Q2 2022 National Fuel Gas Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Q2, 2022 national fuel gas Company earnings Conference call. At this time, all participants lines 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. 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 your first speaker today.
Random Aspen director of Investor Relations.
Please go ahead.
Thank you Jay 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 Cam Yellow Treasurer, and principal financial officer, and Justin lowest president of Seneca resources and National fuel midstream.
At the end of the prepared remarks, we will open the discussion to questions.
The second quarter fiscal 2022 earnings release, and Investor presentation have been posted on our Investor Relations website.
They 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 we 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.
Thanks, Brandon good morning, everyone.
Hope you all had a great second quarter.
Adjusted operating results were $1 68 per share up 25% year over year with each of our four major reporting segments contributing to the increase.
Seneca had an outstanding quarter, both operationally and financially.
Production for the quarter was up sequentially and relative to last year.
That increase combined with the ongoing rise in commodity prices caused earnings to grow by 50% over last year.
As we announced in last Night's release, Seneca has entered into an agreement to sell our California operations to Sentinel peak for $280 million in cash and $30 million in contingent consideration.
Just as the spring of 2020 was a great time for us to acquire natural gas assets. We think the current oil price environment is the right time for us to sell our California properties.
These have been great assets for us since 2010 generating over $1 billion in cash flow. That's funded a good amount of our upstream and midstream growth in Appalachia.
But the regulatory environment in California makes it difficult to grow those operations.
As our Appalachian businesses of Brown, our California assets, we're increasingly noncore.
Sentinel peak will be a great owner of these assets. They are an establish operator in California with an excellent track record.
Justin I'll have more details on the transaction, but before moving on I want to personally thank the California team for their hard work and dedication to the company.
We expect to June 30th closing date for the transaction.
Net proceeds from the sale should be approximately $175 million to $200 million after.
For taxes, the April 1st effective date, and the unwinding of out of the money hedges that will not be transferring to the new owner.
Turning to Senecas capital budget, we're revising capital spending guidance to a range of $475 million to $550 million, an increase of $50 million at the midpoint.
The majority of the increase is related to an acceleration of completions activity later in the fiscal year.
This was an easy decision given the strength in commodity prices.
Particularly through this upcoming winter.
It allows us to capture a better than $3 price differential between winter and summer pricing and pays out in under a year.
The remainder of the increase in capital relates to ongoing cost inflation.
Like most of our peers, we're seeing inflation across the board on materials and services.
Justin will have more on this in a few minutes.
Moving to our pipeline business. This was the first full quarter of operations on the FM 100 project, which was the principal driver of the 14% increase in revenues on our Interstate pipeline system.
Everything about the project is performing as expected.
You may recall, there are two revenue streams associated with the project $35 million in incremental expansion revenues and a $15 million increase in supply as base rates to reflect the modernization component of the project that $15 million base rate increase went into effect as planned this past April 1st.
Not only does that pen 100 provide a great tailwind for the FERC regulated businesses, but it also bolsters Seneca is firm transportation portfolio facilitating access to new markets to further diversify its future sales.
The utility had another good winter heating season, providing safe and reliable service that our customers expect.
Importantly, despite the weather being consistent with last year.
And despite the reduction in our P. A rates due to the OPEC change that we discussed in the earnings release.
The utility experienced growth in customer margin, thanks to our system modernization tracker in New York.
Further we continue to see modest growth in customer counts, which also added to margin.
Because the weather improves our summer construction program kicks into high gear.
We have lined up all the contractor crews in sourced the necessary materials for the projects we have plan.
No surprise, we are seeing cost inflation, but nothing that's overly concerning at least at this point in aggregate costs of roughly 10% higher than last year.
We have another year left on our New York system modernization tracker and it's been 15 years since we've last filed a rate case in Pennsylvania, and we're starting to look at a at the time you have a rate case, there in Pennsylvania.
So with that in mind, we're doing our best to accelerate our pipeline replacement program at the utility.
And as such now expect capital spending for the year will be in the range of $100 million to $110 million.
As you know last December the New York Climate Action Council published its draft scope and plan, which describes how the state plans to achieve its emission reduction goals.
