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National Fuel Gas Is Cheap

$409 million reserve write-down for the company’s E&P segment overshadows its regulated utility and pipeline operations. National Fuel Gas offers the highest number of Marcellus acres per million dollars of enterprise valuation. On a yield basis, National Fuel Gas has not been this cheap since 2006 and 2008. National Fuel Gas (NYSE: NFG ) is three companies in one: a regulated gas utility with midstream assets and an exploration and production company with assets in California and the Marcellus. With the collapse of the oil and gas markets, share prices have followed suit, falling from a high of $72+ registered in 2013, 2014, and again this year. However, NFG’s base of regulated assets provides a cushion for the obvious volatility of its E&P business. A good business overview is offered on 4-traders.com : “NFG is a diversified energy company, which operates through the following business segments: Utility, Pipeline and Storage, Exploration and Production, Energy Marketing & Gathering. The Utility segment through National Fuel Gas Distribution Corp. is engaged in selling and providing natural gas and transportation services to customers through a local distribution system located in western New York and northwestern Pennsylvania. The utility segments services 775,000 customers. The Pipeline and Storage segment through National Fuel Gas Supply Corp. and Empire Pipeline, Inc. is engaged in providing interstate natural gas transportation and storage services for affiliated and non-affiliated companies. The Exploration and Production segment through Seneca Resources Corp. and Seneca Western Minerals Corp. is engaged in the exploration, development and purchase of natural gas and oil reserves in California and in the Appalachian region of the U.S. The Energy Marketing segment through National Fuel Resources, Inc. is engaged in marketing of natural gas to industrial, wholesale, commercial, public authority and residential customers in western and central New York and northwestern Pennsylvania. The Gathering segment through its subsidiary National Fuel Gas Midstream Corp. which builds owns and operates natural gas processing and pipeline gathering facilities in the Appalachian region. National Fuel Gas was founded on December 8, 1902 and is headquartered in Williamsville, NY.” It seems not many analysts like NFG as demonstrated by both a lack of research coverage and a low consensus timeliness rating. There were 12 analysts covering NFG in May 2014, but that number has shrunk to 7, of which four rate NFG as a Hold, two as a Buy, and one as a Strong Buy. Keep in mind, in the world of analyst-speak, a Hold usually and loosely translates to Avoid. At the heart of this dislike is the large write-off NFG took in its recent quarterly reporting . GAAP procedures call for a redetermination of oil and gas reserves every quarter, and in keeping with this process, NFG has taken $409 million write-down over the past 9 months. This creates a GAAP loss of -$2.24 a share. However, the operating results were not nearly as bad with 9-month operating results declining from $2.82 last year to $2.58. Below is a table comparing operating results per share for the first 9 months of FY2015 vs. same time last year. Source: National Fuel Gas press release, Guiding Mast Investments As shown, operating earnings are down “only” -$0.24 a share, or about 9%. However, share prices have declined by 25% this year. NFG has not been this cheap on a yield basis since 2006 and 2008, and 2006 and 2011 on a PE basis. Below is a 20-year FAST Graph chart indicating a more reasonable PE and dividend yield in line with its history. Prior to 2006, NFG did not have as extensive an E&P footprint, and traded primarily with a regulated gas utility matrix. (click to enlarge) Management announced its earnings per share guidance for FY2015 of $2.90 to $3.00, up from previous guidance of $2.75 to $2.90. Guidance was also given for FY2016 of $3.00 to $3.30. Over the years, NFG has generated acceptable and reliable returns on invested capital, with a current 3-year average of 8.75%. Below is a chart, also from fastgraph.com, of 20-year history of ROIC. (click to enlarge) National Fuel Gas is the second largest landholder in the Marcellus shale, controlling over 800,000 acres, with 75% fee-owned. For example, below is a slide from the most recent investor presentation showing the location of the fee-owned 720,000 acres out of 790,000 acres controlled in Pennsylvania. Morningstar believes NFG has a 10-year footprint of over 1500 drilling locations, based on its current drilling schedule. (click to enlarge) NFG offers one of the lowest valuation of its Marcellus acreage compared to its peers. Below is a table of various net acres ownership, current enterprise value, and the number of acres owned