It’s going to be hard for National Fuel Gas Co. to ignore investor Mario Gabelli when he says the Amherst energy company should split off its utility business from its oil and natural gas pipeline and drilling units.
Gabelli owns 9.17 percent of the company’s stock, making him National Fuel’s second-largest shareholder, behind only the Vanguard family of mutual funds.
And Gabelli has the stature and prominence achieved over the years as one of the nation’s leading money managers.
“He’s a bottom-up, value investor and he’s a pretty smart cookie,” said Anthony J. Ogorek, who runs Ogorek Wealth Management in Amherst. “He has a lot of credibility.”
So when Gabelli says he thinks National Fuel’s stock, which currently trades at around $72 a share, is worth around $100 a share, as he did earlier this year in a stock-picker’s roundtable in Barron’s magazine, it’s not to be taken lightly. Especially when he says he has a plan to help the company get its stock closer to that $100 mark.
Gabelli says he’s thinking about putting his suggestion about splitting off the utility business to a shareholder vote next March, giving it even more weight.
Gabelli’s plan, at the moment, is more of a suggestion than a concrete road map. But by publicly disclosing what he’s thinking about, Gabelli is sending an unmistakable message to National Fuel’s management: The time to act is now.
“A stock picker like Mario Gabelli is looking to unlock shareholder value sooner, rather than later,” Ogorek said. “They’re agitators.”
Gabelli, for his part, isn’t trying to be confrontational – at least not yet.
He praises National Fuel CEO Ronald Tanski and notes that his investment company voted its shares in favor of National Fuel’s slate of directors earlier this year. He notes that the funds his company manages aren’t big traders, turning over only 6 percent to 7 percent of their holdings in a given year, on average.
And he points out that National Fuel executives themselves have been openly talking about the possibility of making changes to the company’s structure for the past year or so, mainly through the formation of a tax-advantaged entity, called a master limited partnership, for its cash-hungry pipeline or drilling businesses.
“We don’t think it’s inconsistent with what the company is thinking about,” Gabelli said.
But Tanski, who wouldn’t comment on Gabelli’s possible shareholder proposal, also has said he doesn’t think the time is right for National Fuel to pursue a master limited partnership. And that likely is at the root of Gabelli’s threat to bring the issue directly to National Fuel’s shareholders.
Gabelli, for his part, said National Fuel has several options to consider, from forming an MLP to doing an actual spin-off of the utility business.
Does Gabelli think National Fuel should be broken up into two pieces – its utility business and a separate unit for its pipeline and drilling businesses – or should its utility, pipeline and drilling units be divided into three separate entities?
“I can’t answer,” Gabelli said.
Having fired a shot across National Fuel’s bow with his Securities and Exchange Commission filing late last month, Gabelli said the next move is up to Tanski and company.
“We want the shareholders to vote on it,” Gabelli said. “We’re not going to sit down with them. They have to make a decision.”
And National Fuel has almost five months to think about it. That’s because the deadline for investors to file a shareholder proposal for consideration at National Fuel’s next annual meeting isn’t until late September. And if Gabelli decides to actually submit a shareholder proposal, the meeting itself – and the actual vote – wouldn’t be held until March 2015.
Regardless, activist shareholders aren’t to be taken lightly. National Fuel learned that in late 2007, when the hedge fund that was its biggest investor at the time, New Mountain Ventures, launched a proxy fight to put its own slate of directors on the company’s board after growing impatient with the pace the company was ramping up drilling in the Marcellus Shale region in Pennsylvania.
National Fuel reached a peace deal with the hedge fund in early 2008, agreeing to give New Mountain a seat on the board and to split the chairman and CEO jobs between two executives. As the years went on, National Fuel also went on to accelerate its Marcellus drilling, just as New Mountain had wanted. But the fight between the company and New Mountain cost National Fuel almost $3 million.
Gabelli said times have changed since then. The potential of shale gas, which was still being debated in 2007, now has been proven. And dozens of energy companies have turned to master limited partnerships as a way of raising money for their cash-gobbling businesses.
“Back then, there was no road map,” Gabelli said. “It’s not Columbus taking the first voyage. It is not a complicated right of passage.”
Behind Gabelli’s push is the basic belief that combining a slow-growth utility, with a more risky pipeline business and an even riskier oil and gas drilling business creates a mismatch for investors.
“The utility business is a great business,” said Timothy Wright, the utility industry analyst at Gabelli’s company, Gamco Investors.
“Your traditional utility investor doesn’t want to take a lot of risk,” Wright said. “In general, the exploration and production business is a riskier business. Do the two belong together?”
That’s a question National Fuel shareholders may get the chance to answer for themselves 10 months from now.