Q2 2021 National Fuel Gas Co Earnings Call
Good day, and thank you for standing by and welcome to the Q2 2021 National fuel gas company gas Ernie Company earnings Conference call.
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After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your Speaker today, Mr. Ken Webster Director of Investor Relations. Thank you Sir Please go ahead.
Thank you Brenda and good morning, we appreciate you joining us on today's conference call for a discussion of last evening's earnings release.
With us on the call for National fuel gas company are Dave Bauer, President and Chief Executive Officer, Karen <unk>, Treasurer, and principal financial Officer, and Justin lowest president of Seneca resources at the end of the prepared remarks, we will open the discussion the question the.
The second quarter fiscal 2021 earnings release and May Investor presentation have been posted on our Investor Relations website we.
We may refer to the materials during today's call.
We would like to remind you that today's teleconference will contain forward looking statements.
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.
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 with that I'll turn it over to Dave Bauer.
Thank you Dan good morning, everyone National fuel hedges.
Excellent second quarter with operating results of $1 34 per share up 38% year over year.
During the quarter, we saw the benefits of the ongoing expansion of our FERC regulated Interstate pipeline systems, including significant incremental revenues from our Empire North project, which went into service last September.
In addition, last summer's title of the County acquisition continues to exceed our expectations with gathering throughput and Appalachian production of over 45%.
The increased scale drove cash flow.
The sense to $4.
<unk> per share at the midpoint and increase of 35% and the prior year.
Across all our operations, we continue to successfully execute on our near term growth plans.
And 100 expansion and modernization project received its notice to proceed from FERC in late February and construction commenced in early March.
We finished the critical path tree clearing on schedule and construction is underway on both compressor stations.
We expect to begin construction on the pipeline portion of the project later this month.
Based on our progress to date, we're confident the project will be finished on time.
For a late calendar 'twenty, one and service day.
Once complete this project will generate about $50 million of annual revenue for us and along with Transco is companion Leidy, South project will provide Seneca with another valuable long term outlet for example Asian production.
With limited additional Appalachian takeaway capacity slated to come online and the near term. We believe the Senate. This firm transportation portfolio, which access is diverse and liquid markets will provide significant value and the years ahead.
Maximize the value of this new capacity kind of Kate as operating two drilling rigs and Pennsylvania with first production from its recent rig addition, and our eastern development area scheduled to come online just ahead of the Leidy, South and service day.
This timing will allow seneca to capture the premium winter pricing typically seen and the Transco zone six market.
This next leg of growth underpinned by the Aetna and 100 project positions us differently from our Appalachian peers. This.
And this project will enhance scale and profitability across our upstream gathering and regulated pipeline businesses and is a great example of the value of our integrated business model.
Switching gears the utility also had a good quarter the warmer than normal normal weather did have an impact on earnings.
Bad debt expense, which continues to trend a little higher was also a factor and Karen will have more to say on that later on the call.
Before moving on I wanted to take a minute and acknowledge the exceptional performance of our utility and pipeline operations teams during the winter heating season.
During which time natural gas service was available to our customers more than 99, 9% of the time.
And this isn't impressed and achieved impressive achievement. That's a testament of the hard work of our dedicated work force.
Across the nation policymakers are seemingly in a race to transition the nation's energy supply towards intermittent renewable resources.
However, the events the transpired during February of Superstorm, Yuri in Texas, and the Midwest clearly underscore the need for and all of the above energy strategy.
And this is particularly of the case and national fuel operating footprint, where the low temperatures the cripple, Texas for just a few days are really pretty much the norm for the three coldest months of winter.
And it becomes readily apparent that there is a long term need for reliable whether hard and infrastructure to serve the energy needs of our region and hyper.
And we believe the natural gas with its resilience and safely operating pipeline delivery infrastructure will remain an important part of the nations energy solution.
In March we published our utilities pathways to of low carbon future report, which demonstrate pretty convincingly that natural gas and that's associated infrastructure can in fact have a role and a low carbon world.
The report, which was developed using the findings of the study performed by Guy House and independent consulting firm evaluated scenarios for meeting New York state's aggressive decarbonization targets focusing on the interplay of energy efficiency electrification hybrid heating solutions and low carbon fuels to leverage existing utility infrastructure and.
