Q4 2022 National Fuel Gas Co Earnings Call
Hello, and welcome my name is breaker and I'll be your conference operator for today.
This time I would like to welcome everyone to the key for 2022 National fuel gas Company earnings Conference call.
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After the Speakers' remarks, there will be a question and answer session.
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I didn't ask the director of Investor Relations you May begin your conference.
Thank you Brito 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, Darren 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 fourth quarter fiscal 2022 earnings release in November 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.
Thanks, Brandon good morning, everyone.
National fuel ended fiscal 'twenty, two with a great fourth quarter adjusted operating results were right in line with our expectations at $1 19 per share a 25% increase over last year.
Looking back fiscal 222 was another exceptional year for national fuel.
Operationally, we had multiple successes, including completing the FM 100 project on time and under budget growing Seneca is net production by 8% and replacing more than 150 miles of pipe as part of the utilities modernization program.
Strategically we tighten the focus of our company selling our California assets at the top of the market.
And we also made significant progress on sustainability initiatives.
All of these great accomplishments position the company extremely well for the future.
While the outlook for the business is strong and we arent immune to the challenges facing the broader economy.
During the year inflationary pressures in an extremely tight labor market impacted us across our business segments and as we discussed last quarter, we will likely have a continuing impact in 2023.
Seneca is fourth quarter capital came in a little higher than expected. While some of this was timing between fiscal years. The largest factor was related to increased costs associated with the spot Frac crew that is completing two pads in Tioga County ahead of the winter heating season.
We've taken several steps to mitigate future inflationary pressures on our upstream capital program and Justin will have more to say on this later in the call.
Regarding the labor market like most other companies, it's a challenge to attract and retain key talent.
In response to these conditions, we've adjusted our compensation practices to bring them more in line with the current market.
As a result, we've seen an increase in O&M expense, particularly in our regulated businesses, where we have the largest number of employees.
These inflationary challenges along with increased rate base from our modernization program are expected to lead to rate cases in both divisions of our utility in the coming years.
To that end last week, the Pennsylvania Division of our utility filed its first rate case since 2006.
A summary of the filing is included on page 41 of our updated slide deck.
In short, we're asking for a 28 million dollar annual rate increase commencing August one 2023.
We're also looking to implement a distribution system improvement charge mechanism or desk.
And a weather normalization clause in our tariff.
The disc is a longstanding modernization tracking mechanism that is commonly used by utilities in Pennsylvania.
The system modernization tracking mechanism in New York This would allow us to recover the cost of our Pennsylvania modernization program and a more real time fashion.
The rate proceeding will play out over the next few quarters and it should be relatively straightforward, we already have the lowest delivery rates in the state by a wide margin and even after a full $28 million increase our delivery rates will still be the lowest in the state.
We also expect rate cases in our PRC regulated pipeline subsidiaries over the next few years.
Under the terms of the settlement agreements covering their rates as supply and Empire are both required to come in for new rates in 2024 and 2025, respectively.
Although they can both file earlier than that if they need to.
Switching to the outlook for our fiscal 'twenty three the recent drop in the natural gas forward curve has led us to revise guidance to a new range of $6 42.
The $6 90 per share.
At the midpoint. This is <unk> 85 per share reduction.
Almost all of which is driven by our revised natural gas price assumptions.
Despite the reduction or $6.65 midpoint represents a 13% increase in expected earnings year over year.
Our long standing hedging program mitigate a large portion of the drop in expected pricing.
Our fiscal 'twenty three production is roughly two thirds hedged which is right in line with our stated policy.
As a reminder, that policy gives us a lot of attitude, allowing us to hedge between 40 and 80% of our production in the current fiscal year.
Over the past few years, we've been trying to closer to the high end of that range and this was the result of the natural gas pricing outlook.
Isn't in place at the time, we did the hedges as well as the desire to have greater certainty around cash flows to help support our investment grade credit rating.
Looking forward, we still believe hedging and as important tool to provide downside protection and I expect Seneca will continue to be active with its program.
