National Fuel Gas Co (NYSE:NFG) – Be Skeptical of its Shale Acreage's Value

National Fuel Gas Co (NYSE:NFG), a diversified energy company headquartered in Williamsville, New York, owns 725,000 acres of shale gas in Appalachia. Historically, it’s an asset that has bolstered the company’s valuation. However, today we turn to Chris Mayer, the Agora Financial editor of Capital & Crisis, who has found reason to be skeptical:

“National Fuel Gas (NYSE:NFG) is a fine utility with pipeline and other assets. In March of 2009, when NFG was at $30 per share, I valued these assets at $40 per share. I still think that valuation holds up today. They are worth a little more perhaps, but not much more.

“But the real prize is the shale gas acreage NFG owns. It owns 725,000 acres in the Marcellus of Appalachia, a rich storehouse of natural gas. I put the Marcellus acreage at $20 per share, at least, for a total potential value of $60 per share.

“Since then, I’ve become more of a skeptic of the value of all this shale acreage. The problem is it’s not clear that the shale gas producers are making any money at the current natural gas price. The economics are murky — and controversial. There has been a lot of ink and debate over how profitable shale gas is and at what price.

“Count me a skeptic. As more and more evidence pours in, the shale wells are not as great as advertised. Let’s look at a couple of points of evidence. First, there is Arthur Berman at World Oil magazine. He found the economic life of the wells is much shorter than expected. Andrew Lees at UBS summarizes:

“‘Operators seem to anticipate wells lasting 30-40 years, but the average is 7.5 years, the mode is four years and the maximum is more like 15 years. What is worse, horizontal wells are not living up to expectations. Whilst owners are predicting recoveries of 2.5 billion cubic feet per horizontal well, Berman estimates that the ultimate recovery is just 0.81 billion cubic feet, or just one-third of the predicted numbers, and of course, once the production rate drops below the operating cost, it makes no sense to keep the well open.’

“Then there is Gazprom, the big Russian gas producer, which is looking to get 10% of the U.S. natural gas business. It also makes a good point:

“’The industry has applied the technology effectively in the Barnett Shale and others, but there is a big difference between flatland in Dallas with plenty of water — (fracing uses 2-5 million gallons per well) — and a receptive audience and drilling in the Appalachian Mountains in Pennsylvania, where there is no water, no access to pipelines and environmental sensitivity.’

“Yet there is a rush to gobble up shale acreage. There is lots of drilling and plans for drilling even as the natural gas price lingers in the basement. It doesn’t really make much sense.

“What it means is that the U.S. shale gas boom is probably due for a shakeout. Some of these ambitious shale projects will go bust or prove uneconomic at current prices. The bottom line is that there still might be some short-term pain for natural gas. But longer term, the price will have to rise to make the shale plays economic.”

Based on the above, Mayer sees plenty of reason to be skeptical of the traditionally high value place on NFG’s shale acreage. He also notes that this year the company will be cash flow negative as it sinks money into drilling the Marcellus. You can read more of his thoughts on NFG and other companies – including those that can make money even in a low-price environment — by subscribing to Capital & Crisis. You can read more details about the newsletter at the Agora Financial research page, found here.

Also, to see Chris Mayer live, speaking in person, you should consider attending the Agora Financial Investment Symposium. The event, held in Vancouver, will also feature Bill Bonner, Marc Faber, Frank Holmes and many other insightful speakers. You can register for the July event here.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]

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