Hedge-fund meddling in New York-based diversified energy company National Fuel Gas has put assets of northwestern Pennsylvania's most active driller, Seneca Resources Corp., in play. In Appalachia alone, the E&P subsidiary has some 110 billion cubic feet equivalent of proved reserves, most of these proved developed.

Total reserves held in Appalachia by Seneca are 220 billion equivalent, according to an October 11 update as a result of an evaluation by reserves auditor Netherland Sewell & Associates Inc.

The assets are ideal for an MLP, report New Mountain Vantage Advisers LLC managing directors David DiDomenico and Mathew Lori. The two have accumulated some 9.5% of outstanding NFG shares and are asking management to consider forming an upstream MLP from the Appalachian holdings as well as midstream MLPs out of National Fuel Gas' New York and Pennsylvania pipelines and California E&P holdings.

DiDomenico and Lori have also suggested NFG sell its Gulf Coast E&P assets, and other businesses (timber, sawmill, energy marketing and landfill gas).

In Appalachia, Seneca's gross developed and undeveloped lease-holding was some 990,000 acres (95% net) on September 30, 2006, and entirely in New York and Pennsylvania.

In fiscal 2007, which ended this past September 30, it drilled or participated in 233 wells, excluding three wells drilled in a joint venture with EOG Resources Inc. to evaluate the Marcellus shale.

The 2007 wells were largely successful: 94% were completed as producing or will be; five were plugged; and nine were being evaluated at press time. The 219 successful wells are expected to ultimately recover 97 million cubic feet equivalent, NFG reports.

One of the EOG joint-venture wells, to the deeper Onondaga Reef, is expected to recover 1 billion cubic feet equivalent.

Excluding the joint-venture wells, Seneca's average capital cost per completed well is $200,000, and payout is approximately three years. Netherland Sewell estimates Seneca has more than 1,000 prospective drilling locations on approximately 200,000 of its acres.

What else is in play? For upstream asset-buyers, Seneca's assets include 62.5 million barrels of oil equivalent proved (88% oil) in California and 5.4 million BOE proved (77% gas) on the Texas and Louisiana coasts and in the Gulf of Mexico, as of September 30, 2006.

For midstream asset-buyers and MLP-makers, NFG's holdings in that business involve 2,528 miles of transmission pipeline, 32 storage fields and 439 miles of storage-related pipe, entirely in New York and Pennsylvania.

NFG recently sold its Canadian E&P business, Seneca Energy Canada Inc., to royalty trust NAL Oil & Gas Trust for some US$234 million, involving 7.2 million BOE of proved reserves (93% proved producing), and planned to spend the proceeds on its U.S. upstream-holdings.

DiDomenico and Lori say NFG's Appalachian assets could be worth more than $1 billion if Seneca would drill and develop them.

New Mountain's advisory team includes Fox Benton, former chief financial officer of Ultra Petroleum Corp. and now president of Houston-based Moreno Energy Inc., and Fred Salerno, a former KeySpan board member. (A utility as is NFG, KeySpan was once a majority shareholder in The Houston Exploration Co., which was sold this year to Forest Oil Corp. upon pressure by hedge-fund manager Barry Rosenstein.)

Dan Pickering and team at investment-banking and energy-research firm Tudor, Pickering & Co. Securities Inc. say the Netherland Sewell report on NFG's Appalachian reserves is "underwhelming" and "disappoints."

"Expectations, including ours, have been heady...." If the Netherland Sewell analysis were applied across all of Seneca's acreage, total reserves would be 520 billion equivalent-still not much-the team reports. "(The) reserve report will take the wind out of the (stock's) sails."

They add, "Both sides of the ongoing fight are tenacious, but the underlying-value assumption now has to be lower....A brand-name reserve auditor putting out these numbers for NFG's Appalachian potential doesn't kill a spin-out of the business-or the theoretical value it might unlock-but it surely muddies the waters. Anxiously awaiting Round 4 of this fight."



National Fuel Gas' E&P Assets*

Total Proved Proved %

Proved Gas % Oil Proved

Reserves**ReservesProved Reserves Devel-

(MBOE)% Gas(MMcf)Developed(Mbbl)oped

Gulf Coast5,42477%41,80277%1,24498%

West Coast62,45612%75,86685%54,86977%

Appalachia***8,41097%81,373100%273100%

Total76,29026%199,04189%56,38678%

Note: Assets are held in Seneca Resources Corp. subsidiary. *As of Sept. 30, 2006. ** Using 10:1 gas:oil conversion. ***Appalachian proved reserves were updated on Oct. 11, 2007, to total 110 Bcf

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