Is National Fuel Gas Co. (NFG) a Buy?

Based in New York, National Fuel Gas Co. (NYSE:NFG) is comprised of four business segments; utilities, pipeline and storage, exploration and production, and energy marketing.

National Fuel Gas’ Earnings

On the Feb. 8, 2013, the company released its earnings for 1Q 2013. Earnings per share were up 11% to $0.81 from 1Q 2012.

The Pipeline and Storage segment had a strong quarter with the Tioga Extension project and Northern Access Projects. As a result, the company has been able to add 230 million cubic feet of more capacity per day. The Tioga Project that started its services at the end of 2011 was the major force behind the 70% increase in this segment. Moreover, the new Line N project will start adding 30 million cubic feet per day, plus $1.5 million revenues from November, 2013.

When compared to 1Q12 the utilities segment performed really well, thanks to lower costs and operational efficiencies. In the case of the E&P segment, production grew by 6.3%, thanks to Seneca’s drilling program in the Eastern Development Area. However, earnings declined by $0.04 per share as a result of low gas prices. Another reason was a $3.7 million termination charge related to a rig that the company idled last year. Hence, the company had to operate on a total of three rigs. The Lycoming County acreage in the Eastern Development Area continues to perform really well. Plus, most of the wells at PAD-M have started to contribute to sales. As a result, company has increased its guidance range from 102 Bcfe to 112 Bcfe, an increase of almost 30% from last year. TAccording to the company, the East Coalinga field is expected to mint significant revenues in the future, just like Midway Sunset. Having said this, the recent activities in California and Western Development Area continue to show a lot of promise for the future.

Valuation

National Fuel Gas is trading at a forward P/E (1yr) of 20.29x and is yielding a dividend of 2.60%. It has a PEG of 2.23, and adding its dividend yield to its PEG gives us a PEGY of 1.75. Using an average forward P/E of 19x, I would value National Fuel Gas as follows:

As National Fuel Gas is expected to do better in the coming years, I would use high consensus estimates to value it. As a result I value it at $56.81; hence, it’s trading almost at its fair value.

Gas Industry

Recently, AGL Resources Inc. (NYSE:GAS) released its earnings for 4Q 2012. The company reported earnings per share of $0.91, which decreased 3% from the same quarter last year. Gross margin was down 0.47% to 29.1% in the latest quarter. The core reason behind this weak performance was high operating costs. Though the company is yielding a healthy dividend of 4.70%, it won’t be easy for the company to grow its dividends in the future. Cash per share of $1.60 is far less than the dividend per share of $1.88. A current ratio of 0.80 shows that its liquidity position isn’t that strong. AGL Resources is currently trading at $40.28; a mean recommendation of 3.4 on the sell side clearly shows that it’s not an attractive buy. Hence, we don’t recommend buying it.