric utilities with some natural gas operations, and 15% are pure play natural gas utilities. 
     
•    About two-thirds of the Fund’s holdings have some exposure to renewables. We believe the growth in alternative energy sources will be a driver of the Fund over the next few decades.
     
•    Historically, Utilities traded at a slight premium to the S&P 500 Index and currently, they trade at a discount despite consistent 6-8% growth in earnings per share over the past 10 years for many of these companies.
     
•    There is no statistically significant correlation since the Fund’s inception in 1989 between the performance of the Fund and movements in interest rates 
     
•    47 out 50 companies in the Fund pay a dividend with an average yield of 3.8%. Over the past 3 years, dividends have grown 5% on average per year.1
 

1 Arithmetic average dividend yield is calculated as the sum of all dividend yields divided by the count of that series of numbers. The 30-Day SEC Yield for HGASX was 2.98% as of 3/31/23.

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