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Text: With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources.
We may refer to these materials during today's call.
While National Fuel's expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially.
National Fuel's first quarter was a great start to our fiscal year, with operating results up 5% year-over-year.
Operationally, we had a really strong quarter, particularly at Seneca and NFG Midstream, where in spite of 4 Bcf of pricing-related curtailments, production and the associated gathering throughput was up 36% over last year.
Most of that growth was the result of last year's Tioga County acquisition, which continues to trend better than our initial expectations.
The team has been focused on high-grading our consolidated development program, optimizing our firm sales and transportation portfolio and driving down unit costs.
You can see our success in Seneca's updated guidance.
We increased the midpoint of our production range and lowered our forecasted unit costs, all while holding our capital range constant.
Seneca added a second drilling rig in January, with first production permit scheduled to come online in early fiscal 2022.
The goal is to fill our Leidy South capacity as soon after it goes in service, and thereby, capture the premium winter pricing in the East Coast markets.
The second rig will focus principally on Tioga County.
We're at $2 netback prices, our consolidated returns on Utica wells are north of 65%.
Looking beyond fiscal 2022, absent new firm takeaway capacity, Seneca's program will likely average between 1.5 and 2 rigs, which will keep our production flat to slightly growing.
Our focus will be on generating free cash flow.
As you can see from our updated slide deck at a $2.75 NYMEX price, we expect our Upstream and Gathering businesses will generate approximately $115 million to $125 million in free cash flow in 2021.
As our production grows in 2022 and 2023, we expect this level of free cash flow to similarly increase.
Obviously, our ability to generate cash is heavily dependent on the direction of commodity prices.
As you know, we have an active hedging program and continue to methodically layer in hedges with the goal of protecting our investment in PDPs and locking in the strong rates of return generated by our unique integrated development program.
Switching gears, our FERC-regulated pipeline businesses had a great quarter, with earnings up nearly 25%.
This was driven by the Supply Corporation rate case settlement that went into effect last February, coupled with the new revenues from our Empire North expansion project that was placed in service at the end of fiscal 2020.
Our FM100 expansion and modernization project is on track to continue this momentum into fiscal 2022 and 2023.
As a reminder, this project will add $50 million in annual revenue, once it goes in service, which I expect will occur late in this calendar year.
We're waiting on a few remaining state permits, which we anticipate receiving in the next few weeks.
All of the necessary federal permits have been received.
We've awarded the job to contractors in order for the necessary long lead time items, including pipeline and compressor units.
Once all permits are in hand, we'll file for our notice to proceed with FERC and start construction shortly thereafter.
With respect to the recent change in leadership at FERC, we don't see any cause for concern on FM100.
As you know, FM100 is a companion project to Transco's Leidy South expansion.
And though the latter project is a little ahead of ours in the permitting process, FERC views them as essentially one project.
Just last week, Transco received the notice to proceed from FERC for a portion of their project, which gives us confidence that ours will receive similar treatment when we file for our notice to proceed in the next few weeks.
Switching to the Utility, warmer-than-normal weather and the impact of the pandemic on our operating costs weighed on earnings for the quarter.
These were somewhat offset by the continued growth in revenues from our New York jurisdiction's system modernization tracking mechanism.
As we continue to face the COVID pandemic, the safety and well-being of our employees, customers and communities are our highest priorities.
We remain focused on business continuity and providing the safe and reliable service our customers expect.
With the change in administration in Washington, there has been increased focus on the role of natural gas in the nation's energy complex.
Natural gas has already played a significant role in the decarbonization of the economy.
The displacement of coal-fired power generation and fuel switching for residential heating drove a 12% reduction in total US greenhouse gas emissions since 2008.
The importance of natural gas to the economy cannot be understated.
For example, in our New York utility service territory, nearly 90% of households use natural gas to heat their homes.
And on a day like today, nearly 50% of New York State's electricity is being generated using natural gas.
In the near-term, that role is not going to change overnight.
But longer-term, it's clear we're moving toward a lower carbon world.
I firmly believe the cost and reliability advantages provided by natural gas will ensure it has a future serving the energy needs of the country.
Heating a home in the Northeast using natural gas costs less than half of what it would using electric heat.
And LDCs are incredibly reliable.
This past winter, natural gas service at our Utility was available 99.9% of the time.
It makes little sense to forfeit these benefits in favor of more expensive, less reliable alternatives.
But to make sure we have a place in the energy complex, we must dramatically lower our emissions footprint and National Fuel is committing to do so.
How will we get there?
On my view, there are three main avenues to pursue.
First is improving the emissions profile of our operations.
We've already made great progress here.
For example, through our modernization program, greenhouse gas emissions on our utility system have dropped by more than 60% from 1990 levels.