Recently in person hearings on the scoping plan were held across the state, including in our service territory.
What was evident to me from those meetings is that while most everyone in the community, including US is in favor of reducing carbon emissions in New York, There's a little consensus on how and at what pace, we ought to do so.
People are concerned with cost and the right to be the scoping plan estimates it'll cost on average $20000 to electrify a home in New York State, but that cost could double in the Buffalo area warehouses are older and winners are more severe than in the downstate region.
Further it's estimated that electrifying the heating load in Western New York would require a quadrupling of the energy grid, which would almost certainly adds significant ongoing cost to customer bills.
Energy reliability is also on People's minds, the scoping plan relies almost entirely on wind and solar and everyone knows it's not sunny and windy all the time.
We continue to advocate on behalf of our customers for a more reasonable approach to the energy transition when that pursues aggressive energy efficiency measures and hybrid heating solutions, while continuing to leverage existing infrastructure to deliver low or no carbon fuels.
Such a plan can meet or exceed the state's emission reduction goals, all while saving consumers' money and without sacrificing energy reliability.
Looking to the rest of the year on a consolidated basis, we now expect free cash flow from operations will be approximately $290 million, assuming the midpoint of our updated guidance ranges adding.
Adding in the expected net proceeds from the California sale.
Total excess cash should be in the $475 million area.
Looking out beyond this year with higher realized natural gas prices, along with mid to high single digit production growth at Seneca I expect free cash flow from operations will continue to increase.
This outlook provides us with great flexibility as I stated on last quarter's call. Our first priority is to reduce leverage on the balance sheet with a hope of gaining an upgrade from the rating agencies.
While our credit metrics will likely improve with the recent rise in pricing, we need to be able to sustain those metrics through the cycles and to do so will require a reduction in our absolute debt levels.
Lowering our absolute debt also improves our equity to capitalization ratio, which is helpful. As we head into rate cases across the system.
We also plan to invest in the continued monetization of our utility and Interstate pipeline businesses.
Doing so is a big win for everyone system reliability improves carbon emissions decline in rate base grows.
And I think there'll be further opportunities to expand our pipeline business while projects of the size of FM 100, arent likely in the immediate future I do see continued demand for more modestly sized projects.
But that isn't to say there isn't a need for significant new pipeline infrastructure in Appalachia.
The United States is blessed with an abundance of low cost natural gas in the Marcellus and Utica shales and the demand for that resource is high both domestically and abroad, particularly given the situation in Europe .
But the pipeline infrastructure in the region is nearly full and with the continuing backdrop of unfriendly state and regulatory policy development of large scale pipeline infrastructure is largely stalled.
Without new pipelines producers, including our own Seneca resources.
Cannot continue to grow production in any meaningful way.
As a result, we get the worst of all worlds high prices and reduced energy security.
And despite policymakers best intentions, I think theres, a good chance to carbon emissions will actually increase in the near term.
As an example, this past winter there were several periods of time when more than 20% of new England electricity was generated using fuel oil in spite of the fact that the Marcellus shale is only a few hundred miles away.
Undoubtedly the industry is ready and willing to do its part to help fix the situation. There is more than enough natural gas reserves in the country, both tempur domestic prices and help wean Europe from its dependence on Russia.
All we need is more infrastructure.
National fuel with our unique suite of integrated assets in the core of the Marcellus and Utica shales is well positioned to play a long term role in the development of both the natural gas resource and building the infrastructure needed to get it to market.
In closing national fuel had a great quarter, our integrated model continues to deliver considerable benefits that are evident in our financial and operating results.
Looking forward, we're entering a period of substantial free cash flow, which will give us significant financial flexibility and.
And our focus on ongoing emissions reductions will improve the sustainability of our operations and position us well for the future.
With that I'll turn the call over to Justin.
Thanks, Dave and good morning, everyone before I get into the details of the quarter and future outlook I want to touch briefly on the sale of our California properties.
First and foremost I want to add my sincere gratitude to the Seneca West Division team the.
The employees in our West Division, many of whom have been with Seneca for multiple decades have been tremendous stewards of these assets and are managing the transition to a new owner with the utmost professionalism.
