On Aug 28, 2015, we issued an updated research report on AGL Resources Inc. GAS. That this energy services’ holding player may be acquired by Southern Company (SO) is now common knowledge. We believe that AGL Resources will gain from the deal closure. However, milder-than-normal weather conditions in the future could affect AGL Resources’ natural gas distribution business since the commodity is used for space heating purposes.

The positives and the negatives are reflected in AGL Resources’ Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity.

Last week, AGL Resources declared that it got an approval from its board of directors to be acquired by Southern Company. The completion of the deal, valued at $12 billion with the inclusion of debt, is anticipated by the second half of 2016. As a part of the transaction, the stockholders of AGL Resources will get $66 per share. This is much higher than the current and previous stock prices of the company.

Moreover, AGL Resources − the principal business of which is gas distribution – pays out an annual dividend of $2.04 per share, yielding an attractive 3.4%. It is to be noted that the company increased its dividend payout by 4.1% in Feb 2015. In particular, AGL Resources has a long and consistent dividend-paying record. The company has paid out dividends in each of the last 271 quarters for more than 60 years.  

However, operating results for AGL Resources are affected by weather conditions and may vary on a seasonal and quarterly basis. Natural gas distribution is usually a temperature-sensitive business with about half of all deliveries used for space heating. Usually, almost 75% of the deliveries and sales occur during the six-month period of October through March. Consequently, milder-than-normal weather conditions in the future could hurt the company’s operating results, cash flow and financial condition.

Key Picks from the Sector

Better ranked players in the energy sector include Warren Resources Inc. WRES, Alon USA Energy, Inc. ALJ and Alon USA Partners LP ALDW. Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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