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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 will be participating in the Bank of America Global Energy Conference next week.
Please contact me or the conference planners to schedule a meeting with the management team.
As we reported in last night's release, National Fuels fourth quarter operating results were $0.40 per share.
Consistent with earlier quarters, lower commodity prices were the main driver, contributing to the $0.14 per share drop in operating results, contributing to non-cash ceiling test impairment charge.
Despite the drop in earnings, the quarter went as planned, with operating results right in line with our expectations.
Fiscal 2020 was a remarkable year for National Fuel.
Against the backdrop of a pandemic, we completed a highly accretive Appalachian acquisition and brought online a significant pipeline expansion project, all while continuing to safely and reliably operate our businesses across the natural gas value chain.
Looking ahead, the outlook for natural gas has improved significantly, and National Fuel is well positioned for meaningful earnings and cash flow growth.
We continue to see success with our expansion projects at our FERC-regulated pipeline businesses.
We placed our Empire North Project in service on September 15th.
As a reminder, this project is fully contracted, with the bulk of the commitments extending for 15 years.
The project is expected to add about $27 million in annual revenues.
It looks like the final capital cost will come in around $129 million, which is more than 10% below our initial cost estimate.
Constructing in placing this project into service safely on schedule and under budget in the midst of a pandemic was quite an accomplishment.
We continue to make progress on our FM100 Project, and Transco's companion Leidy South expansion is also on track.
As a reminder, all of the facilities for both projects are in Pennsylvania.
There are few permits still outstanding, and we expect to receive them this winter.
We've started to order longer lead-time items, and once we receive the remaining permits, we'll file for our notice to proceed.
All of this keeps us on pace to be in service near the end of calendar 2021.
And again as a reminder, FM100 will add approximately $50 million in annual revenues between the $35 million expansion component and the additional $15 million modernization rate step-up agreed to in our February rate case settlement.
Moving to our upstream and gathering operations.
We closed the acquisition of Shell's Appalachian assets back in July, and now have a few months of operations under our belt.
The transition could not have gone more smoothly, and we're very excited about the long-term benefits of this acquisition.
It added significant scale, lowered our per unit cost structure and added hundreds of highly economic development locations in Tioga County, which are supported by Company-owned gathering systems and valuable firm transportation, including our National Fuels Empire Pipeline.
In addition, production and reserves continue to be in line with our initial expectations, and as we spend more time operating the assets, we're finding additional efficiencies and revenue enhancement opportunities.
Seneca is currently operating a single rig that moves between our Eastern and Western development areas.
On last quarter's call, we discussed the possibility of adding a second rig prior to the start date of Leidy South.
Given both the meaningful improvement in natural gas prices for fiscal 2022 and our expectations on the timing of the FM100 in Leidy South projects, we've decided to move up the rig out into January.
This will allow us to line up first production with the in-service date of Seneca's new capacity.
It will also allow us to capture the benefits to higher winter pricing.
As you can see from last night's release, we've already hedged the fiscal 2022 production expected from the wells that will be drilled by the second rig.
Because we won't see production from these wells until late in calendar 2021, there is no impact to our fiscal 2021 production or earnings guidance.
Nevertheless, in spite of the incremental $60 million in capital associated with this rig, we still expect to generate in excess of $100 million of free cash flow from our upstream and gathering businesses.
While this increase in activity level differs from the approach taken by many of our peers, the strength of our balance sheet, our methodical approach to hedging and our significant depth of high-quality inventory allows us to take this step to accelerate value, while still generating significant free cash flow.
Over time, the second rig is expected to focus principally in our Eastern Development Area, where we have some of the most economic development opportunities in Appalachia.
If you recall, our valuation of the Tioga County acquisition was based solely on PDPs and the related gathering assets.
We did not attribute any value to the highly economic undeveloped locations.
By adding a rig, we are now able to pull forward the development of these properties, further enhancing the value of the assets, including growing throughput on our gathering facilities.
Our utility business continues to run smoothly in spite of the pandemic.
Our team has done a terrific job adapting to the new reality.
Because of the economic backdrop in our service territory, we've seen a drop in large volume commercial and industrial throughput.
In spite of the pandemic, we had a very successful construction season, replacing over 150 miles of older pipe on the system.
More than two-thirds of the spending associated with the program will be captured in our system modernization tracking mechanism.
Taking all this together, our outlook for earnings and cash flow growth is strong.
As a result of the improved outlook for natural gas prices, we are revising our earnings guidance up to $3.70 at the midpoint, an increase of more than 25% over our fiscal 2020 results.
Despite the backwardation in the natural gas curve, as we look to fiscal 22, the increased activity at Seneca, combined with the expected in-service date of the FM100 project and a continued modest growth in our utility segment are all expected to drive further earnings growth.
In September, we published our initial Corporate Responsibility Report.
