Executive Summary / Key Takeaways

• National Fuel Gas ($NFG) leverages a unique integrated model spanning E&P, gathering, pipelines, storage, and utility distribution in the Appalachian Basin, providing stability and operational synergies unmatched by pure-play peers.
• Recent financial performance reflects the strength of regulated segments and operational efficiencies, with Q2 FY2025 adjusted operating results increasing over 30% year-over-year, driven by rate increases and higher production.
• Seneca's focus on the high-return Eastern Development Area (EDA) and advancements in well design (Gen 3, exploring Gen 4) are yielding significant capital efficiency gains, enabling production growth with decreasing capital investment and best-in-class well economics.
• Regulated businesses are poised for continued earnings growth through fiscal 2027, benefiting from recently approved multi-year rate plans in New York and Pennsylvania and ongoing modernization investments driving 5-7% rate base growth.
• Management has raised FY2025 adjusted operating results guidance to $6.75-$7.05 per share (based on $3.50 NYMEX), targets greater than 10% consolidated EPS growth through FY2027, and is committed to returning capital via a long-standing dividend and a $200 million share repurchase program.

An Integrated Energy Story Unfolding in Appalachia

National Fuel Gas Company ($NFG) is not a typical energy company. With a history stretching back over a century, marked by a remarkable 122 consecutive years of dividend payments and 54 years of increases, NFG has built a distinctive integrated business model centered in the heart of the Appalachian Basin across western New York and Pennsylvania. This structure encompasses natural gas exploration and production (E&P) through its Seneca Resources subsidiary, midstream gathering via National Fuel Gas Midstream, interstate pipelines and storage through National Fuel Gas Supply Corporation and Empire Pipeline, and local natural gas distribution via National Fuel Gas Distribution Corporation.

This integrated approach is more than just a collection of assets; it's a strategic advantage. By controlling key parts of the value chain from the wellhead to the customer's meter, NFG gains operational synergies, cost efficiencies, and a degree of insulation from commodity price volatility that pure-play E&P or utility companies lack. The co-location of assets allows for shared management, labor, and facilities, enabling coordinated projects that optimize the flow of natural gas from prolific Appalachian shale plays to demand centers in the eastern U.S. and Canada. This foundational structure and strategic focus on leveraging its regional footprint set the stage for NFG's current trajectory and future potential.

Competitive Positioning: Leveraging Integration Against Focused Rivals

In the competitive energy landscape, NFG faces a diverse set of rivals. In the E&P segment, it competes with large, often more geographically diverse producers like EQT Corporation (EQT) and SM Energy (SM), as well as smaller regional players. In regulated pipelines and utilities, it competes with other interstate pipeline operators and local distribution companies. NFG's integrated model provides a distinct competitive moat.

Compared to pure-play E&P companies like EQT or SM Energy, NFG's diversified revenue streams from regulated pipelines, storage, and utilities offer greater financial stability, particularly during periods of low commodity prices. While EQT and SM Energy may exhibit higher growth rates during commodity price booms due to their focused production scale (EQT's revenue growth ~15-20% YoY in Q1 2025 vs. NFG's ~10% in Q2 2025), NFG typically demonstrates superior profitability margins (NFG's TTM net margin ~1.91% vs. EQT's ~12% and SM's ~29% TTM, noting NFG's TTM includes significant impairments, while Q2 2025 standalone net margin was significantly higher at ~29.6%) and more stable cash flow generation due to its regulated segments. NFG's integrated pipeline and storage operations, for instance, can offer greater efficiency in gas transportation compared to fragmented third-party arrangements common among some E&P peers.

Within the regulated space, NFG's extensive existing infrastructure and long-standing customer relationships provide a strong position. While other pipeline operators exist, NFG's ability to tie its upstream production directly into its own gathering and transportation network creates a cost advantage and ensures market access for its gas. Its utility segment, serving a large customer base in its service territories, benefits from regulatory frameworks that allow for recovery of prudently incurred costs and investments, providing a stable earnings base.

However, NFG is not without competitive vulnerabilities. Its regional concentration exposes it to specific state regulatory and political risks, particularly in New York with its aggressive climate mandates. Pure-play E&P companies may also be more agile in rapidly scaling production in response to price signals, and larger, more diversified energy majors (like Chevron (CVX), which acquired Noble Energy) possess greater financial resources and global reach. NFG's strategic response is to leverage its integrated model to drive efficiency, focus development on its highest-return acreage, and actively engage in the regulatory process to ensure fair rate recovery and support necessary infrastructure investment. The recent success in securing favorable rate settlements in both New York and Pennsylvania utilities and the Supply Corporation pipeline business underscores the effectiveness of this strategy in the regulated arena.

Technological Edge and Operational Efficiency: Driving Returns from the Ground Up

While not a tech company in the traditional sense, NFG's Exploration and Production segment, Seneca Resources, employs advanced drilling and completion technologies that provide a significant operational and economic edge, particularly in the Appalachian shale plays. The strategic pivot to focus development on the Eastern Development Area (EDA) in Tioga and Lycoming counties is underpinned by the application of these technologies to unlock the region's prolific reserves.