for each million dollars of EV. Source: Guiding Mast Investments Although natural gas production has expanded from 30 MMcf in 2010 to 142 MMcf in 2014, NFG continues to expand its reserves by a factor of 3 to 5 times production levels. There is no reason to believe this trend won’t continue. Morningstar forecasts natural gas production will increase 74% between 2014 and 2019. Oil production in California has not been fully replaced, and reserves have declined 15% over the previous 5 years. In the current era of low prices, company-wide production growth has slowed to just 5% for the first 9 months of 2015 over 2014. National Fuel Gas is expanding its midstream assets of pipelines, storage facilities, and gathering. Over the next few years, transportation capacity will increase from a current 1 bcf/d to over 1.6 bcf/d. This expansion should continue to translate into higher earnings per share. Fund manager Mario Gabelli controls 10% of NFG shares. Last fall and spring, Gabelli pushed for a financial re-engineering of the company by spinning off the utility segment. Management resisted, and Gabelli called for a proxy vote on the issue, but he lost. It is interesting that according to Gabelli’s latest fund notes, NFG is still looking at some type of restructuring, but management is mum on the issue. As NFG continues to gain critical mass by expanding its midstream assets of pipelines and gathering systems, some type of financial restructuring seems inevitable. Morningstar’s even-handed analysis summary is: “Bulls say: National Fuel offers years of development potential with a reasonable margin of safety. We estimate the firm wide break-even index price to be approximately $2.45 per thousand cubic feet. This company has an impressive record of 112 consecutive years of dividend payments, and its 44 consecutive years of dividend increases should appeal to income investors. Midstream infrastructure has lagged production growth in the Appalachian region for several years, leaving NFG’s midstream businesses well positioned to capture incremental transport volumes from Marcellus producers. Bears Say: North American natural gas fundamentals could remain weak for an extended period of time. NFG will remain leveraged to this market for several years while developing its Marcellus acreage. We anticipate that National Fuel Gas will outspend cash flow in each year of our forecast, which could be detrimental to its development aspirations in the event of declining commodity prices. As its higher-risk E&P business continues to grow at a feverish pace, NFG will become less appealing to traditional income investors on the whole, as predictability of future cash flows becomes less certain.” A year ago, I penned a bullish article on NFG when it was trading at $74, and I apologize to those who took my advice at that time. I still believe in the value National Fuel Gas offers in its combined assets of a gas utility with an expanding footprint of natural gas infrastructure and an oil/gas E&P. Management announced the probability of additional reserve valuation adjustments over the next two quarters and this has weighted on share prices. Longer-term thinkers should have this value play on their radar screen. Author’s Note: Please review disclosure in Author’s profile. Disclosure: I am/we are long NFG. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Hunting For Profits At GreenHunter Resources

The CEO has offered to loan (or possibly buy equity) the money to the company to pay the preferred dividends when the lenders allow. One of its biggest customers, Magnum Hunter Resources, has a $430 million joint venture that should allow the company to become profitable within the next year. The company has a cost advantage in disposing waste water. Gross margins are improving and losses from continuing operations are decreasing despite decreasing revenues. SWD capacity will increase to 32,000 barrels per day early in the fourth quarter. GreenHunter Resources (NYSEMKT: GRH ) is a small company that is dedicated to dealing with the disposal and treatment of waste water that is a byproduct of the fracking of wells and the production of oil and gas (primarily). “Today, GreenHunter Water owns and operates salt water disposal wells, a fleet of disposal trucks, including 407 condensate trucks and dispatches third-party trucks, as well as, barging and pipeline operations for the efficient and safe transport of water for disposal.” The above quote from the company website neatly describes the company’s operations. The company exited other operations in Texas and Oklahoma to concentrate on the Utica Shale and Marcellus Shale in the Pennsylvania-West Virginia-Ohio region (possibly even a little bit of Kentucky). As such, it exited Oklahoma before it got caught in the earthquake controversy there. The company maintains that it has a cost advantage in