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[OGS] ONE Gas Thesis 2026: A Pure-Play Tri-State Gas Utility Compounds Rate-Base Growth Into Dividend Increases

Ddrillr ResearchOriginal research
Published 12 min read

ONE Gas, Inc. (NYSE: OGS) is a Tulsa, Oklahoma-headquartered pure-play regulated natural gas distribution utility — one of the largest publicly-traded gas-only LDCs in the United States — serving ~2.3M+ customers across Oklahoma, Kansas and Texas. The company was created in 2014 when ONEOK, Inc. (OKE) spun off its natural-gas-distribution business as a separate public company called ONE Gas, retaining the natural-gas-pipelines/midstream business under the ONEOK name. ONE Gas operates three regulated utility subsidiaries: Oklahoma Natural Gas (~880K+ customers across most of Oklahoma — the company's largest and oldest unit, with deep roots in Tulsa/Oklahoma City), Kansas Gas Service (~660K+ customers across most of Kansas — Wichita, Topeka, Kansas City, Lawrence, Manhattan), and Texas Gas Service (~750K+ customers in Austin/Round Rock, El Paso, several South Texas/Coastal Bend communities, and parts of west and central Texas — historically the highest-growth piece given Austin/Texas population dynamics). Each utility is regulated by its respective state commission — the Oklahoma Corporation Commission, the Kansas Corporation Commission, and the Texas Railroad Commission (which regulates Texas gas utilities). The business model is classic regulated-utility: rate base growth + allowed ROE + customer growth + formulaic rider/replacement mechanisms drive EPS growth, with capex (multi-year ~$5-6B+) funded by a balanced mix of debt + equity issuance. Geography is favorable: Sun Belt states (Texas especially, Oklahoma to a lesser degree) experiencing population/economic growth providing organic customer additions. Capital structure investment-grade, utility-conventional. Robert McAnnally became CEO in 2021 after Pierce Norton departed. OGS enters FY2026 with FY2025 revenue selected various aggregate ~$2.0-2.3B, aggregate adjusted EPS ~$4.05-4.50 (~6-9% growth), adjusted EBITDA ~$830-920M. The first thesis pillar is the regulated tri-state gas-distribution franchise — the entirety of the business: Oklahoma Natural Gas (ONG) the largest unit (~880K+ customers dominant in OK — OKC, Tulsa, Norman, Lawton, Stillwater, Edmond, Broken Arrow), regulated by OCC through periodic general rate cases plus an annual PBRC mechanism for formulaic recovery, rate base ~$2.5-3B growing ~6-8% on infrastructure-replacement (cast-iron/bare-steel via GSEP or similar) + customer growth; Kansas Gas Service (KGS) ~660K+ customers dominant in KS (Wichita, Topeka, KC, Lawrence, Manhattan, Salina, Hutchinson), KCC-regulated with periodic rate cases + GSRS for accelerated capex recovery, rate base ~$1.7-2B growing ~6-8%; Texas Gas Service (TGS) ~750K+ customers serving Austin/Round Rock, El Paso, South Texas/Coastal Bend communities, parts of west/central Texas, RRC + city-tariff-regulated, rate base ~$1.5-1.8B with fastest customer growth (Texas demographics + Austin boom); unified capex plan ~$5-6B+ five-year focuses on cast-iron/bare-steel replacement, system reinforcement (capacity for TX growth), technology/meter modernization, decarbonization-related early-stage investments (RNG blending, hydrogen pilot); FY2025 dynamics are rate base growing ~7-9%, customer growth strong in TX, rate cases in progress, weather mixed, EPS growth ~6-9%; FY2026 catalyst is rate-case approvals (OCC/KCC/RRC), ROE allowances (~9.5-10%+), capex execution, customer growth, weather normalization; risks/competitors are adverse rate-case outcomes, warm winters, gas-commodity volatility, weather/safety operational events (especially TX), long-term electrification headwind, rate sensitivity; comp set is Atmos Energy (ATO, leader