Seneca's "Gen 3" well design, implemented in recent Utica pads in the EDA, is a key differentiator. Management highlights these wells as the "best we’ve turned in line since the inception of our Utica program," exceeding initial expectations for productivity and estimated ultimate recovery (EUR). Specifically, recent Gen 3 Utica pads are maintaining sustained production rates of 25-30 million cubic feet per day for 9-12 months, and early results suggest EURs could exceed the prior expectation of 2.5 Bcf per 1,000 feet of lateral length. The pressure declines observed in these wells are also exceeding expectations, indicating efficient reservoir drainage.

This enhanced well productivity, combined with operational efficiencies in drilling and completion, translates directly into significant capital efficiency gains. Seneca's operations team has achieved cost savings of approximately $50 per foot drilled on recent Tioga Utica pads by reducing drilling days by 20% compared to original budgets. The integrated nature of Seneca and NFG Midstream further enhances this, allowing for coordinated planning and investment in gathering infrastructure (like compression and dehydration facilities at Keeneyville) that minimizes overall system costs and maximizes the value captured from production.

Looking ahead, Seneca is already exploring a "Gen 4" or "Gen 3 plus" design, testing adjustments to inner well spacing and proppant loading (potentially increasing from 2,200 pounds per foot to 3,000-3,800 pounds per foot). The stated goal is to balance increased productivity with the capital invested, finding the optimal point for maximizing returns.

For investors, the "so what" of this technological and operational focus is clear: lower finding and development costs, higher production rates per well, improved capital efficiency (growing production with decreasing capital investment), and ultimately, enhanced profitability and free cash flow generation from the E&P segment. Seneca's inventory in the EDA and Western Development Area (WDA) boasts expected PV10 breakeven prices below $2.25 per Mcf NYMEX, placing it in the top decile of Appalachian well economics and providing a robust inventory for decades of future development.

Segment Performance and Financial Strength: A Picture of Integrated Resilience

NFG's recent financial performance underscores the benefits of its integrated model and strategic execution. For the quarter ended March 31, 2025, adjusted operating results saw a significant increase compared to the prior year, driven by strong contributions across the business.

The Utility segment delivered a particularly strong quarter, with earnings increasing by $18.8 million year-over-year. This was primarily driven by the impact of new base delivery rates in the New York jurisdiction, effective January 1, 2025, following a settlement approved by the NYPSC. These new rates, part of a three-year plan, provide a significant revenue uplift ($57.3 million in fiscal 2025, with additional increases in fiscal 2026 and 2027) and incorporate mechanisms like weather normalization and cost trackers that enhance earnings stability. Higher customer usage due to colder weather also contributed, though the purchased gas adjustment clauses ensure earnings are not impacted by gas cost fluctuations. The elimination of a refund provision related to prior tax benefits further boosted other revenue.

The Pipeline and Storage segment also saw increased earnings ($1 million increase quarterly, $9.4 million increase six-month), benefiting from the Supply Corporation rate settlement effective February 1, 2024, which increased transportation and storage rates. While Empire Pipeline's recent settlement amendment will result in a modest rate reduction ($0.5 million yearly), it secures key contracts and provides regulatory stability. The segment also capitalized on short-term market opportunities, contributing to revenue growth.

In the non-regulated segments, the Exploration and Production segment's quarterly earnings increased by $35.8 million, primarily due to higher natural gas prices after hedging and increased production volumes from recently turned-in-line EDA pads. However, for the six months ended March 31, 2025, E&P earnings decreased by $63.5 million compared to the prior year, largely due to non-cash impairment charges totaling $141.8 million pre-tax ($103.6 million after-tax), mostly related to the full cost ceiling test and water disposal assets. Despite this, the underlying operational performance remained strong, with six-month operating revenues increasing $42.2 million due to higher realized prices after hedging. The Gathering segment's earnings decreased quarterly ($2.4 million) and six-month ($4 million), primarily due to higher operating expenses, depreciation from new plant, and interest expense, partially offset by increased volume.

Overall, consolidated operating revenues for the quarter ended March 31, 2025, were $729.95 million, up from $629.94 million in the prior year. For the six months, revenues were $1.28 billion, up from $1.16 billion. Net income available for common stock was $216.36 million ($2.37 per diluted share) for the quarter and $261.34 million ($2.86 per diluted share) for the six months, compared to $166.27 million ($1.80 per diluted share) and $299.29 million ($3.24 per diluted share) in the prior year periods. The six-month comparison is significantly impacted by the non-cash impairments in FY2025.

