Q1 2021 National Fuel Gas Co Earnings Call
Yep.
Ladies and gentlemen, thank you for standing by and welcome to the q1 2021 National Fuel Gas Company earnings conference call at this time. All participants are in a listen-only mode after the speaker's 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 number.
Please be advised that today's conference is being recorded. If you require any further assistance, please press * 0 hour now like to have the carpets over to your speaker today, Webster director of investor relations. Thank you, please go ahead sir.
Thank you to camera and good morning. We appreciate you joining us on today's conference call for a discussion of last evenings earnings release with us on the call from National Fuel Gas Company are Dave president and chief executive officer caring camiolo, 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 2021 earnings release and February investor presentation has been posted on our investor relations website. We may refer to these materials during today's call. We would like to remind you that today's teleconference will contain forward-looking statements while National Fuel expectations beliefs and projections suck 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 as evenings earnings relieved.
For a listing of certain specific risk factors with that. I'll turn it over to Dave our thanks again. Good morning. Everyone National was a great start to our fiscal year off the results up 5% year-over-year operationally, we had a really strong quarter particularly at Seneca and NFC Midstream. We're in spite of 4 BCF for pricing related curtailments off to auction 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 try and 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 and senecas update guidance. We increase 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 from it scheduled to come online in early fiscal 2022. The goal is to fill our lady South capacity as soon Africa is among a service and thereby capture the premium winter pricing in the east coast markets the second real focus principally on Tioga County where a $2 net back prices are Consolidated Returns on a Wells are north of 65%
Beyond fiscal 22 absent new firm takeaway capacity senecas program will likely average between 1 and 1/2 and two rigs which will keep our production flat to slightly growing month. Our Focus will be on generating free cash flow as you can see from our updated slide deck at a 27059 X price we expect our upstream and Gathering businesses or generate approximately $159,225 and free cash flow in twenty $21 is our production grows in 22 and 23. We expect this level of free cash flow 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 later and hedges with the goal of protecting our investment in May and lucky and the strong rates of return generated by younique integrated development program.
Switching gears are regulated pipeline businesses had a great quarter with earnings up nearly 25% This is 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 twenty.
Or FM 100 expansion and modernization project is on track to continue this momentum into fiscal 22 and 23 is a reminder. This project will add $50 in annual revenues once it goes in service, which I expect will occur late in this calendar year.
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'd awarded the job to contractors in order through necessary long lead-time items, including Pipeline and compressor units once all permits are on hand will file for our notice to proceed with ferc and start construction shortly thereafter.
With respect to the recent change in leadership Pittsburgh. We don't see any cause for concern on FM 100. As you know, FM 100 is a companion project transfer slightly South expansion and down ladder project is a little ahead of ours in the permitting process for fuse them is essentially one project just last week transfer received a notice to proceed from work for a portion of their project which gives us the 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 wait on earnings for the quarter.
Please work somewhere offset by the continued growth in revenues from our New York jurisdictions System modernization tracking mechanism.
If you continue to face the total pandemic the safety and well-being of our employees customers and communities our highest priorities. We remain focused on business continuity and providing a safe and not able service. Our customers expect our employees have done a terrific job, and I'd like to say thank you to them for all their hard work.
Change in Administration Washington. There's been increased focus on the role of natural gas in the nation's energy complex.
Natural gas is 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 wage. 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. Usually 90% of households is natural gas to heat their homes and a day like today nearly 50% of New York's 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 towards the 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 eating at home in the in the Northeast using natural gas costs less than half of what it would using electric heat and all these These are incredibly reliable this past winter natural gas service or utility was available 99.9% of the time. It makes little sense to 450s 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 mission slip print off a National Fuel is committing to do so how we get there one might be either a three main Avenues to pursue first is improving the emissions profile of our operations team has 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 nineteen ninety levels, but we're not done dead.
At the current pace of the program we expected more than 80% reduction by 24.
Second is conservation. We have to encourage our customers to use less. Thankfully the state commission's have given us the tools to do so or 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 office in 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 resource initiative, which is real life 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 that at the end of the day off. I'm very confident natural gas will have a prominent role in meeting our country's energy needs and that National Field operations from the well head to the burner tip will remain an important part of the Energy Solution.
