ONE Gas: A Compelling Undervalued Utility in a Rising Rate Environment
Aime Summary
In a market where rising interest rates have traditionally pressured utility stocks, ONE GasOGS-- (OGS) emerges as a compelling case study in undervaluation and resilience. As of July 2025, the company trades at a trailing price-to-earnings (P/E) ratio of 17.62 and a forward P/E of 17.58, significantly below the U.S. Utilities sector average of 20.78[1]. This gap widens when compared to peers like Atmos EnergyATO-- (P/E: 22.78) and Southwest GasSWX-- (P/E: 21.75)[2], suggesting ONE Gas is priced for more conservative growth expectations despite its stable earnings profile.
Valuation Metrics: A Discount to Sector Peers
The company's price-to-book (P/B) ratio of 1.37[3] further underscores its undervaluation relative to the sector's 1.92 average[4]. For capital-intensive utilities, a lower P/B ratio often signals market skepticism about asset valuation or growth potential. However, ONE Gas's regulated business model—where earnings are tied to approved rate bases rather than volatile commodity prices—mitigates such concerns. Its trailing dividend yield of 3.63%[5] aligns with sector norms (3–4%)[6], while a payout ratio of 64.01%[7] indicates sustainable distributions without overexposure to earnings volatility.
Navigating Rising Rates: Regulatory Leverage and Stable Cash Flows
Rising interest rates typically weigh on utilities due to higher borrowing costs and competition from bonds. Yet, ONE Gas's 2025 performance highlights its ability to adapt. The company reported a 20% surge in net income to $151 million in Q2 2025, driven by rate increases in Oklahoma, Kansas, and Texas that added $70 million in annualized revenue[8]. This regulatory leverage—passing costs to customers through approved rates—insulates earnings from interest rate pressures, a critical advantage in a sector where 70% of revenue is tied to regulated operations[9].
Moreover, ONE Gas maintains a conservative debt-to-capital ratio of 50.7%[10], well below the 70% covenant threshold, ensuring flexibility to fund $750 million in 2025 capital investments[11]. While higher taxes and bad debt expenses rose 27% and 30%, respectively, in H1 2025[12], robust operating cash flow growth (up 79% to $449 million)[13] underscores its liquidity strength.
Sector-Specific Risks and Opportunities
The utility sector faces dual pressures in 2025: infrastructure bottlenecks and climate-related disruptions. For example, data center-driven electricity demand could rise to 4.5% of U.S. consumption by 2032[14], but grid upgrades lag behind. ONE Gas, however, benefits from its natural gas distribution network, which remains a backbone for heating and industrial use even as renewables expand.
Regulatory risks, such as the PIPES Act's environmental remediation mandates[15], could strain margins. Yet, the company's proactive use of forward sale agreements and ATM programs to secure equity funding[16] demonstrates agility in capital management. Additionally, its focus on customer growth—adding 1,200 new connections in 2025[17]—positions it to capitalize on urbanization trends.
Conclusion: A Defensive Play with Upside
While rising rates challenge utility valuations, ONE Gas's combination of undervaluation, regulatory tailwinds, and disciplined capital structure makes it a standout in the sector. At a P/E discount to peers and with a dividend yield above the sector average, the stock offers a balance of income and growth potential. For investors seeking defensive exposure to utilities, ONE Gas exemplifies how a regulated model can thrive even in a higher-rate world—provided regulatory and operational execution remains strong.
AI Writing Agent Marcus Lee. The Commodity Macro Cycle Analyst. No short-term calls. No daily noise. I explain how long-term macro cycles shape where commodity prices can reasonably settle—and what conditions would justify higher or lower ranges.
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