Why GAMCO Investors believes National Fuel Gas is undervalued



Is NFG undervalued?

National Fuel Gas has seen one of its largest shareholders, GAMCO Investors, urge the company to spin off its utility business. This part of the series highlights GAMCO’s views on its investment in National Fuel Gas (NFG).

NFG share price

Development of Marcellus Shale acreage and pipeline expansion to drive growth

GAMCO Investors had commented on its position in National Fuel Gas in its 2Q shareholder commentary. It said, “NFG’s ownership of 800,000 acres in the Marcellus shale, including 745,000 acres in the shale fairway of Pennsylvania, holds enormous natural gas reserve potential, and we believe the position could be worth $3.4 billion based on recent comparable transactions.”

The fund added that it continues to expect “above average long term earnings and cash flow growth from rapidly growing gas production and expansion of the strategically located pipeline network.”

Gabelli believes National Fuel Gas could be worth $100 a share

Gabelli said earlier this year at Barron’s 2014 Roundtable that NFG’s stock did well last year. This performance was partly because natural gas prices rose due to the cold weather in the U.S. and company made some significant discoveries in the Marcellus Shale.

Gabelli said, “Assuming that natural gas stays at $4.40 per Mcf (thousand cubic feet) on the strip (the average of the next 12 months’ futures contracts). National Fuel Gas could be worth $100 a share.”

Will a milder winter and increased production lead to low pricing?

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An August article on the U.S. Energy Information Administration (or EIA) website, “Marcellus Region production continues growth,” noted, “Increased production in the Marcellus Region has outpaced growth in the region’s pipeline capacity, which has resulted in multiple pipeline expansion projects focused on removing bottlenecks in the region. As pipeline capacity is increased, markets in the Northeast gain greater access to Marcellus Region gas, which can result in stabilized or decreased prices.”

The report added that natural gas prices in the Northeast, such as the Dominion South trading point in southwestern Pennsylvania, have increasingly been below the Henry Hub natural gas price. This trend is in part because of increased access to Marcellus gas.

The EIA’s latest “Short-Term Energy and Winter Fuels Outlook” (or STEO) noted that despite the lower stocks at the start of this winter’s heating season, the EIA expects the Henry Hub natural gas spot price to reach $4.00 per million British thermal units (MMBtu) this winter compared with $4.53 per MMBtu last winter. The EIA said the price forecast reflects both lower expected heating demand and significantly higher natural gas production this winter. For more on the outlook for natural gas inventories and pricing, please read Must-know: Winter heating demand versus natural gas production

Lower natural gas prices affected NRG’s earnings this latest quarter. You can find the details of the company’s fiscal 3Q14 results in the next part of this series.

A fall in prices can also affect the margins of NFG’s gas producing peers such as EOG Resources (EOG), Cabot Oil and Gas (COG), Chesapeake Energy (CHK), and EQT Corp. (EQT). Except for NFG, these companies are components of the Energy Select Sector SPDR ETF (XLE).


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