U.S. natural gas prices recently reached a 14-year high, as we're hit with ongoing inflation and the war in Ukraine. As these catalysts are not likely to subside any time soon, natural gas prices could remain elevated at levels not seen since 2008. Here are three stocks related to natural gas exploration, production and distribution, and also pay high dividends to shareholders.
The No. 1: ONE Gas
ONE Gas Inc. (OGS) is one of the largest publicly traded natural gas utilities in the United States. The company provides natural gas distribution services to approximately 2.2 million customers. ONE Gas is the largest natural gas distributor in Oklahoma (with 88% market share) and Kansas (with 72% market share), and the third-largest in Texas (with 13% market share). Its customers are residential, commercial, and transportation-related in all three states. The company generates around $1.8 billion in annual revenues and is based in Tulsa, Oklahoma.
The company is performing well in 2022, thanks in large part to strong rate activity. In the most recent quarter, revenues came in at $429 million, 35.9% higher year-over-year. Once again, demand for natural gas remained elevated while the company achieved customer growth, which, along with higher rates, resulted in improved performance.
Operating income came in at $58.6 million versus $51.1 million in the comparable period last year due to a $14.4 million increase in rates and an increase of $1.5 million in residential sales due to net customer growth in Oklahoma and Texas. These increases were offset partially by an increase of $5.8 million in outside service costs. Accordingly, EPS came in slightly stronger, growing from $0.56 to $0.59 year-over-year.
Management sees its ongoing positive momentum lasting through this year. The company reiterated the previous outlook, which projects fiscal 2022 EPS between $3.96 and $4.20.
With a projected dividend payout ratio of approximately 61% for 2022, the dividend looks highly secure. The company has rapidly grown its dividend since initiating quarterly payments in 2014. Management targets annual dividend growth between 6% and 8% through 2025. Shares currently yield 3.0%.
A Garden of Opportunity: Kinder Morgan
Kinder Morgan (KMI) is among the largest energy companies in the U.S. It is engaged in storage and transportation of oil and gas, and other products. It owns an interest in or operates approximately 83,000 miles of pipelines and 144 terminals. Its pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and more. Kinder Morgan's transportation assets operate like a toll road, whereby the company receives a fee for its services, which generally avoids commodity price risk. Approximately 90% of Kinder Morgan's cash flow is fee-based.
Kinder Morgan has significant network and economies of scale competitive advantages as one of the largest energy companies in the U.S. and the largest natural gas transporter, moving approximately 40% of the natural gas used in the U.S.
In the 2022 second quarter, net income attributable to KMI stood at $635 million, compared to $757 million net loss in the year-ago period. Distributable cash flow increased to $1.18 billion from $1.03 billion in the year-ago period. Adjusted earnings increased to $621 million from $516 million year-over-year. Revenue increased significantly by 63.5% to $5.15 billion year-over-year.
For fiscal 2022, Kinder Morgan continues to expect a net income attributable to KMI of $2.5 billion and declare dividends of $1.11 per share, distributable cash flow of $4.7 billion, and adjusted earnings before interest, taxes, depreciation, and amortization of $7.2 billion and aims to end 2022 with a 4.3-times net debt-to-adjusted EBITDA ratio.
Kinder Morgan's biggest growth catalysts for the future are new pipeline and terminals projects. Natural gas is rapidly replacing coal, which gives Kinder Morgan a major advantage. The company plans to continue investing in growth projects and joint ventures in 2022 and expects to fully fund it with internally generated cash flow without the need to access capital markets.
The current dividend payout level seems to be secure. Kinder Morgan has been deleveraging and the company received a credit rating upgrade from Standard & Poor's and Moody's. The company grew its dividend by 1.9% in 2021 and analysts expect a $1.11 per share dividend in 2022. Shares currently yield 5.8%.
A Salute to National Fuel Gas
National Fuel Gas Co. (NFG) is a diversified energy company that operates in five business segments: exploration & production, pipeline & storage, gathering, utility, and energy marketing. The company's largest segment is exploration & production.
In the most recent quarter, revenue of $502.6 million increased by 27% year-over-year. Adjusted earnings-per-share came to $1.17 for the quarter, up 24% year-over-year. Management expects full-year adjusted EPS to be in the range of $5.85 to $5.95 per share. Full-year fiscal 2023 adjusted EPS is expected in a range of $7.25 to $7.75 per share, which represents an increase of 27% from fiscal 2022.
The company pursues growth by growing its natural gas production and expanding its pipeline network. Thanks to record production and a multi-year high price of natural gas, the company posted record earnings in 2021 and thus it has now grown its earnings-per-share at a 5.6% average annual rate over the last decade. Even better, thanks to a continued rally in the price of natural gas, the company is poised to post record earnings in 2022.
National Fuel Gas' competitive advantage is its combination of regulated and stable businesses (like pipelines and utilities) with cyclical and potentially higher-growth sectors (like exploration & production).
With 51 years of consecutive dividend increases, National Fuel Gas qualifies to be a Dividend King. The current dividend is safe with a 2022 expected payout ratio of just ~30%, which leaves plenty of room for the company's long dividend increase streak to continue. Shares currently yield 2.5%.