This is no surprise and is what you've come to know from such a hard working dedicated group of employees to.
To the team I just want to say thank you for all that you've given to Seneca over the years and I wish you all the best in the future.
They've already hit on the high points of the transaction. So I'll touch briefly on a few of the details we've agreed to sell the properties to Sentinel peak resources for total potential consideration of $310 million with an expected closing date of June 30. This consists of $280 million in cash at closing subject to purchase price adjustments and contingent payments with potential value.
$30 million.
The contingent payments are up to 10 million per calendar year from 2023 to 2025 and are based upon the average Brent price for each year.
Each one dollar per barrel that Brent averages over 95 Sentinel peak will pay Seneca 1 million with a contingent payment capped at an average Brent price of 105 per barrel.
For those who are not familiar with Sentinel peak the acquired Freeport Mcmoran onshore, California assets in 2017 and operate approximately 25000 Boe per day we.
We believe they have both the scale and financial strength to be long term sound stewards of these assets.
We've also had the privilege of being neighbors to Sentinel peak, they know the team and leadership well, we think their history of safely operating assets and ongoing commitment to environmental stewardship combined with their financial Wherewithal makes Sentinel peak the ideal counterparty to prudently operate these assets well into the future.
Switching back to Seneca as results, we had an excellent quarter with record production of 87.1 Bcf an increase of 2% sequentially.
We also brought online too tightly county pads on the acreage acquired from shell in 2020.
Production from these two pads has been outstanding further validating the prolific nature of the acquired acreage the.
The first pad was a firewall Utica pad in northwest Howard County, and the second was a six well Marcellus pad in the South east portion of the county.
Combined these two pads are flowing at a choke restricted rate of about 150 million cubic feet per day, and we have well over a decade of development inventory across this prolific acreage position.
In addition, we secured a large key lease in Lycoming County, which adds about 10 highly economic Marcellus drilling locations that once developed will flow through our trout run gathering system.
Overall during the quarter, we turned in line three pads totaling 18 wells and have now brought online 42 wells for the year split 50 50 between the W. D and E D. A.
As I've talked about for a number of quarters are expected or we expected our turn in line activity to be frontloaded in order to fill our leidy south capacity as quickly as possible.
We fully executed on that plan and for the remainder of the fiscal year. We are only expecting to bring online one new pad seven Utica wells and the W. D E, which should occur in the fourth quarter.
As a result, Appalachian net production is expected to increase to about 950 million per day in the third quarter and then remain around that level until the end of the fiscal year, when we accelerate till activity headed into the winter.
On that theme looking out over the remainder of the fiscal year and into fiscal 2023, we see opportunities in our upstream and gathering businesses to accelerate production during an extremely attractive gas price environment. We are pursuing opportunities to both bring production forward through increased completion activity and to increase existing PDP.
Through compression optimization.
It isn't a few midstream, we're utilizing existing compression to lower suction pressures and boost production levels in the near term.
We are also looking at select opportunities to install new compression units ahead of prior schedules to enhance production over the next 12 to 18 months.
At Seneca, we were achieving our aggressive drilling efficiency targets, which in turn allows us to accelerate completions on a couple of key pads earlier than expected.
In our completions and procurement teams have successfully secured a spot frac crew that will commence work this summer and be able to complete more stages in fiscal 'twenty two than previously envisioned.
This will accelerate some of our planned fiscal 'twenty twenty-three activity into fiscal 2022.
Increasing our capital over the balance of the year.
However, Ford gas prices of roughly $3 higher this winter versus next summer. So the returns are excellent and we will generate significant additional free cash flow over the winter months as a result of these schedule changes.
I also want to reaffirm that our long term plans remain unchanged with our two rig program capable of delivering mid to high single digit production growth over the next several years.
Our increased capital guidance also accounts for continuing inflationary pressures.
Both those who are experiencing today and that we expect to emerge over the remainder of the year.
We are indisputably in an inflationary environment as I've talked about in the past oilfield goods and services such as tubular completion crews diesel fuel and Frac sand continue to experience inflationary headwinds leading to higher costs for everyone in the industry.
We've come out of a period, where oilfield service costs were as low as they've ever been and pricing needed to come up for those companies to retain talent and invest in new equipment.
