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The ongoing drama between a secretive, slow-moving management team at National Fuel Gas (NFG) and their largest shareholder, New Mountain Vantage, continues to heat up.

NFG's Chairman and CEO, Philip Ackerman, briefly responded to a letter by New Mountain and CalPERS making a series of recommendations that the management team should take to unlock value at the Company. Of all the issues raised, Ackerman responded to only one, saying that he had "serious concerns" about the data the fund was using to value the company's Appalachian reserves, and asked to see the report they were relying on. He then said public exchanges between the two could be "confusing" to markets.

In an effort no doubt to clear up some of the confusion, or possibly just to remind the CEO of not-too-distant happenings, David DiDomenico, a Managing Director at New Mountain, sent the following letter to Ackerman:


Dear Phil:

I received your letter dated September 12, 2007. With respect to the analysis we had done by Schlumberger, which you requested in your letter, please recall that I and a team of four other executives representing New Mountain Vantage traveled to your offices in Williamsville on December 12, 2006 and reviewed with you in detail our estimates of the potential value of NFG's Appalachian acreage and the supporting data from Schlumberger.

The meeting lasted about three hours, and the attendees from NFG who accompanied you were Ron Tanski (Treasurer and Principal Financial Officer), Barry McMahan (Senior Vice President of Seneca Resources), Dale Rowekamp (General Manager, East Division, Seneca Resources), Cary Kuminecz (Senior Geologist, East Division, Seneca Resources), Kevin Ryan (Reservoir Manager, Seneca Resources) and Margaret Suto (Director, Investor Relations).

At that meeting, we also presented other confirming and supporting data, including the results of a land man report we commissioned and the practices of other E&P companies in the Appalachian region. Our group of executives included Fox Benton, the former CFO of Ultra Petroleum and Fred Salerno, the former Vice Chairman and CFO of Verizon Communications and a former board member of KeySpan, Consolidated Edison and Orion Power.

At the meeting you said that our findings were "directionally correct". We encouraged you to speak to Schlumberger directly and to retain them to develop a 3-P study of Appalachia and a determination of NFG's available drilling locations. (Subsequently, we sent our presentation materials from that meeting to Robert Brady, the lead independent director of NFG.) Following the December 2006 meeting, we released Schlumberger to work for NFG.

On May 4, 2007, I sent you an email message that questioned the Upper Devonian recoverable reserve estimates that the Company put forth in an 8-K filed on April 27, 2007. I offered in that email to arrange a call with the head of the Pittsburgh office of Schlumberger so that he could lend their professional perspective on the far superior results that other operators in the Upper Devonian are experiencing as compared to NFG.

We continue to encourage you to reach out to Schlumberger directly regarding NFG's opportunities in Appalachia. In short, I believe we have been quite forthcoming with our thinking and our analysis. We look forward to the Company's timely response to each of the recommendations in our September 11, 2007 letter.

Sincerely,

From an outsider's point of view, it appears that NFG has done their homework on the resource, and is relying on good data, provided by Schlumberger, as well as knowledgeable executives in the industry. The movements of other E&P companies in the area, such as Range Resources (which has more than doubled their land holdings in the area over the past couple of years), suggest the value that New Mountain sees in the shale and sand reserves is anything but dreamed up.

Ultimately, the ongoing debate between the management team at NFG and New Mountain is not about the quality of the resource however. Management has after all divested itself of their Canadian assets recently--partly to focus more on their Appalachian reserves. They have also formed a joint venture with EOG that should see a significant amount of new wells (finally) drilled on their near million acres of natural-gas rich land. (Around 250 wells could be drilled next year, and as they come online the market should start to price in this resource more--which, according to some, could be worth as much as the entire market cap of NFG at present.)

The real issues being fought over here are whether management should treat shareholders as owners of the business, a view which would require much greater transparency at the company, and whether management should further divest itself of non-core assets as well as act with speed to unlock value for shareholders (as opposed to the past, somewhat-glacial pace).

As a shareholder myself, it's pretty clear whose side I think should and hope to prevail, but I don't think that success with NFG requires management to move as fast as New Mountain (or I) would like. The margin of safety is wide enough here that a decent amount of upside could be seen with the release of the coming reserve report, as well as the release of data from new wells being drilled via the EOG joint venture. That said, management should be urged to do the right thing for shareholders. If they had been doing this already, there would be no need for a poison pill--because the company would be much more fairly valued (and their jobs much more secure).

Disclosure: the author owns the common stock of and calls on National Fuel Gas.

Source: National Fuel Gas: Heated Activism Continues