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.