its current area of operations and it is trying to build on that cost advantage. The company claims to have one of the most modern truck fleets in the business. All of the trucks are licensed to carry hydrocarbons, which implies that there can be alternative uses for the trucks should the situation arise; however, at the current time, the emphasis is on waste water disposal. Recently, the company added two disposal wells and seeks to add two more disposal wells. The two new wells increased disposal capacity by approximately 40%. When the four wells have approval and are operating, the company anticipates that it will have a total capacity of 32,000 barrels of water per day. To accomplish its goal of adding capacity, the company issued notes in the amount of $16 million (in two draws of $13 million immediately and $3 million within six months) that allowed the company to finance the new wells as well as add trucks needed to support the transport of water and fluids. The interest rate is nine percent and the company must pay a royalty of twelve cents per barrel disposed from September 2015 to the first twelve months after the notes have been paid in full to the lenders. The notes mature in 36 months. That is not a lot of time for the company to become profitable enough for a refinance with longer terms. Still this financing has allowed the company to accomplish at least some of its growth goals. The company has spearheaded an attempt to barge the waste water using the waterways of Ohio. “Our estimates show that a single 10,000 barrels of brine barge will remove in excess of 600 hours of water truck traffic.” The above quote from the company’s website explains why the company has spent years and asked for help from Congressmen to get the Coast Guard moving on this proposal. The company is obviously looking to enhance its low-cost advantage in disposing of waste water. Recently, the company reported Coast Guard approval for the process, but there is more to go with the proposal before barging can actually begin. Shareholders need to hope that the savings projected actually materialize and make the time and money spent on this proposal worth the effort, as the company has spent years on this proposal. The company does claim barging is very safe and will not pollute the waterways with the waste water transported. The company’s SWD wells are all located in Ohio and West Virginia “GreenHunter Pipeline LLC, through the construction and development of multiple pipelines, will engage in the transportation of brine, freshwater and condensate. In addition to transportation, the pipeline destination will also include a processing facility to split condensates into different quality products, typically resulting in higher value for these finished materials. The first phase of the project has begun with right-of-way negotiations underway and is scheduled to be complete and 100% operational in 2016.” This quote from the company’s website shows that the company is thinking about the future. After a certain point of development is reached in a field, the operator usually seeks to connect the wells up to pipelines for the various products and by-products as the cheapest way to transport fluids from the field to processing, and finally to the sales destination. The company is seeking to transport waste water as well as condensate and treat the condensate. This avenue usually represents the final move by most operators to save money for these byproducts and waste materials. At some point in the very distant future, the fields in the area are mature, trucking needs should be very minimal and pipelines will take care of much of the demand for this service. But that is fairly far in the future, as these fields have a long way to before they can be called mature. The CEO and Chairman of the company is Gary Evans. He has several decades of experience and is also the chairman of Magnum Hunter Resources (NYSE: MHR ). He had built a similarly named company in the past and sold it, so he has experience building companies in this industry. With his experience, the company has found a niche in which it can compete effectively. One of the largest customers of the company is Magnum Hunter Resources. So to some extent the companies are linked. With Magnum currently reporting losses, and may report losses in the future, those losses affect the ability of Magnum Hunter to grow and use the products of GreenHunter Resources. Against that, Gary Evans appears willing to invest in either company should they need more resources, and he has loaned both companies money in the past. In the current second-quarter conference phone call, he has indicated a willingness to lend this company money in the future. That vote of confidence from the CEO cannot be ignored. Plus senior management owns a majority of the stock. They can effectively run the annual meetings