Closing National Fuel had a great first quarter. As I said, I'm prior calls. It's still 21 should be a big growth here 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. There are strong hedgebrook helps protect from those swings as we look forward to 22 and Beyond will well position for both growth and meaningful cash flow generation a a combination that many of our peers cannot match. Our balance sheet is in great shape and are integrated with Diversified business model provides a level of downside protection to help us navigate back and close that will inevitably face.
For trying to call over to John I want to take a minute to acknowledge to upcoming retirements as you've probably seen John this is retiring effective May 1st of this year off over the course of his fourteen years with the company John has been instrumental in the growth of Seneca taking it from a small conventional operator that produce less than 50 bcfe and you along to the key player in the Appalachian Basin that Seneca has become also John pistole. Our chief operating officer is retiring effective May 1st. There isn't an individual that I've met who can more dedicated to the company in the industry over his forty seven year career. He led by example and was a main driver of our corporate culture particularly as it relates employee safety package.
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 Brian Kramer will assume the role of CEO. Oh and Justin lower will become the new president. It's not a that I'll turn the call over to John again. It's for an update on our Upstream operations.
Thanks, Dave and good morning. Everyone. Seneca had a strong first-quarter. He produced a company record 79.5 bcsc despite approximately four BCS of pricing could tell month in October and early November our nearly 40% production increase in Appalachia is largely due to the company's fourth-quarter fiscal 2020 acquisition of our assets and 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 operationally, I'm driving a collective $0.10 or mcse decrease in g n a n l o e x boxes from the prior Year's first quarter with about six months of operations. Now with our belt we are seeing additional cost reductions above our initial expectations as an example l o e reductions of over $50,000 a month have been utilized by releasing
I needed equipment rentals and Contract Services on the acquired assets. Additionally. We achieve between $300 to $500,000 to well and reduce water costs on our website Toyota double-oh-seven pad completions through the use of acquired water withdrawal points and storage facilities.
and
I'm with our plans discuss on last quarter's call. We added a second to load rig in early January which will focus on our Eda assets including the Deep inventory of acquired beautiful locations in Toledo. This activity will allow Seneca to bring online additional volumes in early fiscal 22 commensurate with the expected availability of our capacity on the Lighty South project wage premium markets during the winter heating season. We expect Santa Claus other rig to remain focused in the lwda maintaining relatively balanced activity between these two operating areas longer.
Auto pricing fiscal twenty one has not been as strong as we initially projected during this winter will supply and demand fundamentals weather notwithstanding remain constructive over the next five to eighteen months looking out beyond the current year the fiscal 22 strip was around $2.80 and then C F A price will be realized wrong returns from our Appalachia.
As always we have maintained our disciplined approach to hedging and all already well-positioned in fiscal 22 with over 180 BCS a fixed price firm sales 9 x block spam callers and place this provides sound Echo the downside protection of leads the potential to generate significant additional free cash flow should prices move off page. 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 lighting South.
We're maintaining our fiscal 21 capex guidance which remains in the $350 to $390 range based on our strong first-quarter results and solid execution by our operations team. We are revising our production guidance to range to a range of 310 to 335 bcfe a 2 and 1/2 bcfe increase wage midpoint most of our production growth in fiscal 21 should occur during the first half of the year was flat to slightly declining production during the back half as we defer completion and Flowback activity until the winter season. When our new FP capacity is targeted to be in service for the remainder of the fiscal year. We have a hundred eighty-six b c f or around 80% of our East Division gas production walked in physically and financially we have another 30 BCF of firm sales providing basis protection. So over ninety percent of our forecast Thursday.
Gas production is already sold. We currently estimate that will have around 17 BCF of gas explosive spot market. So as always these bonds are potentially at risk for toning and in California, we have around 67% of a remaining oil production. It's hedged at an average price around $57 per barrel.
Finally does indicate it in our press release last month a plan to retire from Seneca effective May 1st. Justin Louis. Our senior VP is Seneca will be promoted to President Bush has been with Seneca for ten 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 of the organization and I am pleased to be leaving Seneca with an experienced and strong management team and with that I'll turn it over to town.
Thank you, John and good morning. Everyone National Fuel first quarter items impacting comparability including a feeling test charge an impact of a game related to the sale of our Timber properties operating results were a dollar sixty per share with the increase of 5% over last year was on the strength of our Pipeline and storage segment results wage as well as the impact of the upstream and Gathering acquisition and 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 year first in line with our expectations. We closed on the sale of our Timber properties and December receiving net proceeds of $105 after closing adjustments as a result may be recorded and after tax gain of thirty seven million dollars, we made the decision to divest substantially all of these properties to fund a portion of our Appalachian acquisition the timing of the same.
