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Hedge fund would bust up National Fuel

Date: Monday, December 17, 2007
Author: David Robinson, Buffalo News

The Buffalo Niagara region has a lot at stake in National Fuel Gas Co.’s fight with its biggest shareholder.

While the main issues in the Amherst- based energy company’s fight with New Mountain Ventures revolve around the hedge fund’s push for National Fuel to be more aggressive, the outcome could have a far-reaching impact on the region’s economy and the 1,230 people the company employs here.

That’s because New Mountain essentially wants to break up National Fuel, selling some of its businesses and spinning off others, leaving the company only with its utility operations.

It would throw into question the fate of nearly 500 jobs at the company’s Amherst headquarters, while leaving the remaining stand-alone utility business to fend for itself in a shrinking market, more vulnerable to a takeover than ever.

“I don’t think it’s an exaggeration to say what they propose essentially means the eventual disappearance of National Fuel,” says Philip C. Ackerman, the company’s chairman and chief executive officer. “What you’re left with is the pure utility business, which would probably be too small to survive on its own.”

So this fight isn’t just about how many wells National Fuel should drill in the coming years on the nearly 1 million acres of land it controls in New York and Pennsylvania — property that both the company and New Mountain think could be a rich source of new natural gas supplies.

It’s also a fight about keeping one of the region’s biggest locally based businesses intact. “The potential consequences for Buffalo and Western New York are serious,” Ackerman says.

The hedge fund, which is interested only in making the most money for itself and other shareholders, is seeking three seats on National Fuel’s board. Winning that vote at the shareholders meeting in February would give New Mountain a pulpit within the company to push for its agenda of asset sales, spin-offs and more aggressive drilling in Appalachia.

“For a short-term gain, New Mountain wants us to spin off and sell, at the expense of the long term. We’re not willing to do that,” says David Smith, National Fuel’s president and chief operating officer. “They’re asking us to move away from our fundamental business model.”

That strategy has meant diversifying beyond National Fuel’s stable but slowgrowing utility business by pushing into other related fields, such as natural gas pipelines, gas storage and even oil and gas drilling. The drilling business, in the words of Morningstar analyst Matthew Coffina, “adds a roulette spin to an otherwise staid regulated utility business.”

With natural gas prices rising, the company has expanded its Appalachian drilling program at a 66 percent annual pace since 2004, including the drilling of 233 wells this year, with plans for 280 more in 2008 and 350 in 2009.

But New Mountain, which thinks the Appalachian land holds enough gas to add $1.1 billion to the company’s value, wants National Fuel to move a lot faster. Ackerman says New Mountain’s estimate is “extremely misleading” because it was based on unrealistic assumptions. An accelerated drilling program would increase the risk of sinking wells that end up being unproductive.

“Simply urging a management team to go faster and do better is not a strategy. It is, at best, cheerleading,” Ackerman wrote in his rejection letter to New Mountain last week. “ ‘Faster and better’ is a worthy goal, but haste frequently makes waste.”

Throwing caution to the wind has never been the National Fuel way. Yet it still has given shareholders an 83 percent return over the last three years. Even New Mountain is sitting on a $98 million profit from its 9.7 percent stake in National Fuel. “Part of the frustration,” Smith says, “is that the company has performed so well.”