This was an important step in furthering our ESG disclosures and highlighting our ongoing initiatives, while continuing the course we've been on for a number of years.
Over the past two decades, we've made significant investments to modernize our natural gas distribution, transportation and storage facilities.
This has significantly reduced emissions across our system.
For example, relative to 1990 levels, our utilities EPA Subpart W emissions are down by over 60%.
We recognize the importance of reducing the global carbon footprint, and we continue to find ways to further reduce our own emissions profile as we grow our business.
This is perhaps most evident on the Empire North project, where we installed our first electric motor-drive compressor station, which virtually eliminates combustion emissions from those operations.
We also continue to look for ways to incorporate renewable natural gas into our transportation and distribution systems.
This past year, we built our system's first interconnect with an anaerobic digester facility.
All of these initiatives highlight our natural gas will continue to be part of the long-term energy solution.
In closing, I'm excited about the future for National Fuel.
2020 was a year of challenges but also one of opportunity.
We've taken several critical steps that have strengthened the Company and positioned it for near-term growth.
When we look to fiscal 2022 and beyond, we expect to generate consistent, meaningful cash flow at current strip pricing.
This should more than cover our growing dividend and further improve our already strong balance sheet, giving us the flexibility to pursue additional growth opportunities as they arise.
Seneca had a strong fourth quarter.
We produced 67.3 Bcfe, an increase of around 14% compared to last year's fourth quarter.
Despite low-end basin and natural gas prices, which led us to voluntarily curtail about 6 Bcf, we achieved our largest quarterly production ever.
For the year, we curtailed 17 Bcf and annual net production came in just over 241 Bcfe.
This new fiscal year high for Seneca was supported by our development program and the impact of our recent acquisition.
For the year, capital expenditures, excluding the acquisition, ended up at around $384 million, a reduction of approximately $108 million or 22% from the prior-year.
Expenses on a per unit basis were down 8% from last year, and we're all within our fiscal 2020 guidance ranges.
PUD reserves increased by 359 Bcfe or 12% to just under 3.5 Tcfe, with the increase largely driven by our acquisition during the fourth quarter.
PUD developed reserves now make up approximately 84% of total reserves.
As a result of our recent acquisition, we now have substantial inventory of both Utica and Marcellus drill locations in Tioga, and our inventory has expanded to approximately 300 locations in the EDA.
Moving to the WDA, our near-term development is expected to shift toward the Rich Valley Beechwood Development Area, which is located immediately to the south of our CRV area, where we are focused over the past few years.
In the Rich Valley Beechwood area, we have around 100 Utica drill locations, and we'll be able to utilize our existing gathering trump line [Phonetic].
Based on results to-date, we believe the economics will be superior to those related to our WDA Utica return trips.
These pads are performing at or above our previously posted Utica type curve.
In California, we produced around 555,000 barrels of oil during the fourth quarter, a decrease of around 9% from last year's fourth quarter.
Year-over-year, oil production was largely flat, with a slight increase of 26,000 barrels.
Earlier this year, in order to cut costs as a result of low oil prices, we significantly reduced well work and steam volumes across most of our heavy oil fields.
This modestly impacted our production decline rates in these fields during our third and fourth quarters.
However, we are recently increasing volumes to previous levels in some of these fields, and we will continue to permit new wells to allow for return to drilling in the event oil prices improve.
As we are currently planning to differ much of our fiscal 2021 development program in California, we have budgeted only $10 million in capex, but again as prices rebound, our intention is to increase our activity in California to return to our development programs in Midway Sunset and Coalinga.
So moving to our fiscal 2021 guidance.
As Dave mentioned earlier, in connection with the continued development of the Leidy South and FM100 projects and a deep inventory of highly economic Utica development locations in Tioga as a result of our recent acquisition, we intend to add a second rig early in 2021.
This additional rig will focus on our EDA assets in both Lycoming and Tioga, and longer term, we would expect relatively balanced activity between the EDA and the WDA.
As part of our recent acquisition, we secured 100 million [Phonetic] a day on Dominion, with access to Transco Leidy line and the Leidy South project, providing us with optionality to utilize this capacity from Tioga, in addition to Lycoming and the WDA.
First production from the additional rig is expected in early fiscal 2022 to align with the expected Leidy South in-service date, allowing Seneca to utilize this 330 million [Phonetic] a day of incremental pipeline capacity to reach premium markets during the winter heating season.
As a result of adding the second rig for approximately nine months of the fiscal year, we are increasing our fiscal 2021 capex by around $60 million from our previous guidance to a total of $370 million at the midpoint.
Even with a second rig, we are forecasting a decrease in capital expenditures of around $15 million year-over-year.
Most of our production growth in fiscal 2021, forecasted to be up over 30% of the mid-point, should occurred during the first half of the year with a moderate decline during the back half, as we defer completion and flowback activity until the winter season when our new capacity is targeted to be in service.