at premium), Spire (SR), Southwest Gas (SWX), Northwest Natural (NWN), New Jersey Resources (NJR), Chesapeake Utilities (CPK), Black Hills (BKH). The second pillar is the dividend-growth track record and conservative capital posture: dividend raised every year since 2014 spin-off, growing ~5-7% annually, ~$2.70-2.95/share currently (~3.5-4.5% yield, quarterly), ~58-66% payout — well-covered with room for continued growth; dividend the headline shareholder-return mechanism (no buybacks — utility model); conservative capital posture — ~50/50 debt/equity target, capex funded through operating cash flow + periodic senior unsecured note issuance (~$200-500M/yr, well-laddered) + periodic equity issuances (ATM or block, ~$100-200M/yr — necessary for capital-structure maintenance and IG ratings); credit profile A-/A3 / BBB+/Baa1-area; capital priorities fund capex → grow dividend → maintain IG → selective bolt-on (rare in gas LDC); FY2025 dynamics are capex on track, dividend grown, balanced debt + equity issuance, capital structure intact; FY2026 catalyst is the next dividend increase, capex execution, rate-case cycle, credit profile preservation; risks are payout-ratio compression from a bad rate-case cycle, equity-issuance dilution ahead of EPS growth, refinancing-rate sensitivity, and long-term gas-distribution-substitution risk (less acute in OK/KS/TX); comp set is gas LDC peers Atmos (ATO), Spire (SR), Southwest Gas (SWX), Northwest Natural (NWN), Chesapeake (CPK), NJR plus broader yield/growth Black Hills (BKH), MGE Energy (MGEE), Avista (AVA). The capital story: growing dividend ~$2.70-2.95/share annually (~3.5-4.5% yield, ~5-7% growth, raised every year since 2014 spin), no buybacks (utility ATM/block equity issuances ~$100-200M/yr), net debt ~$3.5-4.5B (senior unsecured + CP/revolver, well-laddered), ~5-6x net debt/EBITDA (utility-normal), ~13-16% FFO/debt, IG (A-/A3 / BBB+/Baa1-area), ~50/50 debt/equity target, ~62-66M shares (growing modestly), FCF negative-to-modest (capex > OCF, funded by debt + equity), capital priorities fund capex → grow dividend → maintain IG → selective M&A, with rate-case-timing dynamics, rate sensitivity, equity-dilution and FFO/debt covenants as principal considerations. At ~$62-78 per share on ~62-66M shares (~$4.0-5.0B equity, ~$8-9.5B EV) OGS trades at roughly ~15-19x P/E and ~10-12x EV/EBITDA with a ~3.5-4.5% dividend yield — in line with gas-utility peers, with the pure-play tri-state Sun Belt customer-growth story supporting a modest premium — versus Atmos (ATO, leader at premium), Spire (SR), Southwest Gas (SWX), Northwest Natural (NWN), New Jersey Resources (NJR), Chesapeake (CPK), Black Hills (BKH); broader utility comps NextEra (NEE, premium), WEC Energy (WEC), Xcel (XEL), Pinnacle West (PNW), Idacorp (IDA). FY2026 base case: ~$2.05-2.35B revenue + ~$4.25-4.75 adj. EPS + ~$870-960M adjusted EBITDA + ~6-9% EPS growth + rate-base growth ~7-9% + dividend grown ~5-7% + IG credit + capex on track + customer growth in TX/OK steady; bull case: ~$2.1-2.4B+ revenue + ~$4.45-5.00+ adj. EPS on constructive rate cases, accelerated TX/OK customer growth, favorable weather, dividend grown materially, credit upgrade, possible bolt-on, and a re-rating; bear case: ~$1.9-2.05B revenue + ~$3.85-4.15 adj. EPS on adverse rate cases, warm winters, regulatory delays, equity-dilution outpacing EPS growth, unfavorable RRC decision, and a compression. The thesis depends on the regulated-tri-state-gas-utility pipeline (rate-base growth + multi-state rate cases + TX/OK customer growth + infrastructure-replacement capex) plus the dividend-growth + conservative capital pipeline (post-spin annual-increase streak + balanced debt/equity capex funding + IG ratings + payout discipline) plus a constructive Sun Belt regulatory environment plus Robert McAnnally's continued stewardship.