However, with the improved outlook for natural gas, it's very possible our hedge percentages in fiscal 'twenty, four and beyond while it will trend a bit lower within our policy range.
In addition, we've been focused on using more costless collars, which allow us to participate in the upside if commodity prices increase.
On the capital spending side of our forecast the outlook is unchanged.
Considering our revised earnings guidance, we now expect funds from operations will exceed capital spending by $325 million for fiscal 'twenty three.
Karen I'll have more details on our earnings and cash flow expectations later in the call.
Looking beyond 'twenty three the significant investments we've made across our four lines of business should lead to a sustained period of significant free cash flow generation.
This puts us in the enviable position, where we can simultaneously deleverage our balance sheet return capital to shareholders through our long standing dividend and pursue additional future growth opportunities.
National People's outlook is further strengthened by what I see as a growing appreciation of the importance of natural gas.
We all know the affordability resilience and reliability of natural gas are unmatched by any other form of energy today.
At a time when energy security and affordability have never been more important it's obvious that natural gas and it's resilient delivery system needs to be a central component and in all of the above approach to energy policy.
One need only look to the challenges facing Europe , and California to see the perils of going all in on intermittent resources.
Nevertheless, we continue to see policymakers in New York and elsewhere, pushing the narrative the growth in wind and solar alone can meet the needs of a fully electric world, including for winter heating in cold climates like Buffalo.
Without sacrificing affordability and reliability.
Are they fully believe the electric grid can nearly triple in size without impacting costs and they have complete faith that massive amounts of dispatch able emissions free generation solutions will be developed when no such technologies that exist today at scale.
The gap between aspirations in reality is truly remarkable.
National fuel will continue to advocate arm on behalf of our customers for a more reasonable approach one that continues to leverage our existing natural gas infrastructure saving customers money without sacrificing energy reliability.
Lastly of the foreclosing a few words on ESG in September we published our third annual corporate responsibility report, which highlights our substantial environmental social and governance efforts.
And as you can see that we had another great year with our ESG initiatives.
I'm, particularly proud of the progress we've made towards our 2030 methane intensity reduction targets as well as senecas responsibly sourced gas certifications.
In addition system wide the team did a great job advancing our safety culture.
Without a doubt we're focused on adhering to the guiding principles that are at the core of what makes national fuel's successful.
In conclusion fiscal 'twenty, two was a great year for national fuel and I'm excited about our future. We're in a great position to generate significant and durable free cash flow across our businesses.
Combine this with the strength of our investment grade balance sheet, and our significant footprint of assets and one of the lowest emissions intensity basins in the world and I firmly believe the outlook for national fuel is as strong as it's ever been with that I'll turn the call over to Justin.
Thanks, Dave and good morning, everyone, Seneca and <unk> midstream wrapped up the fourth quarter of our fiscal year with strong operational and financial performance continuing the trend of solid execution across our Appalachian development program.
For the year net production increased by 8%, reaching a record 353 Bcf.
While adjusted EBITDA for our nonregulated businesses increased by 34%.
This strong performance continues to be driven by our expansive high quality acreage position.
The ability to deliver gas to premium markets through our valuable marketing portfolio gathering infrastructure connectivity and our unique integrated approach to developing our acreage.
From a reserves perspective, we also had a great year.
Despite the sale of 175 Bcf of proved reserves, we replaced 240% of our fiscal 2022 production and increased our total reserve base by 319 V. C F E.
We now sit with approximately $4 two tcf of proved reserves of which 79% are proved developed.
One of the highest among our Appalachian peers.
Looking back fiscal 'twenty, two was a significant year for Seneca, we brought online multiple pads in our acquired acreage entitled The County with results from both the Utica and Marcellus exceeding our expectations and we closed on the sale of our California operations transitioning to a pure play Appalachian natural gas producer.
We also made major strides in our sustainability initiatives, including certifying our natural gas production under M. IQ Echo origin and project Canary further and independently validating our culture of environmental stewardship and operational excellence.