And cost efficient solutions the.
The study validates that by focusing policy on and all of the above carbon reduction approach. We can achieve significant de carbonization that meets emissions walls, while preserving access to low cost reliable and resilient energy for consumers.
Also in March our utility announced greenhouse gas emissions reduction targets for its delivery system of 75% by 2030 and 90% by 2050, both from 1990 levels.
And the targets rely on our commitment to the continued modernization of our utility infrastructure, which to date has led to a reduction and EPA subpar W emissions of well over 60%.
Importantly, our regulators have been supportive of these ongoing modernization efforts, particularly in New York, where our system modernization tracker has allowed us to recover these investments and our system on a timely basis.
While we started with the utility national fuels and the process of developing a plan to reduce its overall carbon footprint across the rest of our operations.
This plan will include establishing incredible emissions reductions targets for our midstream and upstream businesses as well as enhancing our sustainability disclosures to include additional climate focused information and line with the Tcf the framework.
In conclusion national fuel is in great shape. Our income of 100 project is under construction and on schedule, which positions our pipeline upstream and gathering businesses for significant near term growth.
At the same time, our utility business continues to modernize its infrastructure, which will drive meaningful emissions reductions and provide an opportunity for ongoing rate base growth.
Looking to fiscal 'twenty, two and beyond our capital spending requirements will be substantially reduced and particularly in our FERC regulated pipeline of business, which will lead to significant free cash flow and increased financial flexibility.
And to that of half a century of dividend growth and a solid investment grade balance sheet and I think you'll find the tough to match national fuel long term value proposition.
With that I'll turn it over to Justin for an update on our upstream operations.
Thanks, Dave and good morning, everyone.
And I'd like to start by expressing my excitement to step into the president role at Seneca.
Seneca Couldnt be and a better place with the best in class group of employees decades of economic development inventory and attractive portfolio of takeaway capacity and the benefits of integration with national fuels other subsidiaries, providing the FERC Foundation.
Further we are aligning cynically the organization around sustainability and environmental leadership and are working towards targets for reducing the environmental impact of our operations and.
In summary, the outlook for Seneca is bright.
Moving on to the second quarter Seneca produced a company record $85 two Bcf per day.
Driven by increased highway county volumes from the acquisition completed last summer.
As well as growth and solid production results from our ongoing Appalachian development program.
During the quarter, we brought on line 13, new wells in Pennsylvania.
All of which were and our western development area.
Our operations team did a great job training. These recent wells online a few weeks ahead of schedule.
Allowing us to accelerate production during the winter months, capturing premium winter pricing.
And this increased our second quarter production, however over the balance of the year and as planned we expect modestly declining volumes with only one new pads scheduled to come online in late fiscal 'twenty one.
During the quarter, we also drilled 14, new wells 10, and the W day before and the EBITDA.
As we approach the online date for Leidy, South and the winter heating season, we expect to accelerate our completion operations.
And we plan to delay turning in line most of these new wells until early fiscal 2022.
Coinciding with the expected in service date of our new capacity.
With respect to capital we are forecasting the second half of the year to be heavier due to the increased completion activity and I just mentioned how.
However, our capital guidance range is unchanged.
We also continue to see the benefits of our increased scale.
With cash operating expenses dropping to $1 <unk> per Mcf.
A 14% decrease from the prior year.
Of note, we have realized a significant decrease and per unit G&A expense dropping roughly 25% over the past year, driven by our acquisition and ongoing development and Appalachia.
As the service costs, we have experienced limited cost inflation over the past few months, mostly and tubular.
And at this point, we do not anticipate meaningful increases into 2022 based on conversations with our contractors and suppliers.
In addition, we continue to make strides and improving our operational efficiencies, particularly entitled The County, where our operations team has cut Utica drilling time by 25% compared to our last track double of seven pad.
Given our significant inventory of highly economic development locations, and Taiwan County, and long term development plans, we expect to realize the benefits of these efficiencies per years to come.
On the marketing front, although pricing has been relatively volatile Seneca is very well hedged for the balance of the fiscal year with 88% of our East Division gas production locked in physically and financially.
We also have firm sales providing basis protection.
So all in about 95% of our forecast of gas production is already sold that.
