A&D Intelligence

The saga continues between utility National Fuel Gas, the parent of E&P Seneca Resources, and its near 10% hedge-fund shareholder New Mountain Vantage.

You may remember that New Mountain is shaking NFG’s basket trying to get them to ramp up production on its sizeable Appalachia acreage and to spin out their California assets into an MLP. The spat went public last fall in several published letters where New Mountain drew a line in the sand for action.

Since then the two companies have hammered out a truce. NFG agreed to increase its board from 10 to 11 directors, of which New Mountain representative Frederic V. Salerno was elected at the annual board meeting in February until 2011.

Says outgoing NFG CEO Philip Ackerman, “We are pleased to announce this settlement and look forward to welcoming Fred Salerno to our board. We are confident that, in finding common ground where we can jointly focus our attention on continuing to grow shareholder value, National Fuel is very well positioned to maintain its long record of providing superior returns to all of our investors.”

Sure. Board meetings at NFG are undoubtedly going to have a bit more spice going forward in this uncomfortable marriage as New Mountain seeks to watch over their assets. David DiDomenico, managing director of New Mountain, says, “We have always sought to achieve a productive relationship with National Fuel’s management and board for the benefit of all shareholders. We believe that together we can successfully advance the company’s interests by focusing on developing the Appalachian acreage, including the Marcellus shale, by carefully evaluating ongoing and future activities in the Gulf of Mexico, by considering Vantage’s other suggestions, and by taking important steps to improve corporate governance.”

Message: We have a voice and it will be heard. Expect some late nights around the board room.

As part of the truce New Mountain agreed to stand down in a proxy fight. NFG split its chairman and CEO roles as Ackerman abandons the chief exec spot to David F. Smith, who moves up from the COO position.Other elements of the Settlement Agreement include:

• The companies have agreed to a standstill where, until September 2009, New Mountain will not: acquire voting securities that would increase its beneficial ownership to more than 9.6 % of the company’s voting securities; engage in any proxy solicitations or advance any shareholder proposals; attempt to control the company’s board, management or policies; call a meeting of shareholders; obtain additional representation to the board; or effect the removal of any member of the board.
• The companies agree that the Appalachian acreage, including the Marcellus Shale, is extremely valuable and should be developed with all reasonable speed and on a commercially reasonable best efforts basis. NFG will provide, in conjunction with its quarterly conference call, information on these development efforts, to the extent material and not competitively sensitive.
• NFG reaffirms that it intends to evaluate the divestiture of its assets in the Gulf of Mexico as one key alternative if performance targets set by the company are not met during this fiscal year. NFG will keep shareholders apprised of its progress in conjunction with its quarterly conference call, to the extent material and not competitively sensitive.
• New Mountain will provide to NFG copies of all reports and analyses developed or based upon the research and analysis of Schlumberger Data and Consulting Services.
• NFG will provide Salerno with a copy of the Morgan Stanley report and the other reports, materials and information reviewed by nonexecutive directors of the board in evaluating or analyzing New Mountain’s suggestions.
• NFG will, with the cooperation of New Mountain, file motions to withdraw the petitions it previously filed with the Pennsylvania Public Utility Commission and the New York State Public Service Commission that had requested each regulatory agency take action with respect to New Mountain’s investment in NFG.
• The companies agree that on a semi-annual basis designated representatives from New Mountain will be provided an opportunity to meet with the board. These meetings will afford New Mountain an opportunity to bring its ideas to the board for its reasonable consideration.

Sounds to me like New Mountain got the bulk of what it wanted in the first place, other than immediate action to drill and sell.

In a small side note of the February board meeting, the directors approved amendments to the company shareholder rights plan “to ensure that shareholders receive fair treatment in the event of a proposed acquisition of the company and encourage potential acquirers to negotiate with the company.” The exercise price of the rights under the new plan were increased from $65 to $150, making the poison pill a little more lethal. No word on how Salerno voted.

Don’t expect New Mountain to be a quiet voice when future meetings are called to order. This won’t be “Leave It To Beaver” around the dinner table, more like Archie and Meathead butting heads. The drama is just beginning. There’s a shake-up a’comin’ in the forests of Appalachia.

Steve Toon, Editor, A&D Watch, Contributing Editor, Oil and Gas Investor, stoon@hartenergy.com

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