National Fuel Gas (NYSE:NFG) stands as one of the few remaining diversified energy companies with operations in exploration and production, the midstream area and several other businesses. The company defended this structure and discussed its operational strategy at a recent analyst day.

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Staying the Course
The energy sector has been gripped over the last year with an investor-pushed separation mania, which has led many energy companies to announce restructurings where disparate businesses are sold or spun off.

Williams (NYSE:WMB) and El Paso (NYSE:EP), both of which have a mix of businesses similar to National Fuel Gas, have announced restructurings in 2011. Williams is conducting an initial public offering (IPO) of its exploration and production business, which will do business as WPX Energy. El Paso is also doing an IPO of the exploration and production segment, which will be called EP Energy.

National Fuel Gas plans on staying together and said that the current asset mix has created "operational efficiencies and synergies" that create long-term value for the company.

Exploration and Production
National Fuel Gas conducts its exploration and production operations through Seneca Resources, a wholly owned subsidiary of the company. The company's assets are located in Pennsylvania, New York and California.

National Fuel Gas's growth story is in the Marcellus Shale, where the company has 745,000 net acres under lease. The company expects this play to power production growth of 30-50% annually through 2014. If the company meets this goal, production in 2014 will be in a range from 160 to 200 Bcfe, up from 49.7 Bcfe in 2010.

Capital expenditures will need to ramp up considerably to meet an ambitious growth strategy like this, and National Fuel Gas may spend as much as $1.145 billion in 2014, up from only $398 million in 2010.

Midstream/Pipeline/Storage
National Fuel Gas owns two natural gas-gathering systems in Pennsylvania that handle production from Seneca Resources. The company expects revenues here to reach between $35 million and $45 million by 2014, up from only $3.4 million in 2010.

National Fuel Gas has extensive pipeline and storage assets scattered across its footprint in Pennsylvania and New York. These assets support the company's internal operations as well as outside parties.

The company has seen increased interest from other operators as Marcellus Shale activity has increased, and it is now transporting natural gas for nine customers, up from just two in 2009.

National Fuel Gas also has a number of expansion projects under way in the pipeline and storage segment to take advantage of future growth. The company expects revenue in the pipeline and storage area to reach $255 million by 2014.

Regulated Utility
National Fuel Gas owns the National Fuel Gas Distribution Corp., a regulated utility, which distributes natural gas to customers in New York and Pennsylvania. This business is a source of stable earnings for the company, which is valued as an offset to businesses that are dependent on commodity prices. The capital expenditures required to support the regulated utility are fairly constant and are expected to continue that way through 2014.

The Bottom Line
Although National Fuel Gas may have disappointed some investors that were hoping for yet another spinoff in the energy sector, credit must be given to a company that has a contrarian streak and runs against the herd. (For additional reading, see A Guide To Investing In Oil Markets.)

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Tickers in this Article: NFG, EP, WMB

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