The investigation into the fatal explosions that ripped through several towns outside Boston on Thursday has barely begun. That means Friday’s sell-off in shares of NiSource Inc., whose gas pipelines appear to be the cause, is just the start of what will likely be a long period in purgatory.
As of Friday lunchtime in New York, NiSource stock was down almost 10 percent, its biggest drop since January 2009, when the market was still trying to find a floor amid the financial crisis. Investors thinking of jumping in now, however, would be wise to reconsider.
The obvious analogy here is PG&E Corp. and the September 2010 explosion of its gas pipeline in San Bruno, California. In the year leading up to that disaster, PG&E stock had traded roughly at parity with the regulated utilities sector on forward price/earnings multiples, with a slight discount of 3.4 percent on average. By the end of 2011, however, coinciding with roughly the first year of the aftermath, it had slipped to as much as a 30 percent discount. The stock has taken a similar hit in the aftermath of 2017’s wildfires in California.
Other than the steepness of the decline in PG&E’s relative valuation, the other point that shouldn’t be lost is the longevity of the discount. The investigations and litigation after the San Bruno disaster took a long time. The stock traded at a discount of 5 percent or more to the sector for 75 percent of the five-year period following the explosion.
Looking at NiSource, it was trading at a double-digit premium to the sector before Friday. As a multi-state natural gas utility, it offered investors both a decent growth story resting on reinvestment in the network and M&A potential, given how many of its peers have been bought up by electric utilities. The initial sell-off has cut that premium — but it is still a premium:
Historical parallels are just those, not exact templates. And with so little known at this point, it’s impossible to guess at what investigators will find or what NiSource’s exposure will be. Still, it’s reasonable to assume that finding out will take a while, and anyone jumping in now is taking a huge risk.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
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