National Fuel Gas: Ready To Run

black and white gas stove

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Trying to anticipate and bet on future Fed actions has lost a lot of people a great deal of money over the years, cautions Roger Conrad, editor of Conrad's Utility Investor.

And I’m convinced as ever that tightening money and constraining investment now will only lead to higher inflation later, as identical central bank actions did several times from the late 1960's to the late 80's.

So the bottom line is that this is a time to be cautious. Stocks of the best-in-class companies I often highlight are always in style when they trade at good prices. And that’s the case for National Fuel Gas (NFG).

Between mid-2020 and the summer of 2022, the shares roughly doubled — for a time exceeding my “consider taking profits” level. They’ve since retreated about 25% and are positioned to make another run.

The US natural gas rally that began in 2020 went into overdrive last year, in part because Russia’s invasion of Ukraine spurred interest in LNG exports. The Northern Hemisphere’s milder-than-expected winter coupled with recession worries triggered a sharp reversal, with the fuel sliding from $10 plus to barely $2 per million BTU.

But like oil, the key driver of natural gas’ long-term up-cycle is still intact. That’s the now nearly 10 years old investment slump, arguably made worse by recently falling prices. And it means last year’s supply deficit is likely to be a good deal worse when demand returns.

National Fuel’s fiscal Q1 results released in early February handily beat guidance, with adjusted net income rising 24% on an 11% lift in Appalachian gas production. Nonetheless, management cut the mid-point of expected FY2023 earnings (ending Sept. 30) to just $5.55 from the previous $6.65, on a downward revision in expected gas prices.

I expect an upward reversal for both prices and guidance later this year for two reasons. First, when US gas stays under $4 for more than a few months as it’s already done, production always drops to shrink supply. Second, mild winters are frequently followed by hot summers, which means robust demand for gas to generate electricity.

My expectation is either or both factors will push National Fuel shares to a new high by the end of 2023. But in the meantime, the company’s FERC-regulated natural gas pipelines (24.3% net income) and regulated New York and Pennsylvania gas utilities (20%) will provide plenty of earnings to fund another penny per share increase for the quarterly dividend in June.

National Fuel’s unique integrated business model has enabled the company to consistently grow dividends for decades without a single cut. And the balance sheet is strong as well — with investment grade ratings, just $250 million of maturing debt through 2024, minimal floating rate debt and solid free cash flow. That means we can be patient while waiting on gas to recover. This stock is buy in my eyes at $65 or less.


About the Author

Roger Conrad has successfully advised income investors since the 1980's, with a nationally acclaimed sector specialty in utilities, telecommunications, and energy. He's a managing partner at Capitalist Times LLC and author of the book Power Hungry: Strategic Investing in Telecommunications, Utilities, & Other Essential Services.

Mr. Conrad is also an independent director of NYSE-listed Miller Howard High Income Equity Fund and contributing editor to Forbes.com.


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