Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q1 Twentytwenty National fuel gas Company earnings Conference call.
At this time all participants are in they listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to handle the conference over to your speaker today kind Webster director of Investor Relations. Please go ahead.
Thank you kenzie and good morning.
We appreciate you joining us on todays conference call for a discussion of last evening's earnings release.
So on the call for National fuel gas company, our deep, our president and Chief Executive Officer.
Karen can be Olo, treasurer, and principal financial officer, and John Mcginnis President of Seneca resources.
At the end of the prepared remarks, we will open the discussion to questions.
The first quarter fiscal 2020 earnings release in January Investor presentation had been posted on our Investor Relations website, we may refer to these materials during today's call.
We would like to remind you that todays teleconference will contain forward looking statements.
While national fuels expectations beliefs, and projections are made in good faith.
And are believed to have a reasonable basis.
Actual results may differ materially.
These statements speak only as of the date on which they are made.
And you may refer to last evening's earnings release for a listing of certain specific risk factors.
National fuel will be participating in the Scotia, Howard Weil Energy Conference in March if you plan on attending please contact me for the conference planners to schedule a meeting with the management team.
With that I'll turn it over to Dave Bauer.
Thank you Ken good morning, everyone.
Overall, the first quarter was a good one for national fuel earnings were right in line with our expectations.
From an operations perspective, we continue to execute on the plans we played out in prior quarters.
At Seneca production for the quarter was up nearly 20% over last year.
And if it continues to see excellent results on 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 WD eye and intractable or seven 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 in 17 and development programs. It midway sunset.
Lower natural gas prices are obviously a concern.
Earlier this month, we dropped a rig and are currently operating two rigs and our western development area.
Given the challenging pricing environment as we said last nights release, we intend to make further reductions in select as activity levels in the coming quarters.
John will have more to say on Sonic. This program later on the call.
Our lower E N P activity level will also lead to reduction in Seneca related gathering capital NFG midstream.
Having said that because you can see in last nights 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 undo 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.
First quarter was fairly routine for our regulated businesses.
Utility segment continues to perform well with earnings up a penny 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 to the modernization of our system.
For the calendar year, our monetization program replaced over 150 miles of older distribution pipeline, including 113 miles in New York, where we have a regulatory tracking mechanism. It provides us with timely recovery this rate base investment.
The warmer weather, we experienced in the northeast will likely lead to lower second quarter earnings and our Pennsylvania jurisdiction, where we don't ever weather normalization clause.
On a consolidated basis, but 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.
And the pipeline and storage segment, a though earnings were down due to the lingering effects of the key span contract expiration.
Looking to next year and beyond the outlook for this business is excellent.
The Empire, North and if I'm 100 projects flatter combined $60 million, an 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 early fall this year.
If FERC stays on it sucks expected timeline, we expect a certificate for the F. I'm 100 project later in the fiscal year.
Supply Corp. continues to work through its rate case for FERC, we felt multiple settlement meetings with parties and I'm optimistic we'll reach a settlement.
Our balance sheet is in great shape, and a reduction in spending at Seneca will help ensure it stays that way.
Just recently S&P affirmed our investment grade credit rating and maintaining a stable outlook on our credit.
In the near term, we expect a modest out spend as we build the empire north and if I'm 100 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.
Financially strong and our integrated yet diversified business model provides a large measure of stability the earnings and cash flows.
Into the future. So we're slowing the pace of our E. N P program to match the reality of natural gas prices are regulated segments remain on track to see meaningful growth.
With that I'll turn the call over to John for an update on Senecas operations.
Thanks, and good morning, everyone.
Seneca had a solid first quarter, we produced 58.4 Bcf the 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're reducing our fiscal 2000 activity level and associated capital.
As Dave mentioned this this last week, we dropped one of our rigs after drilling a four well do that compared in Tioga County.
We now have two rigs operating in the basin, both of which are in the WT da.
Additionally, during last quarters earnings call, we discussed the possibility of a further reduction activity should prices not rebound during the winter.
And obviously prices have not rebounded and in fact, if it continues to decline as a result, we're now planning to drop a second rig this summer and defer some of our EA completion activity into the next fiscal year.
We are lowering our fiscal 2008, capex guidance around $42 million or 10% of the midpoint to now range between 375 to 410 million.
This reflects approximately 100 million dollar reduction or 20% and Seneca is expected to fiscal 2008 capital expenditures versus to 19 2019 levels.
Because this further activity reduction will occur relatively late in our fiscal year, we did 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 unexpected turned in line to another six wells later next month.
