Texas, Oklahoma And Kansas Urbanization Will Drive Utility Modernization

Key Takeaways

• Sustained regional growth and regulatory support enable steady customer additions, reliable revenue streams, and improved profit margins for ONE Gas.
  
• Ongoing investments in infrastructure and rising commercial demand position the company for scalable expansion and enhanced long-term earnings.
  
• High capital spending, regional concentration, rising costs, regulatory dependence, and industry decarbonization trends threaten long-term margin stability and growth prospects.

Catalysts

Operates as a regulated natural gas distribution utility company in the United States.

• Sustained population growth and urbanization in Texas, Oklahoma, and Kansas is fueling above-trend new customer additions-including a 9% year-over-year jump in new meters installed-that supports persistent, organic top-line revenue growth.
  
• The shift toward electrification is gradual, with natural gas remaining the preferred and affordable solution for heating, cooking, and industrial use in ONE Gas's core regions; this underpins stable customer retention and long-term regulated revenue visibility.
  
• Favorable regulatory developments, particularly Texas House Bill 4384, enable full recovery of capital expenditures and reduce regulatory lag, which is anticipated to drive higher earnings and more predictable net profit margins in the coming years.
  
• Accelerating capital investment in system reinforcement and modernization (such as the Austin system project), in response to both safety and demand, expands the regulated rate base, resulting in higher allowed returns and EPS growth.
  
• Robust inbound commercial and industrial demand-including interest from data centers and advanced manufacturing-creates scalable growth opportunities likely to drive incremental revenue and bolster earnings over the medium to long term.

ONE Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ONE Gas's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 12.0% in 3 years time.
• Analysts expect earnings to reach $313.6 million (and earnings per share of $4.84) by about August 2028, up from $247.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, up from 17.9x today. This future PE is greater than the current PE for the US Gas Utilities industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 5.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

ONE Gas Future Earnings Per Share Growth

Risks

• Sustained high capital expenditure requirements for system safety, integrity, and growth-including major projects like Austin system reinforcement-may outpace revenue increases, potentially compressing long-term free cash flow and net margins if regulatory cost recovery does not keep pace.
  
• The company's focus on growth opportunities within a geographically limited footprint (Texas, Oklahoma, Kansas) increases exposure to localized weather extremes (e.g., record rainfall and flooding) and regional economic/regulatory risks, which could heighten earnings volatility and limit revenue diversification.
  
• Rising labor and operating expenses (7.5% year-over-year O&M growth in the quarter) reflect inflationary pressures that may erode net margins over time, especially if future rate increases struggle to keep pace with cost escalation.
  
• Expansion and investment strategies are heavily reliant on supportive regulatory outcomes and recent legislative actions (e.g., Texas House Bill 4384); any reversal or limitation in future political/regulatory support or consumer pushback could negatively impact allowed returns and revenue growth.
  
• Long-term industry headwinds-including increasing electrification, policy-driven decarbonization, and possible restrictions on new natural gas hookups-may eventually dampen incremental customer growth and throughput, threatening future top-line revenue and earnings growth despite current demand trends.

Valuation

• The analysts have a consensus price target of $77.5 for ONE Gas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $89.0, and the most bearish reporting a price target of just $66.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $313.6 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $73.83, the analyst price target of $77.5 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.