National Fuel Gas Company (NYSE: NFG) is an energy holding company that operates as both a gas utility and a producer and transporter of oil and gas. Its utilities segment serves 725,000 customers in New York and Pennsylvania, while its transportation segment moves 356 Bcfe of petroleum. Both industries are subject to government regulation, and rates are kept low to enable accessibility for customers while guaranteeing profits for the company. NFG must lobby for rate increases if input costs rise, a process which is long and costly, making the company prone to losing potential profits and creating a lag when input costs rise that squeezes margins. Furthermore, both businesses are prone to seasonality in their revenues, as demand for gas is higher in the colder months of winter.

To supplement the low, steady margins associated with transportation and distribution, National Fuel Gas Co. operates an upstream oil and gas exploration and production company through its subsidiary, Seneca. Seneca has reserves in California, on the Gulf Coast, and in the Appalachians. The company is betting on its Appalachian holdings to deliver much of its future growth, despite the relative mystery surrounding the productivity of the region. This is because Californian reserves are beginning to mature, while Gulf coast reserves are prone to slowdowns that come with hurricane season. With over a million acres in the Appalachians, 800,000 of which are part of the Devonian Shale, the company's growth prospects are rich. Natural Fuel Gas Co. doesn't have any real utilities competition thanks to the high cost of infrastructure installation, but the company competes with other pipeline companies like Enbridge and Kinder Morgan, as well as oil and gas producers like Chesapeake Energy and Devon Energy.

Company Overview

National Fuel Gas Company is a diversified energy company consisting of four business segments: Utility segment, Pipeline and Storage segment, and Exploration and Production segment and Energy Marketing segment. Its subsidiaries include Highland Forest Resources, Inc., Horizon Energy Development, Inc., Horizon LFG, Inc., Horizon Power, Inc. and National Fuel Gas Midstream Corporation. On September 30, 2009, the Company owned 103,317 acres of timber property and managed an additional 3,424 acres of timber rights.[1] In July 2009, the Company’s wholly owned subsidiary in the Exploration and Production segment, Seneca Resources Corporation, purchased Ivanhoe Energy’s United States oil and gas operations.[1]

Business and Financial Metrics

Third Quarter 2010 Results[2]

National Fuel Gas Company reported earnings for the third quarter of $42.6 million or $0.51 per share, a decrease of $0.3 million, or $0.02 per share, from the third quarter of fiscal 2009 due to lower earnings in the Pipeline and Storage segment. Compared to the prior year’s third quarter, production of crude oil and natural gas increased approximately 1.7 billion cubic feet equivalent (“Bcfe”), or 15.1%, to 13.3 Bcfe. Appalachian production increased 115% to 4.8 Bcfe, including production from the Marcellus Shale of 2.4 Bcfe.

With the recent addition of a third Seneca-operated rig in the Marcellus Shale, NFG has accelerated its pace of drilling. This increased drilling, combined with continued strong well results, has allowed the company to nearly double the midpoint of its Marcellus resource potential estimate to 11.5 Tcf. The increase in this estimate and the ongoing development of the entire play continue to provide development opportunities for Seneca, Midstream and the Pipeline and Storage segment.

In the Appalachian Basin, industry-wide growth in production has put pressure on natural gas prices. The erosion of historically favorable prices at the import point at the Canadian border has created short-term challenges in the Pipeline and Storage segment. These challenges, however, continue to create opportunities for new infrastructure construction that will help transport Marcellus Shale gas to the major markets.

Business Segments


The Utility segment operations are carried out by National Fuel Gas Distribution Corporation. Distribution Corporation sells natural gas or provides natural gas transportation services to approximately 727,000 customers through a local distribution system located in western New York and northwestern Pennsylvania. The principal metropolitan areas served by Distribution Corporation include Buffalo, Niagara Falls and Jamestown, New York and Erie and Sharon, Pennsylvania.

Pipeline and Storage[1]

The Pipeline and Storage segment operations are carried out by National Fuel Gas Supply Corporation, and Empire Pipeline, Inc. Supply Corporation provides interstate natural gas transportation and storage services for affiliated and non-affiliated companies through an integrated gas pipeline system extending from southwestern Pennsylvania to the New York-Canadian border at the Niagara River and eastward to Ellisburg and Leidy, Pennsylvania, and 27 underground natural gas storage fields owned and operated by Supply Corporation, as well as four other underground natural gas storage fields owned and operated jointly with other interstate gas pipeline companies.

Empire, an intrastate pipeline company, transports natural gas for Distribution Corporation and for other utilities, large industrial customers and power producers in New York State. Empire owns the Empire Pipeline, a 157-mile pipeline that extends from the United States/Canadian border at the Niagara River near Buffalo, New York to near Syracuse, New York, and the Empire Connector, which is a 76-mile pipeline extension from near Rochester, New York to an interconnection with the unaffiliated Millennium Pipeline near Corning, New York. The Millennium Pipeline serves the New York City area. The Empire Connector was placed into service on December 10, 2008.

Exploration and Production[1]

The Exploration and Production segment operations are carried out by Seneca. Seneca is engaged in the exploration for, and the development and purchase of, natural gas and oil reserves in California, in the Appalachian region of the United States, and in the Gulf Coast region of Texas and Louisiana, including offshore areas in federal waters and some state waters. At September 30, 2009, the Company had United States proved developed and undeveloped reserves of 46,587 thousand barrels of oil (Mbbl) of oil and 248,954 million cubic feet of natural gas (MMcf) of natural gas. The Energy Marketing segment operations are carried out by National Fuel Resources, Inc. (NFR), which markets natural gas to industrial, wholesale, commercial, public authority and residential customers primarily in western and central New York and northwestern Pennsylvania, offering natural gas for its customers.