Allowed us to structure the transaction as a like kind exchange which defers a relatively sizable tax game over the life of the Appalachian reserves that we acquired last year in a large item impacting comparability during before order was the $55 after tax non-cash stealing test charge given where prices are today. We would not expect to record Another C language 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 office which were down three and half million dollars versus last year's first-quarter warmer weather particularly in our Pennsylvania service territory and an additional accrual for bad debts life to result from the pandemic impacted this business during the quarter while we haven't witnessed a material deterioration in customer payment Trends. We are in the midst of the winter heating system.
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 10% increase at the midpoint. This increase was driven by strong results during the first quarter modest decreases in Seneca lake in the costs and a reduction in our expected DNA rate as a result of the the additional ceiling test charge and Reserve bookings during first quarter. These are expected to be some offset by revisions to our commodity price assumptions for the remaining nine months of the year with our natural gas guidance decreasing the $2.75 per mmbtu dead.
and WTI guidance
Increasing 2:50 to $52.50 per barrel. All of our other key assumptions are largely unchanged and fully laid out in the earnings release and investor get published Thursday night with respect to Consolidated Capital spending all of our segments ranges remain the same and we are still projecting between $720 and $830 for the fiscal year at the midpoint of our guidance ranges. We'd expect funds from operations to exceed our Capital spending by approximately fifty million dollars for the year and am reading that with the proceeds from the sale of our Timber properties. We expect to be able to cover our dividends without any material incremental short-term borrowings.
We're well for the remainder of the year, so any changes in commodity prices prices should have a muted impact on earnings and cash flows switching to the balance sheet. We have five hundred million dollars of long-term debt set to mature and December we expect to access the capital markets and fiscal 2021 to replace the security with our next maturity thereafter not until 6 till 2023. We have an ice Runway without any major reason dancing requirements on our short-term credit facilities. We enhanced our liquidity by increasing the size of our 364-day cross facility and extending its maturity through the end of calendar 2022. This now gives us a billion dollars in committed on secured credit facilities that are almost entirely on today from November eleventh 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 twenty twenty to age
And finished construction on the FM 100 project. We expect to see further Improvement of these metrics and closing. We had a solid first-quarter and the outlook for the year remained strong with that is closing at the operator to open the line for questions. You may press the pound key. Please stand by while we compile the survey roster.
Your first response is from Bryan Singer of Goldman Sachs, please go ahead. Thank you and good morning.
Morning, wanted to start on FM 100 but really more from an EMP perspective as FM 100 ramps up at the end of this year. Can you talk a little bit more about what goes into the picture from a duck recount and ultimately production perspective added the second ring and he's turned Development Area. How did the Ducks rigs evolved over the year and then importantly should we expect the production will go up, you know, keep except for Cuba, but for the new capacity.
You want to take that? Yeah, I'll take that. You know, you see the production increase if you go to it one of the slides in Our Deck, let me pull it up.
Yeah, if you go to slide twenty-seven and twenty-eight you sort of get a sense for what we're looking at as we go through the remainder of this year into next year long warranty of the production will certainly come out of the lwda. We're drilling around 25 Wells there this year completing I think around 30. So most of it will come out of the lwda but we may have additional available volumes if we need them in Lycoming and also in Tioga we have around a hundred million a day on a Dominion line that will connect us to Lighty South and if necessary, we can serve or utilize the production coming out of titled as well. But as far as the growth profile if you take a look at those two slides you get a pretty good feel for how we look,
Great. Thank you. And then my follow-up is with regards to some of the comments that you made on Lower carbon Ventures and efficiencies one is you mentioned in your comments on convincing customers to use Lots which is something that's been embraced some New York side. What do you see as the range of potential impact of customer efficiency or demand reduction in gas whether it's in your service areas are more broadly in the Northeast and then you talked on slide. I think Forty-Eight or so on on renewable natural gas, which you also mentioned in in your opening comments. And I wonder if you could just talk about what your key objectives are this year to promote not only this but the other low-carbon Ventures and low-carbon resources initiatives that you that you that you talked about.
