Last December, over 100 stocks were featured in our Top Picks for 2007 report. Now, at mid-year, we turn to the 20 advisors whose picks showed the strongest gains to get an update on their previous picks, as well as a new favorite stock for the second half of the year.
Chris Mayer, editor of Capital & Crisis, chose Rosetta Resources (NASDAQ: ROSE) as his favorite stock for 2007, which rose 32% as of 6/1/07. Here is his original recommendation for Rosetta and his current opinion on the stock.
For his new top pick, National Fuel Gas Co. (NYSE: NFG), he says, "I love companies with 'hidden assets,' things that have been lying around gathering dust but suddenly turn into something very valuable. It's like finding an old Mickey Mantle baseball card in Dad's attic.
"One stock that is a hidden asset in the Appalachians is National Fuel Gas. Like an old baseball card, it's been around a long time. NFG incorporated in 1902, though its predecessor companies are much older. It is an integrated gas utility. This means it is involved in every aspect of natural gas, from the bottom of the well to the burner tip.
"NFG has its own exploration and development company, with oil and gas reserves across many states (45% of production is oil). It has a regulated utility serving 727,000 customers in New York and Pennsylvania.
"It owns nearly 3,000 miles of pipeline, along with 32 storage fields. NFG also owns over 100,000 acres of black cherry hardwood in Pennsylvania. Finally, NFG has a small energy broker business with some 25,000 customers.
"This basic mix of businesses has powered the share price over the years. You can pull up a long-term stock chart and see a steady upward line. It's utility business is solid, but it's also boring too -- so I'm going to get right to the good stuff. The good stuff is 770,000 acres of land sitting on top of Devonian shale.
"Drilling for natural gas in Devonian shale used to be unprofitable. That explains those long years of inactivity (NFG sat on this land for about 70 years). Things are different now. Management is aware these days of the potential value of the company's Devonian shale, long a dormant asset.
"For starters, NFG has a joint venture with EOG Resources to drill the shale acreage. The company has also commissioned a third-party study that will provide an estimate for the unproven reserves lying below its Appalachian acreage. We should get a full update on this asset by the end of 2007. That's a nice catalyst for the stock price. It means we shouldn't have to wait around long for results.
"So what might the shale asset be worth? First, there is a sum-of-the-parts valuation on the integrated utility business, excluding the shale. Using average market multiples for these assets, I get at a ballpark figure of about $49 per share. Since the stock trades for less than that today, we're in OK shape there.
"Another simpler method is to say NFG is worth 17 times earnings, which is about the average of what its peers trade for. The estimate for the year ending September 2008 is $2.60. That gives you a figure of about $44. Basically, I cut the valuation a number of ways and I keep getting numbers in the ballpark of $40-50 per share for the business, excluding the Devonian shale asset.
"Essentially, you are paying for an integrated gas utility business -- which, as far as I can tell, is fairly valued in the market today. The kicker is that you're getting any upside from the Devonian shale asset for free. So what's the shale worth?
"Range Resources is one company that is aggressively buying Devonian shale acreage, right around where NFG is. The investment bank Morgan Stanley put the value of Range's shale acreage at $5,500 per acre -- and that was using some conservative assumptions.
"If you apply that $5,500 figure to NFG's 770,000 acres, you get $49 per share of additional value. It's not exactly comparable, but it is close. And NFG's property could be worth more. Take that $49 and add it to the $49 I got above and you get a $98 stock price -- a double from today's price."
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Reader Comments (Page 1 of 1)
6-23-2007 @ 1:37AM
Michael Schneider said...
I have owned this for some time- over dead bodies of analyst downgrades. The stock has beat earnings expectations in 3 of the past 4 quarters and they have been raising the dividend- the most recent being by a touch in the current quarter. Utilities and nat gas are both in the doghouse right now though. The value is really in the long term and as an asset play as you demonstrate here.
Michael Schneider runs several Web sites including http://www.Barrelomoney.com.