By Philip van Doorn, MarketWatch
Investors may consider natural gas distributors, through pipeline operators or utilities, to be suitable mainly for dividend income but not necessarily for growth, as falling energy prices are a big risk.
But you can see in the following charts that there’s quite a bit of growth among natural gas utilities, even with low energy commodity prices.
The $1.4 billion Hennessy Gas Utility Fund /zigman2/quotes/209801201/realtime GASFX -1.01% has exclusive license to track the American Gas Association (AGA) Stock Index. The index is made up of companies that are members of the AGA, weighted by market capitalization and the share of assets related to natural gas distribution.
According to the Ryan Kelley and Skip Aylesworth, two of the fund’s portfolio mangers (the third is Brian Peery), about 25% of the fund’s holdings are stocks of local natural gas distributors, 25% general partners that manage pipeline limited partnerships and the remaining 50% multi-utilities that distribute electricity and natural gas.
Hennessy Funds is headquartered in Novato, Calif., and has about $6.5 billion in assets under management, in 14 mutual funds.
You might be familiar with the gas pipeline partnership space, which is known for its attractive dividend yields, and most easily tracked with the Alerian MLP Index /zigman2/quotes/210597959/delayed AMZ -1.40% . But the AGA Stock Index, and, in turn, the Hennessy Gas Utility Fund, steers clear of the limited partnerships.
“We prefer to own the general partner as opposed to the MLP,” Aylesworth said when he and Kelley were interviewed by MarketWatch on Sept. 22. “The general partner is, in essence, who manages and controls the limited partner, and controls the timing [corporate structure] conversions that trigger tax issues.”
The Alerian MLP ETF /zigman2/quotes/202900872/composite AMLP -1.20% has a dividend yield of 8.05%, while the Hennessy Gas Utility Fund’s investor shares have a much lower yield of 2.33%. But check out the difference in the funds’ performance over the past five years:
You can see that the oil price decline from July 2014 to February 2016 had a much smaller effect on the Hennessy Gas Utility Fund.
Here’s a 10-year comparison of the funds’ total returns:
Here’s an example of how the AGA stocks index modifies the market-capitalization weighting of companies. Berkshire Hathaway Inc. /zigman2/quotes/200060694/composite BRK.B +0.0094% is a tremendous company, but with only about 0.2% of its assets related to natural gas distribution, it makes up only 0.5% of the Hennessy Gas Utility Fund’s portfolio.
Kelley said mergers among natural gas companies have helped to prop up stock prices, as large companies, including many Canadian energy companies, seek to enter the growing market. He pointed to statistics from the Energy Information Administration showing that while total energy consumption in the U.S. declined by 2% from 2006 through 2016, the use of natural gas increased by 27%, “essentially taking market share from coal, which was down 37%.”