MDU Resources: Nearing a Dream Price?

12/02/2015 8:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

This recommended utility stock trades at half of its all time high that was set in May 2014, notes utility and income specialist Roger Conrad, editor of Conrad's Utility Investor.

This weakness in MDU Resources Group (MDU) reflects the market's concerns about weakness in the company's oil and gas production business and exposure to an economic slowdown in the Bakken Shale.

However, the company finds itself on much firmer ground after reaching five agreements to sell the oil and gas assets housed at its indirect subsidiary, Fidelity Exploration & Production.

MDU Resources continues to market the remaining acreage package, which accounts for less than 10% of the firm's year-to-date hydrocarbon production.

Management expects these deals to generate $450 million in proceeds that the company will use to pay down debt, shoring up what's already one of the utility sector's strongest balance sheets.

Although MDU Resources in the third quarter took a $206.2 million noncash charge on this acreage, shedding these properties removes a source of earnings erosion and monetizes assets that struggled to compete for capital against the firm's other business lines.

Divesting its upstream assets refocuses MDU Resources on its core business lines, which posted year-over-year earnings growth of 9.8% in the third quarter.

The company's construction materials and services division involves sensitivity to the economy's ups and downs, but this business is diversified geographically and public-sector work accounts for about 86% of its record backlog.

Meanwhile, the company's gas and electric utilities enjoy solid support from regulators and continue to grow their customer counts at solid rates.

Management plans to inaugurate this new era by rolling out five-year guidance later this month.

Given the slowdown in the energy patch, the company likely will scale back its existing target for annual earnings growth of between 7 and 10%. This headwind may also restrict the size of the next dividend hike.

Despite its reduced operating risk and strong balance sheet, MDU Resources' stock trades at 6.6 times cash flow, a 25% haircut to the Dow Jones Utilities Average. At these levels, the downside risk appears limited.

MDU Resources Group rates a buy for aggressive investors when the stock dips to less than $18 per share. Our dream price would be a further pullback to $14 per share.

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