National Fuel Gas Co
(NFG)
Updated 9th November 2023
Key Metrics
Current Price:
$51
5 Year CAGR Estimate:
11.5%
Market Cap:
$4.8 B
Fair Value Price:
$73
5 Year Growth Estimate:
1.0%
Ex-Dividend Date:
12/28/20231
% Fair Value:
69%
5 Year Valuation Multiple Estimate:
7.6%
Dividend Payment Date:
1/12/20241
Dividend Yield:
3.9%
5 Year Price Target
$77
Years Of Dividend Growth:
53
Dividend Risk Score:
A
Retirement Suitability Score:
A
Rating:
Buy
Overview & Current Events
National Fuel Gas Co. is a diversified energy company that operates in five business segments:
Exploration & Production, Pipeline & Storage, Gathering, Utility, and Energy Marketing. The
largest segment of the company is Exploration & Production. National Fuel Gas was founded in
1902 and has grown to a market capitalization of $4.8 billion. With 53 years of consecutive
dividend increases, National Fuel Gas qualifies to be a Dividend King.
In early November, National Fuel Gas reported (11/1/23) financial results for the fourth quarter
of fiscal 2023. The company grew its production 7% over the prior year’s quarter thanks to the
development of core acreage positions in Appalachia. However, the average realized price of
natural gas fell -18%, from $2.84 to $2.33. As a result, adjusted earnings-per-share declined
-34%, from $1.19 to $0.78, and missed the analysts’ consensus by $0.07. The company has
beaten the analysts’ estimates in 15 of the last 18 quarters.
Despite the plunge of the price of natural gas this year vs. blowout prices last year amid the
Ukrainian crisis, National Fuel Gas posted just a -12% decrease in its annual earnings-per-share
thanks to strong production growth and its efficient operations. The price of natural gas has
bounced in recent months thanks to the surge of U.S. consumption to all-time highs. As a
result, National Fuel Gas provided strong guidance for fiscal 2024. It expects earnings-per-share
of
$5.40-$5.90, thus implying 9% growth at the mid-point. Accordingly, we expect earnings-per-share
around $5.65.
Growth on a Per-Share Basis
Year
2014
2017
2018
2019
2020
2021
2022
2023
2024
2029
EPS
$3.52
$3.30
$3.34
$3.45
$2.92
$4.29
$5.88
$5.17
$5.65
$5.94
DPS
$1.52
$1.64
$1.68
$1.72
$1.76
$1.80
$1.86
$1.94
$1.98
$2.24
Shares2
84.2
85.5
86.0
86.8
91.0
91.9
92.2
92.4
92.6
98.0
National Fuel Gas pursues growth by growing its natural gas production and expanding its
pipeline network. The company has grown its earnings-per-share at a 4.4% average annual rate
over the last decade. Moreover, the company grew its proved reserves 8% in 2022 and 9% in
2023. This certainly bodes well for future growth prospects.
Nevertheless, due to the high cyclicality of the price of natural gas, we expect earnings-per-share
to grow by only 1.0% per year on average over the next five years off this year’s high comparison
base. Gas prices may find support from the Ukrainian crisis in the short run but numerous
countries are investing in renewable energy projects at full throttle to reduce their dependence
on natural gas right now. As a result, we do not expect gas prices to return to their multi-year
highs, which were reached last year, in the upcoming years. Essentially 100% of the output of
National Fuel Gas is natural gas. Therefore, as the Exploration & Production segment generates
about half of total profits, the earnings of the company greatly depend on the price of natural
gas. As a result, there is always great uncertainty in the long-term forecasts of the earnings of this
company.
Valuation Analysis
Year
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Now
2029
Avg. P/E
20.6
---
---
17.2
12.8
15.6
14.6
11.1
11.1
11.0
9.0
13.0
Avg. Yld.
2.5%
2.1%
2.5%
3.1%
2.9%
3.2%
4.1%
3.8%
2.8%
3.4%
3.9%
2.9%
National Fuel Gas is trading at a price-to-earnings ratio of 9.0, which is lower than its historical
5-year average of 13.0. If the stock reverts to this valuation level over the next 5 years, it will
enjoy a 7.6% annualized gain in its returns.
