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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 Justin Loweth, 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.
The third quarter was another strong one for National Fuel with our Upstream and Midstream businesses continuing the positive momentum they established during the first half of the year.
Seneca had a great quarter with production up nearly 50% on the strength of last year's acquisition and its 2021 drilling program.
That growth in production, along with higher commodity prices, drove nearly 70% increase in EBITDA from our combining Upstream and Gathering operations.
The acquisition continues to impress with both production and operating costs better than we expected.
With the near-term run up in winter natural gas prices, along with increased confidence around online date for Leidy South, we've decided to move up some completion connectivity at Seneca.
This will allow us to more fully utilize our Leidy South capacity from the start and capture some of the valuable winter premiums in the Transco Zone 6 market.
As a result, we expect them [Phonetic] to shift forward a few months.
And while we aren't raising the upper end of guidance, now it's likely Seneca's capital spending for 2021 will be closer to high end of our previous range.
Justin will have a full update on Seneca's operations later on the call.
At the pipeline storage business, construction of the FM100 project has been going well despite a really rainy month of July.
At this point, everything remains on schedule for a late calendar 2021 in-service date.
Pipeline construction is well underway.
Almost 90% of the pipe has been strung on the right away and nearly 40% is in the ground.
The two compressor stations are nearing mechanical completion and once automation and electrical work is complete, commissioning will begin.
I took a tour of the construction site a couple weeks ago and was really impressed with what the team and our contractors have accomplished in such a short period of time.
Truly a great job by all.
As I've said in the past, this is a great project for National Fuel.
It increases revenues on our regulated pipelines by $50 million a year and when combined with Seneca capacity [Phonetic] on Transco's companion Leidy South project will allow for higher E&P production volumes and gathering throughput; the perfect example of the power of our integrated approach to the business and positions National Fuel to deliver solid near-term growth and sustainable free cash flow.
Turning to the utility, our summer construction program is well underway.
Consistent with prior years, our goal is to replace 150 miles of older pipeline, and the team is right on track to hit that mark.
Replacing older pipe goes a long way to reducing methane emissions on our system.
To-date, our program has been the driver of a 64% reduction in emissions from our delivery system compared to 1990 levels.
Earlier this year, we filed for an extension of our system modernization tracking mechanism in our New York division, which makes up a little more than two-thirds of our replacement program.
As you recall, that mechanism allows us to recover in near real time the costs associated with our modernization spending.
It's a great program and that we're able to lower emissions on our system and make it more reliable all without the need to file annual rate cases.
We expect the New York Commission will act on this petition during our fiscal fourth quarter.
Looking to next year on the strength of the FM100 project, our preliminary guidance for fiscal 2022 is $4.40 per share to $4.80 per share and to mid-point a 12% increase from our expected 2021 earnings.
In addition NYMEX pricing of $3.50, we expect about $250 million in free cash flow, which is well in excess of our expected dividend payments and which positions us well to continue to improve our investment grade balance sheet.
Those of you who have followed us for a while, know that we have a disciplined hedging program designed to mitigate price volatility and protect the returns on our upstream and gathering investments.
The goal of that program is to be between 50% and 80% [Indecipherable] at the beginning of a fiscal year, and we typically layer in those hedges over the preceding three to five years.
Our fiscal 2022 hedging program is right on track with those targets through a combination of fiscal firm sales and financial instruments.
We have hedges on roughly three quarters of our expected fiscal 2022 Appalachian production.
So we're well ahead, we still have considerable upside from natural gas prices.
Every $0.25 change in realized prices impacts cash flows by about $20 million and earnings by about $0.15 per share.
Switching gears, as we all know, natural gas has been a significant, if not the biggest driver of greenhouse gas emissions reductions since 2005.
In addition, natural gas and its related delivery systems have consistently proved their reliability, resilience, and affordability.
And without a doubt, consumers recognize and appreciate those benefits.
Notwithstanding the anti-fossil fuel commentary from Washington and Albany, we continued to add customers to our utility system year in and year out.
But in spite of these obvious benefits, our policymakers, particularly on the Coast are pursuing avenues to restrict consumers access to natural gas, including in some cases outright bans.
Taking an electrify everything approach is neither rationale nor practical.
