Company Overview
National Fuel Gas Company (NFG) is a diversified energy company with a rich history dating back to 1902. Headquartered in Williamsville, New York, the company operates an integrated business model, with assets centered in western New York and Pennsylvania, allowing it to benefit from the production and transportation of natural gas from the Appalachian Basin.
National Fuel Gas has four main business segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility. This vertical integration has been a key competitive advantage, enabling the company to share management, labor, facilities, and support services across its various operations, while also allowing it to pursue coordinated projects for natural gas production and transportation. The company's integrated business model has proven resilient, helping it weather various industry and economic challenges throughout its history.
Business Segments
Exploration and Production
The Exploration and Production segment is the largest contributor to National Fuel Gas's revenues, accounting for approximately 45% of total revenues in fiscal year 2024. The company's main producing assets are located in the Marcellus and Utica Shale formations in the Appalachian region, which have been the focus of its upstream development efforts. Seneca Resources, the company's E&P subsidiary, has a deep inventory of highly economic future development locations, with over 10 years' worth of drilling in the Eastern Development Area (EDA) alone, where it expects to achieve PV10 breakevens of less than $2 per Mcf NYMEX.
In the quarter ended December 31, 2024, this segment generated $248.86 million in operating revenues, a decrease of $5.16 million compared to the prior year period. Natural gas production was 97.72 MMcf, down 3.04 MMcf from the prior year quarter, due to lower production in the Marcellus and Utica wells. The average weighted price of natural gas after hedging was $2.53 per Mcf, up $0.02 from the prior year quarter. The segment reported a loss of $46.78 million for the quarter, a decrease of $99.26 million compared to earnings of $52.48 million in the prior year period, primarily due to non-cash impairment charges of $103.6 million, including $79.1 million in ceiling test impairments, as well as lower natural gas production.
Pipeline and Storage
The Pipeline and Storage segment, which makes up around 20% of revenues, operates an extensive network of interstate pipelines and underground storage facilities, primarily in the Northeast region. The segment has benefited from recent rate case settlements, including a 2024 FERC-approved settlement that increased Supply Corporation's annual revenues by approximately $56 million.
In the quarter ended December 31, 2024, this segment generated $106.61 million in operating revenues, an increase of $12.2 million from the prior year quarter. The increase was primarily due to higher transportation and storage revenues, resulting from rate increases implemented in February 2024 in accordance with Supply Corporation's rate case settlement. Transportation volumes for the quarter increased by 2.73 Bcf, or 1.4%, compared to the prior year quarter. The segment reported earnings of $32.45 million for the quarter, an increase of $8.4 million from the prior year period, driven by the higher operating revenues.
Gathering
The Gathering segment, accounting for roughly 12% of revenues, operates midstream assets that gather and transport natural gas produced by Seneca and other third-party producers in the Appalachian Basin. National Fuel Gas has been strategically investing in this segment to support the increasing production volumes from the Marcellus and Utica Shale plays.
For the quarter ended December 31, 2024, this segment generated $61.13 million in operating revenues, a decrease of $1.46 million compared to the prior year quarter. The decrease was driven by a 3.3 Bcf, or 2.7%, decline in gathered volumes, primarily in the Trout Run, Tioga, and Clermont development areas, due to lower gross natural gas production by producers connected to these gathering systems. The segment reported earnings of $27.14 million for the quarter, a decrease of $1.68 million from the prior year period, primarily due to the lower gathering revenues and higher depreciation expense.
Utility
The Utility segment, which makes up the remaining 23% of revenues, provides natural gas distribution services to approximately 742,000 customers in western New York and northwestern Pennsylvania. This regulated business has provided a stable cash flow stream for the company, and in 2024, National Fuel Gas reached a three-year rate case settlement in New York that will increase its annual revenue requirement by $86 million over the next three years.
In the quarter ended December 31, 2024, this segment generated $228.51 million in operating revenues, an increase of $26.5 million compared to the prior year quarter. The increase was primarily due to the impact of new base delivery rates in the New York jurisdiction, which were approved by the New York Public Service Commission on December 19, 2024. The new rates reflect a return on equity of 9.7% and authorize revenue requirement increases of $57.3 million in fiscal 2025, $15.8 million in fiscal 2026, and $12.7 million in fiscal 2027. Utility segment earnings for the quarter were $32.5 million, an increase of $5.95 million from the prior year period, driven by the impact of the new base rates in New York.