[OGS] ONE Gas Thesis 2026: A Pure-Play Tri-State Gas Utility Compounds Rate-Base Growth Into Dividend Increases

Key Takeaways

  • ONE Gas, Inc. (NYSE: OGS) is expected to close FY2025 with selected various aggregate revenue of roughly $2.0-2.3B and aggregate adjusted EPS in the area of $4.05-4.50 (~6-9% growth), with adjusted EBITDA around ~$830-920M, on a pure-play regulated natural-gas-distribution utility serving roughly ~2.3M+ customers across Oklahoma, Kansas and Texas, under President & CEO Robert S. McAnnally (~3-4 year tenure since 2021, a longtime ONE Gas executive who succeeded Pierce Norton).
  • The first deep-dive — the regulated tri-state gas-distribution franchise — is the entirety of the business: Oklahoma Natural Gas (selected various aggregate ~880K customers, the largest unit), Kansas Gas Service (~660K customers), and Texas Gas Service (~750K customers), with total regulated rate base of selected various aggregate ~$5-6B+ growing ~7-9% annually on infrastructure-replacement programs and customer growth; FY2026 catalyst is multi-state rate-case outcomes, capex execution (selected various aggregate ~$750-900M/yr), customer growth (Texas and Oklahoma growing populations), and weather/usage normalization.
  • The second deep-dive — the dividend-growth track record plus the conservative capital posture — covers ONE Gas's history of consistent dividend increases since the 2014 spin-off (from ONEOK), the multi-year ~$5-6B capex plan funded by a balanced mix of debt + equity issuance, and the disciplined regulatory-recovery cycle; FY2026 catalyst is dividend growth (~5-7% trajectory), rate-case decision timing, and customer growth in Sun Belt service territories.
  • Capital position is investment-grade and utility-conventional: a growing dividend (selected various aggregate ~$2.70-2.95/share annually, a ~3.5-4.5% yield), no buybacks (capex-funded with periodic equity issuance), selected various aggregate net debt in the area of $3.5-4.5B, roughly ~5-6x net debt/EBITDA (utility-normal), an investment-grade credit profile (A-/BBB+/A3-Baa1 area), and ~62-66M shares outstanding (growing modestly).
  • FY2026 catalysts: multi-state rate-case approvals (OK Natural Gas, Kansas Gas, Texas Gas dockets in regular cycles), capex execution toward the multi-year plan, ~7-9% rate-base growth, ~5-7% EPS growth, the dividend's continued track record, customer growth in OK/TX, and any regulatory or commercial development.

Company Background

ONE Gas, Inc., headquartered in Tulsa, Oklahoma, is a pure-play regulated natural gas distribution utility — one of the largest publicly-traded gas-only LDCs in the United States — serving roughly ~2.3M+ customers across Oklahoma, Kansas, and Texas. The company was created in 2014 when ONEOK, Inc. (OKE) spun off its natural-gas-distribution business as a separate public company called ONE Gas, retaining the natural-gas-pipelines/midstream business under the ONEOK name. ONE Gas operates three regulated utility subsidiaries: Oklahoma Natural Gas (selected various aggregate ~880K+ customers across most of Oklahoma — the company's largest and oldest unit, with deep roots in Tulsa/Oklahoma City), Kansas Gas Service (~660K+ customers across most of Kansas — Wichita, Topeka, Kansas City, Lawrence, Manhattan), and Texas Gas Service (~750K+ customers in Austin/Round Rock, El Paso, several South Texas/Coastal Bend communities, and parts of west and central Texas — historically the highest-growth piece given Austin/Texas population dynamics). Each utility is regulated by its respective state commission — the Oklahoma Corporation Commission, the Kansas Corporation Commission, and the Texas Railroad Commission (which regulates Texas gas utilities). The business model is the classic regulated-utility one: rate base growth + allowed ROE + customer growth + formulaic rider/replacement mechanisms drive EPS growth, with capex (multi-year ~$5-6B+) funded by a balanced mix of debt + equity issuance. Geography is favorable: the Sun Belt states (Texas especially, Oklahoma to a lesser degree) are experiencing population/economic growth, providing organic customer additions. The capital structure is investment-grade, utility-conventional. Robert McAnnally became CEO in 2021 after Pierce Norton (the founding ONE Gas CEO from the 2014 spin) departed to lead another energy company. Risks: state-by-state regulatory outcomes (rate cases, ROE allowances), weather/usage variability (warm winters compress gas-distribution margins despite decoupling mechanisms), gas-commodity price volatility (passed through but customer-bill optics), the long-term electrification headwind to natural-gas distribution (less acute in OK/KS/TX than in CA/NY but a slow-burning issue), Texas tornado/hurricane operational disruption, interest-rate sensitivity, and equity-issuance dilution.

