Dividend Kings In Focus: National Fuel Gas

National Fuel Gas is currently facing a strong headwind due to the coronavirus crisis, which has caused a severe recession. However, the pandemic has affected the natural gas market much less than the oil market thanks to the somewhat inelastic residential and commercial demand for natural gas.

In its fiscal third quarter, which ended on June 30th, National Fuel Gas grew its production only 2%, as it chose to store its Appalachian volumes in order to sell them in the near future, at meaningfully higher prices. During the quarter, the average realized price of natural gas decreased 19%, from $2.36 in the prior year’s quarter to $1.92, and thus the adjusted earnings per share fell 20%, from $0.71 to $0.57.

A decrease in earnings is never welcome but a 20% decrease in the earnings of a commodity producer in a uniquely adverse quarter marked by lockdowns, is an outstanding performance. This confirms National Fuel Gas’ superior business model compared to other commodity producers.

Growth Prospects

National Fuel Gas pursues growth by growing its natural gas production and expanding its pipeline network. However, it has grown its earnings per share at an average annual rate of only 2.9% over the last decade. This is a stern reminder of the sensitivity of the earnings of the company to the prevailing prices of natural gas.

On the other hand, the company has promising growth prospects ahead. A major growth driver will be a more favorable business environment, as the price of natural gas has plenty of potential upside and limited downside in the long run from its current suppressed level.

Moreover, in July, National Fuel Gas acquired the assets of SWEPI LP, a subsidiary of Royal Dutch Shell, in one of the most prolific areas of Appalachia. This acquisition will greatly increase the output of the company and its gathering volumes in 2021. Management expects the net production in Seneca to grow 32% and gathering volumes to grow 35% in fiscal 2021.

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