Sure with respect to efficiency gains. I think over time it's a lot's going to depend on on technology from a you know, a heating equipment perspective and then how willingly customers are to embrace, um, you know further installation and and call it tightening of the above envelope and you know, our our team is is busy calculating what those impacts could be and I I don't want to throw it a number of where we think we could get to without getting it is a a meaningful reduction particularly on the the the tightening the envelope side. And you know, when you look at some of the technologies that are coming out whether it's a dead, you know gas-fired heat pump or or hybrid type system that uses air source heat pump with supplemental gassy the potential for Meaningful reduction in in usages.
You know and you point out in New York, we have a a revenue to coupling mechanism. So we're we're largely indifferent to well not largely. We are indifferent to our customers. You said with respect r n g I guess in the near-term since we really are early Innings on on it is is is first getting our box is hooked up to our system so that so that we're we're able to take the gas and uh and um and use it and then second working with the commission time to to allow for our gas purchasing department to include our energy in our our overall Supply mix. Those would be the two near term objectives and obviously as we go through time and in the industry becomes more mature it it'll go from there.
Thank you.
Thank you. Your next response is from assistant, please go ahead I just wanted to follow-up and Brian's question on black carbon in Dave appreciate all the comments on reducing carbon intensity and as we've had more clarity on energy policy. Thanks for sharing those details. But if I'm thinking about broadly as we as we find out where carbon policies evolved near-term if I'm thinking about it, it's conservation. You also mention modernization you give detailed on conservation, but is there a further opportunities on modernization that that could help reducing carbon intensity and I'm thinking about technology you said warranty would hydrogen be a much longer-term aspiration also.
Yeah, well hydrogen certainly long-term would be would be an opportunity to to reduce reduce emissions and birth. Yeah, when you look longer-term the best renewable generation sites happened to be very near our service territory. And and so it's certainly possible that the, you know, the excess generation from them could go towards a ugh hydrogen type, uh, production facility in terms of em ization on the Utility side, you know, we've been well both the authority and the the pipeline side we've been added for for a couple of decades in in modernizing our system. I think we we still have have room to go and at the end of the day on the Utility side can certainly get to and eighty percent reduction Rome.
2 to nineteen ninety levels on the pipeline side. It's it's a little bit more challenging cuz we have stack emissions from our our compressor stations that that we've got a dead guy to address but you know, I'm coughing over time will will find a solution, you know, whether it's your Technologies offsets or something else that has thought of got it and how do you view California and potential ramifications with with the changes in you know energy policy.
John you want to take that? Yeah, I mean certainly California is is a larger environmental footprint than our natural gas assets to but we recognize them up and you know, we actually now have a slide in Our Deck as well that we're looking to replace some of our power needs through building solar plants out there and and we've done that at North Midway a few years ago. It's proven to be very successful. We actually hooked up our office to solar power as well and we'll be moving forward with a what the plant in South Midway Sunset Lounge which is another key operation for production operations area for us.
Thanks, Sean John appreciate.
Your retirement and appreciate the comments that you made on Improvement and cost savings and efficiency post-acquisition last year. Could you comment a little bit on what you're seeing in terms of decline a wait on a combined basis, you mentioned earlier that potential Improvement and also any thoughts on service calls for the balance of this year that you're witnessing home and you're talking to climb rates in Pennsylvania or okay, okay, and you know pretty much Remains the Same quarter-over-quarter. We don't see a huge difference but it's in that twenty 23% range maybe a little bit lower some quarters depending on how how recently we brought on new pads, but around 20% decline range is what we see across our Pennsylvania assets and in terms of service costs, honestly, I think they'll remain relatively flat over the next six to twelve months. I don't see them going down this page.
If you are gas prices tend to be going an oil prices, but I think we're at least we're through respect to Senator. We'll we'll be able to keep our service cost pretty much flat.
Thanks. Appreciate the color.
Thank you. Your next response is from Holly Stewart.
Good morning. Gentlemen, Karen.
