Appalachian, Tioga, And PSC Settlement Will Advance Energy Operations

Key Takeaways

• Strong Appalachian development and pipeline projects are expected to enhance production growth and revenue, benefiting long-term earnings.
  
• Favorable hedges and regulatory approvals will drive stable margins and sustainable earnings growth amid increased natural gas demand.
  
• Regulatory and litigation risks, along with infrastructure uncertainties, challenge growth and revenue, while M&A and share buybacks face macroeconomic and stability concerns.

Catalysts

Operates as a diversified energy company.

• National Fuel Gas is confident in its Appalachian development program, particularly in Tioga County, with outstanding well results from its Utica program, which are expected to drive production growth and enhance revenue and earnings due to improved productivity and inventory life.
  
• The rate settlement approved by the New York PSC will be a significant earnings driver for the regulated utility business through fiscal 2027, enhancing net margins and contributing to stable earnings growth.
  
• The Tioga Pathway project is expected to add significant annual expansion revenue to the pipeline business once completed, driving higher revenue and supporting future earnings growth.
  
• Positive market sentiment and structural improvements in natural gas demand, including significant LNG export growth and robust domestic energy demand, are forecasted to sustain higher gas prices, which should positively impact revenue and earnings.
  
• National Fuel Gas has secured favorable hedges for fiscal '26 and '27, enabling it to manage risk effectively while maintaining upside potential, which can lead to higher and more predictable earnings.

National Fuel Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming National Fuel Gas's revenue will grow by 15.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 39.6% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $8.89) by about May 2028, up from $39.6 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, down from 187.4x today. This future PE is lower than the current PE for the US Gas Utilities industry at 19.1x.
• Analysts expect the number of shares outstanding to decline by 1.7% 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

• National Fuel Gas faces regulatory and litigation risks that could hinder the timely completion of energy infrastructure projects, potentially affecting revenue from new developments.
  
• There is persistent infrastructure build uncertainty in the Appalachian region due to resistance from states like New York, which could limit future growth opportunities in pipeline and storage revenue.
  
• While natural gas market fundamentals are strong, increased basis differentials and potential volatility present risks to earnings if anticipated market conditions don't materialize.
  
• Uncertainty around potential M&A activities in regulated businesses may impact capital allocation strategies and financial stability, creating potential risks to net margins and earnings.
  
• The execution of share buybacks has been tempered by macroeconomic uncertainty, and any prolonged delay could impact shareholder value return expectations and earnings per share.

Valuation

• The analysts have a consensus price target of $82.25 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 $1.3 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 $82.08, the analyst price target of $82.25 is 0.2% 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.