But we're not done.
At the current pace of the program, we expect a more than 80% reduction by 2040.
We have to encourage our customers to use less.
Our conservation incentive program has resulted in end-use emissions reductions of over 1.3 million metric tons since its implementation in 2007.
And lastly, we need to embrace technology across all aspects of our business, including our own operations, the equipment used by our customers and alternative fuels like RNG and hydrogen.
We're proud to be an anchor sponsor of the Low-Carbon Resources Initiative, which is researching new technologies that lower the carbon footprint of pipelines, LDCs and their customers.
I'm excited for the future of natural gas.
We have some work to do.
But at the end of the day, I'm very confident natural gas will have a prominent role in meeting our country's energy needs, and that National Fuel's operations, from the wellhead to the burner tip, will remain an important part of the energy solution.
In closing, National Fuel had a great first quarter.
As I've said on prior calls, fiscal '21 should be a big growth year for us.
The first quarter delivered on that expectation, and the outlook for the remainder of the year continues to be strong.
Gas prices have been volatile, but our strong hedge book helps protect from those swings.
As we look toward '22 and beyond, we're well positioned for both growth and meaningful cash flow generation, a combination that many of our peers cannot match.
Our balance sheet is in great shape.
And our integrated, yet diversified business model, provides a level of downside protection to help us navigate the ebbs and flows that we'll inevitably face.
As you've probably seen, John McGinnis is retiring effective May 1 of this year.
Over the course of his 14 years with the Company, John has been instrumental in the growth of Seneca, taking it from a small conventional operator that produced less than 50 Bcfe annually to the key player in the Appalachian Basin that Seneca has become.
Also, John Pustulka, our Chief Operating Officer, is retiring effective May 1.
There isn't an individual that I've met who has been more dedicated to the Company and the industry.
Over his 47-year career, he led by example and was a main driver of our corporate culture, particularly as it relates to employee safety.
I wish them both the best in retirement.
While they'll be missed, I'm certain the Company won't miss a beat under the leadership of Ron Kraemer, who will assume the role of COO; and Justin Loweth, who will become the new President of Seneca.
Seneca had a strong first quarter.
We produced a Company record, 79.5 Bcfe, despite approximately 4 Bcf of price-related curtailments in October and early November.
Our nearly 40% production increase in Appalachia was largely due to the Company's fourth quarter fiscal 2020 acquisition of upstream assets in Tioga County, as well as production from our ongoing development program.
We continue to see the benefits of our recent acquisition, with increased scale and operational synergies driving a collective $0.10 per Mcfe decrease in G&A and LOE expenses from the prior year's first quarter.
With about six months of operations now under our belt, we are seeing additional cost reductions above our initial expectations.
As an example, LOE reductions of over $50,000 a month have been realized by releasing unneeded equipment rentals and contract services on the acquired assets.
Additionally, we achieved between $300,000 to $500,000 per well in reduced water cost on our recent Tioga 007 pad completions through the use of acquired water withdrawal points and storage facilities.
In line with our plans discussed on last quarter's call, we added a second drill rig in early January, which will focus on our EDA assets, including the deep inventory of acquired Utica locations in Tioga.
This activity will allow Seneca to bring online additional volumes in early fiscal '22, commensurate with the expected availability of our capacity on the Leidy South project, reaching premium markets during the winter heating season.
We expect Seneca's other rig to remain focused in the WDA, maintaining relatively balanced activity between these two operating areas longer term.
Although pricing in fiscal '21 has not been as strong as we initially projected during this winter, the supply and demand fundamentals, whether notwithstanding, remain constructive over the next 12 to 18 months.
Looking out beyond the current year, the fiscal '22 strip is around $2.80 an Mcf, a price where we realized strong returns from our Appalachia program.
As always, we have maintained our disciplined approach to hedging and are already well positioned in fiscal '22, with over 180 Bcf of fixed price firm sales, NYMEX swaps and costless collars in place.
This provides Seneca with downside protection, but leaves the potential to generate significant additional free cash flow, should prices move up.
We'll keep a close eye on pricing dynamics and look for opportunities to layer in additional hedges as we move through this fiscal year, closer to the in-service date of Leidy South.
We are maintaining our fiscal '21 capex guidance, which remains in the $350 million to $390 million range.
Based on our strong first quarter well results and solid execution by our operations team, we are revising our production guidance to range -- to a range of 310 Bcfe to 335 Bcfe, a 2.5 Bcfe increase at the midpoint.
Most of our production growth in fiscal '21 should occur during the first half of the year, with flat to slightly declining production during the back half as we defer completion and flowback activity until the winter season when our new FT capacity is targeted to be in service.