The Regulated Tri-State Gas-Distribution Franchise

The entirety of ONE Gas's business is the regulated tri-state gas-distribution franchise — and the state-by-state rate-case cycle plus capex execution drives nearly everything else. Oklahoma Natural Gas (ONG) is the largest unit — selected various aggregate ~880K+ customers, the dominant natural-gas distributor in Oklahoma (most major cities — Oklahoma City, Tulsa, Norman, Lawton, Stillwater, Edmond, Broken Arrow), regulated by the Oklahoma Corporation Commission (OCC) through periodic general rate cases plus an annual Performance-Based Rate Change (PBRC) mechanism that allows formulaic recovery of certain investments between general cases; ONG's rate base is selected various aggregate ~$2.5-3B and grows ~6-8% annually on infrastructure-replacement programs (cast-iron/bare-steel main replacement under the OCC-approved "GSEP" or similar accelerated programs) plus customer growth. Kansas Gas Service (KGS) — selected various aggregate ~660K+ customers, the dominant natural-gas distributor in Kansas (Wichita, Topeka, Kansas City, Lawrence, Manhattan, Salina, Hutchinson and most of Kansas), regulated by the Kansas Corporation Commission (KCC) through periodic rate cases plus the Gas System Reliability Surcharge (GSRS) for accelerated-replacement capex recovery; rate base ~$1.7-2B growing ~6-8%. Texas Gas Service (TGS) — selected various aggregate ~750K+ customers, serving Austin/Round Rock, El Paso, several South Texas and Coastal Bend communities, and parts of west/central Texas, regulated by the Texas Railroad Commission (RRC) plus city-by-city tariff filings; rate base ~$1.5-1.8B with the fastest-growing customer base of the three units (Texas population growth and Austin economic boom drive organic customer adds). The unified capex plan — selected various aggregate ~$5-6B+ over the next five years — focuses on (a) cast-iron and bare-steel main and service-line replacement (gas-safety-driven; recovered via formulaic mechanisms), (b) system reinforcement (capacity additions for customer growth, especially in Texas), (c) technology and meter modernization, and (d) decarbonization-related investments (renewable natural gas blending, hydrogen pilot studies — early-stage). FY2025 dynamics: rate base growing ~7-9% on capex, customer growth strong in Texas, rate cases in progress across all three states (typical 2-3 year cycle), weather mixed, EPS growth ~6-9%. FY2026 catalyst: rate-case approvals at OCC/KCC/RRC, ROE allowances (~9.5-10%+ area), capex execution, customer growth in Texas/Oklahoma, weather normalization, and any new infrastructure programs. Risks/competitors: adverse rate-case outcomes (ROE compression, capex disallowance), warm winters (despite weather normalization mechanisms partially mitigating), gas-commodity-price spikes (customer bills increase, regulatory pressure), wildfire/severe-weather operational events (especially Texas, less acute than CA but exists), the gradual long-term electrification headwind to gas distribution, and interest-rate sensitivity on the refinancing schedule. Comp set: Atmos Energy (ATO, the gas-distribution leader, larger scale), Spire (SR), Southwest Gas (SWX, AZ/NV gas-utility with Centuri spin), Northwest Natural (NWN, Pacific Northwest gas), New Jersey Resources (NJR, NJ gas + clean-energy mix), Chesapeake Utilities (CPK), Black Hills (BKH, multi-state gas + electric) — the multi-state gas-distribution-utility universe.

