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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 Scotia Howard Weil Energy Conference in March.
If you plan on attending, please contact me or the conference planners to schedule a meeting with the management team.
Overall, the first quarter was a good one for National Fuel.
Earnings were right in line with our expectations.
And from an operations perspective, we continue to execute on the plans we've laid out in prior quarters.
At Seneca, production for the quarter was up nearly 20% over last year.
Seneca continues to see excellent results from the Marcellus and Utica wells it brought on production in recent quarters.
Our team has done a great job cracking the code on our Utica development program, both in the WDA and at Tract 007 in Tioga County.
It's also worth highlighting our California oil production, which was up about 5% over last year on the strength of our recent Pioneer and 17N development programs at Midway Sunset.
Lower Natural Gas prices are obviously a concern.
Earlier this month, we dropped a rig and are currently operating two rigs in our Western Development Area.
Given the challenging pricing environment, as we said in last night's release, we intend to make further reductions in Seneca's activity level in the coming quarters.
John will have more to say on Seneca's program later on the call.
Our lower E&P activity level will also lead to reduction in Seneca-related gathering capital at NFG Midstream.
Having said that, as you can see in last night's release, we're raising the midpoint of our gathering capital spending guidance for the year by $10 million.
This increase is driven by capital expenditures related to a new gathering agreement with a third-party producer in the vicinity of our Trout Run system in Lycoming County.
This is a nice little project.
It is expected to add roughly $5 million to $10 million per year in third-party revenues starting in fiscal 2021.
It's a great example of how we can optimize our existing assets to generate new growth opportunities.
The first quarter was fairly routine for our regulated businesses.
Utility segment continues to perform well with earnings up $0.01 a share over last year.
In the fall, we wrapped up another successful utility construction season, and as we have for the past several years, we continue to allocate capital for the modernization of our system.
For the calendar year, our modernization program replaced over 150 miles of older distribution pipeline, including 113 miles in New York where we have a regulatory tracking mechanism that provides us with timely recovery of this rate base investment.
The warmer weather we've experienced in the Northeast will likely lead to lower second quarter earnings in our Pennsylvania jurisdiction, where we don't have a weather normalization clause.
On a consolidated basis, the impact shouldn't be overly significant.
Our customers should see a real benefit from low natural gas prices.
We expect winter heating bills will be more than 10% lower than last year.
In the Pipeline and Storage segment, though earnings were down due to the lingering effects of the KeySpan contract expiration, looking to next year and beyond, the outlook for this business is excellent.
The Empire North and FM100 projects will add combined $60 million in incremental annual revenue over the next few years.
Both projects are proceeding according to plan.
Empire North is under construction and on track to be in service late summer or early fall of this year.
If FERC stays on its expected timeline, we expect a certificate for the FM100 project later in the fiscal year.
continues to work through its rate case before FERC.
We've held multiple settlement meetings with parties, and I am optimistic we'll reach a settlement.
Our balance sheet is in great shape and our reduction in spending at Seneca will help ensure it stays that way.
Just recently, S&P affirmed our investment grade credit rating and maintained a stable outlook on our credit.
In the near term, we expect a modest outspend as we build the Empire North and FM100 projects, but beyond that we should be generating significant free cash flow.
2020 is looking to be a challenging year for natural gas producers, but National Fuel is well positioned.
We're financially strong and our integrated yet diversified business model provides a large measure of stability to earnings and cash flows.
Looking to the future, though we're slowing the pace of our E&P program to match the reality of natural gas prices, our regulated segments remain on track to see meaningful growth.
Seneca had a solid first quarter.
We produced 58.4 Bcfe, an increase of around 19% compared to last year's first quarter, and a slight decrease quarter-over-quarter.
While we continued to see strong operational results with drilling and completion activity on our recent pads coming in ahead of schedule, given the current natural gas price environment, we are reducing our fiscal '20 activity level and associated capital.
As Dave mentioned, this last week, we dropped one of our rigs after drilling a four-well Utica pad in Tioga County.
We now have two rigs operating in the basin, both of which are in the WDA.
Additionally, during last quarter's earnings call, we discussed the possibility of a further reduction in the activity, should prices not rebound during the winter.
And obviously, prices have not rebounded, and in fact have continued to decline.
As a result, we are now planning to drop a second rig this summer and defer some of our EDA completion activity into the next fiscal year.
