Q1 2022 National Fuel Gas Co Earnings Call
Good day, Thank you for standing by and welcome to the first quarter 2022 national fuel gas Company earnings Conference call.
At this time all participants are in I'll, just say it only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone keypad.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to Brad than has been the director of Investor Relations. Thank you. Please go ahead.
Thank you Blue 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 from 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 to questions.
The first quarter fiscal 'twenty two earnings release in February Investor presentation have been posted on our Investor Relations website.
We may refer to these materials during today's call.
We'd 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 Brandon good morning, everyone.
<unk> had an excellent start to the fiscal year with adjusted operating results of $1 48 per share an increase of 40% from last year.
Higher commodity prices and an increase in Appalachian natural gas production drove the strong results.
On the production side, we leveraged our integrated upstream and gathering operations to bring several wells online a few weeks earlier than our initial expectations.
Which allowed us to take advantage of the strong pricing at the start of the winter.
This is largely a matter of timing moving the pads forward in the schedule does not have a material impact on our overall production expectations for the year.
However, capturing higher prices at peak initial production rates, obviously enhances the return profile for those wells.
As noted in last Night's press release.
At the midpoint, we are increasing Senate cause fiscal 'twenty, two capital spending guidance by about $38 million or 9%.
Roughly half of that increase was driven by incremental cost inflation beyond what was included in our initial guidance range.
This should come as no surprise, given the persistent supply chain issues across the economy.
The other half is incremental capital designed to further optimize the production from our two rig program, which we think is a good use of capital given the strength of natural gas prices and the depth of our drilling inventory.
In particular, we plan to more frequently incorporate a top hole rig in our operations, which allows us to reduce drilling time and complete a few more wells each year.
We also plan to use tighter stage spacing on a number of wells throughout the year.
Obviously this isn't a step change in.
And activity level, but it should improve our growth rate going forward.
We've previously talked about maintenance to low growth at Seneca with these tweaks to our development approach. We now expect a growth trajectory in the mid to high single digits area on average over the next few years, which should enhance our cash flow generation. It not just Seneca, but also our gathering business.
Justin I'll provide more details on senecas updated production and capital plans later in the call.
Turning to our pipeline and storage business in December we placed our FM 100 project in service on time and substantially under budget.
Project costs are expected to be $230 million more than 15% under our initial cost estimate of $280 million.
As I've said in the past this project in conjunction with Transco is companion Leidy South project provides a great outlet for 330 million a day of Senecas production and is the perfect example of the benefit of our integrated business model.
And then 100 was the largest project in our company's history and wouldn't have been possible without the hard work and dedication of the many employees and contractors who work on it.
I'd like to say, thank you to everyone who made it a reality.
Looking to the remainder of fiscal 'twenty, two and then into fiscal 'twenty three our focus on our regulated pipeline business will be on <unk>.
System maintenance and modernization.
On an annual basis, we expect to spend about $50 million on maintenance and another $25 million to $50 million per year on average on modernization efforts, including our emission reduction initiatives.
At this level I expect great base will grow modestly say in the low single digit area.
However at this level of spending we do expect significant free cash flow from this business in the $100 million per year area on average.
We will continue to pursue expansions of our system, though in the near term those will likely be of the smaller variety on our line N and Empire systems.
The anti natural gas sentiment of the current administrations in Albany, DC and elsewhere is certainly making larger scale expansion projects challenging but.
But I firmly believe new pipeline infrastructure will be needed if the country is serious about achieving its emission reduction goals.
All too often policymakers pass up actionable projects that can make a real difference today.
There are dozens of electric plants in the Midwest that use coal and millions of homes and buildings in the northeast that heat with you oil all of which can be easily converted to natural gas.
Doing so would not just lower emissions by 30% to 50% would also reduce energy bills.
Investing in natural gas infrastructure would also improve electric reliability many.
Many believe we ought to electrify everything, but adding electric demand while under investing in Baseload generation and hoping intermittent renewables will be there to save the day is slowly eroding the reliability of the electric grid.
The European Union, which is several years ahead of the U S. In its efforts to Decarbonize. The economy clearly recognizes the importance of natural gas. So much so that it's committing to new pipelines and even proposing to add natural gas to its taxonomy of quote Green energy.
I'm optimistic the U S will one day reach that same conclusion and when it does national fuel and the rest of the pipeline industry will be there to build a much needed infrastructure.
