Utility companies are sometimes thought of as boring, steady income opportunities with limited capital gain potential. However, over my 11 years of investing I have found that well-managed utility companies can provide significant capital gains as well as a growing income stream, resulting in excellent returns for patient, long term investors. Today, I am going to highlight MDU Resources Group Inc (NYSE:MDU), which has been a rock solid performer for my portfolio that I can honestly say has been anything but boring.
Regulated Operations
MDU’s regulated business segment includes electric utility operations, natural gas utility operations, and pipeline and energy services. MDU distributes electricity in Montana, North Dakota, South Dakota and Wyoming, and owns or has interests in eleven electric generating facilities, including two wind farms. MDU Resources Group Inc (NYSE:MDU) distributes natural gas in Montana, North Dakota, South Dakota, Wyoming, Oregon, Idaho, and Minnesota. MDU’s 2007 acquisition of Cascade Natural Gas Corporation and 2008 acquisition of Intermountain Gas Company tripled it’s natural gas distribution customer base.
Exploration and Production
Fidelity Exploration and Production Company, a subsidiary of MDU, is involved in the acquisition, exploration, development, and production of oil and natural gas. Fidelity operates in Texas, Louisiana, Oklahoma, New Mexico, Colorodo, Utah, North Dakota, and Wyoming. This segment represents MDU’s growth engine in upcoming years.
Construction
Knife River Corporation, a subsidiary of MDU, mines and sells a wide variety of construction materials including crushed stone, sand, gravel, ready-mix concrete, cement, and asphalt. MDU has significantly expanded their construction materials business by completing a very large number of successful acquisitions. Knife River operates in the central, southern, and western portions of the U.S.
MDU’s Construction Services unit consists of the construction and maintenance of electrical systems, traffic and communications systems, gas pipelines, and mechanical systems. These services are available for a wide variety of commercial and industrial applications. This unit also includes businesses that are involved in equipment rental and sales, and electrical wholesale and distribution.
Competition
Cemex SAB de CV (ADR) (NYSE:CX) is based in Mexico with operations in over 50 countries and annual sales of over $15 billion. Cemex is a manufacturer of a wide variety of construction products, such as concrete, aggregates, asphalt, and precast products such as culverts and concrete blocks. Some of CX’s products compete directly with MDU’s Knife River subsidiary in the U.S. The great recession, the decline in housing, and a large acquisition at the wrong time caused CX’s sales, earnings, and stock price to tumble.
However, the housing market is slowly starting to show signs of life, and this is indicated in CX’s annual sales, which have increased for two consecutive years. The share price has shown signs of recovery as well, even as CX has not made it back to profitability. CX’s share price has climbed back from a low of below $3 per share to the recent closing price of $11 per share, but is still well below it’s high of over $30. Cemex has a global footprint with products that will be in high demand with a booming global economy. Unfortunately, the global economy has a long way to go in its recovery efforts, and as a result I consider CX to be a speculative stock with potentially high rewards.
Chesapeake Energy Corporation (NYSE:CHK) is a producer of oil and natural gas. CHK is a competitor of MDU’s Fidelity subsidiary and is one of a very large number of producers competing for a finite amount of resources. Chesapeake is invested heavily in the natural gas industry and was hurt badly by the decline of natural gas prices. Although Chesapeake is making efforts to shift a portion of its focus into other areas such as natural gas liquids, they will continue to be heavily involved in the natural gas markets. Natural gas has more than likely bottomed, and although Chesapeake has a long way to go it is evident that they will be around for the duration. However, CHK is currently involved in an SEC investigation, and as a result I recommend that you consider opening or adding to a long position in CHK after this situation is resolved.
The Bottom Line
MDU has been through a rough period over the last five years, as revenues and earnings have been relatively flat. The tumbling of oil prices in 2007 followed by historically low natural gas prices created challenges for the Exploration and Production segment. In addition, the Construction Materials segment was adversely affected by the great recession and the bursting of the real estate bubble.
However, due to it’s diverse group of businesses, MDU has made it through this tough period better than most companies that lack MDU’s diversity. MDU’s utility businesses provide stable earnings that allow MDU to ride out circumstances that it cannot control, such as recessions and the volatility of the commodity markets. I believe that MDU’s fortunes are finally starting to turn and that it’s future is brighter than ever. The following points illustrate why:
- Natural gas prices are near historical lows when adjusting for inflation and are projected to remain low for the foreseeable future due to recent domestic discoveries. The demand for natural gas is very high because of these low prices, which bodes well for natural gas utilities. MDU is well positioned to take advantage of the high demand for natural gas due to their expanded customer base from the acquisitions mentioned above.
- Although oil prices will continue to be volatile, they are projected to increase significantly over the next 5 to 10 years. MDU has made it a priority to shift a large portion of it’s exploration and production activities from natural gas to oil. This strategic move will boost earnings significantly in the upcoming years. Also, MDU has made it a priority to produce natural gas containing a high liquid content, resulting in more BTU’s and a more valuable product.
- MDU’s Construction segment should perform well as the economy and housing improves. Infrastructure improvements should also continue to ramp up and MDU is ready to shine in this area.
For these reasons, I recommend that you consider building a position in MDU as part of a diversified, well managed portfolio.
The article Get to Know this Rock Solid, Diversified Utility Company originally appeared on Fool.com and is written by Greg Williamson.
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