The natural gas delivery [Phonetic] system is safe and largely underground, which ensures greater reliability and resilience compared with above-ground electric infrastructure.
And this past winter was a textbook example of the importance of resilience.
In addition, unlike the tens of thousands of windmills and millions of solar panels that would be needed to electrify the country's heating load, the natural gas delivery system already exists and is largely paid for.
To abandon it makes little sense, particularly when you consider that aggressive emissions reduction targets can be met through a mix of energy efficiency measures, hybrid heating technologies and low carbon fuels like renewable natural gas and hydrogen.
I'm all in favor of reducing emissions.
So then all of the above approach is necessary, if we're to have reliable, affordable energy in this country.
Before I give you -- before I close, I'd like to give you a heads up on the second annual edition of our Corporate Responsibility Report, which will be published early next month.
Last year's report was a great first start to our efforts to enhance our ESG related disclosures.
We look to build on it in several important ways this year.
In addition to reporting under the sustainability accounting standards board framework, we'll also include due disclosures under the Task Force on Climate-related Financial Disclosures or TCFD framework.
We're also enhancing our emissions disclosures to include full Scope 1 and 2 CO2 and methane emissions.
And importantly, we'll be using this data to establish what we think are very credible and realistic methane and greenhouse gas emissions reduction targets.
Now, lastly, we're expanding our diversity disclosures using the EO1 framework.
Overall, it's a great report that's responsive to the disclosure requests our shareholders had asked for.
In closing, this is an exciting time for National Fuel.
Construction of the largest pipeline in our Company's history is on time and on budget.
Seneca's production is an all-time high and will continue to increase as new capacity on Leidy South and FM100 becomes available.
And at the same time, the stability of our utility business adds to our financial strength.
All the while, we remain committed to reducing the emissions profile of our operations.
When you bring it all together, National Fuel is in a great position to deliver significant earnings and free cash flow to our shareholders.
Seneca had a strong third quarter with operational results slightly ahead of our expectations.
We produced 83.1 Bcfe, an almost 50% increase from last year, driven by increased Tioga County volumes from our acquisition, which closed in late July 2020, combined with solid results from our Appalachian development program.
We continued to see the benefits of our increased scale with per unit cash operating expenses dropping $0.06 per Mcfe versus the prior year to a $1.13 per Mcfe driven by a significant year-over-year decrease in our per unit G&A expense.
During the quarter, we drilled 12 new wells, five in the WDA and another seven in the EDA.
Notably, this included the commencement of drilling on our first Tioga County pad from our acquisition.
Similar to our activity in the WDA over the past few years, the Tioga pad will be a return trip.
This allows us to utilize existing roads, pads and gathering infrastructure, which significantly enhances our consolidated E&P and gathering returns.
We have approximately ten additional pads within the acquired acreage footprint, where we believe we can take advantage of similar capital efficiencies.
Further, given the contiguous nature of this acreage and continued operational success, we expect most of our Tioga Utica Wells will exceed 10,000 feet treated lateral link generating outstanding returns.
For the remainder of the year, we were on track with our plans to ramp up production to fill Leidy South and capture premium winter pricing.
We have begun the process of accelerating our completion phase, and now have two active completion crews, which is a level of activity we expect to continue throughout the first half of fiscal 2022.
This will drive our production cadence in the coming quarters with most of our new production coming online toward the end of our current fiscal year and in the first half of next year.
As a result, we expect modestly lower sequential production in Q4 of fiscal 2021.
Later this quarter, we plan to turn in line one operated pad within our Western Development Area.
Additionally, in the next few weeks, we expect to see production brought online for six well non-operated pad in Lycoming County.
Seneca holds a 25% working interest in this pad.
However, 100% of the production will flow through National Fuel's wholly owned gathering system, driving throughput growth and revenues for our sister company.
Moving to fiscal 2022, our operations plan is right on track, as we expect to turn in line about 40 wells during the first half of the fiscal year and another ten or so wells over the balance of the year.
As a result, we expect sequential quarter-over-quarter production growth in the first three quarters of the year with production leveling out in our fourth quarter.
Our increased completion base, along with our plans to operate two drilling rigs throughout fiscal 2022 is projected to drive an increase in our capital expenditures by $45 million year-over-year, which is consistent with our prior expectations.