Moving on to our utility business the weather in the first quarter was warmer than it's been in quite a while 24% warmer than normal.
But January has been a different story with whether thats been significantly colder than normal.
Nevertheless, despite the recent bout of cold weather on balance we expect the full year will be warmer than normal which will cause our utility margin in pennsylvania to be a little lower than was reflected in our prior guidance.
On the cost side of things like many companies and industries, we are seeing some general inflationary pressures.
Cost for materials and services, including contractors are all contributing to higher than anticipated costs in our utility and pipeline businesses.
We now expect O&M costs at those operations will be about 4% to 5% higher compared to last year.
We expect to see similar increases in the cost of our capital projects.
Labor shortages have plagued the broader economy, but our team has done a great job lining up contractors and as such we don't have any concerns with our planned construction schedules.
Switching gears most of you know that New York State is enacted significant climate legislation with its climate leadership and community Protection Act that was passed in 2019.
This past December the climate Action Council published for comments a draft scoping plan that describes how the state will go about achieving its aggressive emission reduction goals.
The full document including exhibits totaled about 800 pages, but the message can be summed up rather succinctly.
Electrify everything at any cost.
Transportation heating cooking commercial industrial processes all of it.
Putting aside the cost to consumers, which is an incredibly important considerations that the draft scope and plan largely ignores.
What's particularly concerning the recommendation to begin phasing out affordable reliable fuels like natural gas almost immediately.
Well before the grid itself is green and more importantly, well before it is clear that the electric grid can actually support the AD electric demand that would result.
The scoping plan readily acknowledges that even after an unprecedented build out of renewable generation and battery storage.
By 2040, there still remains a shortfall of 15 to 25 Gigawatts of peak day generation that cannot be met with existing renewable technology.
And that is a startling amount of generation is greater than the total amount of electricity that's being generated in the state as we speak today.
If we electrify all of the states heating load.
The electric peak day will almost certainly shift to the winter. So it's it's almost certain that the shortfall in generation would occur when we need it the most on the coldest days of the winter.
In a state where winters can be brutal, especially in our service territory, where peak day temperatures can be 50% colder than downstate New York It makes little sense to put all our energy eggs in one basket, particularly if there are holes in that basket that needs to be plugged in order to ensure reliability.
Perhaps one day the holes will be filled but in the meantime, and all of the above emissions reduction strategy like the one we proposed in our pathways to a low carbon future report makes a lot more sense.
Through a combination of energy efficiency selective electrification hybrid heating solution and the and the deployment of LOE and no carbon fuels like green hydrogen and renewable natural gas, we can leverage existing utility infrastructure to achieve significant de carbonization.
That meets.
But not only meets the state's emissions goals, but also preserves access to low cost reliable and resilient energy for consumers.
In closing of the underlying fundamentals of national fuel are very strong our deep inventory of economic wells low cost operations and strong outlet for natural gas prices position us to deliver continued growth at Seneca and a few midstream at.
At the same time, the completion of FM 100, and ongoing modernization of our infrastructure will provide rate base and earnings growth in our regulated subsidiaries all of which will lead to significant free cash flow generation in fiscal 'twenty two and beyond.
With that I'll turn the call over to Justin.
Thanks, Dave and good morning, everyone.
Seneca kicked off fiscal 2022 with a strong first quarter the startup of our 330 million per day of capacity on the Leidy South project provides a valuable long term outlook for Appalachian production.
With good visibility on project timing, we began ramping up completion activity last year, allowing us to turn in line 24, new wells during the quarter nearly all of which came online earlier than projected. In addition, operational curtailments came in lower than forecasted as our team found innovative ways to keep our gas flowing.
For example, we were able to avoid shut ins during station maintenance using temporary compression and bypass loops.
This truly coordinated effort between our upstream and gathering teams allowed us to maximize production and enhance returns during a time of very favorable pricing.
These efforts drove production to 85 Bcf for the quarter.
A 7% increase sequentially.
And allowed us to maximize the value of our leidy south capacity from day one.
With our growing base of production, we remained focused on reducing risks, while retaining upside through optimization of our marketing and hedging portfolio.
Our focus over the past few months has been on layering in financial hedges for the near term, while adding firm sales, mostly fixed price over the longer term give.
Given recent natural gas price volatility and favorable skew our hedging strategy included adding 75 Bcf of Costless collars with floors of $3 20.
Mostly targeting our fiscal 2023 and 2020 for production.
