Our rating on National Fuel Gas Co. (NYSE: NFG) is BUY and our target price is $50. We believe that NFG provides a unique long-term investment opportunity, as it combines the stability of a regulated gas utility with the growth potential of an E&P and gathering business. The company also has investment-grade credit ratings and a strong balance sheet. In addition, the current dividend yield of about 4.1% may be attractive for income-seeking investors. NFG has paid a dividend for 118 consecutive years and has raised its payout for 50 straight years. On fundamental valuation, the shares generally trade at discounts to both peer and historical average multiples.
The beta on NFG shares is 0.68.
On November 5, the company reported fiscal 4Q results for the period ended September 30, 2020. The decrease reflected lower commodity prices. Revenue totaled $288 million. For all of FY20, the company earned $2.92 per share on an adjusted basis. Full-year revenue was $1.564 billion.
Along with the results, management updated its FY21 guidance. It now expects earnings of $3.55-$3.85 per share, up from $3.40-$3.70, and capex of $720-$830 million.
The company continues to refine its portfolio of businesses. The ‘Appalachian’ transaction is the largest in the company’s history. The acquired assets are expected to generate annual net natural gas production of 70-75 bcfe and approximately $35 million in incremental EBITDA.
EARNINGS & GROWTH ANALYSIS
Upstream (40% of adjusted earnings), midstream (39%), and downstream (21%).
Fourth-quarter adjusted EBITDA came to $75.4 million, compared to $89.5 million in 4Q19. Realized prices fell to $1.92 per mcf for natural gas (from $2.26 in 4Q19). Seneca’s fourth-quarter net production was 67.3 billion cubic feet equivalent (bcfe), up 14% due to the acquisition of the Appalachian assets.
The midstream segment consists of Pipeline & Storage and Gathering operations. The Pipeline & Storage business posted 4Q20 adjusted EBITDA of $47 million, up from $35.7 million in 4Q19. In the Gathering business, earnings rose to $33.1 million from $29.9 million. The segment reported fiscal 4Q20 adjusted EBITDA of $8.6 million, up from $6.7 million in 4Q19.
Turning to our estimates, based on recent business trends and management’s guidance, we are raising our FY21 EPS forecast to $3.70 from $3.50, driven in part by the Appalachian acquisition. We are setting an FY22 estimate of $3.82.
FINANCIAL STRENGTH & DIVIDEND
NFG pays a dividend. It has paid a dividend for 118 consecutive years and has increased its annual payout for 50 straight years. Our dividend estimates $1.80 for FY21 and $1.81 for FY22.
MANAGEMENT & RISKS
Dave Bauer is the CEO and president of National Fuel Gas. He became CEO in 2019 and has been with the company in leadership roles since 2010. In July 2019, Karen Camiolo was named treasurer/principal financial officer. David F. Smith is the company’s chairman.
Investors in NFG shares face risks. A critical determinant of NFG’s success over the next few years will be its ability to realize profitable prices for natural gas from the Marcellus shale. On the positive side, the company benefits from low per-unit production costs, and plans to realize higher gas prices by building midstream infrastructure that will allow it to ship its production from the Marcellus region to more attractive markets such as Eastern anada, the Mid-Atlantic region, and the Southeast. NFG also plans to contract with third-party producers for the use of these pipelines, which will make use of spare capacity.
On April 5, 2019, FERC overturned the NYDEC decision, allowing National Fuel to proceed with the project.
The company’s performance will also be influenced by the long lead/lag times inherent in its E&P operations. However, these risks are mitigated by the company’s regulated gas utility business, which has more stable earnings and cash flow than its E&P operations.
The regulated gas utility operation distributes and transports gas to more than 1 million customers in northwestern Pennsylvania and western New York. The E&P segment, Seneca Resources, produces crude oil and natural gas in California and Appalachia. The Pipeline & Storage segment owns and operates natural gas pipelines running from Pennsylvania through western New York to the Canadian border near Buffalo. The company has 2,100 employees.
The price/cash flow ratio is 5.1 and the five-year average of 2.4. The dividend yield on NFG is about 4.1%. Based on these metrics and the company’s strong balance sheet, we are maintaining our BUY rating and our target price of 50.
On December 11, BUY-rated NFG closed at $43.11, down $0.08. Report created Dec 14, 2020.