On the heels of Seneca strong results, our gathering business also had a fantastic year registering record throughput significantly growing third party volumes on our system and commencing the build out of centralized facilities entitled accounting that will serve our growing production in the years to come.
Looking forward, we remain focused on execution with no change to our long term plans. We continue to expect our two rig drilling program to deliver mid to high single digit production growth over the next few years.
In the near term, we expect to accelerate production with 17, new wells coming online during the first quarter.
Which will take advantage of the higher natural gas prices expected during the winter months.
10 of these wells are in the W. D E and the other seven our integrity County.
Based on the anticipated timing of these pads are production. This quarter is expected to be flat with Q4 fiscal 'twenty. Two however, our production will increase towards the end of Q1 as these new pads come online.
From their production should continue to ramp steadily throughout the winter spring and early summer before flattening out or modestly declining into the end of the fiscal year.
Given that our operational plans are largely unchanged and we've taken steps to mitigate inflationary pressures where possible, we're maintaining our capital spending guidance range, a fiscal 'twenty three of 525% to $575 million.
As a reminder, this incorporates the impact of the 15% inflation, we experienced in fiscal 'twenty, two and an additional expected 10% increase in fiscal 'twenty three.
At the midpoint of our fiscal 'twenty three guidance range, we'd expect capex to be down slightly year over year. It's.
As Dave alluded to earlier fiscal 'twenty, two capital came in at $565 million a bit over guidance with a portion related to pulling capital forward from fiscal 'twenty, three and the remainder related to higher than expected completion costs on a Tiger County pad, we plan to bring online later this month.
As a result, we had a spot frac crew in place for this pad and spud activity continues on a second pad over the near term.
By Q2 of fiscal 'twenty, three we will be solely utilizing our full time electric Frac fleet under a new long term contract.
We expect that utilizing a dedicated frac crew will allow us to avoid cost challenge challenges, we saw with periodically contracting for a spot crew and a tight service environment.
And our move to electric equipment will meaningfully reduce our exposure to elevated and volatile diesel prices.
Switching to our marketing portfolio, we continue to look for ways to add to our supplement our portfolio of firm transport and firm sales that reach premium markets and support our growth trajectory.
During the fourth quarter, we successfully secured about 43000 deck with arms of long term Transcanada pipeline capacity.
This new capacity will complement our existing capacity on Empire pipeline, providing a path to dawn markets in Ontario, Canada.
<unk> direct access to dawn hub markets, which is both highly liquid and trades at a premium is expected to provide significant incremental value for our tiger production.
We also remain focused on accelerating our sustainability and safety initiatives to that end in August Seneca achieved in a certification grade the highest available certification for 100% of our natural gas production under the <unk> standard for methane emission performance on.
On the gathering side, we also made significant progress on projects to reduce overall emissions and lower the methane intensity of our operations for.
For example, at the Clermont West compressor station the largest owned and operated by NFC Midstream. We are working to convert our current gas driven pneumatics to an air system, which we expect will be completed by the end of the calendar year.
The improvements at this station alongside our existing emissions related efforts are important step in reaching our long term methane intensity reduction goals.
We also had a great year on safety reporting a second straight year of zero Dart injuries at Seneca and midstream, while also maintaining and improving our contract or oversight to ensure adherence and performance in alignment with our high safety standards.
Given the increased activity levels and in certain areas and influx of new workers. This is an outstanding accomplishment and clearly validates our culture of safety first.
Want to thank our entire Seneca and midstream teams as well as our contractors for their tireless efforts in achieving these results and.
In conclusion, our upstream and gathering business are working together hand in glove continuously finding ways to optimize our operations plan and drive differentiated value from our significant development inventory looking forward, we see continued opportunities across our integrated model to enhance margins and investment returns.
Our integrated model paired with our safety and sustainably focused culture position us extremely well in fiscal 2023 and beyond.