However by deferring some EDI a 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 for 60% of our remaining fiscal 20 East Division gas production block and physically and financially at a realized price of $2.28 per Mcf.
We have another 43 Bcf a firm sales providing basis protection over 85% of our remaining forecasted gas production is already sold.
In California, we produced around 600000 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 in 17, then 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.
With that I'll turn it over to Karen.
Thank you John and good morning, everyone National feels first quarter operating results were dollar one per share down 11 cents per share quarter over quarter lower natural gas price realizations were the largest driver. The decrease in addition, the expiration of the 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 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 on expensing of stock based compensation grants can lead to effective tax rate impacts on the periods in which they style.
Last year, we had a large favorable impact resulting from this which did not recur this year.
Looking to the remainder of the year earnings guidance has been revised downward to a range at $2, a 95 cents to $3 in 15 cents per share a decrease of 10 cents at the midpoint.
This is primarily related to the reduction in our natural gas price outlook, which now reflects a two dollar and five cents per annum, Btds Nymex price and a $1.70 for an unbeaten you Appalachian spot price assumptions for the remainder of the year since partially offset by strong first quarter pricing and production relative to.
Our expectations.
The remainder of our major guidance assumptions are unchanged.
Given that our earnings guidance ranges based upon the forward strip and given date in the recent volatility in commodity prices I'll provide some earnings sensitivities for your reference.
Tonsan change in Nymex pricing would change earnings by four cents per share a tencent change in spot pricing would impact earnings by two cents per share and a five dollar change in WT Guy oil pricing would also impact earnings by two cents per share.
On the capital side, taking into account 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 plan for the year. We now expect a funds from operations and capital expenditures to be roughly in line with each other.
Heading our dividend, we expect to financing need of approximately $150 million its full year.
We started the year with nearly $700 million of liquidity available under our revolving credit facility and would 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 inline with expectations.
Natural gas prices are challenged financially we are in a good spot to whether this period of low commodity prices and remain flexible to take advantage of opportunities when they are available.
With that I'd like to turn the call over to the operator for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad again that is starts in the number one on your telephone keypad.
Our first question comes from the line of Holly Stewart with Scotia, Howard Weil. Your line is open.
Good morning, all.
Well I.
You know maybe start to John was see with the rig reduction and just help us think through I think you mentioned in your prepared remarks about.
Fiscal third quarter, and fourth quarter sort of flat to declining volumes.
Can we just.
Or maybe give us a little bit of color on the one rig program as we approach the end of.
Fiscal Tony Tony I know you guys have a decent amount of DUC inventory, but maybe you know the balance between those two things given that I don't believe that one rig could probably hold production flat.
No you're right. It takes one to two rigs is in terms of how we view our maintenance mode, but you're right. Holly is we have built up a duck count I think we're currently at 14.
And we will by the time, we drop at that second rig we will be just above 30 docs.
So we will yeah over the over the next year, so depending on what gas prices do we'll we'll just pace that appropriately which is why we're deferring some of our some of our completion activity into next fiscal year.
Okay. So it wouldn't be appropriate then to just assume.
Yeah, extrapolate I guess that one rig program in in fiscal 21.
No yeah, we've built up a a fairly decent DUC count and so we'll keep that one rig we'll certainly look into fiscal 21, depending on what gas prices do will obviously a begin to reconsider how how we look going forward Yep Yep. Okay. Perfect. That's super helpful. And then maybe just generally.
About production shut ins is there anything in the Tony Tony Guy for production shut ins I know the evasive when gas prices have fallen significantly have certainly you know pivot is quickly and shut in production volume. So just trying to think through the guidance and then how you're thinking about that currently.
First quarter, we had a little bit of curtailment in October I think was 0.7 bees and that.
In terms of our guidance, we do not we're not forecasting any other curtailments.
Okay.
Okay, and then maybe just I'm sorry, one for John and they just John Big picture in the United <unk> have talked about your interest in M&A given the market here today, and assuming that northeast PA is a potential target freeze eyes as you think about that market and knowing and if she is you know.
Very integrated story or their positions in that area right now that are free of midstream commitments that what interests you.
I would say from that perspective, there hasn't been a lot of change since the last quarter, but Holly as we've talked many times, we're always looking for opportunities in the media.
But but we still see the same midstream attachments that we've seen historically.
Okay. Okay. That's all I had thank you guys.
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Our next question comes from the line of Gordon Lloyd from Raymond James Your line is open.
Hi, good money on thanks for taking my question.
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So kind of the first question I had kind of following up on Hollywood.
It seems like the one to two rate.
Oh, It was kind of mentioned as like a man and level of activity spending but that's.
So I guess given that.
