Shareholder Seeks Sale of Some National Fuel Operations
By David Robinson
National Fuel Gas Co.’s biggest shareholder is pushing the Amherst energy company to "tighten its strategic focus" and sell some of its smaller businesses.
In an exchange of letters over the last week, New Mountain Vantage Advisers, which owns 9.7 percent of National Fuel’s stock, made a series of recommendations to the Amherst firm’s management that it believes will increase the value of the energy company’s stock.
"While management has, in fact, spoken favorably regarding several of our suggestions, few actions have been taken in response and we are not satisfied with the pace of progress," New Mountain managing directors David M. DiDomenico and Mathew J. Lori wrote in a letter to National Fuel’s board of directors.
Those recommendations include developing a plan to maximize the value of National Fuel’s oil and natural gas drilling opportunities on the vast swath of land it controls in Appalachia. It also suggested selling National Fuel’s smaller energy marketing, timber and landfill gas businesses, along with its Gulf of Mexico oil and natural gas wells, using the proceeds to buy back stock or pay a special dividend to shareholders.
"The company has implemented a successful business strategy under its current structure," said Julie Coppola Cox, a National Fuel spokeswoman. She said company executives see "great opportunities for success even in times of great change in the energy industry."
New Mountain, which hired Schlumberger Data & Consulting Services to analyze the potential of National Fuel’s Appalachian holdings, said those oil and gas fields could be worth more than $1 billion.
Philip C. Ackerman, National Fuel’s chairman and chief executive officer, responded to New Mountain’s recommendations by noting that an ongoing review of the Appalachian properties by its own consultant is likely to place a lower value on those assets.
"Preliminary indications are that it shows an Appalachian reserve valuation significantly less than suggested in your letter," Ackerman wrote. All of the letters have been filed with the U.S. Securities and Exchange Commission.
National Fuel’s consultant, Netherland, Sewell & Associates, is expected to complete its report later this year on the potential of the Appalachian reserves, which company executives believe could become the focal point of its oil and gas drilling business in the coming years. Ackerman, in his letter, also asked the investment fund to provide its full analysis and supporting documents from the Schlumberger report.
New Mountain responded to National Fuel’s request for more documentation by noting that five of its executives met with Ackerman and six other National Fuel executives in December 2006 to review the Schlumberger data. "In short, I believe we have been quite forthcoming with our thinking and our analysis," DiDomenico responded.
National Fuel’s Ackerman reiterated his request for the full Schlumberger report in a letter filed late Tuesday. He also tried to bring the exchange of letters to a close.
"While we appreciate the views of our shareholders, we believe that further exchanges of letters are not productive and are possibly confusing to the financial market," he wrote.
New Mountain’s recommendations carry sway because they come from a shareholder that owns a 9.7 percent stake in National Fuel. New Mountain said another National Fuel shareholder, the California Public Employees Retirement System, the largest U.S. pension fund, supports its position.
A New Mountain spokeswoman declined to comment Tuesday.
Monica Verma, an analyst at Gilford Securities, said Tuesday in a new report that the exchange of letters initiated by New Mountain "leads us to believe their patience may be wearing thin."
New Mountain also made several recommendations that would change the ownership structure of some of National Fuel’s main businesses.
The investor recommended that National Fuel hire an investment banker to evaluate the potential of a tax-free spin-off of the Appalachian drilling business and compare that with the potential of the company’s internal development plan.
New Mountain urged National Fuel to consider forming master limited partnerships for its oil and gas drilling operations, along with its pipeline and storage business. It estimated that forming an MLP for National Fuel’s California oil and gas drilling business and its pipeline business could add more than $800 million in shareholder value to the company.
Master limited partnerships are publicly-traded securities with significant tax advantages that were created by Congress in the 1980s to encourage investment in energy and natural resources. MLPs do not pay corporate income taxes. Investors pay taxes on the income the partnership pays out to its shareholders.
Ackerman, in a conference call last month, said National Fuel was considering the formation of MLPs for various portions of its business. He also said the results of the Netherland Sewell report would be an essential part of that evaluation.
"We are looking at MLPs and their implications, but at this time, no decisions have been made," Cox said.
New Mountain also recommended that National Fuel sell its timber, energy marketing and landfill gas businesses, along with its "high risk, low return" oil and gas wells in the Gulf of Mexico. "We believe these non-strategic assets may be worth more to other acquirers than the value that is currently reflected in National Fuel’s market value," the investment fund wrote.
New Mountain also urged National Fuel to eliminate its poison pill, which is triggered when an investor acquires more than a 10 percent stake in the company. Poison pills help companies fend off hostile takeovers by issuing new shares when they are triggered. That, in turn, drives up the costs of an acquisition.
The investor also wants National Fuel to eliminate the staggered terms that its directors now serve in favor of having the entire board stand for election every year.
National Fuel’s stock, which rose $1.15 to $45.40 on Tuesday, has gained 18 percent this year.
e-mail: drobinson@buffnews.com
Originally published by NEWS BUSINESS REPORTER.
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