These are relatively small amount of production less than 10 Bcf exposed to in basin spot pricing.
I also want to point out of recent project, our sister company and a P midstream completed.
Tying together the Covington gathering system with the recently acquired title of the gathering system.
This has significantly increased <unk> flexibility to move more gas to premium Dominion and Empire markets versus the weaker T. G. P 300 zone for market.
It's another great example of the significant value, we can capture as and integrated business.
As we look a bit further out and we've maintained our disciplined approach to hedging and already have 188 Bcf of fixed price firm sales Nymex swaps and Costless collars in place for fiscal 2022.
This provides seneca with downside protection, but.
That leaves the potential to generate significant additional free cash flow should prices move up.
Overall, we remain constructive on long term natural gas prices with LNG exports near all time highs, Mexico exports near all time highs and storage levels below both last year and five year inventories.
We expect these factors together with continued capital discipline by producers to lead to further strengthening of the natural gas strip and 2023 and beyond.
As Dave mentioned, <unk>, 100, and Leidy South both remain on track for a late calendar 2021 and service day and once complete we will provide a valuable long term outlet per senecas production from each of its core development areas.
This additional capacity sets us up for further production growth throughout fiscal 2022.
Thereafter absent the ability to enter into additional long term firm sales or firm capacity that would result in strong realized prices Seneca expects the shift into a maintenance to low growth production mode.
Our focus will continue to be on generating significant free cash flow, especially when combined with the cash flows of the company's wholly owned gathering assets.
Moving to the regulatory front.
While there has been some recent pronouncements and California related to oil production and extraction.
It is important to note the Seneca, California operations do not utilize fracking.
And thus while we are closely monitoring the regulatory and legislative landscape, we do not expect any significant impact to our operations based on these recent developments.
<unk> has long been the case, California, it can be a challenging regulatory place to conduct business.
However, we have.
And we've been able to successfully navigate the changing regulatory environment, while generating strong returns on our oil producing assets and anticipate that to remain the case.
We expect our annual capital levels, and California will be and the $10 million to $20 million range over the next few years absent further increases and the longer term oil strip.
Additionally, so it continues to look for opportunities to invest and solar facilities in California to power, our production operations and to reduce our carbon footprint.
At present, we of solar facilities already online at our North Midway Sunset field, and our Bakersfield office.
And we are constructing another facility and south midway Sunset, which will provide about 30% of our field electricity use.
And with our Appalachian natural gas operations centered on what most would consider to be the lowest emitting shale basin in the U S. We are well positioned to be and upstream leader and ESG.
And with that I'll turn it over to Karen.
Thank you Justin and good morning, everyone National fuel and second quarter GAAP earnings per gallon and 23 per share when you back out of items impacting comparability principally related to the premium paid for the early redemption of our $500 million December 21 maturity of our operating results of $1 34 per share a significant.
Can increase over last year Dave.
David and Justin and I 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 the year.
First as I.
I alluded to we were active and the capital markets a few months ago and February we issued 500 million of too.
295% 10 year notes and <unk>.
Proceeds from which were used to fund the early redemption of our 500 million dollar of four 9% coupon on December 21 maturity.
And that transaction was very well received by the market with our board and reaching more than eight times oversubscribed that level of demand allowed us to achieve our lowest ever coupon for 10 year notes.
Treasuries have moved materially higher since then so overall of this looks like of great transaction for us.
With our next maturity not until early 2023, we have a nice window, where we don't need to be active and the capital markets.
Combining this with our $1 billion and short term committed credit facilities, and our expectation of meaningful future cash flow generation, where and a great spot from a liquidity position.
While this debt issuance will translate into $2 $5 million of.
Interest savings per quarter going forward, the fiscal 2021 impact of somewhat muted by the overlapping periods during the second quarter, where both of the redeemed notes and the new issue around our balance sheet.
Before turning to our outlook for the remainder of the year just the brief update on customer payment trends and the utility.
As we stated in terms of the beginning of the pandemic are than a year ago, we expected the biggest headwind on customer and payment trends to occur as we got through the winter heating season.
For the past few months, we havent seen a modest increase from historic levels of customer non payment.
As a result, we have continued to accrue incremental bad debt expense and intend to do so for the remainder of the year.