The Dividend-Growth Track Record and Conservative Capital Posture

The second deep-dive bundles the dividend-growth track record with the conservative capital posture that supports it. The dividend track record: ONE Gas has raised its dividend every year since the 2014 spin-off, growing the dividend ~5-7% annually on average — selected various aggregate ~$2.70-2.95 per share annual dividend currently (a ~3.5-4.5% yield, on a quarterly cadence) — supported by a payout ratio of selected various aggregate ~58-66% of adjusted EPS (well-covered, with room for continued growth). The dividend is the headline shareholder-return mechanism (no buybacks — utility model). The conservative capital posture: ONE Gas operates with a ~50/50 debt/equity capital structure target, funding the multi-year ~$5-6B+ capex plan through (a) operating cash flow, (b) periodic senior unsecured note issuance (selected various aggregate $200-500M annual debt issuances, well-laddered), and (c) periodic equity issuances (typically ATM or block offerings, ~$100-200M annual) — the equity issuances dilute modestly but are necessary to maintain capital-structure targets and the investment-grade ratings. The credit profile is investment-grade at all three major agencies (A-/A3 at S&P/Moody's-equivalent, BBB+/Baa1 at Fitch — depending on agency), supporting low funding costs in a sector where credit ratings matter. Capital priorities: (1) fund the multi-year capex program, (2) grow the dividend (continuing the streak), (3) maintain investment-grade ratings, (4) selective bolt-on opportunities (rare — natural-gas LDC M&A is consolidation-driven and slow). FY2025 dynamics: capex on track, dividend grown ~5-7%, balanced debt + equity issuance, capital structure intact. FY2026 catalyst: the next dividend increase (~5-7% growth), capex execution, the rate-case cycle, and the credit profile preservation. Risks: payout-ratio compression from a bad rate-case cycle (a dividend cut would be a major signal — very unlikely given the track record), equity-issuance dilution pace ahead of EPS growth (a watch item), refinancing-rate sensitivity, and the long-term gas-distribution-substitution-risk discussion (in the OK/KS/TX context, less acute than coastal states but a real long-term consideration). Comp set: gas-distribution-only peers — Atmos Energy (ATO), Spire (SR), Southwest Gas (SWX), Northwest Natural (NWN), Chesapeake Utilities (CPK), New Jersey Resources (NJR); broader utility yield/growth — Black Hills (BKH), MGE Energy (MGEE), Avista (AVA).

Capital Position + Balance Sheet

ONE Gas runs a utility-conventional, investment-grade balance sheet. The company pays a growing dividend (selected various aggregate ~$2.70-2.95/share annually, a ~3.5-4.5% yield, growing ~5-7% annually — every year since the 2014 spin), conducts no buybacks (utility model relies on equity issuances to fund capex), and carries net debt of selected various aggregate roughly $3.5-4.5B (a mix of senior unsecured notes — well-laddered — and commercial paper / revolver), bringing net debt to EBITDA to selected various aggregate ~5-6x — utility-normal — with FFO/debt selected various aggregate ~13-16% (rating-agency-relevant) and an investment-grade credit profile (A-/A3 / BBB+/Baa1 area). Capital structure targets ~50/50 debt/equity. Free-cash-flow conversion is negative-to-modest given the heavy capex (capex consistently exceeds operating cash flow), funded by debt + equity issuance. Capital priorities: fund capex → grow dividend → maintain IG → selective M&A. ~62-66M shares (growing modestly via ATM/block issuances of selected various aggregate ~$100-200M/yr). The principal balance-sheet considerations are rate-case-timing dynamics, interest-rate sensitivity, equity-issuance dilution, and FFO/debt covenants.