Looking beyond next year, we expect capital to trend downward as we decrease our activity levels and move to a maintenance to low growth mode.
On the marketing front, Seneca's Appalachian production is well protected in fiscal 2022.
With firm sales contracts in place for approximately 93% of our expected fiscal 2022 production volumes, minimizing our exposure to invasive spot pricing.
We also have hedges in place on approximately three quarters of our expected Appalachian production.
Overall, the setup remains very constructive for natural gas prices.
With Appalachian producers, currently exercising capital discipline, LNG and Mexico exports near all-time highs, and storage levels remaining below both last year and five-year inventories.
However, with prices north of $3.50 per MMBtu for our fiscal 2022 and $3 for fiscal 2023, the caveat will be whether this capital constraint will continue over the coming months and whether producers will stick to their current focus on free cash flow generation and maintenance production levels.
While I'm cautiously optimistic the new found discipline will hold, at Seneca, we expect to continue adhere to our long-standing methodical approach to risk management, by layering in additional hedges over the coming quarters.
At current forward prices, our program will continue to generate attractive returns and significant free cash flow.
Looking out beyond fiscal 2022, our activity level will be geared toward generating sustainable free cash flow.
Absent the ability to enter into significant additional long-term firm sales or acquire firm capacity that would result in strong realized prices.
Seneca expects to shift into a maintenance to low growth production mode focused on fully utilizing our existing and diverse marketing portfolio.
Moving to California, we expect to invest $10 million to $15 million a year, generating substantial free cash flow or moderating production declines, and we'll look for ways to increase our activity to the extent oil prices remain at current levels.
That said, our opportunities to increase our activity levels remain limited by the challenging regulatory environment and tempered by the lengthy timeline to obtain new permits.
On the renewable side, we're making excellent progress on our new solar plant at our South Midway Sunset field in California, which is expected to be completed later this year.
We are also moving forward on an additional solar plant at our South Lost Hills production field, which we expect to complete in fiscal 2022.
With the ability to generate California low carbon fuel standard credits and reduced grid power consumption, these projects are not only highly economic, but they also reduce our emissions.
Upon completion of these projects, approximately 20% of our power needs in California will be met with solar.
We also continue to make considerable strides in our sustainability initiatives in Appalachia.
Last month, we commenced a comprehensive real time in-field study, evaluating the emissions generated by various types of completion equipment.
And just last week, we announced that we are in the process of completing a six-well EDA pad using e-frac technology.
The results of these field trials will provide Seneca with high quality comparative data on the emissions profile of these completion technologies, supporting our efforts to select equipment that aligns with our long-term sustainability goals.
Additionally, we are also actively evaluating the various responsibly sourced gas initiatives and expect to move toward one or more of these frameworks over the coming months.
As a best-in-class operator and the lowest carbon intensity shale basin in United States, we are well positioned to be an upstream leader in ESG.
National Fuel's third quarter GAAP earnings were $0.94 per share and after adjusting for an unrealized gain on our non-qualified benefit plan investments, operating results were $0.93 per share.
Last night's release explained the major drivers for the quarter.
So I'll focus on our guidance updates for the remainder of the year and our initial projections for next year.
Starting with fiscal 2021, we're increasing and tightening our earnings guidance to a range of $4.05 per share to $4.15 per share.
In addition to the strong results from the third quarter, we've incorporated the significant strengthening of natural gas prices for the remainder of the year.
Moving into fiscal 2022, we are projecting a 12% increase in earnings at the mid-point with our preliminary guidance in the range of $4.40 per share to $4.80 per share.
At a high level, the increase in earnings relative to fiscal 2021 can be boiled down to three main drivers.
The first two are related to integrated upstream and midstream development tied to the FM100 expansion and modernization project.
Starting first with the Pipeline and Storage segment, the direct benefit of the project will be approximately $50 million per year of incremental revenues.
Given the late calendar [Technical Issues] we expect approximately $30 million to $35 million of revenue from this project during fiscal 2022.
A large portion of this revenue will flow through to the bottom line, but will be partially offset by the associated operating costs and depreciation expense.
In addition, in fiscal 2022, we expect a decrease in AFUDC that was accrued during the FM100 construction period.
Next, this project along with its companion Leidy South expansion will provide Seneca with a key outlet for its growing natural gas production.