We've also added roughly 75 Bcf of long term fixed price firm sales contracts for fiscal 2024 and well beyond bolstered.
Bolstering our existing firm transportation portfolio and locking in strong economics, as we move towards modest growth.
Regarding our overall activity levels as Dave mentioned, we're maintaining our two rig program, but have increased our top hole rig work, allowing us to accelerate development within our tayo acreage and further enhancing expected consolidated returns.
Our top hole rig program will reduce drill times by three to five days per well, allowing us to drilling complete more wells per year, while also lowering our drilling costs on a per foot basis.
We are also planning enhanced completion designs for some of our pads tightening stage spacing from 200 feet to 150 feet. This incremental investment generates extremely attractive returns that payback in a matter of months.
Overall these activities further optimize our development program, increasing our ability to generate long term sustainable free cash flow.
The additional top hole rig activity and completion enhancements are expected to drive roughly half of our fiscal 2022 capital increase and we expect to see the majority of the production benefit in fiscal 2023.
With growth in the 10% area compared to this year's forecasted production.
Also driving our capital guidance modestly higher is inflation.
We talked previously about overall inflation in the context of mid to high single digits, which we expected to largely mitigate through operational efficiencies.
While we are fully realizing those efficiencies cost for certain services and materials have risen beyond our prior estimates and our continuing headwind.
We now expect our overall drilling and completion expenses to be up 10% to 15% from the prior year.
So our operational efficiency efficiencies.
<unk> this impact to the mid to high single digits.
While we've locked in our rigs for longer term contracts cost for labor trucking completion spreads in certain materials like tubular are still rising.
Despite these challenges our procurement team has done a tremendous job temporary cost increases where possible and ensuring we have material and service availability to keep our operations on schedule.
Putting these items together, we've increased the midpoint of our capital guidance by $37 5 million to a range of $425 million to $500 million.
Moving to production cadence for the remainder of fiscal 2022, the bulk of our new wells coming online are scheduled for the spring.
As a result, we expect our fiscal second quarter to be relatively flat to slightly up compared to the first quarter.
From their output is expected to ramp into the third quarter and then level out just shy of one bcf per day.
We've modestly increased our production guidance to a range of 340 to 365 Bcf to.
To account for this revised cadence and incorporating the strong results of our first quarter.
At the midpoint of our updated guidance, we have hedges and fixed price firm sales in place for nearly 80% of our expected remaining fiscal 2022 natural gas production.
We have another 13% with basis protection that is not hedged, which leaves less than 10% of expected production exposed to in basin pricing.
We've been opportunistic with our marketing portfolio over the past few months when prices rally locking in favorable basis differentials and creating price certainty at great prices.
As I discussed last quarter, we've adjusted our development plans to increase activity within our titled the County footprint.
We recently brought online a four well Utica pad and track Double-o seven.
Which included laterals that extended into the acquired acreage.
Our newly combined contiguous acreage position allowed us to optimize our well spacing and lateral lengths and the results speak for themselves. This pad has been producing at almost 80 million a day since late November .
We have two additional development pads entitled they're expected to come online this spring.
Five well Utica patch in the northwest and a six well Marcellus pad in the South East.
Developing these pads, including modifications to existing gathering infrastructure less than 18 months. After we closed the acquisition is a testament to the outstanding job, our upstream and gathering teams are doing and.
And we have well over a decade of development running room on this prolific acreage.
While our operations are moving along really well we've also taken great strides in our sustainability initiatives.
Starting with our California operations, our new South Midway Sunset Solar plant is expected to go in service very soon.
And we will offset 30% of the field's power needs.
We are also moving full speed ahead with a new plant at South lost Hills and target in service later this year.
And our team has adjusted and refocused our steaming operations, resulting in approximately 15% less steam fuel consumption with dual benefits of lower LOE and reduced cotwo <unk> with minimal impact to production of <unk>.
True win win.
Moving to our Pennsylvania sustainability efforts earlier. This month, we achieved certification of 100% of our Appalachian production under accrual origins EDA 100 standard for responsible energy development.
As a reminder, this framework is a series of rigorous environmental social and governance performance targets.
Achieving certification is a validation of our long standing culture of environmental stewardship and community engagement and allows us to differentiate our responsibly sourced gas in the marketplace.
Additionally, we are working with project Canary to certify 121 wells, which produced approximately 300 million per day under the Trustful certification.