From a liquidity perspective, NFG remains well-positioned. Net cash provided by operating activities totaled $473.9 million for the six months ended March 31, 2025. The company maintains a $1 billion unsecured revolving credit facility extended through February 2029 and access to commercial paper markets. In February 2025, NFG proactively managed its debt profile by issuing $1 billion in new notes (5-year and 10-year tranches) at favorable rates, using proceeds to redeem existing notes and fund a trust for upcoming maturities, effectively discharging a legacy indenture and removing associated covenants. This strategic financing move, achieving "record low credit spreads," managed fixed income liabilities through early next year and demonstrates strong access to capital markets. The company's debt to capitalization ratio was 0.47 at March 31, 2025, well below the 0.65 covenant limit, providing significant borrowing capacity.

Outlook and Growth Trajectory: Regulated Stability Meets Efficient E&P Growth

National Fuel Gas is forecasting continued growth, driven by both its regulated and non-regulated segments. Management has revised its fiscal year 2025 adjusted operating results guidance upwards to a range of $6.75 to $7.05 per share, based on a NYMEX natural gas price assumption of $3.50 per MMBtu for the remainder of the year. This represents a $0.15 per share increase at the midpoint from prior guidance, reflecting strong Q2 performance and an improved commodity price outlook.

The regulated Utility and Pipeline & Storage segments are expected to contribute significantly to this growth, with management projecting a 7% to 10% average annual increase in earnings per share over the next three years. This is supported by the recently approved multi-year rate plans in New York and Pennsylvania, which provide clear visibility on revenue increases, as well as ongoing modernization programs and expansion projects like the Tioga Pathway. These investments are expected to drive regulated rate base growth in the 5% to 7% area, providing a stable foundation for future earnings. The Tioga Pathway Project, specifically, is on track for a late calendar 2026 in-service date and is expected to add $15 million in annual expansion revenue for the Pipeline business while providing Seneca with a crucial outlet for 190,000 Dth per day of Tioga County production.

In the non-regulated segments, Seneca's production guidance for fiscal 2025 remains strong at 400 to 420 BCFE. The strategic focus on the high-return EDA, coupled with continued operational efficiencies and advanced well designs, is expected to enable Seneca to grow production at a low to mid-single-digit percentage rate on average in the coming years while simultaneously decreasing capital expenditures. Management views this "positive capital efficiency trajectory" as a key driver of free cash flow growth beyond fiscal 2025.

The long-term outlook for natural gas demand, particularly from LNG exports, data centers, and industrial growth, is constructive and supports NFG's development plans. Appalachia is seen as an attractive region for new demand centers due to its resource depth and existing infrastructure, and NFG is uniquely positioned to provide solutions through its integrated assets.

NFG remains committed to returning value to shareholders. The company has a long history of dividend increases and is targeting completion of its $200 million share repurchase program by the end of calendar 2025, having already repurchased 1.92 million shares for $115 million as of March 31, 2025. While the pace slowed temporarily due to market uncertainty, management intends to resume its prior cadence as conditions stabilize. The combination of expected earnings and free cash flow growth, coupled with the dividend and buyback, positions NFG to deliver significant shareholder value.

Risks and Considerations

Despite the positive outlook, investors should be mindful of potential risks. Commodity price volatility remains a factor, although NFG's hedging program (63% hedged for FY2025 at $3.44, well above current strip) and firm sales/transportation agreements (nearly 90% of FY2025 production secured) mitigate near-term exposure. The non-cash full cost ceiling test impairment risk persists, influenced by historical commodity prices, though management notes the forward curve suggests economic value exceeds current book value.

Regulatory and political risks, particularly in New York, pose challenges. The state's aggressive climate agenda, including emissions mandates, potential carbon pricing (like the Cap-and-Invest program), and restrictions on fossil fuel use in new buildings, could impact the Utility segment's customer base and increase compliance costs. While NFG is actively engaged in regulatory processes to recover costs and advocate for balanced energy policy, adverse outcomes could affect earnings. Infrastructure permitting also remains challenging, as evidenced by the decision to cease development on the Northern Access project due to cost increases.

Inflationary pressures can impact operating and capital costs, potentially creating regulatory lag in cost recovery for regulated segments. Disputes with collective bargaining units representing a significant portion of the workforce could lead to operational disruptions.

Conclusion

National Fuel Gas presents a compelling investment thesis built on the foundation of its unique integrated business model in the strategically important Appalachian Basin. The company is successfully leveraging its regulated segments for stable, predictable growth through favorable rate settlements and ongoing modernization, while simultaneously driving significant capital efficiency and production growth in its non-regulated E&P and Gathering businesses through focused development in high-return areas and advanced operational techniques.

Management's upward revision of fiscal 2025 guidance and projections for double-digit consolidated EPS growth through fiscal 2027 underscore confidence in the company's trajectory, supported by a constructive long-term outlook for natural gas demand. While commodity price volatility and the evolving regulatory landscape present challenges, NFG's integrated structure, disciplined hedging strategy, strong balance sheet, and commitment to returning capital position it well to navigate these factors and continue delivering value to shareholders. The combination of regulated stability, efficient non-regulated growth, and a clear path for capital allocation makes NFG a noteworthy consideration for investors seeking exposure to the energy sector with a differentiated approach.