The good news is that we continue to realize operational efficiencies and commodity prices have substantially increased allowing us to generate significant incremental free cash flow in spite of these higher drilling complete costs.
Between our accelerated activity, which accounts for the majority of our increased capital spending and cost inflation, we are revising our capital forecast to a range of $475 million to $550 million.
Lastly, we continue to progress on our environmental stewardship efforts to that end, we recently announced the successful completion.
Well pilot program under project Canaries trustworthy responsibly sourced gas standards, representing approximately 300 million a day of our Appalachian production.
This was the conclusion of a multi month assessment process that evaluated many operational facets of our program, including methane emissions water management and well integrity.
We received platinum and gold ratings for all the wells in this pilot and when combined with our previous responsibly sourced gastro designation under the F. O origin program, we continued to differentiate our natural gas production pro.
<unk> the opportunity to participate in the rapidly evolving RSP marketplace and.
In conclusion, Seneca is executing well on our plan our portfolio of valuable firm transportation capacity provides access to premium markets outside of the constrained Appalachian basin, allowing us to grow production and generate increasing amounts of free cash flow.
I think we're very well positioned for long term success with that I'll turn the call over to Karen.
Thanks, Justin and good morning, everyone National Fuel's GAAP earnings were $1 82 per share while adjusted operating results for the quarter were $1 68, an increase of 25% from the prior year.
The primary difference between our GAAP earnings and operating results was the impact of a onetime noncash benefit of <unk> 16 per share. This was related to an approved tariff filing and our utilities, Pennsylvania jurisdiction. We've previously discussed that permitted us to stop collecting post employment benefit costs into the overfund.
The nature of these plans.
The order approved several items, including the unwinding of a previously recorded regulatory liability leading to the onetime noncash $18 5 million.
The other benefit recorded this quarter.
On an ongoing basis, we also expect a reduction to margin of approximately $10 million annually and a corresponding decrease to EBITDA.
This drop is fully offset by the elimination of the associated overhead expense.
Most of which is non service cost sitting below operating income.
As a result, we expect no direct earnings impact in our Pennsylvania jurisdiction.
We also agreed to refund a portion of the remaining regulatory liability through onetime and ongoing bill credits, starting last October and extending over a period of five years. These credits will be funded by money previously set aside in the trust for the sole benefit of ratepayers, resulting in no impact to operating cash.
Cash flows.
Switching back to our ongoing operations are focused mostly on the outlook for the coming quarters since results for the quarter were relatively straightforward.
Writing with earnings guidance, we've revised our range, which is now expected to be $5 70.
To $6 per share. This reflects several changes to our assumptions first we've increased our natural gas price forecast to average $7.25 per and then btu for the remainder of the year with basis differentials, averaging a dollar.
This reflects the average strip price over the past week or so.
Given the volatility it's worth noting that a 25 cent change in natural gas prices impacts earnings per share for the remainder of the year by roughly four cents per share.
Our updated guidance also reflects the impact of divesting, our California properties, assuming an expected June 30 closing date. This.
<unk> two items.
We've revised our production guidance to a range of 340 to 360 Bcf for the whole year.
This reflects approximately four bcf fee related to the sale of California, and a modest production increase in Appalachia related to the accelerated activity that Dave and Justin discussed.
Our unit cost assumptions have been revised lower to reflect the elimination of our higher cost, California operations starting July one.
As we look forward, we expect Senate because unit costs decreased by at least 15 cents per Mcf on an annualized basis.
As it relates to California, we are expecting to incur a tax gain on the net sale proceeds combining this with the increase in taxable income related to our improved results, we expect to be a modest federal cash taxpayer this year we.
We have an NOL carryforward of approximately $140 million and federal tax credits credits totaling approximately $40 million we expect.
To utilize all of these federal tax attribute this year.
When combined with expected state taxes, we should have a cash tax outlay of $25 million to $30 million or approximately 4% of pretax income.
Looking forward as bonus depreciation phases out over the next few years, we expect consolidated cash taxes to increase from the mid teens next year to the 20% area and a few years.