In November we deployed project Canary continuous monitoring devices on three producing pads and we expect to complete this certification process in the next few weeks.
These efforts with Echo origin and project Canary are not only important to us from a sustainability perspective, but we believe they will also benefit our long term marketing efforts.
In the near term, we think are responsibly sourced gas designation will give us a competitive advantage and allow us to create value by selling some of our production at a modest premium.
Longer term, we think that many buyers utilities or otherwise will require this certification from producers to meet their own sustainability initiatives.
Finally, we've completed our comprehensive emission study on emissions associated with various types of completion equipment. This study done in conjecture conjunction with next year in U S. Well services is two key takeaways.
First it confirm that increasing utilization of natural gas in place of diesel fuel significantly lowers ghd emissions intensity with 100% natural gas reciprocating engines being the clear winner of the equipment tested.
Second as we displace more and more diesel consumption with natural gas the fuel costs of our completions are expected to be substantially lower for example, moving from 100% diesel to 100% natural gas fueled completions would reduce annual fuel cost by more than 60% for each frac.
Spread.
This submission study along with our assessment of equipment reliability and cost will guide our decision making going forward.
On the heels of this study we are redoubling, our efforts to increase the use of natural gas to fuel our drilling and completion operations.
National fuel is uniquely positioned to do this more efficiently than many of our peers given our focus on consolidated upstream and gathering development.
Our teams have worked in lockstep to accelerate the development of key gathering infrastructure to ensure we can utilize fueled gas in nearly all of our operations.
We will continue seeing the benefit of increased diesel substitution in our overall emissions intensity in the years to come.
This is just one of the many examples of the national fuel team collaborating to stay on the leading edge of emissions reduction initiatives.
In closing as we look out over the next few years Seneca is in a great position.
The completion of Leidy, south and execution of additional long term firm sales contracts support the next leg of growth for Seneca and gathering.
With a strong natural gas price backdrop, and additional takeaway capacity, we are moving forward to take advantage of our deep inventory of high quality acreage by modestly toggling up activity.
This added growth now expected to be in the mid to high single digits over the next several years enhances our capital efficiency and long term free cash flow generation.
That coupled with our laser focus on sustainability position Seneca for continued success.
And with that I'll turn it over to Karen.
Thanks, Justin and good morning, everyone.
As Dave mentioned National feels adjusted operating results for the quarter were $1 48 per share an increase of 40% from the prior year.
The increase was primarily in our E&P and gathering segments, driven by both higher commodity price realizations and increased Appalachian production.
As it relates to the former tightening supply demand fundamentals have strengthened commodity prices as a result, our natural gas price realizations were up 18% from last year, while crude oil realizations were up over 25%.
Combining this with a 7% increase in total production, which has a corresponding benefit to our gathering throughput.
<unk> between the segments were up 43 per share.
And our regulated segments earnings were flat compared to last year as the FM 100 commenced service in December we started to see the benefit of the projects show up in our results recognizing just under $3 million of revenue during the quarter.
As a reminder, the expansion portion of this project is expected to generate annualized revenues of $35 million.
In addition, we have a $15 million per year of revenues commencing in.
In April related to the modernization component of the project.
At the utility we continue to see the growing benefits of our system modernization tracker in New York, adding about $1 million to margin during the quarter.
Going the other direction was the approximately $2 million impact of warmer weather in our utilities, Pennsylvania jurisdiction, where we do not have the benefit of a weather normalization clause.
Temperatures on average were 8% warmer than last year, and 24% warmer than normal in Pennsylvania.
As we look to the remainder of the year, we are increasing our earnings guidance to a range of $5 20 to $5 50 per share an increase of <unk> 10 per share at the midpoint.
There are a couple of key drivers worth noting.
First we are truing up our commodity price assumptions to better align with the current forward strip.
Our Nymex natural gas price.
<unk> has been revised to $4 50 per annum Btu. We previously were guiding to $5.50 from January to March and $3 75 for the last six months of the fiscal year.
Pricing has had a healthy dose of volatility as of late for.
For reference our earnings while move up by <unk> <unk> for every 25 cent change in pricing for the remainder of the year.
We've also moved our Wty price assumption to $80 per barrel up $5 from our previous guidance.
A $5 change in oil impacts earnings by <unk> <unk>.
The other two notable changes around the cost side of things first at Seneca, we are reducing our LOE guidance by <unk> <unk> per M. Cfe.