Trends and Forces

State Regulation of Gas Distribution Guarantees NFG Profits - at the Cost of Low Margins

Utilities and pipelines tend to be highly regulated businesses in the U.S., with the national government setting transmissions rates and state governments setting electric and gas distribution rates. These rules are designed to ensure both profitability for the company and accessibility for the consumer, but often hold back utilities companies, like NFG, from achieving potential revenues and profitability by preventing them from charging delivery rates that the level of demand would really allow. Regulation can also cause the company's margins to be very volatile, as lobbying the government is the only way the company can control its prices. Unfortunately, natural gas costs fluctuate very rapidly, but it takes a long time for utilities lobbyists to convince state and regional regulators to raise the price ceiling. For the most part, regulators will only raise rates if the company can show that something, whether rising costs or inflationary pressure, is causing their margins to shrink to unfair levels.

New York and Pennsylvania have both implemented laws encouraging competition in the gas distribution market; they allow customers to choose between receiving natural gas from utilities companies and natural gas marketers. Though this takes away potential revenue from NFG's utilities segment, the company's marketing segment sold over a third the amount the utility did, and its transportation arm receives revenue for transporting gas for other marketers.

NFG Revenues Follow Seasonal Patterns; Unusual Seasons Mean Unusual Sales

Natural gas is used most commonly in home heating systems, making its demand partially dependent on the temperature outside. Since NFG operates on a different fiscal calendar, in which its first quarter ends December 31st, its revenues follow a different quarterly pattern than competitors. For NFG, second-quarter revenue tends to be highest because of New York and Pennsylvania's cold late winters. Both states have rainy first and third quarters which tend to be cooler, causing those months to have higher revenues than summer.

This temperature dependence also means that unusual seasonality has a real effect on the company's operations; warmer winters, a predicted outcome of global climate change, will damage the company's revenues by decreasing demand at a key part of the year.

Incidentally, the gas utilities demand cycle is exactly opposite that of electric utilities, who see higher demand in warmer months because air conditioning units are electrically powered.

National Fuel Gas Company is Gambling on its Upstream Petroleum Operations

With the price of oil at $100/bbl, exploration and production margins have shot through the roof. Because regulation keeps NFG's utilities margins relatively low, the company's upstream oil and gas operations have the potential to make its business highly profitable.

Historically, petroleum prices have been volatile because of the cyclical nature of commodities prices; E&P businesses see their margins move up and down with the price of oil. Growing demand from emerging markets and slowing production (possibly due to peak oil), however, have led many to believe that petroleum has nowhere to go but up. If this is the case, NFG's margins will move with it.

With its California and Gulf Production Dwindling, NFG is Looking to its Appalachian Holdings

In the past, Seneca, NFG's E&P subsidiary, relied on its West Coast and Gulf Coast holdings for much of its oil and gas production. Gulf operations are historically subject to shutdowns and damages from the hurricanes that sweep the coast late every summer; California's fields are starting to mature, with production steadily decreasing. In an effort to increase production and take advantage of high oil prices, Seneca has ramped up drilling in its one million acres of Appalachian holdings.

The catch about relying on Appalachia to supply future growth is that very little is known about the region's yield potential. Though it is known that there are 800,000 acres of Devonian Shale within Seneca's holdings, it's unclear as to how much oil and gas the shale could really yield, or at what cost. Furthermore, developing an oil shale can cost up to $60 per barrel.[3] In the event of a precipitous drop in petroleum price, the shale could become too expensive to profitably develop, and Seneca would be left high and dry.


NFG is a diversified natural gas company that explores for, produces, transports, markets and distributes gas. It competes in the upstream oil and gas business with industry powerhouses like BP, Chevron, Exxon Mobil, ConocoPhillips, and Royal Dutch Shell - the oil majors. It also competes with a number of independent oil & gas companies like Chesapeake Energy, Devon Energy, and EnCana.

The company's pipelines segment competes with natural gas transporters like Energen and Equitable Resources, as well as major pipeline companies like Enbridge, Kinder Morgan, and Chevron.

NFG's utilities segment operates in New York and Pennsylvania. It has little real competition thanks to the high cost of infrastructure installation; government regulation, however, keeps the company from charging the rates and turning the profits that would otherwise be expected of a monopolist that sells products with inelastic demand. On a larger scale, NFG competes with other gas utilities like:

  • AGL Resources - AGL Resources operates gas delivery services in Florida, Georgia, Maryland, New Jersey, Tennessee, and Virginia, and has close relationships with twelve different gas marketing companies.
  • Atmos Energy - Atmos operates in Texas, Kentucky, Louisiana, Mississippi, Colorado, Kansas, Tennessee, Georgia, Illinois, Iowa, Missouri, and Virginia. It is not only a gas utility but also a natural gas marketing, pipeline, and storage company.
  • ONEOK - ONEOK is a transport and distribution company that acts as a utility in Oklahoma, Kansas, and Texas.
  • Southern Union Company - Southern Union is engaged in the storage, transport, production, and refining of natural gas; its utilities business operates in Missouri and Massachusetts.
  • National Grid Transco - National Grid is a gas and utilities company that operates in the United Kingdom and the United State; in the U.S., it operates in Rhode Island and New York.


  1. 1.0 1.1 1.2 1.3 1.4 Reuter: NFG Company Profile
  2. National Fuel Gas Company Investor Relations: "NATIONAL FUEL REPORTS THIRD QUARTER EARNINGS" August 5, 2010
  3. Oil Shale and Tar Sands Programmatic EIS: About Oil Shale
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