Safety, Quality, Competitive Advantage, & Recession Resiliency
Year
2014
2015
2016
2018
2019
2020
2021
2022
2023
2024
2029
Payout
43.2%
---
---
50.3%
50.0%
60.3%
42.0%
31.6%
37.5%
35.0%
37.7%
National Fuel Gas has a healthy balance sheet while its interest coverage level stands at a strong
5.7. Moreover, its dividend payout ratio is sufficiently low to enable continued dividend growth
even if earnings stall temporarily.
Management has always targeted a dividend payout ratio around 50% in order to have a wide
margin of safety against the wide fluctuations of the price of natural gas. As the 3.9% dividend
yield of National Fuel Gas is more than twice as much as the yield of the S&P (1.5%), the stock
may entice income-oriented investors. However, these investors should be aware of the
company’s high dependence on the price of natural gas.
Qualitatively, National Fuel Gas’ competitive advantage is its combination of regulated and stable
businesses (like pipelines and utilities) with cyclical and potentially higher-growth sectors (like
exploration & production). This allows the company to endure difficult operating environments
and downturns, such as the coronavirus crisis, with less difficulty than its peers who may focus
exclusively on the more cyclical areas of the energy sector.
Final Thoughts & Recommendation
National Fuel Gas has sustained production growth, a promising outlook and a reasonable
valuation. However, the company is highly cyclical and the price of natural gas has moderated
vs. blowout levels in 2022. As a result, the stock has shed -22% in the last 12 months. It could
now offer an 11.5% average annual return over the next five years thanks to 1.0% growth of
earnings-per-share, a 3.9% dividend and a 7.6% valuation tailwind. The stock receives a buy
rating.
Total Return Breakdown by Year
Income Statement Metrics
Year
2015
2016
2017
2018
2019
2021
2022
2023
Revenue
1,761
1,452
1,580
1,593
1,693
1,743
2,186
Gross Profit
1,075
1,055
1,080
1,014
1,031
760
903
Gross Margin
61.0%
72.6%
68.4%
63.7%
60.9%
43.6%
41.3%
Operating Profit
515
532
594
520
512
665
802
Operating Margin
29.3%
36.6%
37.6%
32.6%
30.2%
38.2%
36.7%
Net Profit
(379)
(291)
283
392
304
364
566
Net Margin
-21.5%
-20.0%
17.9%
24.6%
18.0%
20.9%
25.9%
Free Cash Flow
(165)
7
234
31
(94)
40
1
Income Tax
(319)
(233)
161
(7)
85
115
117
Balance Sheet Metrics
Year
2014
2019
2020
2023
Total Assets
6,728
6,462
6,965
Cash & Equivalents
37
20
21
Accounts Receivable
150
140
144
Inventories
67
80
85
Goodwill & Int. Ass.
5
5
5
Total Liabilities
4,317
4,323
4,993
Accounts Payable
137
132
134
Long-Term Debt
1,723
2,189
2,660
Shareholder’s Equity
2,411
2,139
1,972
D/E Ratio
0.71
1.02
1.35
Profitability & Per Share Metrics
Year
2014
2015
2016
2019
2021
2023
Return on Assets
4.6%
-5.7%
-4.8%
4.9%
5.0%
Return on Equity
13.0%
-17.1%
-16.4%
14.9%
19.4%
ROIC
7.5%
-9.2%
-7.5%
7.2%
7.9%
Shares Out.
84.2
84.6
85.1
86.8
91.9
Revenue/Share
24.87
20.87
17.12
19.51
19.01
FCF/Share
(0.06)
(1.95)
0.09
(1.09)
0.43
Note: All figures in millions of U.S. Dollars unless per share or indicated otherwise.
Disclaimer
Nothing presented herein is, or is intended to constitute, specific investment advice. Nothing in this research report should be construed as a recommendation to follow any investment strategy
or allocation. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed
on any such statements or forecasts when making any investment decision. While the analyst has used reasonable efforts to obtain information from reliable sources, we make no
representations or warranties as to the accuracy, reliability or completeness of third-party information presented herein. No guarantee of investment performance is being provided and no
inference to the contrary should be made. There is a risk of loss from an investment in marketable securities. Past performance is not a guarantee of future performance.