On April 22, Mario Gabelli began to publicly put pressure on mid-cap National Fuel Gas (NYSE:NFG) management to split up the company. As the second largest shareholder behind the Vanguard mutual fund family, Gabelli has been a strong supporter of NFG over the years. However, even with consistently rising earnings, Gabelli wants the Buffalo-based gas utility split from the natural gas exploration and midstream assets.
From the 13D SEC filing:
On April 22, 2014, GAMCO indicated that in preparation for the Issuer's 2015 Annual Meeting of Stockholders it will be evaluating all options available to it, including the submission of a proposal to be included in the Issuer's 2015 proxy statement to have stockholders vote on a proposal that the Issuer's Board either spin off the Issuer's LDC operation or its non-regulated operations. Further, GAMCO believes the Issuer should examine the strategic option of spinning off its LDC operation into a stand-alone publicly-traded utility, thus creating multiple C-corporations. The LDC C-corporation would then be in a better position to participate in the industry consolidation that is occurring.
The bottom line is that even though Gabelli supports management and has kind words for both the current and previous regime, the stock market has not appreciated NFG anywhere close to his belief of its underlying value. His estimate for the past few years has been that NFG should be worth $100 a share. With a current price of $74.55, this leaves lots of room for shareholder gains.
Gabelli announced he was considering filing a shareholder action in the form of a proxy vote to spin off the utility as a separate company. However, with the firm's fiscal year ending September, the actual vote would not take place until the next annual meeting in March or April 2015, or around 10 months from now.
National Fuel Gas Co. is a diversified natural gas company. NFG owns a regulated gas utility serving the region around Buffalo, NY, gas pipelines that move gas between the Midwest and Canada and from the Marcellus to the Northeast; and an oil and gas exploration and production business. NFG's regulated utility and pipeline businesses, as well as its California oil production business, provide stable earnings and cash flows to support the dividend, while the natural gas production business offers significant upside potential. NFG's ownership of 800,000 acres in the Marcellus shale, including 745,000 acres in the shale fairway of Pennsylvania, holds enormous natural gas reserve potential, and we believe the position could be worth $3.4 billion, based on recent comparable transactions. Despite the decline in natural gas prices leading to lower production levels, we continue to expect significant long-term earnings and cash flow growth from gas production, and we remain excited about the expansion or financial engineering potential of the strategically located pipeline network. The company has increased its dividend for over forty consecutive years.
Not to regurgitate information from the Jan article, below is a breakout of the sum of the parts on a price per share basis:
- Marcellus land and producing assets - $41
- Master Limited Partnership of Marcellus assets - $25 to $30
- Seneca oil and gathering assets - $17
- Natural gas utility - $12
Combined, these assets total between $95 and $100 a share, and match Gabelli's long-held potential valuation for NFG. Gabelli recently reiterated this valuation in the 2014 Barron's Roundtable discussion:
Next, think of Mother Earth. The first 1,000 feet of earth below sea level is the Upper Devonian. That's where 99% of the gas-drilling takes place. The next 8,000 to 9,000 feet is the Marcellus, and below that is the Utica, which is rich in energy liquids. National Fuel Gas [NFG] owns 720,000 acres, and leases 60,000. The stock is $70, and the play here is simple. The company operates the gas utility in Buffalo that is worth about $20 per share. It has a midstream pipeline business, which it has not monetized, and a growing exploration and production business in the Marcellus. Let's assume that natural gas stays at $4.40 per Mcf (thousand cubic feet) on the strip (the average of the next 12 months' futures contracts). National Fuel Gas could be worth $100 a share.
How do you figure?
Gabelli: The new CEO, Ron Tanski, has said the company is looking at financial engineering, including a master limited partnership for its midstream business. When Columbus came across the sea to America, everyone figured out how much money could be made, not whether it was a safe journey. If you're a utility CEO, the question is, how embarrassed will you be if you're not on the cutting edge? Oneok decided to spin off its local-distribution company, and the stock has rallied sharply. That would be a good path for NFG to follow. Natural gas was $4.79 per Mcf in 2009. It fell to $4.64, and $2.83, and then rose to $3.60. Now it is heading north because of the cold weather in much of the country. The stock did well last year, partly because natural-gas prices rose, and the company had some significant discoveries in the Marcellus shale. Regarding the numbers, there are 83 million shares outstanding, and the market capitalization is $5.6 billion. National Fuel Gas has $1.7 billion of net debt, and pays a dividend of $1.50 a share.
NFG recently announced quarterly earnings and upped its guidance for FY September 2014. For the second quarter, NFG reported operating earnings of $1.15 vs. a consensus of $1.13. Revenues were substantially above consensus at $756.2 million vs. consensus of $679 million. The conference call can be found here. For the fiscal year, management raised guidance from $3.20 - $3.40 to $3.40 - $3.55.
I find it very interesting that the only news organization to notice this information is the Buffalo News. In addition to the article referenced above, two subsequent articles have been published by the Buffalo News here and here. Although these do not add much to the initial article, they are worth a quick review.
Investors can still pick up shares of NFG at a 33% discount to Gabelli's valuation - but for how long is the question.
Author's Note: Please review important disclaimer in author's profile.
Disclosure: I am long NFG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.