Turning to capital we've increased our guidance range $60 million at the midpoint and now we're projecting a range of $725 million to $872 million as Dave mentioned, combining this with our revised cash flow forecasts and net proceeds from the sale of California, We anticipate roughly four <unk>.
<unk> hundred $75 million of available cash before any impacts of working capital.
This will be more than sufficient to fully fund, our dividend and positions us well to reduce our absolute leverage level.
We ended the second quarter with approximately $220 million in short term borrowings half of which was related to hedging collateral on deposit with our counterparties.
As we move through the year, we expect to pay down the short term debt with our available cash flows as well as through the return of our collateral deposits as those contracts settle.
The volatility in commodity prices makes it challenging to forecast working capital requirements.
As we move through the remainder of the year the timing of cash flows related to Seneca natural gas sales the costs for the utility to inject gas into storage this summer and any potential collateral requirements on our hedged portfolio will drive changes in short term liquidity relative to our internal projections.
To that point we.
We have ample access to short term liquidity in February we executed an agreement with our banks for a new billion dollar five year unsecured revolving credit facility that was strongly supported by a bit by our bank group.
Looking forward, we have 400 $549 million of long term debt set to mature in March of 2023.
When you take the expected proceeds from the California sale, our outlook for significant free cash flow generation and the recent five year extension of our revolver. We are in a great position to work towards our goal of reducing absolute long term debt we.
We will continue to watch long term interest rates, but unless theres an opportunity to lock in a favorable coupon I would expect us to manage this liability through the use of cash on hand, and short term liquidity.
And the credit rating side of things and metrics continued to improve.
With debt to EBITDA expected to trend toward the two and a quarter times area by the end of the year and at that voted that approaching 40%.
Dining this with our goal to reduce absolute leverage levels. We believe we are positioned well to improve our credit rating to the mid triple B level. We think this is the optimal credit rating for US providing continued access to a lower cost of capital and balance sheet flexibility, while offering sufficient cushion to weather broader macroeconomic challenges.
That we may face in the future.
From an overall financial perspective National appeal is in a great spot with the completion of the FM 100 project, we've hit an inflection point, where we expect to generate meaningful and sustainable free cash flow.
This offers us the.
Offers us the ability to focus on multiple fronts, including near term deleveraging, while retaining the flexibility to maximize value for our shareholders through the prudent deployment of capital in the future.
With that I'll ask the operator to open the line for questions.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad again that is star then the number one that withdraw your question. Please press the pound or hash key please standby, while we compile the Q&A roster.
Your first question comes from the line of Neil Mehta with Goldman Sachs. Your line is open.
Good morning team and thanks for all the perspective here and congrats on a on the recent sale. The first question I have is just talking through your hedging strategy gave some good sensitivities around your natural gas sensitivity for 2022, but talk about your hedge position in 2003 and.
And how sensitive you are to movements in and Henry hub.
Good morning.
Thanks for the question. We are we have you know.
We'll guide out our exact production.
For or expect to guide out our production for fiscal 'twenty three are likely at our next call.
But you know within our disclosures you can see that generally speaking our.
A number of hedges that kind of roll off so a relative percent covered it will be lower and therefore the exposure to.
Upward prices will be quite.
Quite a bit higher.
And then I guess overall I would I would tell you that the.
The strategy, we have remains intact and we we've got a lot of flexibility within our policy, but we've also moved more recently towards collared approaches to try to retain a lot of upside and frankly take advantage of the positive skew in the market.
Look for more clarity there and then talk.
About what can drive longer term earnings growth that any any debottlenecking opportunities in appalachia or or incremental growth projects.
And that will drive the vector of earnings growth higher.
Yeah I think this is Dave I think we've got a great opportunity to continue to.
Continue growing the company.
The upstream side.
Through the through firm sales.
We're able to grow our production.
Kind of in that mid to high single digits area for you know for at least the next few years.
You know, which for us is that a decent percentage, but relative to the total market isn't a huge amount of volumes that'll be coming.
Coming to the market, so I don't see us really moving prices.
And then on the regulated side.
We've got really two things. One is is the continued modernization of our of our systems. So if you look at our our past history, we've been spending in the $100 million to $110 million range on the utility most of that modernization that has Ah.
