Morningstar | NTGY Updated Star Rating from 26 Feb 2019
Naturgy is the only integrated international Utility in Europe to which we ascribe a moat. This is driven by the high weight of gas regulated networks in which the group has a demonstrated ability to regularly outearn its cost of capital whether in Spain or in Latin America. We believe this will continue due to high regulated returns in Latam and the fact that returns are not regulated in Spain where the group benefit from its leadership position. Altogether, networks provide cash flow visibility and sustainable organic growth.With 378 TWh of gas sold in 2018, of which 141 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. In 2018, profitability strongly bounced back, especially due to International LNG division, which was boosted by increasing gas prices and spreads across the world. As Naturgy is the last utility in Europe to have a sizable LNG business unit, it could attract interest from international oil companies.Profitability of the Spanish power generation business should increase though 2022 on significant cost-cutting and commissioning of new wind and solar capacity. Also, Naturgy's strategy to sell power generation from hydro, nuclear, and renewables at fixed prices will reduce the earnings volatility.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.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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