Is This Gas Company a Buy?

Waqar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Based in New York, National Fuel Gas Company (NYSE: NFG) is comprised of four business segments; utilities, pipeline and storage, exploration and production, and energy marketing.

National Fuel Gas’ Earnings

On the Feb. 8, 2013, the company released its earnings for 1Q 2013. Earnings per share were up 11% to $0.81 from 1Q 2012.

The Pipeline and Storage segment had a strong quarter with the Tioga Extension project and Northern Access Projects. As a result, the company has been able to add 230 million cubic feet of more capacity per day. The Tioga Project that started its services at the end of 2011 was the major force behind the 70% increase in this segment. Moreover, the new Line N project will start adding 30 million cubic feet per day, plus $1.5 million revenues from November, 2013.

When compared to 1Q12 the utilities segment performed really well, thanks to lower costs and operational efficiencies. In the case of the E&P segment, production grew by 6.3%, thanks to Seneca’s drilling program in the Eastern Development Area. However, earnings declined by $0.04 per share as a result of low gas prices. Another reason was a $3.7 million termination charge related to a rig that the company idled last year. Hence, the company had to operate on a total of three rigs. The Lycoming County acreage in the Eastern Development Area continues to perform really well. Plus, most of the wells at PAD-M have started to contribute to sales. As a result, company has increased its guidance range from 102 Bcfe to 112 Bcfe, an increase of almost 30% from last year. TAccording to the company, the East Coalinga field is expected to mint significant revenues in the future, just like Midway Sunset. Having said this, the recent activities in California and Western Development Area continue to show a lot of promise for the future.

Valuation

National Fuel Gas is trading at a forward P/E (1yr) of 20.29x and is yielding a dividend of 2.60%. It has a PEG of 2.23, and adding its dividend yield to its PEG gives us a PEGY of 1.75. Using an average forward P/E of 19x, I would value National Fuel Gas as follows:

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As National Fuel Gas is expected to do better in the coming years, I would use high consensus estimates to value it. As a result I value it at $56.81; hence, it’s trading almost at its fair value.

Gas Industry

Recently, AGL Resources (NYSE: GAS) released its earnings for 4Q 2012. The company reported earnings per share of $0.91, which decreased 3% from the same quarter last year. Gross margin was down 0.47% to 29.1% in the latest quarter. The core reason behind this weak performance was high operating costs. Though the company is yielding a healthy dividend of 4.70%, it won’t be easy for the company to grow its dividends in the future. Cash per share of $1.60 is far less than the dividend per share of $1.88. A current ratio of 0.80 shows that its liquidity position isn’t that strong. AGL Resources is currently trading at $40.28; a mean recommendation of 3.4 on the sell side clearly shows that it’s not an attractive buy. Hence, we don’t recommend buying it.

On the other hand, the American natural gas utilities company Sempra Energy (NYSE: SRE) is trading at a forward P/E (1yr) of 17.29 and has a dividend yield of 3.20%. It has a PEG of 2.62; adding its dividend yield in its PEG gives us a PEGY of 1.87. A mean recommendation of 2.2 on the sell side clearly shows that Sempra is one of the better buys in the gas utilities sector. Using our earnings multiple analysis, we value Sempra at $85.22; therefore, it is undervalued by almost 10%. Adding its dividend yield into this, we get to a total return of 13.20%. The bottom line is that I recommend buying Sempra Energy.

Conclusion

National Fuel Gas Company is all set to increase its production in the coming years, thanks to Line N Project, PAD-M, and the East Coalinga field. Furthermore, the company has plans of reactivating various idle wells in California in the years ahead. In Kansas, the company has further plans for Seneca operated well in the third quarter.

The bottom line is that in order to lower its production costs, National Fuel Gas is investing a lot on more cost efficient projects. In short, the company is expected to grow its operating profits to some degree in 2013 and 2014. However, with low gas prices in the country, generating substantial profits would still be difficult in the coming years. Hence, we remain neutral on National Fuel Gas in the short run.


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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