National Fuel Gas Co. (NYSE: NFG) was supposed to have big upside. After a weekend decision by the New York State Department of Environmental Conservation (NYSDEC), NFG’s rejected planned Northern Access Pipeline has changed a lot of the bullish upside. This is a story where industry faces a return to the woes of politics and regulation.

A report was issued by Jefferies, and the firm downgraded its rating to Underperform from Buy. The old upside price target of $66 was slashed to a below-market price of $52 in the call.

What is interesting here is that this is a state ruling blocking a federal approval. The Northern Access project received a FERC certificate in February, but without NYSDEC approvals it cannot move to construction. In February, NFG revised its in-service date to March of 2018.

According to Jefferies, this denies NFG the necessary permits, with the NYSDEC citing adverse impacts to water quality and related wildlife. The report noted:

While NFG may appeal and/or seek other means to advance the project, the NYSDEC denial provides significant project uncertainty and we remove it from our model. As the Northern Access would have allowed significant growth across multiple NFG business segments, we cut our sum of the parts derived price target to $52 and downgrade to Underperform.

The project was shown in the NYSDEC filing to consist of a new 97-mile interstate transmission pipeline that would transport natural gas extracted in Pennsylvania, through the Allegany, Cattaraugus and Erie counties of New York. The aim was to deliver natural gas to New York, the Northeast and Midwest United States, and to Canada.

The NYSDEC statement said:

After an in-depth review of the proposed Northern Access Pipeline project and following three public hearings and the consideration of over 5,700 comments, DEC has denied the permit due to the project’s failure to avoid adverse impacts to wetlands, streams, and fish and other wildlife habitat. We are confident that this decision supports our state’s strict water quality standards that all New Yorkers depend on.

Jefferies has an upside scenario that would get National Fuel Gas up to $70. This upside scenario noted that additional midstream opportunities would be secured and progress successfully through regulatory approvals processes. It would also include stronger than anticipated proved reserve growth and continued improvements in drilling and completion activities, as well as a sharp and sustained increase in natural gas and crude oil prices, and limited basis issues.

Jefferies gave a downside scenario that is even worse than the $52 downside target price. This is where expansion projects presently in execution encounter cost overruns and time delays, and where production and reserve growth trails expectations. Also noted for a downside risk would be a sharp and sustained reduction in crude oil and natural gas, all leading to a potential $45 share price on that downside analysis.

NFG shares traded at $60.69 on Friday, but the stock was down 8.4% at $55.60 in late-day trading on Monday. As of 2:45 pm Eastern Time, the 2.46 million shares was nearing five times normal volume.

National Fuel Gas has a 52-week trading range of $50.09 to $61.25 and a consensus analyst target price of $65.50.

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