New York Utility Rate Settlement Will Improve Cost Recovery And Efficiency

Key Takeaways

• Focusing on high-return acreage is expected to increase production and improve revenue, enhancing future earnings through capital efficiency.
  
• Operational improvements and cost reductions should enhance free cash flow, while market access projects and strategic settlements may drive revenue growth.
  
• Abandoning the Northern Access project and facing regulatory challenges could limit infrastructure expansion, while volatile natural gas prices and rising costs pressure profitability.

Catalysts

Operates as a diversified energy company.

• National Fuel Gas is focusing its drilling and development activities on its highest-return acreage in Tioga and Lycoming counties, with expectations of continued capital efficiency and increasing production, which should positively impact future revenue and earnings.
  
• The company's recent rate settlement for their pipeline and storage business and future projects, such as the Tioga Pathway, are expected to increase capacity and improve market access, potentially driving revenue growth.
  
• The incremental $86 million annual revenue increase from the New York utility rate case settlement addresses previous regulatory lag, increasing the potential for improved net margins through better cost recovery and efficiency.
  
• Seneca Resources' marketing strategy, including hedging and firm sales agreements, aims to protect cash flow and minimize earnings volatility, which should help maintain stable or growing earnings despite current natural gas price pressures.
  
• Continued operational improvements and cost reductions, such as drilling efficiencies and water management strategies, are likely to enhance free cash flow and boost earnings by lowering operational expenses and capital requirements.

National Fuel Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming National Fuel Gas's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 24.1% in 3 years time.
• Analysts expect earnings to reach $655.4 million (and earnings per share of $7.41) by about December 2027, up from $77.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2027 earnings, down from 71.0x today. This future PE is lower than the current PE for the US Gas Utilities industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

National Fuel Gas Future Earnings Per Share Growth

Risks

• The decision not to pursue the Northern Access project due to increased costs could limit future revenue expansion opportunities and impact anticipated earnings from pipeline infrastructure growth.
  
• Volatility in natural gas prices and their current low levels could affect National Fuel Gas's revenue and profitability, particularly if there is a warmer-than-expected winter resulting in decreased demand.
  
• While hedge positions mitigate some pricing risks, future production and revenue forecasts could still be affected by the high percentage of hedged natural gas prices, potentially limiting upside in an improved market environment.
  
• The challenges with regulatory and environmental approvals, specifically highlighted by the abandonment of the Northern Access project after litigation, pose risks to the anticipated expansion in infrastructure, potentially affecting future earnings.
  
• Rising operational expenses, such as those brought on by prevailing wage requirements in New York, as well as the inability to fully capitalize certain maintenance costs, may negatively impact margins and net profits.

Valuation

• The analysts have a consensus price target of $71.25 for National Fuel Gas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $83.0, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $655.4 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 5.9%.
• Given the current share price of $60.63, the analyst's price target of $71.25 is 14.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.