Nice upward trend on on rate base growth.
Similarly on the pipeline side, we spent in call. It the 50 to 70 million dollar area on on modernization that are also helps with rate base growth on top of that I do think we can continue to do expansions on our our pipeline system. We just recently did an open season on our line N.
And are sorting through the service requests that we got there you know we're optimistic that we can can have a project that in a rough order of magnitude could be in the $100 million to $200 million.
Per day type size, and then Empire North we expanded last year and I think we've got the ability to to add.
Third compressor.
To that.
Project.
And were row, we're chasing that so.
Is it going to be.
Is it going to be double digit growth now, but what would be a.
You know modest call it mid single digit growth.
Yes.
Great color thanks, guys.
Yep.
Your next question comes from the line of Holly Stewart with Scotiabank. Your line is open.
Gary.
Good morning Ali.
Dave Gary I'm, not sure, which one do you want to take this one but Karen I know you talked a lot about accelerating the debt reduction.
Brandon and sort of what.
What you're targeting but maybe from a capital allocation standpoint.
Maybe the first question would be is there a targeted absolute debt level or maybe even a normalized leverage target you know assuming kind of a long term commodity deck, maybe that we should be thinking about and then you know I guess that the bolt on to that would be you know kind of aster.
Yeah, you get to these targets is bumping the dividend more than you historically have or maybe even a special dividend.
Something that you would consider.
Yeah from a.
And overall target.
I think we'd like our R. R.
Our at call it our equity to cap ratio to be in the you know call it low mid fifties area.
Which is helpful and in rate case proceedings.
In terms of capital allocation once we get beyond that.
Certainly.
I'd like to continue growing the company.
So our first priority is going to be to try to to do that but beyond if theres. The opportunities just aren't there a return of capital is certainly something that we would.
Consider whether it's a dividend or a buyback.
We'll determine when when we get them.
Okay, David and then maybe a follow on to that would be.
Obviously, the gas prices doing what they're doing getting your ear skewing to the non regulated side of things in terms of kind of Gabelli.
Is there.
Yeah. It is an area of thought processes, keeping that more level like how do you think of those growth opportunities, whether they're internal or external.
Yeah.
Just on the previous question went through a ton of internal opportunities that we see.
Yep.
I'd like to continue to grow the regulated side of the business.
We've been active in looking at some of the assets that had been on the market and I think given the environment. There's a good chance that that additional regulated.
Property is old will be on the market and we'll we'll be looking at those as well.
Okay, that's great.
And then maybe just in just one for you on you've kind of kept the Q rig.
So Graham.
And place accelerating those completions in already to take advantage of the higher commodity price environment. I guess, maybe how are you thinking about the 23 program any.
New factors that year, you think.
Through our weighing into and genetic activity set whether that's you know outlining 23 or even even 24 at this point.
Yeah, So I'd say I mean, the teams just executing very well so we're getting our wells drilled right in line with with what I felt were pretty aggressive assumptions and so that's kind of set us up for this opportunity where we can get after some completions a little bit earlier than maybe we previously thought.
And then even with in spite of this this tight service environment that that everyone is in a we've been.
Says full it at getting accrue to do pretty soon if the amount of work for us starting at some point. This summer so that really a lot of this activity is is a combination of a little bit of bump to what previously we thought our production could be in fiscal 'twenty three.
But it's also about shaping and so when I talk about that what I'm really referring to is trying to move production that we might have seen next summer and get as much of that into the winter as possible.
You know I didn't the strip keeps moving so much. These days so it's hard to keep up but.
Generally it's three to $3 50 higher to sell gas in say January versus.
April and so to the extent, we can do some things.
In an overall, maybe increase our volumes a little bit, but even as almost as importantly, bring some of that activity in the winter.
It's meaningfully accretive to us to do so so that's that's the driver and long term.
Absolutely what we've been stating it is very much our focus here, we've got you know.
Mid to high single digit production growth.
Of course that will drive growth through through the midstream business as well.
And you know our program with two rigs and using a top hole rig in is.
It was really designed to achieve that and we're protecting that future production.