Seneca's expected production range for next year is 335 to 365 Bcfe.
This nearly 8% increase relative to fiscal 2021 will also benefit our gathering business, driving higher throughput and related revenue.
While there is a modest amount of associated expected gathering segment expense, the vast majority of this incremental revenue will flow through to the bottom line.
The third major driver is higher commodity price expectations.
For fiscal 2022, we're assuming $3.50 per MMBtu with spot prices of $2.85 in the winter months, and $2.25 in summer period.
On the oil side, we're assuming $65 per barrel.
As Dave mentioned, we're well hedged going into next year, but for reference, even with the level of hedges we have given our base of production, changes in pricing could impact earnings for the year.
For reference, a $0.25 change in natural gas prices is expected to impact earnings by $0.15 per share, a $5 change in oil by $0.03 per share.
While those are the major drivers year-over-year, I'll touch on a few other smaller assumptions around our guidance range.
In our utility for the first three quarters of this year, we averaged about 13% warmer than normal -- warmer than normal weather.
For fiscal 2022, we're forecasting a return to normal weather, and as a result, we expect margins to be higher by approximately $10 million year-over-year, particularly in our Pennsylvania jurisdiction where we don't have a weather normalization clause.
This will be largely offset by modestly higher expected O&M expense, which we anticipate to increase 3% to 4% compared to fiscal 2021 driven by higher personnel costs, principally related to negotiated wage increases with our collective bargaining units along with normal inflationary increases to labor and other items that we see each year.
In the Pipeline and Storage business, we expect O&M to increase by 4% to 5% versus fiscal 2021.
This was principally driven by a one-time favorable benefit to O&M expense of approximately $4 million in fiscal 2021 that will not recur in fiscal 2022.
Outside of this item and operating expenses related to FM100 underlying cost in this business will be relatively flat year-over-year.
Lastly, from a guidance standpoint, we're expecting a modestly lower effective tax rate next year at 25% to 26% to stem from our ability to take advantage of tax credits related to our enhanced oil recovery activities at our California facilities for fiscal 2022.
These credits are available based upon historical oil prices and given the low pricing environment in calendar 2020 we expect to be able to take advantage of this credit next year.
However, where oil prices are today we'd expect this to phase out again for fiscal 2023.
Turning to our capital plans for next year, we're projecting a roughly 10% decrease relative to fiscal 2021.
This is driven by the completion of the $280 million FM100 project early in the year.
We expect that reduction would be somewhat offset by modestly higher upstream and associated gathering spending that we'd been planning for over the past year.
As a reminder, Seneca added second drilling rig in January, and we expect to see an increase in our completion phase this fall in advance of new transportation capacity.
With respect to our cash position as we discussed previously, we expect to live within cash flow this year when you consider the proceeds of our timber sale and our dividend payments.
This hasn't changed as the slightly higher expected spending at the mid-point of our updated guidance is largely offset by higher cash flows from the expected increase in earnings for the year.
We started the year with a modest amount of short-term borrowings and well, we've had roughly $120 million of cash on hand at the end of June.
We expect to be back in a borrowing position as we continue to spend on the FM100 project.
As we look to fiscal 2022, assuming a $3.50 NYMEX natural gas price we expect funds from operations to exceed capital expenditures by roughly $250 million.
This more than covers our dividend and is expected to leave us nearly a $100 million of excess cash flow positioning as well going into fiscal 2023.
While our balance sheet is already in a good spot, we expect the combination of higher EBITDA and increased cash flows along with lower leverage to lead to continued improvement in our investment grade credit metrics.
We would have stepped over the course of fiscal 2022 to trend toward 2.5 times debt to EBITDA and with sustainable free cash flow beyond next year to seek further improvement beyond that level.
With this leverage trajectory, we will have significant flexibility to deploy capital, whether that's in making growth investments or returning cash to shareholders, we will look to deploy capital in the most valued creative manner for our shareholders.

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national fuel gas q3 gaap earnings per share $0.94.
q3 gaap earnings per share $0.94.
qtrly adjusted operating results of $85.7 million, or $0.93 per share.
initiating its fiscal 2022 earnings guidance with a range of $4.40 to $4.80 per share.
increasing its fiscal 2021 earnings guidance to a range of $4.05 to $4.15 per share.

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