Now projecting a range of 81 to 84.
This is largely a function of lower steam fuel costs in California that Justin referenced earlier.
On the regulated businesses, Dave discuss some of the inflationary headwinds we are facing we now expect O&M costs to be up approximately 4% to 5% versus last year just to remind.
Mind, everyone. We had a one time favorable benefit of about $4 million to pipeline and storage O&M in fiscal 'twenty, one that will not recur this year.
Outside of this dynamic as well as the costs to operate at a 100 underlying O&M costs are expected to be up approximately three 5%.
Moving to capital given the dynamic Stephen Justin discussed earlier, we have revised our consolidated capital expenditure guidance.
To a range of $665 million to $810 million.
An increase of $37 $5 million or 5% at the midpoint.
Bringing this all together the balance sheet is in great shape, and our cash flow projections remain strong.
We previously discussed funds from operations exceeding capital spending by $300 million to $350 million in.
In spite of the increase in our capital guidance, we still anticipate being in that range generating free cash flow well in excess of our dividend.
This level of free cash flow will continue to improve our leverage metrics for the 12 months ended December 2021, we were approximately two five times levered from a debt to EBITDA perspective.
As our EBITDA grows and we continue to generate free cash flow.
Expect this to trend closer to two and a quarter times over the next 12 months.
While there are no hard and fast rules with the rating agencies, we are well positioned to work our way toward mid triple B metrics over the course of the next year or so depending on how commodity prices play out.
In closing despite the inflationary and weather headwinds the first quarter was a strong one national feel it's projecting to generate meaningful free cash flow, which will further strengthen our investment grade balance sheet and positions us well for the future.
With that I'll ask the operator to open the line for questions.
Thank you as a reminder, SASSA question, you will need to press star one on your telephone.
And that is star one to ask a question to withdraw your question just press the pound key.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Zach Parham for Wisdom JP Morgan Your line is open.
Hey, Thanks for taking my question.
First off we've seen a delay on that new pipe out of Appalachia production numbers for the basin seem declined in the year and cynical as part of that.
I know youll, mostly locked in near term volumes, but just curious on your view on local basis it.
It looks like Youre, assuming 85, so thats helpful.
Actually the guidance for Appalachian spot, but just any worries on that why it'd be out further or even the industry potentially getting into a situation where some producers have the shut in volumes similar to what we saw a couple of years ago, just general thoughts on basis really.
Sure Zach.
We.
We are pretty much locked in at least as much of our in basin exposure as we'd feel comfortable with so we're less than 10% exposed to any sort of.
Massive blowout in basin and that's in part with our new Leidy, South capacity and it's in part due to some of our efforts along marketing to protect that.
It's hard to say.
Exactly what will happen with with basis this summer.
It depends where we and of course, the winter and what storage levels look like and some of it will depend frankly on on what other other producers are doing.
In terms of our Rover activity levels, we're really anticipating production, it's pretty similar to where we were before at least through this year.
Longer term I think the story is the same it's going to depend on how people how the our.
Our peers in Appalachia.
How they handle their overall production levels as they stick to kind of more of the maintenance or if they decided to grow but what we've done is we've insulated that risk well beyond 2022, so with our existing firm transport and firm sales portfolio that gives us a minimal amount of exposure to that in basin long.
Term.
I think we you know we view it as a risk we're not really willing to take in as we've said consistently we're not going to grow just to grow we want to grow knowing we have a good home for our gas and that is not in basin.
Got it thanks for that color.
Maybe just one follow up you mentioned in your prepared remarks, the RSC certification.
Potentially getting a premium on some of that gas can you talk a little bit about what the market for RSV looks like and what kind of premium you could potentially get for that gas.
Sure. So I'd say, it's the market's developing.
And.
We think we absolutely think we'll be successful at.
Selling some of our gas at a modest premium.
The premium is not going to be.
Nickels dimes and quarters, it's more likely pennies and I think we're kind of settling in on what the right number is and just for commercial purposes, I'd, rather not not speak specifically to that but at least order of magnitude that should help guide you on what we're expecting.
We're definitely seeing a lot of interest interestingly a lot of our gas we can get it to Canada and in Canada.
Particular very interested in in the Echo origin certified gas. So we think theres a great opportunity for us there.
As well as into other markets and we think it will keep developing.
Particularly at the utility level as.
Public utility commissions get onboard with the noxious asking their utilities to reduce their.
