OGS - Technicals And Fundamentals Align For Big Gains In ONE Gas

Summary

• ONE Gas is currently offering investors a rare opportunity that may not come again.
• ONE Gas is a consistently growing business largely immune to current market turmoil.
• Technicals and fundamentals are aligning for big gains for ONE Gas investors.

ONE Gas ( OGS ) is currently offering investors a rare opportunity, one that occurs infrequently and may not come again. Readers who follow the recommendations here can expect a return of as much as 40% over the next year. Although there may be other small caps that project a similar return, with the current turmoil in economies and markets few if any can offer the degree of confidence we see with ONE Gas.

ONE Gas: The company

ONE Gas is a local distribution company [LDC] in the business of selling and distributing natural gas to 2.2 million customers in Texas, Oklahoma, and Kansas. It was founded in 2014 when ONEOK ( OKE ) divested its local distribution business to become strictly a gas producer. LDCs are often favored by conservative investors. They have a guaranteed rate of return from regulators, a monopoly in their area, no dependence on commodity prices, and slow but steady growth. More details can be found in my first ONE Gas article, ONE Gas: An Ideal Stock For Uncertain Times .

The Rare opportunity

Periodically the ONE Gas stock price drops significantly, unexpectedly, and irrationally, followed by a price recovery in short order. This is shown in the chart below, with arrows showing the low points.

Since first reaching a share price of $64 in late 2016, ONE Gas has touched that price again four times but never gone lower, even during March 2020 and the energy price crisis of 2021.

The first drop was in late 2017, from a combination of market rotation into tech and a consolidation after four years of steady gains. The stock fell 20%, from $79 to $63.59. Then came 2020, when the anti-fossil fuel ESG movement was dominating the news. All O&G stocks suffered, and OGS dropped three times into the 60s, from $96 to a low of $63.37. In all cases the decline quickly reversed, to a peak of $96 in the first case and $90 in the second. The speed and size of these rebounds is a testimony to company fundamentals.

Now, in October 2022 we see a third drop, from $90 to $70. The latest decline stems from uncertain O&G sentiment, interest rate hikes, and general economic weakness. As explained below, it is highly likely the stock will reverse and move up near all-time highs of $90. If the current decline continues to $64, its floor for over six years, an rebound to $90 plus dividends would be a return of 40%.

Confidence is high

The reasons for the recent decline are of little concern to longer term investors. Changes in gas prices have little to do with OGS, which by regulation passes all changes through to customers. A weak economy will reduce the total volume of business, but demand for gas is relatively inelastic and regulators guarantee a specified level of profit. No large debt offerings are planned, and $43 million was recently raised in an ongoing ATM equity program, so higher interest rate expense is of little concern. In summary, the recent decline drop is the result of generalized fears that are not related to ONE Gas's business. At a time when there is a steady drumbeat of announcements of reduced revenue and earnings projections across the investing universe, ONE Gas reaffirmed its 2022 guidance in its latest earnings release.

The resilience of ONE Gas's price, i.e., the solid rebounds from around $64 to $90 and higher, is a triumph of the company's strong fundamentals. Since inception in 2014, ONE Gas has achieved growth in income, EPS, and dividends for eight (soon to be nine) years under all economic conditions. Since the price first reached the level it now appears to be approaching in 2017, net income has risen 30.0%, EPS 27.6%, and dividends 43%.

With such durable improvements in financial performance there is no fundamental reason for shares to be trading at the level of 2017. In late 2017 the PE ratio was 20.64. Over the years the PE range has been from a low of 16.8 to a high of 27.2, with a median of 20.6. With the increase in EPS the present PE ratio is 16.5, an all time low.

If the PE returns to the 20.6 median and achieves the 4.08 projected 2023 EPS, the share price will be $84.13. Prices of $90 or higher are quite possible considering the stock price history.

Risks

There is a risk that the long term sentiment against fossil fuels will affect the LDC business by discouraging its use. However, OGS is somewhat insulated against this by operating in three very gas-friendly states, Texas, Oklahoma, and Kansas. General weakness in the economy will hurt OGS because of rising uncollectible accounts and reduced use by industrial/commercial customers. Finally, as we have seen this year sentiment always plays a role, and regardless of company performance this has been hurting the stock price.

Investment Recommendations

I first recommended ONE Gas in 2016 at a price of $59, and it subsequently reached $96. My next recommendation was in 2021 at $73, and it rose to $92. With its consistently improving performance I expect a similar result here.

ONE Gas is a STRONG BUY at its present price of about $70. There are several total return scenarios to consider in a 12 month time frame.

Investors who wait until the price drops to $65 will have even larger returns. Such a price would come solely from market sentiment, however. With the improvement in fundamentals over the years, $65 may be out of reach.

Summing up

ONE Gas is the perfect solution to a market where fear and uncertainty are the order of the day, when it's difficult to see where to safely put investment dollars and be confident of a respectable return. OGS has had steadily improving fundamentals for its eight year existence. It is now at a price near it's long term floor, a level that was successfully tested in both March 2020 and the energy price crisis of 2021. The chances of a loss from here are low and the chances of meaningful gain are high. In addition, the record high yield of 3.6% makes it a good place to put money while waiting out the tribulations of the general market and still preserve the possibility of capital gains. The bottom line is this: Consistently good long term performance makes a winner in the long run. This may be the last time for investors to put that time-tested principle to use with ONE Gas at these prices.

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