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National Fuel Gas Company Adds Shell's Assets To Vertical

Jun. 02, 2020 1:54 AM ETNational Fuel Gas Company (NFG)SHEL8 Comments


  • National Fuel Gas, a $3.7-billion market cap company with a 4.1% dividend yield, is unusual for its vertical integration from natural gas production through midstream and into gas utility operations.
  • On May 4, 2020, National Fuel Gas announced it was buying Shell’s Appalachian assets for about $500 million.
  • As part of the acquisition, although not required for financing, the company will close an additional 3.8 million share offering on Tuesday, June 2, priced at $39.50/share.
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Vertically integrated across the natural gas sector, National Fuel Gas Company (NYSE:NFG) doesn’t fit into just one sub-sector. Its four reporting segments span upstream to downstream:

*exploration and production (Seneca Resources);

*pipeline and storage (National Fuel Gas Supply and Empire Pipeline);

*gathering (National Fuel Gas Midstream);

*utility (National Fuel Gas Distribution).

NFG has an off-cycle financial reporting schedule, albeit one that makes sense for natural gas demand, which peaks in the winter and summer. The company’s fourth quarter ends in September; its March 2020 financials thus marked six-month or half-year results.

The company’s dividend yield is 4.1%, good especially when compared to competitors. Its vertical integration, including midstream and utility operations, gives it a buffer against changeable natural gas prices. The company has strong governance ratings, also different from some of its competitors.

NFG will close an additional 3.8 million share offering on Tuesday, June 2, 2020 priced at $39.50/share. Its price on June 1, 2020, was $42.52/share.

Acquisition and Guidance

On May 4, 2020, National Fuel Gas announced that it was buying Shell’s (RDS.A) (RDS.B) Appalachian assets for approximately $500 million. Included in the assets are:

*710 billion cubic feet (BCF) of developed producing reserves with net production of 215-230 million cubic feet per day (MMCF/D);

*142 miles of gathering pipelines, compression, and related facilities;

*over 400,000 net acres across Pennsylvania, 200,000 of which are highly prospective;

*about 300 MMCF/D of firm transportation capacity.

These assets are expected to generate about $125 million in incremental EBITDA in the year following closing, based on existing hedge portfolio, $2.50/MMBTU natural gas prices, and $25.00/barrel oil prices (West Texas Intermediate).

NFG's guidance for its fiscal 2020 production (October 1, 2019-September 30, 2020) is 245-255 BCF (680-700 MMCF/D) and lower lease operating and administrative expenses of $0.84-0.87/MCF and $0.26-0.28/MCF, respectively. The company has also updated its fiscal year earnings guidance by about $0.05/share to $2.80-3.00/share.

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This article was written by

Laura Starks profile picture

Laura Starks is the CEO of Starks Energy Economics, LLC and has a degree in chemical engineering and an MBA with a concentration in finance which she has used to invest personally and share her ideas about energy companies for many years.

She is the leader of the investing group Econ-Based Energy Investing where she delivers actionable analysis of energy companies and the partnerships between them. Features she offers include: 3+ actionable ideas a month, two model portfolios, regular macro discussion, direct access in chat for questions, and regular updates on all current and new ideas. Learn more.

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Comments (8)

It sure would be nice if the share price went up occasionally.
George Fisher profile picture
Nice recap of NFG. The purchase of Shell midstream assets was a nice coup. Having a gathering network in-house allows for that profit to add to overall returns and Seneca can continue in feed it with new volume.

I have been a long term holder of NFG and added a bit below $40, had a GTC at $31 that I missed by $1 ( boo hiss). Thanks for the added coverage.
waynor profile picture
Thank you. An informative analysis. Long NFG.
02 Jun. 2020
An additional risk factor you did not mention is jurisdictional and/or political risk. If the same anti-fossil fuel anti-pipeline types that control New York assume power in PA, NFG could face significant regulatory burdens to expanding or even maintaining their business and gas volumes. NFG’s New York mineral rights are nearly worthless given drilling restrictions in that state. I am not saying the same thing will happen in PA, but the possibility exists that it could. I don’t see the trends in that regard as favorable. Don’t underestimate the ability of the “save the planet” types to have severe negative impacts on any company in the fossil fuel business, even relatively clean natural gas. There is probably little political risk to gas producers in places like TX, LA, or WY. At present PA does not have a problem but I am not sure about the future.
Laura Starks profile picture
@nesd I agree that drilling is unlikely in New York. NFG has been around a long time as a pipeline-small utility; the Marcellus find has definitely been in their backyard and they have capitalized on it.
I have experience marketing gas which led to looking for the big LDC and industrial markets. PA is one. While never say never, the state has held onto many of those businesses, which in turn then really benefited fron the trillions of cubic feet of inexpensive Marcellus and Utica natural gas.
When the price of oil corrects I would like to see NFG exit the California assets and apply the proceeds towards debt and a special dividend. Great job on the Shell purchase. Long NFG.
rrb1981 profile picture
Will be interesting to see how it plays out over the next 5 years. NFG is a logical buyer for these assets (as was UGI).
Gas Utility Yield with a E&P +/-kicker !
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