Emissions intensity and moved towards.
Sustainability will allow them to recover the cost of buying RSP from a producer like Seneca.
And our hope is that will that discussion will continue and will ultimately get there in the months and years to come.
Thanks for the color that's all from me.
Your next question comes from the line of Holly Stewart from Scotia, Howard Weil. Your line is now open.
Good morning, gentlemen, Karen.
Good morning.
Dave maybe I'll start off on a on a bigger picture question, because you talked a lot about electrification and the reliability of the.
Of the overall grid.
And it looks like a few weeks ago, our Pennsylvania Senator invited in SG to relocate its headquarters to the state of Pennsylvania versus New York, It's actually a very interesting moves given that New York has made a lot of them.
Just say anti fossil fuels claims.
Last few years so.
Maybe just curious as to your thoughts around this.
And sort of how how the company and you are thinking about this this offer.
Yes sure.
We've been getting the question a fair amount.
I'm not ready to give up on New York, just yet I think we're we're solidly in.
The political phase of.
Of climate legislation and the next phase is going to be the more practical implementation and I think when you start bringing things like cost in the play.
And electric reliability in the play.
The state May.
They come to its senses and decide that it's not it's not.
All of that smart to move at the pace that.
As currently being contemplated.
So we're not not ready to give up on New York just yet.
And plan.
Plan to keep our headquarters here.
Is that just thought it was an interesting move out of them out of that Senator.
Maybe just moving on you highlighted a lot of free cash flow generation.
And this year and beyond I thought maybe we could get your.
Your updated thoughts on.
On on that capital allocation it looks like maybe there's a small maturity that set a little bit of a higher rate that you could take out but other than that.
Not doesn't appear to be a lot to do on the balance sheet side of things. So just maybe any updated thoughts you can give us.
Yes.
As we talked in the past.
The first priority is going to be to delever a bit.
And de levering not just in and a lower debt to EBITDA number.
That's driven by higher EBITDA, but also reducing absolute leverage on our balance sheet, because as you know our capital structure plays into our rate setting process and so lowering absolute that makes a lot of sense of if rate cases are on on the horizon. So we've got our next maturity in <unk> and <unk>.
February of 2023, I think it is.
<unk>.
And the $500 million range.
So we'll likely use.
Some of our excess free cash flow to.
To pay down that maturity and.
Do a smaller issuance.
Then longer term.
Certainly free cash flow will grow in 'twenty three.
As we have all of the revenues from from FM 100, and we have lower lower capital really no change in our thinking.
We'd really like to continue growing the company and find find opportunities either organically or through acquisitions.
If those don't arise return capital to shareholders in some way.
Okay, that's great maybe slipping to Justin.
Yeah, and Justin Pardon me, if I missed the comment.
I know you're talking about.
A few more pads and kind of enhancing.
Enhancing that I guess that completion design and just some of your spacing and whatnot can.
Can you just give us maybe what you had in plan for tills for 'twenty, two which and then that updated number.
Now today with it with the new capital in terms of those skills for 'twenty two.
Sure Holly.
So we brought on 24 wells in the first quarter.
Our tails on them for the balance of the year don't really change the incremental kind of completion and top hole that I spoke about so on the completion side, it's more about.
More.
Enhanced design, where we're doing tighter stage spacing and we've got a lot of data and a lot of history through our kind of development over time and optimization and it where prices are today and what we see out there the returns on an investing that incremental capital over the balance of the fish.
Full year.
Payout I mean, we're talking for the most part. These are these are 100% plus IRR on that incremental capital and payouts that are just.
You can count the months on your hand, so that's more of a.
I'll call it an optimization enhancement of our plan and we'll really see the benefit we might see a little bit of that benefit towards the very tail end of the year. There's one pad in particular, but most of that will spill into fiscal 'twenty three.
Early in the top hole.
We're just going to employ our top hole rig more frequently and likely top hole really all of our pads and that what that does is that that has kind of the impact of accelerating how quickly we can bring.
Wells on in the sense that you drill incrementally 3456, maybe four four to seven incremental wells per year with our two larger rigs. It just speeds those up and has the benefit of lowering our costs again that mostly will spill into fiscal 'twenty three benefits from a production.
<unk> perspective.
Okay, and sorry, I don't have that number at my fingertips.
In terms of just the total pills expected for the year.
I don't have that number right off.
But we can follow up on that.
Okay perfect.