to their advantage and to the disadvantage of the minority shareholders. This, however, is very unlikely to happen. In the long run, the major investment by senior management of the company in the common stock of the company is a very good sign. Despite the drop in revenues , as fees decreased across the industry for this service and many other services, the company is clearly in a growth phase. There was a lot of good to report in the second quarter. Gross margins on water disposal went from 32% to 42%, and internal trucking margins roughly doubled. SG&A decreased 19% to $1.7 million. The loss from continuing operations was $2.0 million vs. $3.3 million the year before. While that is some improvement, the company needs to aim for profitability. On the balance sheet, the current ratio is a little weak at 0.8:1, but not so weak as to doom the company. The company is fairly leveraged, with long-term debt nearing twice the amount of equity. As part of the recent loan, the company must raise $2 million in equity before the end of the year. The recent loan also requires that the company not pay preferred stock dividends until certain ratios come into compliance for two quarters. Since the company is going to require a fair amount of cash to build the required pipelines and grow, the equity requirement is a drop in the bucket. Of far more consequences to the preferred shareholders is when they think the company will meet the ratios required by the loan. The company had a good history of paying the preferred dividends before this deferral. The reason for the deferral appears to be the delays in getting the new SWD wells approved to operate. Even though these wells are converted wells and, therefore, cost far less than drilling a new well for these purposes, the approval delays are very costly to the company. Therefore, the preferred shareholders will probably have to wait until the last disposal well is approved in October and operating. The loan agreement and amendment appears to specify a longer time period, but given the company’s history of paying the dividends, and the comments made on the second-quarter conference call, an investor could assume that the company will make a legitimate attempt to begin paying the dividends again later this year and catch up the arrearage. Since the preferred stock has fallen below ten dollars a share ($8.38 as of today, September 14), this makes the preferred stock a speculative investment vehicle at this time, with the potential to more than double by the end of the year plus considerable dividend payments. Although, it is justifiably tempting for the average investor to wait for the stock to stop falling before investing. Magnum Hunter Resources, one of the largest customers of the company, announced a joint venture where the partner will invest more than $400 million. This amount of activity by Magnum Hunter Resources will drive GreenHunter Resources into profitability, assuming that the trends (ratio improvements) noticed on the income statement trends underway continue and hopefully increase favorably. This also assumes that GreenHunter continues to get all of Magnum Hunters’ applicable water disposal business. So profitability for this company within a year is very possible, and even with the dilution through equity raising, this stock offers a speculative value investment play on the oil industry. It is slightly safer than the average oil and gas exploration play in that no matter who discovers the oil, this company will be disposing of the waste water in the area and hopefully processing a significant amount of condensate in the future. Disclaimer: I am not an investment advisor and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents, and press releases to see if the company fits their own investment qualifications. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Vanguard Dividend Growth Fund: A Solid Core Holding

Summary VDIGX has low expenses and has outperformed its peers over the years. Don Kilbride looks for stocks that can pay a steady and growing stream of dividends. Vanguard also offers a Dividend Appreciation Index fund which will compete with VDIGX. Overall Objective and Strategy: Growth and Income The Vanguard Dividend Growth Fund (MUTF: VDIGX ) seeks to provide a growing income stream along with long term capital growth by investing in high quality companies that not only pay a dividend, but also have good prospects for growth in both earnings and dividends. Dividend yield is expected to be above the market average, but stocks with very high dividends but no growth are avoided. Stays diversified across all market sectors. Can allocate up to 25% of assets to foreign securities. Benchmark: the NASDAQ U.S. Dividend Achievers Select Index. Fund Expenses The expense ratio for VDIGX is 0.32% which is very low for an actively managed equity fund. Morningstar