With that I'll turn the call over to Karen.
Thanks, Justin and good morning, everyone.
National fuel closed at its fiscal year on a strong note with GAAP earnings coming in at a $1 71 per share several items impacted comparability to our prior year results that are described in last night's release, So I won't cover them here.
Excluding these items adjusted operating results for the quarter were $1 19 per share an increase of 25% higher natural gas prices increased incentive because production and its corresponding impact on gathering throughput along with the benefits of our FM 100 pipeline project, where Alton drivers during the quarter.
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This was partially offset by higher costs in our regulated business.
As Dave mentioned, the tight labor market has driven increases in employee compensation, which is putting upward pressure on O&M expense.
Impaired to the prior year O&M expense was up 13%. We saw the combined impact of wage increases for both are collectively bargain and salaried employees that went into effect earlier in the year. Additionally, we accrued an expense related to a short term incentive program for our supervisory workforce.
It's tied to strong corporate performance for the year across a number of metrics.
While operating costs are rising alongside the broader inflationary headwinds.
Top line of our regulated businesses is performing really well utility margin was up 3% year over year, while revenues in our pipeline and storage segment were up $13 million or 15% over last year the.
The increase in pipeline revenues was largely attributable to our F 100 project along with some good results in our short term business, which helped push us over the high end of our guidance range. Our commercial team has found ways to optimize our facilities to maximize revenue through short term contracts leading to some uplift during the quarter.
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While modest these contracts continue to highlight the value of our pipeline infrastructure.
Turning to next year, we have reduced our earnings guidance to a range of $6 40 to $6 90 per share or $6 65 at the midpoint.
85 cent decrease is almost entirely due to lower Nymex natural gas forward prices, we've reduced our natural gas price assumptions from $7.50 in the winter and $5 in summer.
$6 this winter and $4.75 in the summer.
As we mentioned last quarter every 50 change in Nymex natural gas prices and tax earnings by approximately <unk> 45 cents.
Given that our hedge position remained relatively constant this pricing sensitivities still holds.
Other than a few other minor adjustments our guidance assumptions are largely unchanged and can be found in our earnings release and investor presentation.
One other item of note relates to a recent order in our New York utility that has no impact on earnings or cash flows, but it does reduce EBITDA going forward.
Our pension plan, becoming fully funded and significantly de risked we made a voluntary filing to stop recovering revenue from our customers that was used to fund these plans.
This allows us to reduce utility rates heading into the winter without any impact to our financial results.
EBITDA will be reduced by $18 million with an offsetting benefit in non service pension costs, which falls below operating income on our income statement.
This is a bit complicated so please reach out to brand and to walk through the finer details.
Moving to capital our consolidated spending was in line with our prior guidance for fiscal 'twenty, two and our plans for fiscal 'twenty three remain unchanged.
From an overall cash flow perspective fiscal 'twenty two was a great year between cash from operations, our capital spending and proceeds from the sale of our California properties, we were able to reduce our outstanding debt by $100 million during the year.
And but for the $90 million in hedging collateral deposits would have ended the year with no short term debt outstanding.
Looking to fiscal 'twenty three we now expect funds from operations to exceed capital spending by approximately $325 million. This is down $50 million from our prior guidance and is driven primarily by our revised natural gas price assumptions, partly offset by a lower.
<unk> cash tax rate, which we now forecast to be in the high single digits as compared to the mid teens and our prior guidance.
This puts us in a great spot to continue growing our longstanding dividend and to fully redeem the $549 million of long term debt that is maturing next March which we expect to accomplish with a combination of cash flow and short term debt if necessary.
As we said for a while now this focus on near term debt reduction will leave us with a significant amount of financial flexibility moving forward, we anticipate that it will further reduce our leverage profile with debt to EBITDA trending from roughly two two times at the end of fiscal 'twenty two.
Two to below two times next year.
This is consistent with the MIT applebee metrics the rating agencies have guided us towards which is where we'd like our rating to be moving forward with.
