National Fuel Gas is trying to change what kind of company the market thinks it is. For most of the last decade the Williamsville integrator earned the bulk of its profit from Seneca Resources wells in the Appalachian basin and from the gathering lines that move that gas. The pending purchase of CenterPoint Energy's Ohio gas utility is the event that is supposed to rebalance that mix toward regulated cash. Management has finished the last regulatory step and the permanent financing, and the close is scheduled for the first day of October. The transaction is designed to double the utility rate base and lift the share of earnings that come from rate-regulated pipes rather than from the wellhead. That is the change the equity is being asked to underwrite.
The third-quarter print showed why the re-rating is not automatic. Seneca produced less gas this summer as new wells failed to offset natural declines, and unit costs rose as third-party gathering fees and depletion charges climbed. A hedge book still delivered a gain that more than offset weaker NYMEX prices, which is why adjusted earnings looked orderly even as volumes slipped. Management cut full-year production guidance and raised upstream capital spending. The regulated utility still grew customer margin on year two of the New York joint settlement, and the pipeline arm signed a long-haul contract to feed a coal-to-gas conversion at the Shippingport Power Station. The company is becoming more utility-like on paper while the cash engine that funds that transition is having a messy operational quarter.
Adjusted earnings of $1.54 trailed last summer. Nine-month free cash flow still reached $280 million. The board lifted the annual dividend to $2.22. The equity now trades near eleven times trailing earnings, a producer multiple rather than a gas-utility multiple. The open question is whether the Ohio close and the late-year pipeline in-service dates are enough to make the market pay for a more regulated mix, or whether Seneca's well-design friction keeps the stock priced as Appalachian gas with a long dividend history attached.