has computed the average expense ratio of similar funds to be 1.04%, so you pick up over 70 basis points of relative outperformance through lower expenses alone. Vanguard does not offer a lower cost Admiral share class for this fund. Vanguard does offer a passively managed index fund with similar goals to VDIGX – the Vanguard Dividend Appreciation Index Fund (MUTF: VDADX ) which requires a $10,000 minimum investment with an expense ratio of only 0.10%. VDADX is weighted more to mega-cap companies and has a higher allocation to the Consumer Staples sector than VDIGX. Minimum Investment VDIGX has a minimum initial investment of $3,000. Past Performance VDIGX is classified by Morningstar in the “Large Blend” or LB category. Compared with other mutual funds in this category, VDIGX has performed quite well, largely because of its low expenses and consistent stock selection. These are the annual performance figures computed by Morningstar since inception in December 2013 (as of September 14, 2015). Investors who compare their performance to the S&P 500, might be a little disappointed with the recent performance of VDIGX, since its five year performance of 13.56% lags the 14.13% performance of the S&P 500. But I wouldn’t blame the fund for this, since its Dividend Appreciation strategy has been a bit out of favor for the last five years. I believe the fund should outperform the S&P 500 over a full market cycle including some bear market periods. VDIGX Category (LB) +/- Category Percentile Rank in Category YTD -3.85% -4.48% +0.63% 41 1 Year +1.08% -1.58% +2.66% 17 3 Year +11.79% +11.37% +0.43% 48 5 Year +13.56% +12.58% +0.97% 34 10 Year +8.42% +6.25% +2.17% 4 15 Year +5.07% +3.97% +1.10% NA Source: Morningstar Mutual Fund Ratings Lipper Ranking : Funds are ranked based on total return within a universe of funds with similar investment objectives. The Lipper peer group is Equity Income. 1 Yr #21 out of 509 funds 5 Yr #23 out of 299 funds 10 Yr #5 out of 192 funds Morningstar Rating : Overall 4 Stars (out of 1,388 funds) 3 Yr 3 Stars (out of 1,388 funds) 5 Yr 4 Stars (out of 1,225 funds) 10 Yr 5 Stars (out of 872 funds) Fund Management The fund has been managed by Donald Kilbride since February 2006. Kilbride seeks to build a portfolio that produces a steady and growing stream of dividends. He looks for companies that have the ability and the willingness to increase their dividends over time. Kilbride does not buy non-dividend paying companies that may begin to offer a payout in the future- he wants the dividends now. Volatility Measures Beta: 0.91 (less volatile than the S&P 500) R- Squared: 0.93 (fairly high correlation with S&P 500) Sharpe Ratio: 1.39 Standard Deviation: 9.27 Comments VDIGX is a concentrated fund and is not an index hugger. It has $24 billion in assets invested in only 46 securities. These are the top ten holdings as of June 30, 2015: Top 10 Holdings % Weight United Parcel Service (NYSE: UPS ) 3.21% Microsoft (NASDAQ: MSFT ) 2.92% UnitedHealth Group Inc (NYSE: UNH ) 2.90% TJX Companies (NYSE: TJX ) 2.87% Honeywell (NYSE: HON ) 2.74% Nike Inc (NYSE: NKE ) 2.69% ACE Ltd (NYSE: ACE ) 2.68% Coca-Cola (NYSE: KO ) 2.60% Accenture PLC (NYSE: ACN ) 2.60% Praxair Inc (NYSE: PX ) 2.49% VDIGX is an excellent mutual fund that can serve as a core holding, especially in a retirement account. In 2008, it held up relatively well losing only 25.57% versus a 37.79% loss for its category peers and a 37% drop in the S&P 500. In times of severe financial stress, VDIGX is a good way to continue investing, since its holdings are very solid and unlikely to go into bankruptcy. Vanguard has set up an interesting competition between VDIGX and VDADX (which is pegged to the Dividend Appreciation Index). These two funds are good test vehicles for active versus passive management using the same basic strategy and it will be interesting to see whether Kilbride can outperform over the longer term. Last year, there was a friendly controversy here on Seeking Alpha between Geoff Considine and Larry Swedroe. Considine listed reasons why dividends are a valid basis upon which to select stocks, while Swedroe disagreed citing some research from DFA. Take a look at this Seeking Alpha article from last year for more information- ” Why Dividends Matter: A Review of Recent Research “. Considine later published a summary on Advisor Perspectives- ” Understanding the Controversy over Dividend‐Based Investing “. I believe that dividend-based investing has a place in any diversified portfolio, especially in retirement accounts. But for those in a higher tax bracket, I think it also makes sense to hold some non-dividend paying stocks (like Berkshire Hathaway (NYSE: BRK.A )) in taxable accounts. Over time, the tax savings will add up. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VDIGX over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.