And then Justin sorry.
I'll stop here, but last.
Last one and a little bit maybe more in the weeds. It looks like from a midstream perspective, the ratio of sort of gathered volume.
Seneca volume has been rising and particularly the last two quarters and maybe the fee is deciding a bit so.
And I'm sure that's just based on mix or gross versus net or I'm not sure how to think about it. So I guess that's my question is what's driving that and then should we think about that trend here going forward in the forecast.
Sure. So its couple of things driving it and you kind of dialing in on them. So.
So one is just simply the difference between the gross and the net of Seneca for the throughput the other one is.
Exciting in the sense that we we know or have added meaningful volume third party volumes and third party revenues to our through our gathering systems.
We've been working on for a long time and this quarter was the first quarter, where some of that started to show up and you should absolutely anticipate those benefits continuing through the balance of the year and into the future.
Okay.
Great. Thank you all.
Yes.
Your next question comes from the line of John Abbott from Bank of America Your lifestyle open.
Good morning, Thank you for taking our questions.
And our first one.
Our first question is on maintenance Capex I mean, David you addressed some of this in your opening remarks, but you are seeing cost inflation.
And granted you are going to grow over the next several years it sounds like but when you think over a multiyear period of time.
What are your latest thoughts unmade maintenance capex across your various segments.
Yes.
On the pipeline side.
I said it was in the $50 million range and that would take into account the cost inflation that we've seen at least to date.
On the utility side.
I would say in the let's say $60 million to $70 million range for for true maintenance right. So not so excluding modernization and replacement of Av.
Older pipe.
And then on the gathering side, it's very very small.
Given the age of the system, it's more preventative maintenance.
Which which which falls in O&M and then just and you want to hit Seneca sure. So <unk>.
Seneca.
Our plans are quite maintenance so all baseline you on what they what they look like so going into next year, we would expect capital to come down it will still be.
Okay.
It will come down say in the.
The 400 to $4 50, but then as we think about long term if we.
We just continue at that mid high single digits, it's more closer to 400, and if you think about just maintenance off of that you would subtract another $50 million to $75 million per year. If we went to truly just flat production.
That is very helpful. And then the second question it was touched on earlier about basis differentials.
When you saw that you've been adding marketing contracts when you think about Appalachia post 2023.
How are you thinking about your long term differential in Appalachia I mean, the majority of our gas is being sold out of basin, but how are you thinking about that long term differential.
At this time.
So in terms of gas that would be exposed to in basin pricing.
It depends a lot on where we're Nymex is which will drive overall activity levels and gas supply, but I would say it's in a range of kind of 70 cents to one dollar and I know that's pretty wide, but it.
It will be.
Highly variable depending on.
How much production is growing or not growing within the basin.
There are certainly.
Other than.
In V P, which which is.
Some setbacks recently there are no large infrastructure projects with with gas getting out of the basin. So unless you have.
Unless you have a great firm.
Firm transportation portfolio and augment it with some firm sales on top of that.
I think I think people are going to have to generally stay.
Keep their their production and checking that will result in kind of that that range I'm talking about long term kind of 72 to $1 off of Nymex.
And that's for in Basin correct. When you play on your marketing when you layer in your marketing contracts, where do you see the differentials sort of potentially shaking out for you long term.
So I guess, what I would I would point you to is in our slide deck, we have we show.
What our long term basis looks like it slide 29 of our deck and.
And if you take a look at at fiscal 'twenty, three where we just show an average.
That would give you a pretty good assessment, if you look at our Nymex contracts or Don contracts are our other contracts that go through Transco and into some of the Northern New York Empire markets that gives you a really good flavor and some more specifics.
I would expect us to be.
In those those general ranges.
And it will just evolve over time.
But all what.
What im describing there are realizations that are better than what we would see if we were in basin overall.
In some cases meaningfully better.
That is very helpful and if I could squeeze one more in here so with inflationary pressures.
Just for the regulated businesses how does this influence the timing of potentially a rate case for those businesses, how does that sort of factor in the inflation and maybe how does that work.
It certainly is.
A driver of rate cases.
The pipeline side of things we have.
Ah stay out.
And both pipes for at least another year.
On the <unk>.
Utility side of the business, we can file.
I think we can file in both jurisdictions now.
We're earning we're earning good returns, but obviously it inflation eats into that and I think we're we're likely approaching the point, where youll see us file a rate case in the next.
