MDU Resources Group, Inc. (MDU,
$27.44): “Weathers On”
By: Andrew Plank, AIM Student at
Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• MDU
Resources Group, Inc. (NYSE, MDU) runs a two-platform business
model including a regulated energy delivery platform and a constructions materials
and services platform. This company is
organized into five reportable segments comprised of electric, natural gas
distribution, pipeline and midstream, construction materials and contracting,
and construction services. MDU operates
primarily in Montana, the Dakotas, and Wyoming.
This firm was founded in 1924, and is headquartered in Bismarck, ND.
• Natural gas distribution experienced operating
income loss of $(4.4) million for the three months ended June 30, 2018.
• In February 2018, MDU purchased Thunder Spirit
Wind farm increasing the electric generation portfolio to approximately 27%
renewable energy.
• Construction on the Company’s Valley Expansion is expected to be completed in late 2018 adding an additional 38-miles of pipeline to eastern North Dakota.
• The Company announced the acquisition of Teevin
& Fischer Quarry, LLC in April 2018 in an effort to expand its construction
and materials segment.
• Second-quarter earnings missed by 21.43%
plummeting stock price.
Key
Points:
Moving into late 2018, MDU Resources reported negative earnings from the natural gas segment due to several factors. Maintenance and operating expenses increased, hurting profits, while a rate case settlement decreased revenues. WUTC deemed rates for natural gas to be too high and passed a settlement that lowered the prices MDU could extend consumers for their gas supply in parts of Wyoming. Because the need for natural gas to heat homes in the summer is grossly lower than in the winter, the natural gas industry is extremely cyclical which also explains decreased earnings over the past three months.
Moving into late 2018, MDU Resources reported negative earnings from the natural gas segment due to several factors. Maintenance and operating expenses increased, hurting profits, while a rate case settlement decreased revenues. WUTC deemed rates for natural gas to be too high and passed a settlement that lowered the prices MDU could extend consumers for their gas supply in parts of Wyoming. Because the need for natural gas to heat homes in the summer is grossly lower than in the winter, the natural gas industry is extremely cyclical which also explains decreased earnings over the past three months.
Through the purchase of the Thunder Spirit Wind Farm, MDU will continue increasing its renewable energy portfolio. The wind farm will have a generation capacity of 155MW upon completion which would consequently bring the Company’s energy production to 27% renewable. MDU recognizes the importance of moving into renewable energy and has plans to continue growing its renewable energy portfolio through construction and M&A through 2025.
The Valley Expansion project includes 38-miles of pipeline through eastern North Dakota and western Minnesota and is designed to transport 40 MMcf of natural gas per day. The Company has plans for several other pipeline expansions in the future including 13-miles of piping in the Bakken area of northwestern North Dakota.
The acquisition of Teevin & Fischer Quarry, a crushed rock and gravel supplier in northwestern Oregon, signaled an effort to grow the Company’s construction and materials segment. Gravel mining in the United States is projected to have an annual growth rate of 2.7% over the next five years. The company continues to explore M&A opportunities in the construction sector.
The second-quarter earnings call for MDU Resources went poorly with estimated earnings of $.28 Actual earnings were reported at $.22 per share, 21% lower than estimated which significantly lowered the company’s stock price by over 5%.
What has the stock done lately?
On February 4th, 2018 MDU Resources reached a price low of $24.29. The Company proceeded to beat earnings three days later and climb to their price high of $29.62, on June 28th. Since hitting their price high MDU has fallen to its current stock price of $27.44. Based on the cyclicality of the natural gas and electric utility industry, the summer weather most likely played a large part in lowering their price over the summer. The natural gas segment was hit especially hard by rate changes which negatively affected revenue along with increased operating expenses.
Past
Year Performance:
Over the past year, MDU had a price decrease of less than 1%. While this stock made large gains between February and June 2018, these gains were nearly erased by the struggles the company had undergone during the summer. Missing earnings in the second-quarter of 2018 lowered the company’s stock price by over 5%, but the stock was fortunately able to quickly recover over a week. MDU has been closely following the Russell 2000 (Figure 1) in terms of declining summer prices, while the firm seems to be experiencing more volatility than the other stocks in the Russell 2000 over these past two months.
Over the past year, MDU had a price decrease of less than 1%. While this stock made large gains between February and June 2018, these gains were nearly erased by the struggles the company had undergone during the summer. Missing earnings in the second-quarter of 2018 lowered the company’s stock price by over 5%, but the stock was fortunately able to quickly recover over a week. MDU has been closely following the Russell 2000 (Figure 1) in terms of declining summer prices, while the firm seems to be experiencing more volatility than the other stocks in the Russell 2000 over these past two months.
Source: FactSet
My
Takeaway:
MDU Resources has struggled recently with missed
second-quarter earnings along with rising operating expenses. Despite these issues, the Company shows a lot
of promise in terms of expansion and M&A activity. The Company’s management has not only
expressed their desires to move further into renewable energy production, but
has demonstrated it with their acquisition of the Thunder Spirit Wind
Farm. Utility companies that have failed
to recognize the opportunity in the renewable energy space have struggled when
compared to their peers that focused on growth through alternative energy. Because of MDU Resources expansion activity
along with their focus on growth through renewable energy, I see a positive
outlook for this company.