Through executing firm sales in excess of our firm transportation portfolio. So again aligning to what we've always said, which is not growing just to grow but growing into markets that we can get great prices and so that's a.
It's just kind of a continuation of things we've been talking about with a little bit of modulation and the focus to twenty-three to really take advantage of the strong winter pricing.
Yep, Okay. That's great. Thank you guys.
You bet.
Your next question comes from the line of John Abbott with Bank of America. Your line is open.
Good morning, and thank you for taking our question Karen I think Johns question is could it be for you.
It's gonna be on rate cases, with utility business and growth in the utility business.
So listening to your opening remarks, it didn't sound like there was any change in the growth outlook for the utility business.
But guidance for the utility business was sort of slightly reduced even though you had a peak.
It looks like based on colder weather.
So trying to understand because.
My initial impression that might've been driven by the reduction.
And the slight reduction in the rate case and P E, but what's driving that.
Difference in growth of the utility business.
No.
I don't think that we're anticipating much change to our growth in the utility business.
We've always kind of talked that low single digit growth, where we've got some small addition of customers. We've got the system modernization tracker in New York that continues to allow us to.
To grow rate base there.
Yeah.
I guess I'm not seeing that we're expecting a change and what we had on for Jack.
Yeah, I thought I thought the high end of the growth range previously was 4%. It just looks like it dropped down a little bit 3%. So I was just trying to understand that.
Pretty much yeah, Glenn sorry down.
And then the other I guess.
So again. This is this is this is actually a continuation of the first question I had a second question on the pipeline.
No.
I guess, it's probably standard procedure, but just given inflation I mean, the P. A move to reduce the rate case here, because you don't need to recover for the retirement benefit.
I mean does that give you any sort of concern going into a rate case, because you are experiencing inflation. So why do the lowering now.
Well I think part of that was just kind of in response to pandemic. The commissions had been asking utilities to find ways to reduce the impact of rates.
And on customers and this was something that we had developed over the years. This this overfunded.
Oh pad liability and it really just gave us the opportunity to pass those back to the customers were also able to lower our rates. There. So then when we go in for a rate case, it's going to it will be.
Will it be more likely to be able to you know.
Get good response from the commission to increase that rates for things like inflation.
John one thing to keep in mind on the the OPEC reduction.
Those dollars were.
And expense, where we're fully tract and reconciled to.
To rate recovery.
So we could only use those co op dollars.
For OPEC expense.
So we couldnt couldn't use it to offset inflation for example.
Does that make sense.
So they've got dollars just sat trust and we're we're now giving them back.
That it that helps out quite a bit there.
The other question, Ken I was bitten could be on the pipeline and storage segment.
Is that there was an increase in percentage for OEM. It looks like Europe is expected to be up 8% year over year versus 5%. Prior you described that as pipeline integrity and fuel costs.
I mean, what's the you know what's the risk that act that actually goes even higher sort of looking into 2023, how do we sort of think about that.
Yeah, we're not we're not expecting there to be.
Huge impact from inflation there at this point.
Alright.
Very much very much appreciate it thank you for taking our questions.
You bet. Thanks.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by the number one on your telephone keypad again that is star then the number one. Your next question comes from the line of Trafford Lamar with Raymond James Your line is open.
Thank you guys. Thanks for taking my question.
My first question you already answered it was about 23 production growth.
A follow up.
It revolves around our S G.
You all achieved you've already achieved 100% certification E L F.
30% certified under project Canary.
With regards to kind of the premium markets. What are you all seeing currently and kind of what are your thoughts on premium market similar to net zero oil are we getting near and midterm.
Sure. So you know.
What I would share with you is that.
We actually we have been successful at selling responsibly sourced gas certified gas at a premium.
The market is is going to evolve in our assessment of the market is going to evolve a lot over the balance of this year and into the future.
The premiums that you can achieve today and I think I've mentioned this maybe in the past but.
It's pennies, it's not nickels and dimes.
And in quarters for that matter, it's pennies, but I think theres a lot of opportunity as it develops to see to see that improve somewhat.
Somewhat depends on on.
On what happens at <unk>.
