NJR - New Jersey Resources Corporation: Solid Business But Pricey

2023-08-23 09:10:16 ET

Summary

• New Jersey Resources Corporation is a potential investment for exposure to the gas industry, but the current valuation is high.
• Despite market volatility, NJR has shown a solid growth rate and a potential recovery in natural gas prices is expected in the future.
• NJR faces risks from its investments in solar energy projects and the fickle nature of pricing in its Energy Services segment.

Investment Summary

The gas industry continues to be a backbone for energy generation in the US but also internationally. The necessity for the commodity is massive and having some form of exposure to it I think is advisable which is why New Jersey Resources Corporation ( NJR ) has been on my mind recently as a way to get it. But what is keeping me away from buying into it yet is the valuation and premium that you have to pay right now. A p/e of around 16 is quite high even for the sector's standards.

The company however recently reaffirmed its guidance when it posted its last report. The net financial EPS for 2023 is set to be $2.62 - $2.72 which sets NJR on track to achieve a long-term annual growth rate of 7 - 9% right now. That is intriguing enough to make it a hold least. Together with a dividend yield of around 3% at least you would be getting a very solid yearly return on investment. However, I would prefer a better margin of safety before entering into a position, but holding onto shares seems very positive still.

A Rebounding Market

The prices for natural gas have been volatile, which seems to have been caused by the ongoing war in Ukraine. Volatility hasn't been happening only to natural gas but also to many other commodities like coal and copper during 2022. Since it has been a bit more relaxed though. Examining the trajectory of natural gas prices thus far reveals a rather disheartening trend. After reaching peaks exceeding $9 in 2022, they have plummeted to below $3 at present. This decline reflects a complex interplay of factors, including supply-demand dynamics, geopolitical influences, and evolving global energy markets. This has of course affected the earnings of NJR which between Q3 2023 and Q3 2022 saw a drop of $11.5 million but has not necessarily resulted in such a big difference for the nine months ended June 30 at least, which still shows a YoY growth. This showcases that NJR can grow at a solid rate despite market volatility.

While the recent past has been challenging for natural gas prices, a glimmer of optimism emerges when we turn our gaze to the future. Projections and analyses indicate a potential upward shift in prices, heralding a ray of hope for industry stakeholders. Forecasts tentatively predict that by 2024, natural gas prices could be on an ascent, potentially reaching around $3.4. This projected improvement of approximately 25% from the current levels signifies a potential recovery.

As NJR operates as an energy service holdings company that is providing regulated natural gas distribution and other retail and wholesale energy services in the United States. Four various segments make up the business and the company makes the vast majority of net financial earnings from the Clean Energy Ventures which amounted to $7.2 million last quarter, a massive improvement from a year ago when it was negative $5 million instead. NJR is still quite dependent on deploying a lot of capital to ensure their business continues to grow, I don’t think a lot of organic growth is expected to be had. Looking at new customer additions there was $51 million used for this which is having a near immediate return for NJR which is quite impressive to see actually. YTD they have added 5892 customers.

Risks

NJR, like many of its peers in the industry, is faced with a variety of potential risks that have the potential to exert influence on its operations and overall profitability. Within this landscape, one notable risk arises from the company's substantial investments in solar energy projects. These projects hinge on the continuance of existing regulatory incentives and federal tax credits. Should these vital supports undergo expiration, a scenario of concern emerges—a potential dent in the company's operational and financial performance.

Moreover, the operations of NJR, Energy Services, introduce another layer of risk to the equation. The subsidiary's earnings and cash flows are intricately intertwined with its adeptness in optimizing its array of natural gas storage and pipeline assets. This optimization hinges on astute pricing differentials across varied locations and timeframes. Yet, the fickle nature of pricing across these variables implies the inherent susceptibility to unfavorable shifts. Sudden alterations in pricing patterns could conceivably translate into adverse ramifications for Energy Services' cash flow dynamics.

The performance for the segments has been quite volatile and I think we need to find a clear base level from which to grow further in the future. I think with more stability there will also be more stability and growth for the FCF which as we see above is a bit all over the place. The TTM is negative 6.7% right now which in fairness is better than the average for the company the last 5 years, but still leaves a lot to be desired in my opinion.

Financials

Looking at the financials of NJR I think there is some room for improvement. The lacking FCF has made it difficult to establish any form of significant cash position for the company and right now it's more or less non-existent. Accounts receivables however are quite strong at nearly $120 million.

This in comparison to the $2.7 billion of debt the company has is making it difficult though to justify that NJR sits in any strong financial position. Once solid FCF is starting to be generated again, then I fear a lot will have to go here first before increasing the dividend or buying back shares.

Valuation & Wrap Up

The main thing that keeps me away from investing in NJR right now is the price. The price is above what I'd like to be buying. The p/e is at 16 and I would prefer something like 14 instead to get some margin of safety as the balance sheet does offer some risks and ongoing volatility and suppressed natural gas prices are placing pressure on NJR to come up with stronger earnings quarter over quarter.

As for the long-term outlook, I still think it looks very good for NJR and I will be rating the company a hold as a result. Investors seeking exposure to a variety of energy markets should keep an eye on NJR and once the price gets down a bit more a position might be able to be started.

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