Trying to anticipate and bet on future Fed actions has lost a lot of people a great deal of money over the years, cautions Roger Conrad, editor of Conrad's Utility Investor.
And I’m convinced as ever that tightening money and constraining investment now will only lead to higher inflation later, as identical central bank actions did several times from the late 1960s to the late 80s.
So the bottom line is this is a time to be cautious. Stocks of the best in class companies I highlight are always in style when they trade at good prices. And that’s the case now for Aggressive Focus stock National Fuel Gas (NFG).
Between mid-2020 and summer 2022, the shares roughly doubled — for a time exceeding my “consider taking profits” level. They’ve since retreated about 25 percent and are positioned to make another run.
The US natural gas rally that began in pandemic 2020 went into overdrive last year, in part because Russia’s Ukraine invasion spurred interest in LNG exports. The Northern Hemisphere’s milder than expected winter coupled with recession worries triggered a sharp reversal, with the fuel sliding from $10 plus to barely $2 per million BTU.
But like oil, the key driver of natural gas’ long-term upcycle is still intact. That’s the now nearly 10 years old investment slump, arguably made worse by recently falling prices. And it means last year’s supply deficit is likely to be a good deal worse when demand returns.
National Fuel’s fiscal Q1 results released in early February handily beat guidance, with adjusted net income rising 24 percent on an 11 percent lift in Appalachian gas production. Nonetheless, management cut the mid-point of expected FY2023 earnings (end September 30) to just $5.55 from the previous $6.65, on a downward revision in expected gas prices.
I expect an upward reversal for both prices and guidance later this year for two reasons. First, when US gas stays under $4 for more than a few months as it’s already done, production always drops to shrink supply. Second, mild winters are frequently followed by hot summers, which means robust demand for gas to generate electricity.
My expectation is either or both factors will push National Fuel shares to a new high by the end of 2023. But in the meantime, the company’s FERC-regulated natural gas pipelines (24.3 percent net income) and regulated New York and Pennsylvania gas utilities (20 percent) will provide plenty of earnings to fund another penny per share increase for the quarterly dividend in June.
National Fuel’s unique integrated business model has enabled the company to consistently grow dividends for decades without a single cut. And the balance sheet is strong as well — with investment grade ratings, just $250 million of maturing debt through 2024, minimal floating rate debt and solid free cash flow. That means we can be patient while waiting on gas to recover. Buy at $65 or less.
