MDU Resources Group, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

MDU Resources Group, Inc. is a diversified company operating in the energy and construction industries, with a business structure that spans regulated utilities, energy production, and construction services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

MDU Resources Group, Inc. operates across four primary segments: Regulated Energy (electric and natural gas utilities), Pipeline (transmission and storage), Construction Materials and Contracting, and Construction Services.

  • Regulated Energy: This segment consists of regulated electricity and natural gas utility operations. It involves the generation, transmission, and distribution of electricity and the distribution of natural gas.
  • Pipeline: This involves the transportation and storage of natural gas through pipelines.
  • Construction Materials and Contracting: This unit produces and provides aggregates, asphalt, concrete, and related construction materials, and constructs commercial and heavy highway projects.
  • Construction Services: This segment offers infrastructure and specialty construction services to a wide range of clients.

Financials and Performance

MDU Resources has shown a solid, but uneven, performance in recent periods.

  • Revenue Distribution: The revenue is diverse across segments. Regulated Energy has the highest revenues overall with around $1.4 billion. The next highest is the Transmission segment with just north of $1 billion, and then construction materials and contracting with $775 million. Construction services come in last at $430 million for the past year, but in general, each segments contribution to total revenue varies from quarter to quarter depending on many circumstances.

  • Profit Margins: The company’s gross and operating margins have seen some fluctuations, mostly due to the changes in commodity prices. Overall the operating margins vary a lot by the segments they are, for example the natural gas distribution and transmission businesses have a smaller margin compared to construction which have been significantly higher, they are mostly between a range of 5% and 20%. In general, they have been rising year over year, especially from 2022 lows.

  • Recent Performance: In recent quarters, the business has seen increased revenue largely due to the strong growth in the company’s natural gas distribution and transmission businesses, which the company has noted as “driven primarily by higher natural gas prices” while construction revenues have been more stable and have faced some headwinds. In their earnings call, management seemed pretty optimistic about the future growth of the company, particularly in the energy sector.

  • Capital Spending: Capital expenditures of the company are substantial, especially in infrastructure projects such as building gas pipelines. Management has communicated plans to increase capital spending further in the next 3 years to around $1 billion each year, driven by growth opportunities and regulations. This indicates a focus on reinvesting capital to increase the size and efficiency of its operations.

  • Financial Strength: The company maintains a moderate level of debt. It does not take on extremely high leverage. Most of their debt has a fixed maturity that is pretty reasonable, and their cash flows are more than sufficient to meet their financial obligations. Their investment grade credit ratings also add to the companies stability. They have however, been increasing debt to finance acquisitions and growth.

Moat Rating: 2/5

MDU Resources possesses a limited moat due to several factors:

  • Regulated Utility Operations: The regulated nature of the energy segment provides a degree of stability and somewhat predictable revenue streams, and because of that creates a mini-moat. This business unit does carry a lot of debt though, but they generally get the money back from consumers to pay for it.
  • Location-Based Advantage: For Construction Materials, the company enjoys local advantages because transportation costs of its products (aggregate, asphalt, cement) makes it extremely difficult for competition in close proximity.
  • Limited Differentiation: The company faces high competition in the construction sector, and although there are many players, there is not a lot of brand loyalty, making margins in this sector volatile.
  • Lack of Intangible Moats: The company does not have a strong brand or patented technology (though they are always investing in new technology).
  • Scale-Based Moat: MDU is a large company, which has some scale economies, particularly in its utilities and pipeline segment. It is able to leverage scale in its distribution networks. But, this isn’t a very strong moat compared to other peers who have significantly larger economies of scale.

Risks to the Moat

  • Regulatory Risks: MDU’s regulated businesses are subject to a lot of regulatory changes, which could affect profitability. * Commodity Price Volatility: Fluctuations in oil, gas, and material costs can create significant swings in revenue and profits, especially for their construction divisions, which is a big risk.
  • Interest Rate Increases: Higher interest rates can impact borrowing costs as the company needs to spend large sums of capital on its infrastructure, and thus reduce the companies profit or hinder growth.
  • Environmental Risks: New stricter regulations relating to pollution controls, carbon emissions etc can potentially cost the company to operate and limit its growth, adding compliance costs that are not easily passed on to the customer.
  • Competition: As mentioned before, they face intense competition in the construction markets.
  • Technological Disruptions: The rapid developments in green energy technologies could affect the long-term economics of the company.

Business Resilience

  • Diversification: The diversification across the energy and construction industries helps to partially shield MDU from major economic downturns in a particular sector. For example, if the construction sector suffers, the regulated energy and pipelines division can help offset such losses, and vice versa.
  • Essential Services: MDU provides essential services such as electricity, gas, and construction, which are important even in economic downturns. The need for such services means the company can have relatively steady sources of revenue throughout its cycles.
  • Regulatory Stability (partially): The regulated aspect of utilities allows a stable, but slower growth with its earnings, and protects some of their businesses from complete obliteration, if something goes wrong.

Understandability Rating: 2/5

MDU Resources is a fairly diversified business. While the individual segments are not particularly difficult to understand (utilities, pipelines, construction services, and construction materials), the interplay of these segments creates a complexity that is not very easily understood.

Balance Sheet Health: 3/5

  • Moderate Debt: MDU carries a significant amount of debt, however it is well within its financial capabilities and its credit rating is investment grade.
  • Stable Cash Flow: The company usually generates fairly steady cash flows due to its essential business lines.
  • Growth Driven Spending: The company has been taking on new debt to finance acquisitions, and infrastructure projects. There are no guarantees that all such projects will materialize into returns.

Recent Concerns and Management Outlook

The company’s recent earnings call was mostly positive, highlighting a strong performance in the natural gas distribution business and infrastructure growth initiatives. However, concerns included: * Lowering commodity prices: While management is bullish on prices of gas and other commodities in the long term, there have been periods of reduced prices, which could affect earnings for the company in the short-term.

  • Increase in Debt: The company is taking on additional debt to make investments. And while it expects these to improve the company’s earnings and performance, there is a possibility they might not pan out as planned. * General Macro-Economic Weakness: They are not immune to a downturn in the overall economy, which could see demand for their products and services weaken.

In the earnings calls, management seemed very bullish on future outlook, projecting growth to continue, although they did warn that they could not foresee the exact future and might be wrong. Despite some potential downside risks, the company seems well-positioned in the current environment. The management seemed to be focused on improving operations, and increasing its profitability and value creation through strategic initiatives. Management seemed confident that its strategies would improve its financials and shareholders returns.