Financials
National Fuel Gas has demonstrated its ability to navigate various market conditions, as evidenced by its strong financial performance. In fiscal year 2024, the company reported revenues of $1.94 billion and net income of $77.51 million, despite facing headwinds from lower natural gas prices. The company's diversified business model, with its regulated and midstream assets, has helped to offset the volatility in the Exploration and Production segment.
For the most recent quarter (Q1 2025), National Fuel Gas reported revenue of $549.48 million, representing a year-over-year growth of 4.6%. Net income for the quarter was $44.99 million. The company's annual operating cash flow for fiscal year 2024 was $1.07 billion, with free cash flow of $134.72 million.
One of the key factors contributing to National Fuel Gas's success has been its focus on operational efficiency and capital discipline. The company has consistently been able to deliver production growth while lowering its capital expenditures, thanks to its integrated development approach and continuous improvements in areas such as drilling and completion, water management, and other operational initiatives.
Additionally, National Fuel Gas has demonstrated a strong commitment to returning capital to shareholders. The company has a long history of paying dividends, with the most recent quarterly dividend of $0.515 per share, and has also been actively repurchasing its shares, having bought back $99.1 million worth of stock as of December 31, 2024.
Liquidity
National Fuel Gas has a strong balance sheet, with a debt-to-capitalization ratio of 0.48 as of December 31, 2024, providing the company with the financial flexibility to pursue strategic initiatives and weather potential market volatility. The company's debt-to-equity ratio stands at 0.95, indicating a balanced approach to leverage.
As of Q1 2025, National Fuel Gas had $48.69 million in cash and cash equivalents. The company also maintains a $1 billion committed revolving credit facility, which was fully available as of Q1 2025, further enhancing its liquidity position. The current ratio and quick ratio both stand at 0.39, reflecting the company's ability to meet its short-term obligations.
This financial strength has been crucial in helping the company navigate challenges, such as the impact of the Tax Cuts and Jobs Act in 2017, which required the company to write down a significant portion of its deferred tax assets. Despite this setback, National Fuel Gas was able to manage the impact and maintain its strong financial position.
Future Outlook
Looking ahead, National Fuel Gas remains well-positioned for further growth. The company's Exploration and Production segment is expected to continue delivering strong production volumes, supported by its extensive inventory of high-quality assets and its disciplined capital allocation strategy. The Pipeline and Storage and Gathering segments are poised to benefit from the increasing demand for natural gas infrastructure in the Appalachian region, while the Utility segment is expected to provide a stable source of cash flow.
For fiscal year 2025, National Fuel Gas has revised its adjusted operating results guidance to a range of $5.50 to $6.00 per share, based on the assumption that NYMEX natural gas prices average $2.80 per MMBtu for the year. This revised guidance was lower than previous estimates, primarily due to the decline in natural gas price assumptions. However, the company noted that if natural gas prices had remained consistent with the prior quarter, their guidance would have increased from the previous range.
National Fuel Gas has provided multiple sensitivities for their fiscal 2025 adjusted operating results at various NYMEX natural gas price levels to offer more transparency to investors. For fiscal 2025 capital expenditures, the midpoint of the company's guidance is $20 million below the fiscal 2024 level, reflecting continued capital efficiency improvements. The company expects its capital spending to be moderated in the first half of fiscal 2025, with an increase in the second half of the year as they shift back to a two-rig program.
Conclusion
In conclusion, National Fuel Gas is a well-diversified energy company with a long history of operational excellence and a proven track record of delivering value to its shareholders. Its integrated business model, focus on efficiency and capital discipline, and commitment to returning capital to shareholders make it a compelling investment opportunity in the energy sector. Despite facing challenges in the Exploration and Production segment, the company's Pipeline and Storage and Utility segments have demonstrated earnings growth, underscoring the benefits of its integrated approach. With a strong balance sheet, ample liquidity, and a clear strategy for future growth, National Fuel Gas is well-positioned to navigate the evolving energy landscape and continue creating value for its stakeholders.