Key Core Metrics

  • Revenue: selected various aggregate ~$2.0-2.3B FY2025
  • Adjusted EBITDA: selected various aggregate ~$830-920M FY2025
  • Adjusted EPS: selected various aggregate ~$4.05-4.50 FY2025 (~6-9% growth)
  • Customers: selected various aggregate ~2.3M+ (gas-only, residential dominant)
  • Three regulated utility subsidiaries: Oklahoma Natural Gas (~880K+ customers, OCC-regulated), Kansas Gas Service (~660K+, KCC), Texas Gas Service (~750K+, RRC)
  • Total regulated rate base: selected various aggregate ~$5-6B+ (growing ~7-9% annually)
  • Capex: selected various aggregate $750-900M+/yr ($5-6B+ multi-year plan)
  • Capex focus: infrastructure replacement (cast-iron/bare-steel mains under GSEP/GSRS/similar accelerated mechanisms) + customer-growth system reinforcement + technology/meter modernization
  • Texas Gas Service: fastest customer growth (Texas population dynamics, Austin economic boom)
  • ROE allowance: ~9.5-10%+ area across state jurisdictions
  • Regulators: Oklahoma Corporation Commission (OCC) + Kansas Corporation Commission (KCC) + Texas Railroad Commission (RRC) + city-by-city Texas tariffs
  • Net debt: selected various aggregate ~$3.5-4.5B FY2025
  • Net debt / EBITDA: selected various aggregate ~5-6x (utility-normal)
  • FFO/Debt: selected various aggregate ~13-16% (rating-agency-relevant)
  • Credit profile: investment-grade (A-/A3 / BBB+/Baa1-area at the three agencies)
  • Dividend: selected various aggregate ~$2.70-2.95/share annually (~3.5-4.5% yield; ~5-7% annual growth)
  • Dividend streak: raised every year since 2014 spin-off
  • Payout ratio: selected various aggregate ~58-66% of adjusted EPS
  • Buybacks: none; ATM/block equity issuances ~$100-200M/yr funding capex
  • Shares outstanding: selected various aggregate ~62-66M (growing modestly)
  • Capital allocation: fund capex → grow dividend → maintain IG → selective M&A
  • Origin: 2014 spin-off from ONEOK Inc. (OKE)
  • CEO: Robert S. McAnnally (President & CEO, ~3-4 year tenure since 2021; longtime ONE Gas executive)

Market Evaluation

At roughly ~$62-78 per share on ~62-66M shares, ONE Gas carries an equity value of selected various aggregate ~$4.0-5.0B (and an enterprise value of selected various aggregate ~$8-9.5B including net debt), which on FY2025 cash flow is roughly ~15-19x P/E and ~10-12x EV/EBITDA with a ~3.5-4.5% dividend yield — a multiple in line with gas-utility peers, with the pure-play tri-state Sun Belt customer-growth story supporting a modest premium versus more mature gas LDCs. The comp set: Atmos Energy (ATO, the gas-distribution leader, larger and at a premium multiple), Spire (SR, gas-utility holding), Southwest Gas (SWX, AZ/NV with Centuri spin), Northwest Natural (NWN, Pacific Northwest), New Jersey Resources (NJR, gas + clean-energy mix), Chesapeake Utilities (CPK), Black Hills (BKH, multi-state gas + electric); broader utility yield/growth comps — NextEra Energy (NEE, premium regulated + renewables), WEC Energy (WEC, Midwest gas + electric), Xcel Energy (XEL), Pinnacle West (PNW, Arizona electric), Idacorp (IDA, Idaho electric). FY2026 base case: selected various aggregate ~$2.05-2.35B revenue + ~$4.25-4.75 adj. EPS + ~$870-960M adjusted EBITDA + ~6-9% EPS growth + rate-base growth ~7-9% + the dividend grown ~5-7% + investment-grade credit + capex on track + customer growth in TX/OK steady — a "set-it-and-forget-it" gas-utility year. Bull case: selected various aggregate ~$2.1-2.4B+ revenue + ~$4.45-5.00+ adj. EPS on constructive rate-case outcomes (full capex recovery, attractive ROEs), accelerated TX/OK customer growth, favorable weather, the dividend grown materially, a credit upgrade lowering funding costs, possible bolt-on M&A (rare in gas LDC), and a multiple expansion. Bear case: selected various aggregate ~$1.9-2.05B revenue + ~$3.85-4.15 adj. EPS on adverse rate-case outcomes (ROE compression), warm winters (compressing margins despite decoupling), regulatory delays, equity-issuance dilution outpacing EPS growth, an unfavorable Texas Railroad Commission decision (the most utility-fragmented of the three regulators), and a multiple compression. The thesis turns on the regulated-tri-state-gas-utility pipeline (rate-base growth + multi-state rate cases + customer growth especially Texas + infrastructure-replacement capex) plus the dividend-growth + conservative capital pipeline (the post-spin annual-increase streak + balanced debt/equity capex funding + investment-grade ratings + payout discipline) plus a constructive Sun Belt regulatory environment plus Robert McAnnally's continued stewardship of the post-spin ONE Gas franchise.

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