National Fuel Gas shareholders don’t want to break up the Amherst energy company.
The shareholders Thursday rejected a proposal that called for National Fuel to spin off its utility business – a move that would have divided the company into two separate entities, one with the utility business and a second with its pipeline and oil and natural gas drilling operations.
“We’re pleased that such a large number of shareholders voted to support our current corporate structure,” said National Fuel CEO Ronald J. Tanski.
Investor Mario J. Gabelli, whose GAMCO Advisers owns a more than 9 percent stake in National Fuel and is the company’s single biggest shareholder, had made the shareholder proposal to split the utility business into a separate entity.
Gabelli argued that National Fuel’s share price is being depressed because the company mixes the lower-risk utility business with a much chancier, but faster-growing oil and natural gas drilling operation, as well as a growing pipeline business.
Those different businesses, Gabelli argued, appeal to different types of investors, with conservative shareholders drawn by the utility and its dividend, while more aggressive investors are attracted to its faster-growing and more volatile oil and gas drilling business. He also argued to shareholders that a standalone utility business could gain added heft by making acquisitions in a consolidating industry.
But National Fuel shareholders voted against Gabelli’s plan, the company said at its annual meeting held Thursday in Naples, Fla. National Fuel did not disclose the vote totals. The results of the voting would be revealed in a regulatory filing the company expects to make early next week, said Karen L. Merkel, a National Fuel spokeswoman.
While the two sides disagreed on the merits of Gabelli’s proposal, the tone of the debate was both polite and subdued, unlike the bitter and contentious proxy fight National Fuel went through in 2007 with its then-biggest shareholder, New Mountain Ventures, over how aggressive the company was being in its efforts to drill in the Marcellus Shale during the early days of the shale gas effort.
“We’re appreciative of the fact that Mr. Gabelli, a long-term shareholder, discussed with us his ideas to increase the value of our company,” Tanski said.
“I expect that we will have ongoing discussions with Mr. Gabelli as market conditions continue to evolve.”
National Fuel argued that a spinoff would make the company less valuable. With its extensive drilling operations in Pennsylvania, pipelines stretching from Pennsylvania to the Canadian border, and a utility business that serves consumers in Western New York and northwestern Pennsylvania, the company said its diverse makeup has helped it save $200 million in taxes over the last five years because losses from one business can be used to offset earnings at another.
The stability of its utility business also helps the company maintain an investment-grade credit rating, which reduces borrowing costs for its growing pipeline and drilling businesses, the company said.
The vote is not binding on National Fuel, but analysts said a solid showing in favor of splitting off the utility business would put added pressure on Tanski to consider changes to the company’s three-pronged structure.
Tanski said after the vote that the plunge in oil and natural gas prices, which has hurt the profitability of energy producers, had changed the dynamics of National Fuel’s business since Gabelli first proposed splitting off the utility business publicly last April.
“The fact that our share price has not declined as drastically as pure-play exploration companies has confirmed one of the benefits of our integrated model,” Tanski said.
National Fuel’s shares, which hit a 52-week low Wednesday, rose by 72 cents, or 2.21 percent, to close Thursday at $60.29. The stock is down by 13 percent this year.
Over the last year, National Fuel’s shares have dropped by 16 percent, which is better than the 22 percent decline for oil and gas production companies as a group, according to Morningstar Inc.
“National Fuel is transforming into a more exploration- and production-focused company, while its distribution businesses continue to play a crucial role in stable cash-flow generation, and as a balance to business lines more reliant on sensitive commodity prices,” said Mark P. Hanson, a Morningstar analyst.
Gabelli contended that spinning off the utility would make National Fuel’s remaining pipeline and drilling businesses more attractive to investors and give the company more flexibility to pursue different capital structures, including the formation of a master limited partnership for its pipeline unit – a step that Tanski has said the company is considering for 2016.
Master limited partnerships are popular in the energy industry because they are not taxed at the federal level, which lowers their cost of capital and allows them to invest more in infrastructure, while also retaining management’s control over the business.