Morningstar | Naturgy's Unique Capital Structure Drives Shareholder-Friendly Policy
With 34 billion cubic meters of gas sold in 2017, of which 11 bcf were LNG, Naturgy is one of the largest gas utilities in Europe. The profitability of the gas supply division has been under pressure since 2012, owing to a drop in the unit margin from intense competition and narrowing of spreads between gas prices across the world.This backdrop has reversed in 2018 due to increasing gas prices and spreads across the world. We expect the profitability of the gas supply and International LNG divisions to significantly increase through 2022 owing to increasing volumes, continuing margin improvement though contract renegotiation in the short term, and rebalancing of the LNG global market in 2022 and beyond. Also, the group is the last utility in Europe to have a sizable LNG business unit, which could attract interest from international oil companies.Profitability of the Spanish power generation business should increase though 2022 on normalisation of hydro conditions after the 2017 drought. Naturgy's strategy to sell power generation from hydro, nuclear, and renewables at fixed prices will reduce the earnings volatility.Electricity and gas networks in Spain and Latin America form the group's largest division with around 60% of consolidated EBITDA. They provide cash flow visibility and sustainable organic growth in Latam. With 40% of Naturgy's capital owned by international investment funds Global Infrastructure Partners and CVC Capital Partners, Naturgy has a unique shareholder structure for a European utility. The former acquired its stake in November 2016 and the latter in February 2018, both at an average price of EUR 19 per share. We believe the funds were enticed by the group's strong free cash flow generation. The significant increase in shareholder remuneration through dividend and share buy back announced in June 2018 reflect the funds' clout. The 10% annual dividend growth through 2022 can entice income seekers.Gas Natural SDG is a gas company based in Spain. Co. and its subsidiaries are primarily engaged in the supply, transportation, distribution and commercialization of piped natural gas, as well as the activities involving exploration and developing, supply, regasification, liquefaction and storage of natural gas, and the generation and commercialization of electricity. Co. operates mainly in Spain and also outside of Spain, especially in Latin America, Puerto Rico, Italy, France and Africa (through Maghreb-Europe gas pipeline and integrated LNG projects in Algeria).
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