With our strong balance sheet and outlook for continued free cash flow generation, we are in a great financial position going forward.
With that I'll ask the operator to open the line for questions.
Thank you.
He would like to ask a question. Please press Star then one when you're touching keypads.
You change your mind any time, please press star two.
The first question we have from the phone line comes from John Other with Bank of America. John Your line is open.
Good morning, and thank you for taking our questions.
Hi, Good morning question is just given we're.
Just where inflation has been going and stuff is just how do you think about maintenance capex across your various businesses sort of long term.
Well, we've had an ongoing capital program.
That are that we're going to stick.
Stick with I think what it does is you know to the.
Sent that there there are inflationary pressures over time I think it just influences the timing at the edges of when we would be filing for a for a rate case, but we're certainly going to do what we need to do to keep the system safe and reliable.
<unk>.
Yes.
We're actually sort of thinking about what do you think of long term maintenance capex for the E&P business.
Gathering business pipeline and segment and utility business, I mean, I understand what you're saying about the utilities to keep at the level, where you take long term maintenance Capex is for the E&P business.
Yeah.
Yeah, So John I'd say, the the general view is where we are now.
To go down to a maintenance you would look for that number to come down by.
$50 million to $150 million per year.
It would be a little bit different because unlike today, where we're continuously operating a couple of rigs utilizing top hole rig and we will have active completions.
And more and we're growing our production as I've spoken about and plan to continue to grow in that mid to high single digits moving to kind of a flat mode. We wouldn't have the same cadence of completions and that would causal variability year to year.
At Seneca would also cause a little variability at midstream as think about expansions, but big picture.
You can you can think broadly about a $50 million to $150 million.
Reduction.
I appreciate it and then follow up question I have is if.
If the Karen here, so Karen if I understand so cash taxes.
Fiscal 2023 will now be in high single digits versus the mid teens prior.
How do you think of cash taxes looking at strip beyond two task fiscal 2020, and when do you expect to be forecast taxes, just based off the change in cash tax guidance.
Yes, so I mean, I think will be over the next.
Few years definitely moving into the mid teens and.
As far as when we'd be a full taxpayer.
We're looking at probably 2024.
No that is very helpful. Thank you very much for taking our questions.
You bet. Thanks.
Thank you.
We now have you mean Calgary with Goldman Sachs You May go.
Your line is now open.
Hi, Good morning, and thank you for taking my question.
So the first question would love to get a pulse on New York Scoping rules.
How does it change your long term plans on E&P business.
Business.
When their business and have that creates additional opportunities for <unk> to participate in other business lines like <unk> for example, low carbon sequestration for example.
Sorry, you broke up just a little on the first part of her E&P could you say that one more time please.
Sure.
So would love your thoughts around that New York Scoping routes.
And then how does that change your plan.
For E&P.
Business for it to grow and if it creates any additional opportunities for energy to participate in like businesses like <unk> for example, which you had indicated before.
Yeah.
Well I'll start with the scoping plan.
The climate action counsels busy.
Busy.
<unk> the plan that they would would vote on it and publish it at the end of the year.
Our our hope is that they they take a a more reasonable approach than what was put forth in the the initial scoping plan. It seemed to me that they they pretty much ignored.
<unk> costs and reliability.
And it's our hope that they are they take a more reasoned all of the above our hybrid approach. However, you want to describe it approach to <unk>.
Energy policy going forward.
I think regardless of the scoping plan.
When you just look at the overall trends towards <unk>.
De carbonization.
Independent of what happens there or it or at Seneca We <unk>.
Have the ability to to.
And RMG hydrogen and the like and it's an area that we've we have teams in place that are are looking at that and it's my hope and expectation that over time, we will come to a point, where we are able to to make investments there.
With respect to both the scoping plan and RMG.
I'm not so sure that has much of an impact on our our E&P business for the near term.
We're going to be operating a two rig program.
Generating considerable free cash flow.
And we're going to do that regardless of what happens in <unk>.