Maybe first start off by a big congrats to John John. Good luck in your retirement. We were all jealous month and it's definitely been a pleasure working with you all these years. Thank you. I appreciate that. I'll start off with you, you know on the on the Carfax I think for the first quarter. I mean really kind of light across the board as you sort of extrapolate it to the the full year guidance, but maybe focusing on Upstream specifically, how long should we think about that progression of spend throughout the next couple of quarters? Assuming we should see quite a bit of jump up into Q giving the rig add but just kind of wanted to to walk through this off with them. Yeah, that's exactly right is is you'll see an increase in our second quarter and then it should remain second to third quarter said remain relatively consistent with as we step into our
Fourth quarter and even first quarter of next fiscal year you'll begin to see that ramp up, you know as because we're deferring some of our completion activities fullback activity as a result of waiting for the turn on date of Life South will begin to wrap up those that activity level pretty much in. Our fourth quarter is what we see right now.
Sorry, I kind of got confused there. So a ramp up and spending and two Q flat and three q and then fourth quarter would decline know. We'll see even a first name. Okay? Yes. Yeah cuz there'll be a number of Wells that we're going to look to to complete in our fourth quarter of this fiscal year and first quarter next fiscal year depending on the turn on date palm yourself, obviously. Okay ramping into that that that pipe. Okay got it. I understood and then it maybe it appears that the that the free cash flow generous numbers actually went up pretty nicely. You know, I was kind of honing in on that 275 type of price even though you know, you you decrease your your gas price, you know overall in the guidance. So any any sort of color on this on what drove that free cash flow increase it certainly the increase in productivity.
Having the Tioga assets, you know for the entire quarter producing.
Our gathering obviously that goes into a hundred percent into our gathering business. And so that was a big plus and and we had a as you just pointed out. We had a low capex quarter off, you know, in terms of Seneca as a stand-alone. We we will not be generating the same free cash flow because we added that second rig as we go forward, but on a Consolidated basis we would continue to do so
Sure. Sure, and you know, I guess one one more for me if I could and this is either for for John or or for Dave, you know, you guys obviously just completed your your largest acquisition to date with the shell deal but there appears to be sort of more North East PA assets that are being talked about on the market. That's your appetite right now for for additional m&a.
Yeah, I think you know as we said on on prior calls that we would certainly be interested in in in adding acreage the areas that would be adjacent areas where we're we're currently active and in particular like home and County ideally the month, you know, what we would be, you know near us and have a gathering opportunity and you know, either come with ft or be able to be sold in into ft that we have already. So the extent that stuff comes on the market like that. We we definitely would be interested.
Thank you guys. Thank you, please press * 1 to withdraw your question, press the pound key.
Good morning, everyone enough to John your upcoming retirement.
So my first question is for a pajama with kind of the current ship about 50 until about twenty twenty-three or so. How long have you been in any discussions regarding increasing spending California from the ten million maybe getting back to the thirty million and then on top of that?
with a what does kind of a maintenance level program in California look like
Okay. Yes. We are already talking about adding development dollars back into California as we've seen over the last few months prices continue to improve I think recently. We're in the mid fifty level mid 50 plus and and we do have projects out there that makes sense in that dollar range are our struggle right now and which I don't think we'll hopefully wage last is is looking in fiscal 22 and Beyond it's still fairly low. I think last I looked is $50. So we're looking for that $55 to $60 range both this year next year and then we'll begin to add $30 back into California. I do not see only ten million in in spending on an annual basis out in California. I would prefer to get back up to that 20 to 30 million dollar range because we we do have two or three new farm and opportunities out there that that so far have been fairly successful and we'd like to get back developing and developing.
Those assets, huh?
As far as maintenance mode on out in California, you know, our our decline rate out. There is fairly low looking at anywhere from six around 6% plus or minus a couple having said that are typically that 20 million dollars a year is what's really needed to sort of keep our production flat out there. So I would say 20 plus or minus it a couple million.
and then my follow-up I was looking at the
in storage cutbacks
Is with the guidance between 250 and 300 is that kind of 50 million Delta? How much is that is down to the timing of started construction at the 100 and how much of it is just down to earth and other kind of Maintenance capex spending.
Yes, so most of it probably is is is due to the up and 100 project and timing of one of those when those costs hit.
Okay, perfect then make sense. Thank you all.
At this time, there are no further questions in the queue. I like to turn the conference call back over to Ken Webster for closing remarks.
I see the camera. We'd like to thank everyone for taking the time to be with us today a replay of this call will be available this afternoon on both our website and my telephone and Thursday Friday February 12th. To access the online. Please visit our investor relations website investor National Fuel Gas and to access by telephone call one 805-855-8367 and enter conference ID number 936-325-7016 clue. Conference call for today. Thank you and goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yep.