Initiative you guys have currently have.
The spot from Ducs, so with that kind of trend.
As maintenance level going forward be closer to a two rig program.
And I guess I'm, just trying to think about.
What that a joint venture in terms of spending going forward.
Oh, yeah, it's a bit earlier to be discussing fiscal 21, but having said that we've just until recently been at three rigs, which has allowed us to build this DUC inventory.
I do not view going into next year as a maintenance mode per se.
We're looking to keep.
Production generally flat.
Maybe a capex that 350 million range plus or minus.
But I want to make sure or ensure that were prepared when gas prices rebound that we'll be able to to react quickly. So I really wouldn't call. This a maintenance mode per se, but its its more just pulled back and wait to see gas prices improve.
Got it that makes sense and I guess just to kind of.
Just maybe over his simplistic, but in your previous guidance was assuming kind of up to 40 Nymex and.
End of period program in fact kind of.
He doesn't want to see guess recovered to the kind of.
Go back to maybe two rigs.
No I I think what has to be a bit better than 240.
I think we will begin to have that conversation. If we if we saw that to 50 to 75 range and that and those were volumes that we could hedge I think to 40 would still be a bit light.
Got it and then side just one more question I guess.
So we're trying to figure out.
You guys had previously mentioned like a 10% cater for the.
In terms of gathering revenue.
We're just trying to figure out if there's any you guys have any adjustment for that given kind of the shift in terms of your activity levels.
And with that I mean going forward.
Well it should it should generally follow a senecas production cadence, but then layer on top of that the third party opportunity that we had that.
Again is in the the call it $5 million to $10 million.
Annual range.
Okay that makes sense, then oh yeah.
Our next question comes from the line of credit signal feet with Jefferies. Your line is open.
Hey, good morning, guys.
Hi, Chris.
I wanted to also follow up I guess previous questions.
I look maybe to inform what I'm asking that if I look in your slide presentation, you guys published last night slide eight.
On the right inside of that you have sort of the forecast of a gross production trend and then.
Built up with it the physical elements of your of your portfolio in terms of.
You know take away and and security of flow and so just curious if we think about that then.
As the sort of flattish line that we see throughout much of calendar 21, just that idea of completing those dogs with maybe keeping.
The one rig program and using the DUC inventory to sort of hold that production.
Yeah, that's exactly right Chris.
If we didn't have the DUC count we wouldn't be able to hold our production flat at a one rig pace.
Right and then I guess, the 30 Ducs that you were talking about with Holly having sort of.
We anticipate to be in place by the time, you dropped down to a one rig program just out of curiosity, how many pads is that broken across because I'm, assuming you you'd make a decision around completion on a pad basis.
Honestly, Chris I don't know that answer I can let me talk to Ken and we'll get that back to I'm not sure how many pads that includes.
Okay, and then or is there anything as I look at this obviously you've had the wedge fear for awhile, where the idea was let's try to fill in some in basin for themselves.
If prices and those opportunities are appropriate sort of further de risk our our exposure.
Obviously, the wedges lower now with a lower production profile, but are there other things John you can do to maybe pull forward contracts that are in the future at different points and.
You know as as sort of your production profile not only is lower but maybe the location of is shifted a bit.
Yes.
Some of our fixed price deals, we can certainly push those around depending on what pipe, we need them on but we're not going to be pulling forward.
Yes futures pricing into at least within this this fiscal year I, just don't see us doing that.
[noise] into fiscal 2000.
Exactly yeah, yeah, exactly, but but where that wedge exists perhaps in 21 that that's an option you'll look you'll look to depending on what's available right now absolutely yep.
Okay.
And I guess staying on this slide eight and following up on the previous question. If I look at the to the left side of this slide.
We've had the reduction of 2020 guidance, obviously includes half the fiscal year into two rig program.
And you sort of noted when a rig costs on an annual basis, but I'm just curious the completion side of it are you seeing benefits there or.
As a lot of producers in the region scale back or should we just look at prior comments about completion cost.
And sort of extrapolate from there with the budget might be.
Yeah actually in December we saw significant reduction both in our rig rates on our and what we're paying on the completion side.
The completion side, we saw almost up to 20% reduction, but those are baked into a lot of our guidance already so I don't see us being able to drive that down further I'm not sure I want to want to make sure. We keep this rig crew busy ER and that they don't go head out to another basin.
But having said that we've seen a lot of that reduction already.
And we will keep a rig crew busy through the remainder of this year.
Okay.
