Utility Expert Sees Gas Sector Gains

12/23/2015 10:00 am EST

Focus: ENERGY

The 5-star rated Hennessy Gas Utility Fund focuses on the distribution side of the natural gas business. Despite headwinds in the gas industry over the past year, portfolio manager Skip Aylesworth sees long-term reasons to remain optimistic. Here, he discusses the fund, the gas sector, and some well positioned ideas among specific gas distribution stocks.

Steven Halpern:  Our guest today is Skip Aylesworth, portfolio manager of the Hennessy Gas Utility Fund (GASFX), which is five-star rated by Morningstar. How are you doing today, Skip?

Skip Aylesworth:  I’m fine, thank you very much.

Steven Halpern:  Well, thank you for taking the time. You’ve been an investment manager for over three decades and the portfolio manager for Hennessy Gas Utility since 2001. Could you give our listeners an overview of the fund?

Skip Aylesworth: I’d be delighted. The fund was established in 1989. Its primary objective has been to provide investors a diversified approach to investing in the distribution side of the natural gas business.

The strategy that it follows is an index strategy, index owned by the American Gas Association comprised in a market weighting—modified market weighting—philosophy of its publicly traded members, so that is how the fund is constructed and the strategy that we follow.

Steven Halpern:  Now, your fund has historically shown very strong total returns. In fact, it returned over 20% in 2014 and over 25% in 2013, but the past year’s been more of a challenge. Could you explain the headwinds that have faced the overall sector and what your outlook is looking at 2016 and beyond.

Skip Aylesworth:  Well, we follow the good and the bad.  We’ve certainly had a long positive run for the fund and it’s all attributed to the industry that the fund invests in. There’s been really no change in philosophy, that being that the distribution side of the natural gas business.  

Now, the headwinds this year have really been tied to oil.  It’s very public.  We see the headlines of the decrease in oil price from roughly $100 a barrel to $35 a barrel today and natural gas on a wholesale price has come down also.  I think today’s current price is about $1.85, $1.90 a million BTU and that’s down from about 2.50 over the last year.  

Now, there are two pieces to the energy business.  There’s the exploration & production side, that’s the drilling.  That’s who’s had the toughest challenge of these lower commodity prices, because they have costs and it’s a function of the profit that they can sell the product for.

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On the distribution side—which is what the fund invests in—there's not quite so much of a headwind.  The issue is primarily volumetric, what are we pulling through the pipes, what are we distributing, and that’s really tied more to demand, economy, and uses, and there’s a big difference between oil and gas, oil primarily used in transportation, the oil decline in price really kind of governed by the Middle Eastern politics, whereas natural gas is a pure supply/demand.  

It’s in our political control, 100% of it.  We have abundant supplies and low and stable pricing, so demand continues to increase, but we’re still face these headwinds of energy, in general, and the various problems in the oil patch.

Steven Halpern:  I’d like to discuss a few individual stops within the portfolio, and one is WGL Holdings (WGL), diversified electric and gas distributor in the DC area. What’s the story here?

Skip Aylesworth:  Well, you’ve commented.  It’s in the DC area, so it’s primarily the local energy company in the District of Columbia, Maryland, Virginia, and the surrounding areas of DC. Now, DC, because of its location, very strong economy tied to the government, very strong in energy initiatives for conservation, green energy, and WGL has positioned itself as “the energy solution for residence and for commercial,” so it really doesn’t produce any power.  

It’s not an electric generator, per se, but it’s the local guy who connects to the house, to the business, whatever, and he brings power to you produced by others.  

He brings natural gas that he brings in on pipelines, whatever the energy solution you would like, he helps you convert to solar or wind power.  He’s a problem solver in energy in a strong economic area and that’s really been the key to WGL’s success. They’re up almost 20% this year, so very popular return.

Steven Halpern:  Now, you also point to Atmos Energy (ATO) and One Gas, Inc. (OGS), which you note are local distribution companies. Could you explain that part of the industry and the attraction that these two stocks offer?

Skip Aylesworth:  Well, they’re even a purer play than WGL. They are the local gas guy in their particular location. Atmos covers eight states throughout the center part of the United States from Texas north.  One Gas is in Oklahoma and Texas.  

These are good economic areas, good growth areas, but they are purely—their story—is they’re the local gas guy. They connect gas from what they call the city gate, which is where the major pipeline drops it off in the area and connects it from there to the home or to the commercial facility. They have absolutely no oil exposure at all.  

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That’s a positive in today’s environment and both stocks are up in the mid-teen area year-to-date, so been successful, have good economic areas, and they’re very focused on what it is they do. They do one thing and they try to do it very well. Very simple story, and in today’s times, that’s been very good.

Steven Halpern:  Now, are these all companies that are focused just on growth, or did they also have a dividend component.

Skip Aylesworth: They—all three that we’ve talked about—have dividend components. In the fund in concept we have today 61 holdings, 59 pay dividends, and the story is really a total return story.  There is a dividend component, as well as the appreciation of the industry, we hope the appreciation of the industry that we’re investing in.

Steven Halpern:  Now, finally, I’d like to ask about a company that’s been in the headlines lately and that’s Kinder Morgan (KMI), the well-known pipeline company that’s faced some troubles.  Over the last year, the stock’s down some 60%. Is there a light at the end of this tunnel?

Skip Aylesworth:  Well, first, I’d say, “Ouch.”  It is a member of the index and, hence, we own it, and so that’s detracted from these other companies that we’ve recently talked about. The Kinder Morgan is like one of the main arteries in the body.  It is one of the large interstate pipeline companies of the United States.  

It has a very large network and has a very diversified business model, which has come under attack because some of their businesses, some of their subsidiaries not only move natural gas but also move oil, and so as oil price has come down and American production is decreasing or is expected to decrease, there is concern about revenues for Kinder Morgan.  

Part of the Kinder Morgan story has been a very large dividend, and they’ve used that dividend, rather in paying dividends, that cash flow to pay dividends rather than invest in the company.

So what’s recently happened in the last couple of weeks is they’ve cut the dividends and now are going to take the majority of that cash flow and invest in their business because there’s a lot of pipeline capital needs coming up, so there’s been a kind of a restructuring there.  

They’ve cut the dividends. Usually, when companies cut their dividends the stock price goes down, and so that’s the story of Kinder Morgan, we hope success going forward, but fundamentally, it is one of the main arteries of the energy business within the US at long-term should be a good investment and we hope that proves true for the fund.  

Steven Halpern:  Again, our guest is Skip Aylesworth of the Hennessy Gas Utility Fund, and for our listeners, the symbol for that fund is GASFX.  Thank you for your time today, Skip.

Skip Aylesworth:  My pleasure.

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