We are lowering our fiscal '20 capex guidance around $42 million or 10% at the midpoint to now range between $375 million to $410 million.
This reflects approximately $100 million reduction or 20% in Seneca's expected fiscal '20 capital expenditures versus 2019 levels.
Because of this further activity reduction will occur relatively late in our fiscal year, we do not expect to see a significant production impact in fiscal '20.
As to production timing, last quarter, I had mentioned that we expected to see increases during our second and fourth quarters.
We still expect to see increased production in our second quarter as we turned in line 12 wells in late January and expect to turn in line another six wells later next month.
However, by deferring some EDA completion activities into next year, we now expect to see flat to slightly declining production during our third and fourth quarters.
Overall, our production guidance for fiscal 2020 remains unchanged with our strong first quarter results, largely offsetting our lower production expectations in Q4.
Moving to our marketing and hedging portfolio.
We will remain well-positioned for the remainder of the year.
We have approximately 102 Bcf or 60% of our remaining fiscal '20 East Division gas production locked in physically and financially at a realized price of $2.28 per Mcf.
We have another 43 Bcf of firm sales providing basis protection to over 85% of our remaining forecasted gas production that's already sold.
In California, we produced around 6,000 barrels of oil during the first quarter, an increase of around 5% over last year's first quarter.
This increase was due primarily to our recent drill activity in both Pioneer and 17N, both located within our Midway Sunset field.
These properties are now producing around 800 barrels a day.
And as we look out for the remainder of fiscal '20, we expect Q2 oil production to be down modestly from our Q1 production level and relatively flat thereafter.
And finally, over 70% of our oil production for the remainder of the year is hedged at an average price of around $62 per barrel.
National Fuel's first quarter operating results were $1.01 per share, down $0.11 per share quarter-over-quarter.
Lower natural gas price realizations were the largest driver of the decrease.
In addition, the expiration of a significant contract on our Empire Pipeline late in last year's first quarter and an increase in our effective tax rate contributed to the drop in earnings.
Our higher effective tax rate was driven by two factors.
As mentioned on previous calls, the enhanced oil recovery tax credit that was in place last year is no longer available due to the current crude oil prices.
And second, the difference between the book and tax accounting rules and expensing of stock-based compensation grants can lead to effective tax rate impacts on the periods in which they struggle.
Last year, we had a large favorable impact resulting from this, which did not recur this year.
Looking to the remainder of the year, our earnings guidance has been revised downward to a range of $2.95 per share to $3.15 per share, a decrease of $0.10 at the midpoint.
This is primarily related to the reduction in our natural gas price outlook, which now reflects a $2.05 per MMBtu NYMEX price and $1.70 per MMBtu Appalachian spot price assumptions for the remainder of the year.
This is partially offset by stronger first quarter pricing and production relative to our expectations.
The remainder of our major guidance assumptions are unchanged.
Given that our earnings guidance range is based upon the forward strip at a given date and the recent volatility in commodity prices, I'll provide some earnings sensitivities for your reference.
The $0.10 change in NYMEX pricing would change earnings by $0.04 per share, a $0.10 change in spot pricing would impact earnings by $0.02 per share, and a $5 change in WTI oil pricing would also impact earnings by $0.02 per share.
On the capital side, taking into account our reduced activity level, our new consolidated guidance is in the range of $695 million to $785 million, a decrease of approximately $33 million at the midpoint.
With our revised earnings projections and lower capital spending planned for the year, we now expect our funds from operations and capital expenditures to be roughly in line with each other.
Adding our dividend, we expect a financing need of approximately $150 million for the full year.
We started the year with nearly $700 million of liquidity available under our revolving credit facility, and we plan to use that as the first source of financing.
Given the favorable conditions in the capital markets, we will remain opportunistic as it relates to long-term financing needs and nearer-term maturities.
As John and Dave said, operationally, things are moving along in line with expectations.
While natural gas prices are challenged financially, we are in a good spot to weather this period of low commodity prices and remain flexible to take advantage of opportunities when they are available.

user
sees fy 2020 earnings per share $2.95 to $3.15.
low natural gas prices weighed on national fuel’s first quarter earnings.
national fuel gas- facing continued deterioration of natural gas prices, co slowing down development pace in appalachia.
co's other earnings guidance assumptions, including production, remain largely unchanged from the previous guidance.

assistant