Hedge Fund is Gadfly to National Fuel

By David Robinson

It isn’t even winter yet, but things are heating up at National Fuel Gas Co.

The Amherst-based energy company’s biggest shareholder, New Mountain Vantage Advisers, is losing patience with National Fuel over the recommendations it’s been touting since late last year to boost the firm’s value.

And National Fuel is starting to get fed up with New Mountain’s prodding, which played out publicly in an exchange of four letters recently.

By Tuesday, National Fuel chief executive Philip C. Ackerman sounded like he was getting fed up. He wrote New Mountain to say he had “serious concerns” about their analysis and recommendations for the company’s Appalachian oil and natural gas fields. And he concluded by telling New Mountain that they’d made their point, much in the same way a parent tells a persistent child

,9l,7p6 that enough is enough.

“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 markets,” Ackerman wrote.

That’s not the way CEOs usually talk to an investor that controls just shy of 10 percent of their company’s stock. Then again, National Fuel is solidly profitable and its stock is up 19 percent so far this year, after rising 24 percent in 2006, so Ackerman isn’t exactly speaking from a position of weakness.

However, the company’s 25 biggest institutional investors now control 39 percent of National Fuel’s stock, up from less than 15 percent three years ago, and some of those hedge funds, like New Mountain, like to try to “help” management create more value for shareholders. New Mountain, on its Web site, says it looks for growth companies selling at attractive stock prices, “then seeks to work to build the value of these companies.”

Those investors aren’t drawn to National Fuel’s stable and steadily profitable pipeline and utility businesses. In an era of high energy prices, they’re attracted by the company’s oil and natural gas drilling business, especially the nearly 1 million acres in Pennsylvania and New York where it has drilling rights.

“The company may have stumbled on a gold mine with its Appalachian mineral rights,” said Morningstar Inc. analyst Matthew Coffina in a recent report.

The trouble is, no one is sure just how much natural gas is under that land. New Mountain, based on an analysis by its own consultant, thinks the Appalachian property could be worth more than $1 billion. National Fuel, which is awaiting a report from its consultant, thinks that review will put a value on the Appalachian reserves that is “significantly less” than New Mountain’s estimate.

New Mountain is frustrated that National Fuel isn’t moving fast enough.

“The pace of activity in Appalachia clearly lags that of other players. We believe it has underestimated the dynamics of its exploration and production business,” Gilford Securities analyst Monica Verma wrote in a report last week. “This new class of [shareholder] is likely to become restive in the absence of value creating corporate actions.”

Julie Coppola Cox, a National Fuel spokeswoman, says the company believes its approach has been successful, and she notes that management already has been investigating some of the other recommendations New Mountain made. That includes spinning off some of its operations as master limited partnerships, which would save on taxes because the partnerships wouldn’t have to pay corporate income taxes.

National Fuel hasn’t said anything about New Mountain’s suggestion that it sell its smaller energy marketing, timber and landfill gas businesses, along with its Gulf of Mexico drilling operations.

It’s still too early to predict how all this will play out, but one thing is sure: The heat has been turned up in National Fuel’s Amherst headquarters.

e-mail: drobinson@buffnews.com

Originally published by NEWS BUSINESS REPORTER.

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