The declining natural gas prices in the UK and Europe have definitely given households a reason to cheer. Gas prices in Europe have been steadily declining since August 2022, reaching €76/MWh in January 2023. This is mainly due to the reduced demand after a warmer winter this season.
This creates added pressure on the energy sector, and analysts expect more volatility in prices in 2023. HSBC has reduced its gas price forecast by 30% for 2023, but the bank feels the prices will still be higher.
Based on this backdrop, we have shortlisted utility sector stocks National Grid (GB:NG) and SSE (GB:SSE) from the UK market. Currently, these stocks have not witnessed any hit on their share prices and remain well-positioned for the future.
Let’s have a look at how these companies are placed.
SSE is among the largest electricity network companies in the UK and is leading the way in renewable energy generation. The company has a more diverse mix of business segments, which makes it more resistant to the changing market conditions.
In January 2023, the company issued its Q3 trading statement, stating that it has already achieved 90% of its planned output in renewable energy generation. The company also updated its adjusted EPS to 150p, up from 120p in previous guidance.
Analysts see SSE as safe stock against the falling gas prices as its share price still does not reflect its transition to the renewables business. Sam Arie from UBS feels SSE has “good exposure to power prices for the next three years.” He forecasts earnings growth of 7-10% annually over the next five years.
Arie has recently reiterated his Buy rating on the stock at a target price of 1,950p.
What is the Target Price for SSE PLC?
In the last year, the stock has gained almost 20%, and analysts remain positive on further upside.
The stock has a Moderate Buy rating on TipRanks, with five Buy recommendations. The average target price for SSE stock is 1,917.5p, which has an upside of 9.2%. The price has a high forecast of 2,110p and a low forecast of 1,738p.
National Grid is a UK-based utility company involved in the transmission and distribution of electricity. Being part of a recession proof sector, the company enjoys consistent demand and earnings.
On a long-term horizon of five years, NG stock has gained more than 75%. The company benefits from its dominant market position, as it controls 30.4 million residential and commercial areas in the United Kingdom. This was clearly reflected in its financial numbers as well.
For the first half of fiscal year 2022-23 the company posted a 45% growth in its profits before tax of £1.5 billion. This was a result of profits from UK electricity distribution as well as sales to Berkeley Group Holdings (GB:BKG).
Moving forward, analysts remain optimistic about the company’s revenues as they forecast higher demand for electricity in the coming years. The company also raised its guidance for the full year and now expects EPS growth of 6-8%. NG is also targeting an asset growth CAGR of 8-10% over the next three years.
Are National Grid Shares a Buy?
According to TipRanks’ analyst rating consensus, NG stock has a Moderate Buy rating. The stock has four Buy and four Hold recommendations.
The NG share price forecast is 1,104p, which is 6.4% higher than the current price level.
Moving forward, the heating demand will remain strong over the remaining months of cold weather in Europe. This will support gas prices, but volatility is expected to continue in 2023. The falling gas price could hit the share prices of energy stocks, but it can also create a better entry point for investors.