At this point, we believe that additional reserves will be adequate to handle potential collection challenges, we may face in the coming quarters.
As it relates to the rest of the year based on our strong second quarter results. We've increased our earnings guidance to a range of $3 85 to $4 five per share up 15 cents at the midpoint.
Given the we are now more than halfway through the year, we continue to refine our guidance assumptions the vas.
The majority of them are spelled out and the earnings release, but I do want to highlight some key operating expense assumptions across each of our business.
And our regulated companies consistent with our earlier guidance, we anticipate O&M expense the up approximately 4% and both our utility and pipeline and storage segment.
And the utility as I mentioned earlier, we are projecting a more conservative expense assumption as it relates to our bad debt reserves.
And as being largely offset by ongoing expense savings as we remain focused on keeping our cost structure low.
And the pipeline and storage storage business and the bulk of the year over year increase is back loaded and the second half of the fiscal year.
For our nonregulated.
The regulated businesses, we now expect <unk> full year LOE to range between 82, and 84 cents per Mcf a day.
A penny lower at the midpoint of our revised guidance range.
While our alloy rate was lower than this for the first half of the year as we look to the balance of the fiscal year, we expect to see slightly higher LOE <unk> and the increased levels of maintenance of the spring and summer months.
And the gathering side of our business costs are in line with prior expectations and we still anticipate O&M.
To be in line with our earlier nine per Mcf guidance.
Lastly on the expense side of the equation similar to a couple of our other assumptions, we'd expect senecas per unit DD&A to increase of and the second half of the year relative to the first two quarters.
We had some positive revisions to our reserve bookings and the quarter that had the effect of reducing RGD and expense.
As we look to the back half of the year and beyond.
We would expect and DD&A trend closer to the low 60 per Mcf the areas.
All of our other key assumptions are fully laid out and the earnings release and Investor Day that was published last night.
With respect to the to consolidated capital spending all of our segment ranges remain the same and we are still projecting between 720 and $830 million.
For the fiscal year.
There hasnt been any other material changes from a cash flow perspective, and as a result, we expect to live within cash flow. This year. When you consider the proceeds of our timber sales and our expected dividend payments.
We are well hedged for the remainder of the year. So any changes in commodity price prices should have a muted impact on earnings and cash flows.
In closing we had a solid first half of the year and are optimistic about the direction, we are heading with.
With that I'll close and ask the operator to open the line for questions.
And at this time, if you'd like to ask a question. Please press star one on your telephone keypad.
That is star one.
And your first question comes from Holly Stewart from Scotia, Howard Weil.
Good morning, gentlemen, good morning, Karen.
Hey, good morning.
Maybe first one for for Kevin or Dave.
Looks like the I think at slide seven and the free cash flow guidance from from the non regulated businesses went up modestly.
First is the prior expectations.
Curious drivers behind that I mean, I know, we had a better <unk>.
Better second quarter, but anything else that might be driving.
Some of that some of that better outlook.
Yes, and that really Ali I mean, mostly the <unk>.
The results for.
The second quarter and.
And joining up of our of our marketing.
The marketing of Mark that you all are of our forecast assumptions.
And the release.
Okay. Okay.
And maybe just and one one for you just bigger picture.
And he had a big M&A deal and your neck of the Woods announced yesterday, so I'd be remiss not to.
To ask you guys kind of what Youre seeing out there and and maybe how you feel about valuations and sort of the evolution of the M&A market. Since you did your deal.
Last year with shell.
Yeah sure Ali.
I guess first I'd start by just.
Congratulating and our friends at Ulta and are on a great result, the.
The Anadarko assets, where and when also originally bought those those are the ones that we thought were very attractive as well and.
They've obviously been very successful with them and.
And then note as well we're looking forward to working with EQT, We've got a number of <unk>.
Shared operations and Lycoming County out there so we'll be partners.
Overall, I think it's and alignment with the continued consolidation and the basin, which would which we would and <unk>.
<unk> will continue.
And certainly highlights the value of the acquisition.
And we're fortunate and our timing of that and the acquirer, but we picked up.
Awesome regulated assets or excuse me the OSM integrated assets with significant gathering midstream infrastructure water assets.
