As Oil Rises, So Will This Dividend King

After several years of declines, oil prices may finally be on the rise. First, the Energy Information Administration reported a surprise 4.4 million barrel drop in crude inventories. Separately, the Federal Reserve confirmed it will keep interest rates low for several years, which is generally viewed as inflationary. The result of these items is that West Texas Intermediate crude oil eclipsed $40 per barrel in the United States. While $40 crude would normally not be seen as a bullish indicator for the energy sector, it represents a significant move from the lows of $25 per barrel in May 2020. If oil continues to rise, it will be a major positive for energy stocks. We see National Fuel Gas , a Dividend King that has increased its dividend for 50 years in a row, as benefiting from the move in oil. National Fuel Gas has a diversified business model, a long history of dividend increases, and a solid 4.2% dividend yield. NFG will benefit from a continued rise in oil prices, and is an attractive buy for income investors. Five in One National Fuel Gas Co. is a diversified energy company that operates in five business segments: exploration and production, pipeline and storage, gathering, utility, and energy marketing. The company's largest segment is exploration and production. The stock has a current market capitalization of $3.9 billion. NFG has a diversified business across upstream, midstream, and downstream segments. The company's upstream assets located in the Marcellus and Utica shale formations have production capacity of 800 million cubic feet of gas per day. Upstream represents approximately 42% of the company's annual earnings before interest, taxes, depreciation, and amortization, or EBITDA. The midstream operations include pipeline infrastructure, and represent 37% of company EBITDA. Finally, NFG's downstream utility segment provides utility services to over 740,000 customers and represents 21% of total EBITDA. Full of Energy National Fuel Gas' competitive advantage is its combination of regulated and stable businesses, like pipelines and utilities, with cyclical and potentially higher-growth sectors, like exploration and production. This allows the company to endure difficult operating environments and downturns, such as the ongoing one, with less difficulty than its peers who may focus exclusively on the more cyclical areas of the energy sector. Despite operating in the highly cyclical and economically-sensitive energy industry, National Fuel Gas performed very well during the Great Recession. Earnings-per-share increased 10% from 2007-2009, with continued growth in the years after. This recession-resilience has allowed the company to increase its dividend for 50 consecutive years. National Fuel Gas has had its growth held back in the past few years, mostly the result of weak commodity prices. The onset of the coronavirus pandemic has only made operating conditions worse for the energy sector. But despite these challenges, NFG has performed relatively well to start 2020, all things considered. For example, the company posted resilient operating results for the most recent fiscal quarter. On August 6th, National Fuel Gas reported financial results for the third quarter of fiscal 2020. Adjusted EBITDA declined 6% year-over-year. An increase of 2.4% in production was not enough to offset the impact of weak commodity prices. Despite the suppressed natural gas prices, National Fuel Gas exhibited decent performance, partly thanks to its integrated business model. The company generated adjusted operating earnings-per-share of $0.57 for the quarter. Over the first three fiscal quarters, adjusted earnings-per-share declined 13%. We expect positive long-term growth for National Fuel Gas. The recent acquisition of Shell's integrated upstream and midstream assets in Pennsylvania for $541 million is expected to boost natural gas production by 215 million to 230 million cubic feet per day. The coronavirus is a lingering challenge for the economy, but the pandemic has affected the natural gas market much less than the oil market. And, NFG would be a big beneficiary of a sustained rise in commodity prices. Average natural gas prices and average oil prices both fell 19% in the most recent quarter, from the same period one year ago. This was a major overhang on the company's financial results over the course of the year. But if the trend reverses, oil and natural gas pricing would suddenly turn into a meaningful tailwind for the company. As a result, management still expects the company to generate strong adjusted earnings of $2.75 to $2.85 per share. NFG expects a significant rebound in fiscal 2021, with forecasted adjusted earnings per share of $3.40 to $3.70. The company should continue to generate more than enough cash flow to continue raising its dividend. NFG currently pays an annualized dividend of $1.78 per share, which equals a current yield of 4.2%. So, NFG is an attractive stock for income investors, as it provides over twice the yield of the broader S&P 500 Index average. And, NFG has increased its dividend for 50 consecutive years. With a projected dividend payout ratio of 64% for the current fiscal year and 50% for fiscal 2021 based on the midpoint of guidance, NFG should have little trouble continuing to increase its dividend each year moving forward.

As Oil Rises, So Will This Dividend King

National Fuel Gas has a diversified business model, a long history of dividend increases, and a solid 4.2% dividend yield

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