National Fuel Gas Heating Up

Last week, in a number of filings, National Fuel Gas (NFG) responded to inquiries from a hedge fund, owning ~9.8% of outstanding shares, to its Board regarding, among other issues, the slow pace of E&P development of its Appalachian reserves.

NFG has been slow to realize the value of its near million acres of prime Appalachia acreage. To put this in perspective:

1) The company hasn't booked any PUDs on its developed acreage even.

2) It has only developed 50% of it's shallow potential.

3) NFG has only one deep Shale well with nearly the entire 939,000 acres available for development and no deep reserves booked.

We see a few catalysts that should accelerate value creation for shareholders in the near to intermediate term: a) forming an MLP off of its more mature California assets; b) disclosure of the Netherland Sewell reserve estimate of NFG's shallow reserves (expected in 4Q'07); c) contract Netherland Sewell to perform an assessment of the deeper Shale reserves in Appalachia; d) accelerate drilling in the Appalachia region to match its peers in the area; and e) potentially sell off its non-core segments such as the timber and marketing group.

From an NAV perspective, we believe the short term value jump from a disclosure of the shallow Appalachia reserves report could be as much as $10/share. Accelerating production growth by 15% could also produce steady earnings growth of 5plus% a year in our view. Needless to say, the NFG story is heating up and should provide some exciting developments in the near future as we see how management responds to hedge funds demanding changes.

Disclosure: none

Comments

[Daniel W:]

Enter your comment hereEOG is expected to drill 10 wells over 2007, and 250 in 2008 (in order to keep the joint venture active). Management said in the latest CC that this # can be revised up or down depending on results, and prices.

The value of the near-million acres NFG owns--approximately $50 per share if you use comps given to peers in the same play--ought to get priced in more and more as this data becomes available for market participants.

Personally, I'm not expecting a big move on the reserve report but there's no telling what the market chooses to do. Either way, NFG seems to have both good downside support and upside potential--with shareholders urging management to take a series of steps that would allow the value to be realized quickly.

Conclusion: there are worse companies to own. Thanks for posting this. I was going to right something on the news but you beat me to it. The only thing I'd add is that management's response to the letter by New Mountain and CalPERS was truly pathetic--if you can call it a response it all (as opposed to side-stepping nearly every issue raised).

2007 Sep 19 02:16 PM

[Monica Verma:]

It's great to see someone else looking into these guys. Saw your posting as well and I guess we were thinking along the same lines.

The last response did seem to indicate that management was getting a little annoyed with the correspondence. We'll see in the coming weeks.

I do think that as more information becomes available, NFG will bump up for the shallow reserves. The problem is that the N/S report is only for the shallow. So using the deep valuation of its peers, the stock could have a great deal more of embedded value. It may be some time coming...

I did a little survey of a sample players in the area (which I'm happy to send over if you like), looking at capex, reserves, planned wells, exisiting wells, etc. Just to give you a sense of how slow they are going, companies like Range Resources (RRC) and Equitable (EQT) are devoting almost 3x the amount of capex to the region. NFG has one shale well while Cabot Oil and Gas (COG), I think, has around 100. This is kind of interesting given the fact that NFG is the incumbent player in the region.

Bottom line, I see a lot of similarities between NFG and Questar (STR) at the beginning of its transformation...the STR story has turned out really well, so let's see what NFG can do to create more value for shareholders.

2007 Sep 21 10:26 AM

[Daniel W:]

I'd be very interested to see your work on this one but am hesitant about leaving email details in a public forum. I just started a blog though--which is rarely visited! Could you post it there in the comments section on one of my NFG posts? The address is easy, just type my name then add .blogspot.com (my creativity knows bounds).

We do agree on much about NFG. While you can definitely tell that management is getting annoyed with the correspondence--a telling point in my opinion--the recent letter by New Mountain shows that their patience is wearing thin too.

One of the recommendations, to drop the poison pill, is important because New Mountain is basically limited from buying more--given their ownership of close to 10% of the shares (the point at which the "pill" is triggered).

From recent filings it appears that NFG has sold off some of their position, though they still own roughly 9% of the company. I'm looking forward to the next quarterly disclosure reports to see if Citadel increased their stake substantially again--and whether or not all of the recent drama has brought in any activist funds with significant shareholdings.

2007 Sep 22 01:27 AM