Right and if I could just one final question. Dave you had mentioned the third party gathering opportunity I believe it was in media and modest amount of capital, which sort of implies that you're leveraging tsum tsum iron in the ground or stealing the ground already I'm. Just curious you know had and seen this from you guys in a while I'm just.
What's that opportunity set like is that are your commercial teams out there sort of hunting hunting across the basin for these opportunities is that something that sort of came to you given installed capacity located close to where this this operators operating or you just give us a sense of how came in with the opportunities that might be.
Yeah, it's really both right, where we have we try to.
Keep relationship with producers and around our acreage and try and leverage our.
Our existing investment in this case, we were we're dealing with a with state lands and it was just far cheaper and and and inefficient to build on to our system than to cut through the force.
And then I guess is the capital pickup modest capital pick up for fiscal 2000 <unk> does that then have extension into 21 should we expect some spending modestly on on this on this arrangement as well.
It'll be it.
It's really modest.
Okay.
All right well things off at times when you guys. Appreciate it you better.
Our next question comes from the line of Tim Winter with Gabelli. Your line is open.
Hi, Good morning, guys and thanks for taking my question.
Werent going back to Big picture.
You know what are the political challenges in the state in sort of the view toward natural natural gas in New York and now surrounding states you guys considered branching out into other states or maybe getting into the renewable development business are evolving similar the business into.
In the you know.
So some visiting with less with less political challenges.
Yes.
Certainly if you look at the way, we're we're spending our capital I'm on the pipeline side are our most of our future spending is in Pennsylvania as opposed to New York.
And you know as we've said on other calls we're we're always looking at different opportunities sets you know whether it be on on the gas side or or other businesses. I guess at this point I don't really have anything to the comment on beyond that.
But we're we're always mindful of other opportunities.
Okay. Okay has the that the change in drilling activity in the sort of on the ongoing low gas prices impacted your interest or the economics of building the northern access pipeline.
Yeah, well the biggest challenge we face on northern access in the near term is on the litigation front you know, we're going to wait for that to the play itself out right now.
The DC has.
Has sued FERC and you escort and that.
That proceeding is going to play out into a in call. It the middle to second half of 2021.
So that's you know in the near term the biggest challenge, but then you know if you're certainly right with prices where they are.
And the reduction in in Senecas program, having a delay in that project is not worsening in the world.
Okay. Thank you.
You bet.
Our next question comes from the line of Ryan Levine with Citi. Your line is open.
Good morning.
Learning from what are your current current thoughts around your leverage targets in this environment as you go out a couple of years and what's your plans around the refinancing in two to three years.
Yes, so our intent is to remain investment grade credit or our leverage.
Ratios are well within the the yard sticks or goalpost, whatever and they all do you want to use of what the agencies of they've laid out for US you know with with bringing Seneca spending in.
That business should be is not going to be generating any sort of outspend.
So the to the growth in leverage over time is gonna be linked mostly to our the pipeline side of our business and so we have to good sized projects that will be built this year and then next year that will cause our leverage to tick up modestly and then after that.
Even at that strip pricing, we should be generating.
Really meaningful free cash flow thereafter.
If production or gas prices were to deteriorate further.
Lever is would you be prioritizing to achieve that investment grade.
Well I think it would be mostly on the the S&P capital side further scaling back our.
Our activity.
Okay, and then I guess last one on on that side is in terms of the distribution or dividend policy.
You know what are the longer term outlook, there and how you continue to occur I guess, you reiterated stable and growing dividend in your press release and presentation should we read and intend anything with that.
So.
As we've said in the past, we we generally Oh, you our dividend in light of are.
The earnings of our regulated businesses.
And so if you look over time.
Between the modernization programs and modest customer growth on the utility side and the Oh, the bigger pipeline projects on the FERC regulated jurisdictions, we'd see earnings in those businesses continue to grow and continue to fund a an increase in our dividend.
Okay, and then last question for me.
In terms of the gathering Capex increase could you comment on build multiple.
Associated with that spend.
Yeah for.
Credit of reasons, I guess I prefer not to its really not a large amount of capital as you can see from the from the release and.
We gave you the revenue guidance.
Okay understood and thank you yeah.
You bet.
This concludes the Q and a session for today I will now hand, the call back to kind Webster for closing comments.
Thank you kenzie.
I'd like to thank everyone for taking the time to be with us today.
A replay of this call will be available at approximately three PM Eastern time on both our website and my telephone and will run through the close of business on Friday February 7th.
Access the replay on line. Please visit our Investor Relations web site at Investor Dot National fuel gas Dot com.
And to access by telephone call one 800.
585, Athree six seven.
And enter conference I'd number 8154487.
This concludes our conference call for today, Thank you and goodbye.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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