European TTF gas prices jumped by 36% on March 2 to €43/megawatt-hour after Qatar Energy halted LNG production following the targeting of the world’s largest export facility, Ras Laffan, by an Iranian drone attack. This sent the German April forward power price up by 18%.
Why it matters: There is a high correlation between gas and power prices in Europe. The power producers with the largest valuation sensitivity to changes in power prices are Verbund, Acciona Energia, EDP, and SSE, in descending order. The former surged by nearly 8% on March 2.
- Through its large gas trading business, Naturgy NTGY is favorably exposed to high gas prices. Although most of its 2026 gas sales are hedged, it retains optionality through a fleet of eight LNG tankers. Engie could also benefit from high gas prices through its energy trading business, as it did in 2022-24.
- High gas prices should boost the short-term earnings of Centrica’s North Sea gas production assets. On the flip side, high power prices could reduce electricity demand.
The bottom line: On Feb. 27, our median price/fair value estimate ratio for the European utilities we cover was 1.11. Overvaluation stems from the HALO rally and an overoptimistic view of electricity demand growth. The median dividend yield was 4%, below the historical median of 4.7%.
- Although high gas and power prices are overall positive for the sector, they could spur inflation and, in turn, interest rates, which would hit stocks. This is what happened in 2022-24 when the sector underperformed despite record profits.
- Against this backdrop, we favor narrow-moat undervalued Naturgy, which yields 6.7%. Should the market selloff continue, we would look for entry points in utilities most exposed to UK and US electricity networks, such as SSE, National Grid, or Iberdrola.
Long view: We reaffirm our medium-term German wholesale power price assumption of €64/MWh based on a carbon price of €52 and a gas price of €23/MWh.
Key Morningstar Metrics for Naturgy Energy Group
- : €28.70Fair Value Estimate
- : ★★★Morningstar Rating
- : NarrowMorningstar Economic Moat Rating
- : MediumMorningstar Uncertainty Rating
