Transition To Eastern Development Area Will Surpass Expectations, Improving Well Performance And Efficiency

Key Takeaways

• Rate-making success and efficient capital use are expected to drive earnings growth and enhance operating income significantly.
  
• Strategic projects and demand growth in natural gas could boost revenues and provide new growth opportunities for National Fuel.
  
• The company faces potential revenue instability and margin pressure due to asset devaluations, debt maturities, regulatory challenges, and uncertain project expansions.

Catalysts

Operates as a diversified energy company.

• National Fuel’s recent successful rate-making activities, including the New York and Pennsylvania rate cases, are expected to provide over $130 million of additional margin compared to fiscal 2023, driving significant earnings growth in the regulated segments.
  
• The Company's production increase of 6% and significant capital efficiency improvements, with capital expenditures down 14% while production grew 12%, are expected to enhance net margins and drive higher operating income.
  
• The transition to the Eastern development area has surpassed expectations, with improved well performance and capital efficiency leading to increased production guidance and lower capital spend, positively impacting revenue and earnings.
  
• The multi-year New York rate settlement and new pipeline projects like the Tioga Pathway project are anticipated to deliver substantial revenue growth by increasing capacity and optimizing the supply chain.
  
• Expected demand growth in natural gas from data centers and AI industry expansion may position National Fuel for increased revenues and new growth avenues by leveraging its integrated model and strategic location.

National Fuel Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming National Fuel Gas's revenue will grow by 17.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.5% today to 38.2% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $8.6) by about April 2028, up from $-10.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, up from -686.8x today. This future PE is lower than the current PE for the US Gas Utilities industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

National Fuel Gas Future Earnings Per Share Growth

Risks

• The company is experiencing noncash impairments in the E&P segment, primarily due to the ceiling test, indicating potential asset devaluation, which could negatively impact earnings.
  
• The planned increase in production hinges on strong well performance and secured transportation, but further expansion in production without guaranteed market access could lead to pricing issues, affecting revenue stability.
  
• The company faces upcoming debt maturities totaling $1 billion in the next few years, potentially leading to increased interest expenses in a higher rate environment, which could strain net margins.
  
• The Tioga Pathway project and other expansions are contingent on regulatory approvals and environmental assessments, posing execution risks and potential delays that could impact projected earnings growth.
  
• While the New York rate settlement provides visibility and planned rate increases, there might be further regulatory noise and challenges, especially in states with increasingly unsupportive views on natural gas, which could pressure future margins.

Valuation

• The analysts have a consensus price target of $80.75 for National Fuel Gas based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $79.8, the analyst price target of $80.75 is 1.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.