Year or two.
Very helpful. Thank you for taking our questions.
You bet.
Yeah.
Again as a reminder.
To ask a question please press star one.
Your next question comes from the line of trough for Lamar with Raymond James Your line is now open.
Great. Thank you guys for taking my question. The first one has to do with 23 production growth and given the additional growth capital for Capex. This year.
Should we expect kind of a proportionate increase in midstream spend in 'twenty three is that a fair assumption to make.
No not necessarily there might.
We likely will have a few more wells that we're able we will have a few more wells, we're able to turn in line during fiscal 'twenty, three which which will likely result in a very modest move or an incremental piece of pipe or need to put in the ground et cetera, but.
Not not a material step up.
The other thing just to make sure I was clear in stating earlier is that.
I would see capital even with our revised plans to this kind of mid to high single digit growth I would see Seneca capital.
Gathering capital shifting down from this year to next year and.
And by 'twenty, four kind of the Seneca side of that falling into.
Appalachian.
Capital of in the ballpark $400 million with this growth that we're talking about.
Okay perfect. Thank you and then last question.
Just kind of revolves around the recent and current winter storms.
Just wanted to know if you have experienced any production shut ins or if its had any any.
Any effect on <unk>.
<unk> production.
If any effect on our midstream as well.
Yeah. So fortunately.
At Seneca and gathering we've really the team has done a fantastic job.
Keeping our production flowing we've had.
Very very minimal.
Freeze offs or other issues associated with the weather.
And on the on the regulated pipeline side of the business no issues.
Okay. That's great news. Thank you guys.
Yep.
Your next question comes from the line of <unk> Chaudhry from Goldman Sachs.
Okay.
For taking my questions.
Just one I wanted to circle back on the Odyssey certification.
Are you seeing way engagements from policymakers to support future development as it get certified by independent bulk dose.
And like you mentioned carbon intensity of natural gas is much lower than colon.
And it's about 200 lab and so do you see potential to kind of increase that engagement in the upcoming quarters.
Maybe you can also touch on the outlook.
Click on pipeline pipeline.
Those 10 pipeline demand.
Cross Appalachian Basin.
Thank you.
So certainly as it relates to what we're doing from a sustainability front, we're very engaged.
In speaking with policymakers.
In D C as well as at a state level.
And I think.
That just holistically I'll speak to that slightly to say, whether it's the responsibly sourced gas or just overall.
Sustainability initiatives that that the industry is taking.
We're kind of in the catch up education phase of how far we've come in just how quickly we've come to this place and where we're going and.
Seems to be good receptivity to that how that ultimately.
Finds its way into the state level public utility commissions and their ability to to actually pass on an incremental cost of buying responsibly sourced gas to their consumers I think just takes time like anything else, but that education process.
Certainly from a producer perspective is ongoing and I think speaking for for us and other companies peer companies, we're very engaged in making sure. We're we're kind of informing the key.
Key stakeholders on what we're doing and why it matters.
He asked about about pipeline.
Expansion opportunities right here that that part right.
That's absolutely any any any expansion opportunities.
In Appalachia.
Existing systems and the timing of that on deck.
Yes, I think I think we will have the opportunity to continue to expand our system I don't think its going to be quite as large as say our FM 100 project.
But I think there are projects that can can get done. So for example, our on our Empire line, we built our Empire North project.
In 2020 that was a compression only project that boosted throughput.
We've got the opportunity to add to.
Do another expansion, there, where we add another a compressor station and boost volumes.
Similarly on the.
The line N system, there's a lot of petrochemical development, that's going on there that can be served by <unk>.
By our pipeline is I think it would be interesting for us to.
See if we can connect our system.
With the Rover system that isn't very far from our our line N.
And I think those types of things will lead to.
<unk>.
To further expansions.
In terms of timing we're pursuing these things.
I wouldn't I wouldn't expect anything to be built further in 2022.
But our hope is that.
As we get into 'twenty, three and 'twenty four some of these projects.
We will come to fruition.
That's great. Thank you.
Yep.
There are no further questions at this time I will now turn the call over back to Brandon Aspen.
Thank you blue.
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 by telephone.
Run through the close of business on Friday February 11th.
To access the replay online please visit our Investor Relations website at Investor Dot National fuel gas dot com and to access by telephone call. One 800, 505, <unk> hundred 67, and enter conference I'd number <unk> hundred 75065. This concludes our 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.
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