And a lot of a lot of development inventory.
No.
And we're excited to have that we're excited to have that done and we're enjoying the benefits of it today and will continue for a long time.
Okay, Great maybe maybe.
And just the one.
One other one for me and this is more just nuance here and I can follow up with Ken If you don't have it at your fingertips, but you.
You mentioned most of the tills being sort of done for for the first half of FY 'twenty. One can you give us those numbers for I guess and total for the first half of the year and then I think you mentioned one more pad.
And that's expected so curious and number of number of wells on that pad.
So Holly yeah, I'll I'll defer to kind of follow up on the exact number and.
In the first half.
The final pad, we have remaining this year to bring online it's six wells in Lycoming County, which will happen late in the fiscal year.
In line with what I was suggesting and the and the remarks. There. We really are will be very active and our completions operations throughout the summer and into the fall and even into the next spring and all of that activity is really aligned with the leidy South and service.
But we're really we're really looking to hold back some of that production until we hit those premium winter months too.
And as we look to utilize our new capacity on Leidy South.
Yes, no that makes sense alright, I appreciate it.
Yeah.
Your next question comes from Zach Parham from J P. Morgan.
Yes.
Thanks to key production was very strong of a bit above our expectations you talked a little and your prepared remarks about the declining and the back half of the year can you just give us some detail on kind of the magnitude of the declines you're expecting and then there is clearly a step up in production and fiscal 'twenty, two with Aetna and 100 coming on so maybe.
Some detail and help production should trend through 'twenty two.
And so we haven't guided 22, yet, but really the what we try to do is target our production as best we can and alignment with our operations plan to.
And to have peak production and flow back recurring and the peak winter months and when the market is the best and so we really had engineered and designed our program during the fiscal 'twenty one to capture a lot of that and so we had and our operations team did a great job accelerating some things to get the tail end of the winter on some some pads so that just <unk>.
A little bit of an acceleration and the first half of the year and then now we do have that one pad, but we kind of slow down as we get into Q1 and.
Q2 of fiscal 'twenty, two we will absolutely be bringing online a number of pads.
We haven't guided 22, yet, but I think big picture of what to what I would.
Advised to expect is kind of a gradual increase throughout the year and so it'll be a year, where beginning to and will be more or less continuously growing so kind of of different.
Cadence of production versus what Youre seeing here in fiscal 'twenty one.
Got it thanks, Jeff and that's all for me.
Sure thing.
Your next question comes from Gordon Loy with J P. Morgan.
And good morning, all and thanks for taking the question.
So I was looking at him.
The slide 33 and.
Yes.
And of the temporary increase in Appalachia other alloy.
And so I guess I was just trying to figure out once you kind of a onetime cost.
To bring kind of quite of assets in line with San Antonio.
Very well and kind of the other although we didnt Appalachia turned back down and sort of like the seven cents per Mcf the range or what are you kind of get.
A further uplift just from kind of the increased scale.
Sure so.
The.
The small incremental increase is really related to some of the work we're doing particularly on the newly acquired properties, where we're really bringing those up to to Seneca standards and the.
The other thing that that definitely.
Plays into things a little bit is just as you have more wells you see you of a little less production per well and some of your fixed costs typically.
Don't move as much and so you can have a little bit of creep, but I definitely see that.
See that other low line or is that other elderly box.
And that say seven to nine range going forward, we're a bit heavy right now largely because of the incremental work, we're doing bringing those properties of the scenic operating standards.
Alright that makes sense my my.
And my follow up kind of Christopher recipient of the other charges.
The other Oliver yes, its a whole percentage of house.
Basically trended down pretty consistently since 2018.
And I'm, assuming some of that is down to kind of lower activity in California by bandwidth.
And of activity of shifting more and more to Appalachia is there kind of.
Kind of long term run rate that you guys are.
Are expecting.
Or kind of some of you continue to expect the typical of kind of small incremental reduction.
Yes, so the fundamental driver of there is really the relative contribution of our Appalachia gas production versus our California oil production just on a unit basis the.
The California law and is higher its the nature of the operations out there.
So as our production continues to grow and Appalachia relative to California, you should anticipate that that great wedge on the left hand side of the slide to continue to compress.
