National Fuel Gas: A Dividend King In A Highly Cyclical Sector

Company Background and Recent Earnings Results - National Fuel Gas operates in upstream, midstream, and downstream sectors, with upstream being the most significant. The company has over 1 million acres in the Marcellus and Utica shales and serves over 750,000 utility customers in western New York and northwestern Pennsylvania [2][6] - For Q2 of fiscal year 2024, National Fuel Gas reported a revenue decline of 12.2% to $630 million, marking the fourth consecutive quarter of year-over-year declines. However, adjusted earnings-per-share increased to $1.79 from $1.54, exceeding expectations by $0.33 [2][4] - The company revised its 2024 guidance, expecting average gas prices to drop to $2.00 from $2.40, leading to a new adjusted earnings-per-share range of $4.75 to $5.05, down from $4.90 to $5.20 [2] Natural Gas Price Correlation - National Fuel Gas' performance is closely tied to natural gas prices, which are subject to volatility. The company forecasts average natural gas prices to be $2.00 per MMBtu for the remainder of the fiscal year [3][14] Dividend and Valuation Analysis - National Fuel Gas has a long history of paying dividends, with a growth streak of over 120 years. The current dividend growth rate is 2.5% over the last decade, with a recent 4% increase in the quarterly dividend [9][15] - The stock currently yields 3.7% based on a forward annualized dividend of $2.06, with a projected payout ratio of 42% [9] - The shares closed at $55, implying a forward price-to-earnings ratio of 11.2, which is slightly overvalued compared to the energy sector's median ratios. However, on a historical basis, the stock appears undervalued [9] Business Segment Performance - The Gathering segment saw an 18% earnings growth and a 12% revenue increase, while the Pipeline & Storage segment reported a 22% earnings gain and a 14% revenue increase. The Utility segment experienced a 41% revenue growth and a 29% earnings increase due to rate increases [14] - Hedging strategies helped mitigate the impact of falling natural gas prices, resulting in only a 1% decline in average realized prices [14] Long-term Outlook - National Fuel Gas has significant natural gas reserves, with approximately 1.2 million acres in Pennsylvania containing over 4.5 trillion cubic feet of natural gas equivalent, providing a long-term development inventory [14] - The company is well-positioned for potential recovery in natural gas prices, despite current low prices [14]