3 Gas Utility Stocks Poised to Gain Despite Industry Challenges

About the Industry

The shale boom has significantly expanded U.S. natural gas output, while its relatively lower emissions than coal continue to support broad use across residential, commercial, industrial and power markets.  Per the U.S. Energy Information Administration (“EIA”), U.S. natural gas production is expected to reach 122.5 billion cubic feet per day (Bcf/d) in 2026, surpassing the 2025 level of 118.5 Bcf/d. The distributors continue to successfully deliver natural gas to meet rising demand from residential, commercial and industrial customers. The country also relied on nearly 2.45 million miles of gas distribution mains and service lines in 2025. However, aging infrastructure and rising replacement costs remain challenges, while rapid renewable and battery-storage growth could gradually curb gas-fired power demand.

3 Key Trends Reshaping the Gas Distribution Industry

Rising Competition From Cleaner Energy Sources: Natural gas is facing growing competition from alternative clean energy sources. Technological advancements have substantially reduced the cost of utility-scale renewable energy development, improving the economic appeal of wind and solar projects. Meanwhile, expanding battery storage capacity is helping mitigate renewable intermittency and provide a more reliable power supply. As renewables become cost-competitive and distributed generation reduces reliance on long-distance natural gas infrastructure, the economics of developing new pipeline projects may become less attractive. A wider range of clean energy technologies are also making alternative heating and power solutions more viable for new developments, potentially limiting future natural gas demand.

Aging Infrastructure Creates Challenges in Operations: The U.S. natural gas distribution industry continues to struggle with aging infrastructure, with many old pipelines still in operation, which are nearing the end of their effective service life. Even with ongoing upgrades and system expansion, nearly 1% of main distribution is made of iron, which raises safety concerns. Aging pipelines still require maintenance, raising concerns about safety, methane leaks and overall system reliability. The leaks in pipelines are resulting in service disruptions, creating safety hazards and leading to higher maintenance costs.

Strong Gas Production & Rising Demand From Data Centers: According to the EIA, U.S. natural gas production is surging to new historical highs. The EIA projects dry gas output to rise from 107.7 Bcf/d in 2025 to 111 Bcf/d in 2026, driven primarily by strong drilling in the Permian and Haynesville regions. Utilities and midstream operators are experiencing growing electricity demand driven by the expansion of AI and digital infrastructure. To meet the reliable baseload power requirements of data centers, utilities are increasingly relying on natural gas generation. The natural gas pipeline operators play a very important role in transporting natural gas to end users.

Zacks Industry Rank Indicates Bleak Near-Term Prospects

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The Zacks Utility Gas Distribution industry — a 14-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #195, which places it in the bottom 21% of the 247 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries results from a negative earnings outlook for the constituent companies in aggregate. Since December 2025, earnings estimates for 2026 have moved down 36.6%.

Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.

Industry Lags the S&P 500, but Outperforms the Sector

The Gas Distribution industry has underperformed the Zacks S&P 500 composite but outperformed its sector over the past year. The stocks in this industry have gained 7.1% in the said time frame compared with the Utility sector’s growth of 5.8%. The Zacks S&P 500 composite has gained 21.3% in the same time frame.

Price Performance (One Year)

Gas Distribution Industry Trading at a Discount

Since utility companies have a lot of debt on their balance sheets, the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio is commonly used to value them.

The industry is trading at a trailing 12-month EV/EBITDA of 11.53X compared with the Zacks S&P 500 composite’s 17.91X and the sector’s 14.73X.
 
Over the past five years, the industry has traded at a high of 15.71X and a low of 9.73X, with a median of 11.9X.

Utility Gas Industry vs. S&P 500 (Past Five Years)

Utility Gas Industry vs. Sector (Past Five Years)

3 Natural Gas Utility Stocks With Long-Term Potential

Atmos Energy: This Dallas, TX-based company is engaged in the regulated natural gas distribution and storage business. Atmos Energy plans to invest $4.2 billion in fiscal 2026 to strengthen its infrastructure further and efficiently serve more customers. ATO’s longer-term plan calls for $26 billion of capital spending in fiscal 2026-2030, with more than 85% dedicated to safety and reliability.

The current dividend yield of 2.40% is better than the Zacks S&P 500 composite’s 1.35%. Long-term (three to five years) earnings growth is currently pegged at 6.82%. The Zacks Consensus Estimate for ATO’s fiscal 2026 and 2027 earnings per share increased 0.72% and 0.78%, respectively, in the past 60 days. The company currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: ATO

ONE Gas Inc.: This Tulsa, OK- based 100% regulated natural gas distribution utility provides natural gas distribution services to more than 2.3 million customers. ONE Gas will invest $800 million in 2026 and has plans to continue with systematic capital expenditure to strengthen its operations.

The current dividend yield is 3.45%. Long-term earnings growth is pegged at 7.4%. The Zacks Consensus Estimate for OGS’ 2026 and 2027 earnings per share increased 4.25% and 2.22%, respectively, in the past 60 days. The company currently has a Zacks Rank # 3.
 

Price and Consensus: OGS

MDU Resources: This Bismarck, ND-based company provides value-added natural resource products and related services to its customers. MDU’s regulated utility operations, disciplined capital investments, rising data center demand and pipeline expansion prospects support steady earnings visibility and durable shareholder returns. The company planned $3.1 billion in capital investments in the 2026-2030 period to strengthen its gas distribution operations further.

The current dividend yield is 2.81%. The Zacks Consensus Estimate for MDU’s 2026 earnings per share remained unchanged, while the same for 2027 has moved up 0.95% in the past 60 days. The stock currently carries a Zacks Rank #3.

Price and Consensus: MDU

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This article originally published on Zacks Investment Research (zacks.com).

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