In New York and the level of capital that we're talking about on the the RMG and hydrogen side isn't so big that it would put put a two rig program.
Or make it difficult to fund a jewelry program.
Gotcha, that's great color. Thank you.
And then maybe if officials gas if you look at the eastern development area.
Can you remind us how much inventory do you have in that area and then if there are any bolt on opportunities, which you would look towards to add to inventory.
Yes, so in the across the EMEA I mean, we have we have well over a decade of inventory within that area across Tiger and Lycoming counties.
So we're we're sitting in a great spot.
We do continue to evaluate opportunities to bolt on we will continue to do so.
And we will continue to be you know.
Basically adhering to the principles, we put out before which is which is focusing on assets where we.
We see them as either continuous contiguous or very proximate to our existing acreage.
Ideally, having an opportunity to leverage our integrated model, whether that's the gathering side or at supply and Empire will continue to focus on those and as those opportunities come up we'll certainly evaluate them in and look to complete the ones that makes sense.
That makes sense. Thank you.
Okay. Thank.
As a reminder, if you'd like to ask any further questions. Please press Star then one on your telephone keypad.
We now have the next question on the line from traffic number of Raymond James. Please go ahead from your Lady tested.
Hey, guys. Thanks for taking my question.
My first one is kind of the item thats been pretty topical in this quarter.
Revolves around why didn't basis differentials.
And you all have a good chunk of firm takeaway capacity or firm sales already baked in but looking at the revised guide at all.
Can a basis dips widening, especially in the second half.
23.
You don't kind of talk about what you have seen recently.
And kind of your thoughts on maybe second half of 'twenty three and beyond.
Yes, sure happy to drive it so.
Generally it's been to say, it's been an interesting and volatile markets, probably a huge understatement.
We're very well positioned I would I would encourage you to as you have time to look at slide 29 of our investor deck.
That gives you a really good visibility into our overall level of what I'll call takeaway protection. So the combination of all.
Our firm sales and takeaway capacity overall for the year, we've got 88% of our forecasted production.
Flowing through either firm transport <unk> firm sales, so that significantly mitigates our exposure to <unk>.
Any sort of in basin.
LOE cash prices ran out of the gates.
And then on slide 29, what you can really see as we've developed our portfolio to kind of meet our expected growing production throughout the year and so where we are today versus the growth that we expect through the year, particularly into Q3, you can see that following the quarterly disclosure on.
Our firm sales and so we think we've positioned the portfolio really well we have seen the Ford marks widen and so we thought it made sense to kind of true those up to literally what we're seeing as of a couple of days ago in the forwards.
But again that is not a very big exposure for us it's a relatively minor exposure for us given our positioning on firm sales and then you combine that with our our kind of hedge in fixed price position, which is roughly two thirds.
We think we're in a pretty good spot to participate in upside and to have some protection to any sort of downside.
Great. Thanks for the color on that Justin and then one more on the Seneca you mentioned the long term contract with an electric Frac Frac crew coming on in <unk>.
Diesel over $5 $5, a gallon what are the cost savings versus a diesel crew at.
At this time.
So it's very significant.
So on an annualized basis, it's well over that.
The net difference between the gas versus the diesel is well over $10 million.
So it's a it's a pretty big new to go from one one input fuel to the other from a cost perspective, and then obviously, there's some great intangibles there from an emissions in our long term sustainability goals as well, but that will meaningfully mitigate some of the the pricing around <unk> around our completion operations.
Great. Thanks for the color and congrats on a really good year guys.
Thank you.
Thank you I'd like to turn the call back over to Keith Brandon.
Any final remarks.
Thank you Brito, 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 and will run through the close of business on Friday November 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 1866, <unk> 39403, and enter conference I'd number 533 110.
This concludes our conference call for today, Thank you and goodbye.
Thank you all for joining that does conclude today's call you may now disconnect your line.
Yes.
Yes.
Yeah.
Okay.
Okay.
Yeah.