Utility commissions, among various states and if they want to embrace that part of Decarbonising in reducing overall emissions means differentiating natural gas in pain and premium specifically to natural gas that has a very low methane intensity associated with it.
We could see that that premium expand.
I think there's also an opportunity as you think about.
Carbon credits and so forth that you know.
Appalachian natural gases is really the lowest methane intensity out there.
It's way better than everything else and so to the extent, there's a way to capture that more in and define it in certify it better I think theres an opportunity that can develop around that.
We're still in very early innings, and we've been as I mentioned successful to date its selling some responsibly sourced gas, but I think we're early in it we'll keep evolving.
Perfect I appreciate the color.
Your next question comes from the line of Zach Parhat with Jpmorgan. Your line is open.
Hey, Thanks for taking my question I guess first one for Justin.
Can you talk a little bit more about what youre seeing on cost inflation, specifically, what services, where you're seeing the most inflation.
And maybe give us a little color on how contracted you are on your rigs and other services that you're using going forward.
Sure.
So I'll start with with how contract with Arizona, we have.
We have contracts that extend out.
Through this year, even into next year for both of our big rigs, which are high spec rigs.
So theres not a whole lot of near term change in any of that similarly, we have a long term contract for our main frac crew that extends out through the end of the year.
And we continue to have discussions with with them about extending that so if you think of the real the real big line items. I mean, those are those are two of them.
The places where you know the other services not not so much I mean very and contract terms.
The price inflation I mean, the biggest probably single item that that absolutely everyone is looking at relates to steel costs, and so tubular have gone up massively and.
Perhaps.
Someone bought enough inventory to get through a certain period of time, a number of months, but the reality is every single person in our industry is facing increased steel costs and in their massively increased.
Fortunately in Appalachia, our overall steel costs are a little bit less.
Then other plays but nonetheless, that's a big one frac sand has tightened up very much.
The spot crew market on on Frac spreads has gone up.
Significantly from the prices that we saw last year and it goes without saying to anyone in any business that things like diesel fuel and labor have gone up as well. So I think generally speaking this is across the board.
And we're just trying to be very transparent about exactly what we're seeing.
And get out ahead of it and make sure that you know as we've always done we try to be transparent with our guidance and with our commentary on all of this and this is what we're just calling it as we see it.
And so.
That's what's ahead of US we've also baked in definitely what we've experienced of late and see an existing contracts as well as trying to think about.
Where we see the market going.
So that we capture we captured more holistically.
So that's I mean, that's really the punch line on inflation happier.
That helps.
No that's helpful color.
I guess, maybe just following up on that on a on a cost per foot basis.
Where were your cost running now on the wells that you're drilling.
Yes, so I'm happy to follow up with some more detail on that but what I will tell you is that.
We're actually below on a dollar per foot were below our cost of 2021, but that's largely because we've been able to move to areas, where we are drilling longer laterals and so the the velocity and the overall spend is higher but through our operational efficiencies through the flexibility we have through our highly can.
U S large WD acreage in our <unk>.
<unk> expanded position in Tayo go where we can drill much longer laterals than perhaps we did before on a dollar per foot basis, we're actually kind of neutral to down from last year, but we're just we're just getting more T O L.
Got it that makes sense, that's all for me. Thanks.
And there are no further questions over the phone line at this time I would now like to turn the call back to Brendan for any additional and closing remarks.
Thank you. Thank you Andre if.
We'd like to thank everyone for taking the time to be with us today are <unk>.
Play of this call will be available. This afternoon on both our website and by telephone to run through the close of business on Friday May 13.
Access the replay line. Please visit our Investor Relations website at Investor Dot National fuel gas dotcom and access by telephone call. One 805, 858, $3 67, and enter conference I'd number 4564187.
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.
Sure.
[music].
Okay.
[music].
Yes.
[music].
Yeah.
[music].
Hi.
Okay.
Okay.
[music].
Yeah.
Sure.
[music].
Okay.
Okay.
Hello.
Yes.
Yes.
100 Rover.
Yes.
Okay.
Right.
Hum.
Hum.
[music].
Okay.
[music].
Yes.
Okay.
[music].
Yes.
Hum.
<unk>.
[music].
Yes.
Yeah.
[music].