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Buy this dividend-paying utility and get a free call option on nat gas

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June 12, 2012 – Comments (2) | RELATED TICKERS: NFG , CHK

 

I took a look at National Fuel Gas (NFG) when Mario Gabelli mentioned it in a previous Barron's Roundtable. As a result of a collapse in the price of natural gas NFG is thirty-something percent cheaper today than when I first saw him mention it. It's starting to look more interesting at this level.

At its core, NFG owns a valuable natural gas utility and a pipeline that when looked at on a sum-of-the-parts basis make up nearly the entire valuation of the stock today. That means anyone who purchases it at this level not only gets a relatively solid company that has increased its dividend for 42 consecutive years (currently yielding around 3.3%), but through its significant Marcellus acreage essentially a free call option on natural gas prices.

While the upside on a company like NFG likely isn't as great as it would be on a pure nat gas play like some other companies, including he messed-up Chesapeake Energy (CHK), I suspect that the downside is significantly less as well...and that is something that I always pay VERY close attention to in my real-life portfolio. Almost all of my stocks pay me solid dividends to wait for some potential catalyst to materialize. NFG fits that bill nicely and may be my next real-world purchase.

Here's what Gabelli had to say about the company in this week's Barron's:

National Fuel Gas [NFG] is a Buffalo, N.Y.-area utility which I recommended in the past. Natural gas has dropped to $2.40 per thousand cubic feet from $4.40 per Mcf. National Fuel Gas bought significant acreage in what is known as the Marcellus shale area. The utility has about 750,000 customers and generates good cash flow. It is worth about $17 a share. They have a midstream business -- pipelines -- that is worth about $20. The balance of the company is the Marcellus acreage. Assuming gas prices rise to $4 to $4.50 per Mcf two or three years from now, the stock could be worth close to $80, up from $44. The company pays a dividend of $1.46 a share and yields 3.3%.

Caution: Sharp Turns Ahead

Thanks for reading everyone.  Have a great evening!

Deej

2 Comments – Post Your Own

#1) On June 13, 2012 at 4:07 PM, ikkyu2 (99.32) wrote:

Well stated.  I love these posts - keep it up!

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#2) On June 14, 2012 at 11:23 AM, TMFDeej (99.41) wrote:

Thanks ikkyu2!  See you around.

Deej

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