Okay, perfect and that makes sense and congrats on the quarter.
Thanks, Thank you.
And if you'd like to ask a question. Please press star one on your telephone keypad and your next question comes from Carol and channel with Goldman Sachs and company.
Hi, Good morning. This is Caroline on for Neil Mehta, Thank you for taking our questions.
Good morning, I first just wanted to circle back on the production and Capex trajectory outlook and given the timing of production for the rest of the EBITDA.
Production will decline as the hold back some of that to bring the wells online with the Mighty Falcon complete and it seem like this implies pretty favorable capital efficiency as the capital has already spent ahead of the stronger growth of.
And the winter just I know, it's early but wanted to get your initial thoughts and what that means from a capital spend perspective and just.
Fiscal year, 2020 two.
Sure so.
The the way to think about it is where we added a second rig back in January.
And that activity is really the reason to have the the increased activity is all about growing into to the new capacity. So.
And we've been actively drilling those wells drilling additional wells.
And that the activity will continue and that activity will continue certainly throughout fiscal 'twenty two with the two rigs running.
And then the completion side of it.
That gets heavier as we get into the second half of this year as.
As we start two to complete the wells, we have that are docs today.
And that activity, though will continue into fiscal 'twenty, two so fiscal 'twenty two will be a.
Unlike fiscal 'twenty one.
We will have two rigs running the entire year and.
And we will have a higher level of completions operations ongoing throughout the year as we as I described earlier as we kind of go from the beginning of the year to the end of the year seeing the.
Cadence of production growth being generally consist of growing each quarter likely growing each quarter throughout the year.
We fully utilize all of our our firm sales and FERC transport capacity.
So big picture the way to think of it is the activity levels and 'twenty, two will actually be a little bit heavier even than fiscal 'twenty, one and you get beyond there and Thats, where you start to see that roll happen and youre at much higher production levels and the decreasing capital levels absent and ability to access additional premium.
Markets through firm sales of our firm transportation.
Okay. Great. That's helpful. Thank you and then just my follow up is you have you have and unique perspective, given the integrated business model and during the prepared remarks, you mentioned the favorable outlook for Nat gas and for Ngls, Okay, but just wanted to get your thoughts more specifically around what youre seeing from the local.
And gas demand price and takeaway perspective, and how that might inform future growth decisions and then on the pipeline side just any.
Update latest you can provide on the northern access project and how is that all of that would factor into future growth.
Well I'll be happy to start on kind of our general views on on the gas markets and then I'll kick it over to Dave to talk about northern access.
Certainly as it is.
As it relates to kind of where where we see things today I mean, yes, we're constructive.
We are and a better place certainly than last year, that's an understatement.
But we feel like we've got the Leidy, South project coming on and anticipated to come on anyway at the end of this calendar year that adds additional takeaway capacity, which sets up for some improvement and the in basin pricing.
And overall generally at least among the the public operators had been pretty prudent about the overall level of capital spend and seemingly the.
And <unk>.
Move towards generating free cash flow and.
And doing what's right by the shareholders and so.
I think that activity probably continues and we should see.
Basis improve when <unk> comes on and then really what happens after that is going to be more about what.
What activity levels look like and overall.
And the levels of production, particularly as it relates to our production and.
Generally the northeast and central P. So lines like.
Like the Tennessee 300 line.
And Transco and Dominion.
And then with respect to the to the pipeline side and really nothing.
Nothing new to report on on the northern access front.
We did have another victory in court where the.
The the Appeals court.
Upheld FERC position and finding waiver on our.
Our 401 of water quality certificate of both.
But the state still has the ability to further appeal that and based on their past history, we fully expect them to do that so there's a bit of time, but still going to play out.
On that front and.
And once the litigation runs out.
<unk> the market and.
And update you then.
Great. Thank you.
Yes.
And there are no further questions at this time I would like to turn the conference over to Mr. Ken Webster for closing remarks.
Thank you Brenda wed 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 of our website and by telephone and will run through the close of business on Friday may of the 14th.
The access the replay online please visit our Investor relations website at Investor the National fuel gas dot com and to access by telephone call. One 800, 580, 580, 367 and enter conference I'd number 252468.
This concludes our conference call for today, Thank you and goodbye.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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