Gabelli Pushing National Fuel Gas Towards Spin

Mario Gabelli’s GAMCO recently unveiled a shareholder proposal that it sent to National Fuel Gas’ (NFG) management for consideration at its 2015 Annual Meeting. The firm wants NFG to hire an investment bank to explore the spinoff of its utility business, leaving the remaining parent company more focused on its E&P and pipeline units. The rationale is that a separate utility business could ‘participate in the consolidation activity occurring in the utility space’ and a more focused E&P/pipeline company would have more flexibility and be more ‘easily embraced’ by shareholders. Not the most eloquent or well defended proposal out there and certainly nothing on the level of adding salt to pasta.

NFG has actually been in GAMCO’s portfolio for a little while now and was even one of Mr. Gabelli’s top picks in this year’s edition of the Barron’s Roundtable. Part of his thinking then was that NFG showed a similar dynamic to ONEOK (OKE) which spun off its utility business, ONE Gas (OGS). Here were his comments on National Fuel Gas at that time and they provide some additional insight into his thinking:

[Gabelli] …Next, think of Mother Earth. The first 1,000 feet of earth below sea level is the Upper Devonian. That’s where 99% of the gas-drilling takes place. The next 8,000 to 9,000 feet is the Marcellus, and below that is the Utica, which is rich in energy liquids.National Fuel Gas [NFG] owns 720,000 acres, and leases 60,000. The stock is $70, and the play here is simple. The company operates the gas utility in Buffalo that is worth about $20 per share. It has a midstream pipeline business which it hasn’t monetized, and a growing exploration and production business in the Marcellus. Let’s assume that natural gas stays at $4.40 per Mcf [thousand cubic feet] on the strip [the average of the next 12 months’ futures contracts]. National Fuel Gas could be worth $100 a share.

[Moderator] How do you figure?

Gabelli: The new CEO, Ron Tanski, has said the company is looking at financial engineering, including a master limited partnership for its midstream business. When Columbus came across the sea to America, everyone figured out how much money could be made, not whether it was a safe journey. If you’re a utility CEO, the question is, how embarrassed will you be if you’re not on the cutting edge? Oneok [OKE] decided to spin off its local-distribution company, and the stock has rallied sharply. That would be a good path for NFG to follow. Natural gas was $4.79 per Mcf in 2009. It fell to $4.64, and $2.83, and then rose to $3.60. Now it is heading north because of the cold weather in much of the country. The stock did well last year, partly because natural-gas prices rose, and the company had some significant discoveries in the Marcellus shale. Regarding the numbers, there are 83 million shares outstanding, and the market capitalization is $5.6 billion. National Fuel Gas has $1.7 billion of net debt, and pays a dividend of $1.50 a share.

Based on his January comments, I bet Mr. Gabelli thought the company and new CEO was much more open to this type of ‘financial engineering’ move than they really were and probably expected the company to have pursued such a move by now. That obviously hasn’t happened, so the firm is pursuing a more direct approach and providing a strong nudge via the shareholder proposal. If the company decides to fight back, I wouldn’t be surprised if his ‘financial engineering’ comment gets thrown back in his face.

GAMCO owns a little less than 5% of NFG’s shares, but significant ownership hasn’t been necessary to exact change recently. We will keep you updated as this situation evolves.

Disclosure: Author holds no position in any stock mentioned.