For the remainder of the fiscal year, we have 186 Bcf or around 80% of our East Division gas production locked in physically and financially.
We have another 30 Bcf of firm sales providing basis protection, so over 90% of our forecasted gas production is already sold.
We currently estimate that we'll have around 17 Bcf of gas exposed to the spot market.
So, as always, these volumes are potentially at risk for curtailment.
And in California, we have around 67% of our remaining oil production, is hedged at an average price of around $57 per barrel.
Justin Loweth, our Senior VP of Seneca, will be promoted to President.
Justin has been with Seneca for 10 years and has been instrumental in much of our success over the past decade, and I am confident in his ability to lead the Company forward.
We pay a lot of attention to our succession planning across the organization, and I am pleased to be leaving Seneca with an experienced and strong management team.
National Fuel's first quarter GAAP earnings were $0.85 per share when you back out items impacting comparability, including a ceiling test charge and the impact of a gain related to the sale of our timber properties, operating results were $1.06 per share.
This increase of 5% over last year was on the strength of our Pipeline & Storage segment results, as well as the impact of the Upstream and Gathering acquisition in Appalachia.
Dave and John already hit on the high-level drivers, so I'll focus on a few other details from the quarter and discuss our outlook for the remainder of the year.
First, in line with our expectations, we closed on the sale of our timber properties in December, receiving net proceeds of $105 million after closing adjustments.
As a result, we recorded an after-tax gain of $37 million.
We made the decision to divest substantially all of these properties to fund a portion of our Appalachian acquisition.
The timing of the sale allowed us to structure the transaction as a like kind of exchange, which defers a relatively sizable tax gain over the life of the Appalachian reserves that we acquired last year.
The other large item impacting comparability during the quarter was the $55 million after-tax non-cash ceiling test charge.
Given where prices are today, we would not expect to record another ceiling test impairment in the fiscal year.
Moving to operating results for the quarter.
John and Dave hit the high points in our Upstream and Pipeline businesses, so let me touch briefly on earnings at the Utility, which were down $3.5 million versus last year's first quarter.
Warmer weather, particularly in our Pennsylvania service territory and an additional accrual for bad debt, likely to result from the pandemic, impacted this business during the quarter.
While we haven't witnessed a material deterioration and customer payment trends, we are in the midst of the winter heating season, and customers are only just beginning to see larger monthly bills.
As a result, we continue to conservatively accrue additional expense to reserve against the potential for increased bad debts, and would expect to do so at least through the remainder of the winter.
Switching to our outlook for the rest of the year, we've revised our guidance range higher, now projecting earnings to be between $3.65 and $3.95 per share, a $0.10 increase at the midpoint.
This increase was driven by strong results during the first quarter, modest decreases in Seneca's cash unit costs and a reduction in our expected DD&A rate as a result of the additional ceiling test charge and reserve bookings during the first quarter.
These are expected to be somewhat offset by revisions to our commodity price assumptions for the remaining nine months of the year, with our NYMEX natural gas guidance decreasing to $2.75 per MMBtu and WTI guidance increasing to $52.50 per barrel.
With respect to consolidated capital spending, all of our segment ranges remain the same, and we are still projecting between $720 million and $830 million for the fiscal year.
At the midpoint of our guidance ranges, we'd expect funds from operations to exceed our capital spending by approximately $50 million for the year.
Incorporating that with the proceeds from the sale of our timber properties, we expect to be able to cover our dividend without any material incremental short-term borrowings.
We are well hedged for the remainder of the year, so any changes in commodity prices should have a muted impact on earnings and cash flows.
Switching to the balance sheet.
We have $500 million of long-term debt set to mature in December.
We expect to access the capital markets in fiscal 2021 to replace this maturity.
With our next maturity thereafter, not until fiscal 2023, we have a nice runway without any major refinancing requirements.
On our short-term credit facilities, we enhanced our liquidity by increasing the size of our 364-day credit facility and extending its maturity through the end of calendar 2022.
This now gives us $1 billion in committed unsecured credit facilities that are almost entirely undrawn today.
From an overall leverage standpoint, our balance sheet is in great shape.
We are well within the investment-grade targets set forth by the rating agencies.
And as we look to fiscal 2022 and finish construction on the FM100 project, we expect to see further improvement in these metrics.
In closing, we had a solid first quarter, and the outlook for the year remains strong.

user
compname reports q1 gaap earnings per share $0.85.
q1 gaap earnings per share $0.85.
qtrly adjusted operating results $1.06 per share.
sees 2021 earnings, excluding items impacting comparability, will be within range of $3.65 to $3.95 per share.
co now assumes that wti oil prices will average $52.50 per bbl for remainder of 2021.

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