National Fuel Gas Co. (NFG) is a Good Long-Term Investment

National Fuel Gas, like so many companies in the natural gas industry, is challenged by the abundance and low prices of natural gas. Let’s take a look at how this small-cap company has performed and what investors should look for in the future.

Earnings Guidance

The company increased its GAAP earnings guidance for fiscal 2014 to a range of $3.10 to $3.40 per share (the previous earnings guidance had been a range of $3.05 to $3.30). This guidance reflects Seneca’s updated production forecast for fiscal 2014, which is now in a range of 145 to 165 Bcfe (the previous range had been 134 to 146 Bcfe). The forecast also assumes a flat NYMEX price of $4.00 per MMBtu for natural gas and $90 per Bbl for crude oil.

Watch for a “Deferred Tax Reallocation”

The company has done a better job of managing its finances. Its loss of $0.3 million for the quarter is far better than the comparable loss of $5.6 million from the prior year’s fourth quarter. For the year, it looks just as good. A loss of $2.2 million for this year is far better than the $6.6 million loss from the prior fiscal year. Even though the numbers look good, investors should not be fooled. While both losses look better, they are mainly due to lower income taxes because of an intercompany tax-deferred reallocation. It’s not due to better management.

Utility Segment Success – Due to Weather

As with most utility businesses; as goes the weather so goes the business.

In the region where NFG services clients, Western New York and Northwestern Pennsylvania, temperatures were almost 20% colder this last fiscal year than they were the previous year. This translated into more natural gas use to heat homes and businesses.

Pipe & Storage

Even though the pipe and storage segment did not earn as much as it did in the fourth quarter of 2012, it was worse than it looks.

The company recorded earnings of $15.4 million for the fourth quarter which was a decrease of $9.7 million for the same period a year ago. These earnings, however, were not generated through sales. Supply Corporation, a part of the company’s pipe and storage segment, eliminated a regulatory liability that was associated with its postretirement benefit plan through a case settlement. The result was a $12.8 million addition to earnings. If we subtract that, the real earnings for the quarter were only $2.6 million.

Exploration & Pipe Production

Exploration and pipe production is the real bread-and-butter for the company. Like most companies in this arena, it performed much better for the year. Its fourth quarter was also better than the same period a year ago. The increase in revenue occurred because of increased production with lower prices.

Production for the year was up 44.8%. The workhorse behind the increase came from the Seneca Appalachia properties that enjoyed a yearly increase of 60.3%. This translated into an increase of $0.22 per share earnings.

The Challenge

Companies in the independent oil & gas industry have been challenged by the low prices of natural gas. Many invested heavily in natural gas expecting it to be a great financial boom. As time progressed and the gluttony of oversupply brought down prices, pouring the majority of one’s future growth in natural gas did not make sense. Over the last couple of years, many companies went back to oil production because it was more profitable. Even with investing capital in natural gas not panning out as expected, companies in the industry earned more than the S&P 500 as a whole over the last 10 years.

How has National Fuel performed compared to rivals? If we look at NFG next to three of the larger companies in the industry, it holds its own when we look at the average earnings growth over the last 10 years.

Occidental Petroleum Corp (OXY) 6.55%

Enterprise Product Partners L.P. (EPD) 16.30%

Apache Corp (APA) 5.12%

National Fuel Gas (NFG) 6.18%

SPDR S&P 500 ETF Trust (SPY) 4.42%

While the company is not the top producer in the industry, it still performed better than the SPDR S&P 500 ETF Trust. Even with the challenge of natural gas prices, the industry and NFG have done well.

It is no secret that natural gas trapped within the dense sedimentary shale rock has become abundant with the advent of hydraulic fracturing. Production in the United States is growing and as horizontal drilling becomes more sophisticated, energy supplies and reserves continue to grow.

In the past, investors have focused on temperature patterns to understand how to invest with the dynamics of the economy. But investing is still uninspiring with supplies remaining so high. It is going to take years for the commodities demand to match the supplies that we have here in the United States.

Prices will continue to fluctuate with weather patterns, but investors are not going to see a long-term steady rise in the price of natural gas in the near future. This is one of the challenges that NFG will continue to face as an investment.

NFG has done well in its industry while facing the challenges that all its competitors face. Despite the challenges of low natural gas prices, it has still done better than the S&P 500 over the last 10 years. The Seneca Appalachia properties show a lot of promise along with some of its other properties and it will continue to produce at higher levels to generate revenue. Natural Fuel Gas is a good long-term investment since natural gas prices will systematically increase with demand. Investors have a company here that will be around for a long time and it has a great performance record.

About MissionIR 

MissionIR is committed to connecting the investment community with companies that have great potential and a strong dedication to building shareholder value. We know our reputation is based on the integrity of our clients and go to great lengths to ensure the companies represented adhere to sound business practices.

Sign up for “The Mission Report” at www.MissionIR.com

Please see disclaimer on the MissionIR website http://www.missionir.com/disclaimer.html