Moving forward, we have 234 Bcf around 77% of our fiscal 2021 East Division gas production locked in physically and financially.
We have another 41 Bcf of firm sales providing basis protection.
So 90% -- around 90% of our forecasted gas production is already sold.
We currently estimate that we'll have around 30 Bcf of gas exposed to the spot market.
So as always these volumes are potentially at risk for curtailment.
And finally in California, around 50% of our oil production is hedged at an average price of just over $58 per barrel.
As Dave stated at the beginning of the call, National Fuels operating results for the quarter came in at $0.40 per share, adjusting for items impacting comparability, which was in line with our expectations.
Although our upstream business continued to face significant commodity price headwinds, each of our businesses performed well during the quarter, setting the Company up for a strong fiscal 2021.
One item of note during the fourth quarter was our effective tax rate, which at approximately 15% was much lower than expectations and the prior year.
Periodically, we're required to assess the appropriate tax rate to use for recording deferred tax assets and liabilities.
Our recently closed acquisition included significant additional firm transportation capacity to markets outside of Pennsylvania, which resulted in the forecasted percentage of total revenues allocable to Pennsylvania to be lower in the future.
As a result, we were required to remeasure the deferred taxes on our balance sheet to reflect the lower-expected state tax rate.
Since we are in a net liability position, we recorded the differences of benefit to deferred income tax expense, reducing our effective tax rate for the quarter.
Looking to fiscal 2021, we revised our earnings guidance higher to a range of $3.55 to $3.85 per share or $3.70 at the midpoint.
There are a couple of major drivers behind that increase.
First, we've increased our NYMEX assumption to $3 per MMBtu and correspondingly increased our in-basin pricing forecast to $2.50 in the winter months and $2.10 in the summer and shoulder months.
Second, as a result of the ceiling test impairment charge recorded during the quarter, we now expect DD&A at Seneca to be in the range of $0.60 to $0.65 per Mcfe.
This does not include any future impairments at Seneca.
Going in the other direction, reflecting recent changes in forward crude oil prices, we've reduced our WTI assumption to $37.50 per barrel and made a slight adjustment to our California basis differential, moving it down from 95% to 94% as a result of recent trends we are experiencing in the region.
Additionally, while the increase in natural gas prices is a significant benefit to earnings, there are a few natural offsets to this.
First in Pennsylvania, we are subject to the state impact fee.
This shows up in our other taxes line item on the income statement, and is calculated based upon the age of each well and the average NYMEX gas price for the year.
There is a tipping point into a higher tier as we hit the $3 per MMBtu mark.
So our updated forecast reflects this increased fee, which is approximately $3 million higher for the fiscal year.
Additionally, as John mentioned, we're forecasting return to normal steam volumes in California.
One of the key inputs in our steam generation is natural gas, and with the increase in pricing, we expect modestly higher LOE in the region, which is reflected in the slight widening of our guidance range now forecast between $0.83 and $0.86 per Mcfe.
Overall, these adjustments on the cost side are more than offset by the benefit of expected higher realizations on our natural gas production.
Further on production, as John mentioned, we continued to actively hedge as the forward curve moves up, and now have price protection on 77% of our natural gas volumes.
We also have 50% of our crude oil production hedged at $58 per barrel.
Moving to the regulated businesses.
As a reminder, we are forecasting a return to normal weather at the utility, which will drive a $5 million increase in margin year-over-year.
Combining this with $3 million of incremental revenue related to our New York system modernization tracker, we expect to see margin growth of approximately 2% for the year.
Going in the opposite direction, we now project O&M to increase approximately 3% to 4%, which is modestly higher than our previous guidance.
As a result, we now expect operating income to be relatively flat year-over-year.
At our pipeline and storage business, our assumptions remain unchanged for the year.
We still expect revenues to be in the range of $330 million to $340 million, and O&M expense to increase approximately 4% for the year.
On a consolidated basis, we are in line with our expectations for fiscal 2020.
Looking to this year, as Dave and John both mentioned, we expect Seneca's capital to increase by approximately $60 million, as a result of the increased Appalachian activity level.
All of our other guidance ranges remain unchanged.
So at the midpoint of our range, we expect spending to be $775 million.
Tying everything together, we now forecast our funds from operations to exceed capital spending by $50 million to $75 million on a consolidated basis.
This is a great outcome when considering our expectation that we will be constructing a large portion of the FM100 project in fiscal 2021, which is the most capital-intensive pipeline project in the Company's history.
Combining this free cash flow with the proceeds from our timber sale, which we expect to close next month, we don't expect any external financing needs [Indecipherable] seasonal working capital changes.

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now projecting that fiscal 2021 earnings will be within the range of $3.55 to $3.85 per share.

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