Q1 2023 National Fuel Gas Co Earnings Call
Yeah.
Hello, everyone and welcome to the National fuel gas company Q1, FY 'twenty to 'twenty three earnings Conference call. My name is Jay and I'll be your operator today, if he would like to ask a question. During today's call. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by Chi.
I would now like to turn the call I've got cheap Brandon that the director of Investor Relations. Please go ahead.
Thank you Joe 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 and National fuel midstream.
At the end of the prepared remarks, we will open the discussion to questions.
The first quarter fiscal 2023 earnings release in February 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 you may refer to last evening's earnings release for listing of certain specific risk factors with that I'll turn it over to Dave Bauer.
Thanks, Brandon and good morning, everyone.
National Fuel's fiscal year started off with a great first quarter.
Adjusted operating results were $1 84 per share an increase of 24% versus last year with each of our four business segments contributing to the increase.
Starting with our upstream business our production in Appalachia increased by 11%, which when combined with the 50 cents per Mcf improvement in our natural gas price realizations led to a 29% increase in EBITDA.
This increase is particularly impressive given that last year's EBITDA includes the benefit of our California assets, which we sold last summer.
Senecas production growth also contributed to a 6% increase in gathering EBITA the.
The combination of our valuable transportation and marketing portfolio, along with great operational execution by our team drove the improved performance of our nonregulated businesses during the quarter.
Justin will have more details on these results in a few minutes.
Our regulated segments also had a good quarter. Despite the inflationary headwinds ive discussed on past calls our earnings were up in both businesses we.
We saw continued growth in pipeline and storage revenues driven principally by the FM 100 expansion and modernization project as you recall. This project went in service in December 2021. So we saw the impact of a full quarter of both expansion revenues and the modernization rate increase associated with the project that went into effect last April .
In the utility business, excluding some ratemaking adjustments that did not impact earnings.
Our underlying customer margin was up about $6 million driven by the ongoing benefits of our infrastructure modernization tracker in New York and increased usage, which was largely related to colder weather versus last year.
The increase in margin more than offset the inflationary pressure on our operating expenses leading to earnings growth for the quarter.
Turning to capital allocation, our fiscal 'twenty three capital spending guidance is unchanged at $830 million to $940 million.
Seneca what we plan to continue our two rig program.
Despite the near term drop in natural gas prices largely due to reduced demand in the early stages of winter. The long term outlook is still constructive.
The pipeline of LNG projects expected to come online mid decade, as well as the continued transition from coal to gas generation support long term base load demand.
Having said that we remain flexible and if market conditions warrant we can adjust our spending to ensure we continue to generate free cash flow.
As you saw on last night's release, we've lowered our Nymex natural gas price assumption to an average of $3 25 per M. Btu for the remaining nine months of the year, which is in line with forward markets.
Obviously this is a big decrease but the impact is dampened by our hedging portfolio.
We continue to believe in our disciplined hedging strategy as a way to protect earnings and cash flows from the inherent volatility of commodity prices.
Looking forward long term prices haven't moved quite as much as the front end of the curve. Our program economics are quite attractive at the current strip and should generate robust returns and significant free cash flow, which as I've said in the past, we expect to use to deleverage the balance sheet pursue growth opportunities and return capital to shareholders.
As you likely saw in the media over the Christmas weekend, we experienced exceptionally challenging weather conditions across our operating footprint, including a once in a generation Blizzard within our New York Service territory.
It's no exaggeration to say that winter storm Elliot recap on a region, which is particularly noteworthy given that our region is no stranger to big snowstorms.
I want to thank all of our employees, who went above and beyond the call of duty to keep our system running safely.
Our region needed us to deliver and the national fuel team was up to the challenge.
Whether it was dealing with freeze offs at Seneca is wells, keeping our midstream compressor stations operational are sharing or assuring the gas supply was adequate and emergency calls were responded to with the utility I'm very proud of the effort of our entire national fuel team.
This storm highlights the importance of resilient, whether harden infrastructure.
Less reliable, but critical energy sources faltered as tens of thousands of customers throughout our service territory were without power at some point during the holiday weekend.
Across social media and anecdotally people express their appreciation for natural gas service as they huddled around natural gas fire places to stay one continuing to use natural gas stoves for food preparation and in many cases users use natural gas generators to run furnaces appliances or power entire homes.
Against this backdrop, it's astonishing that New York State policymakers are unwavering in their push for a rapid transformation to a predominantly electric future powered primarily by intermittent wind and solar.
In December of last year, the state's climate action Council finalized its scoping plan as required by the climate Act that was enacted in 2019.
If adopted as written the scoping plan would remake the way energy is produced distributed and consumed in most every element of the state economy.
The breadth of what's contemplated is truly remarkable on the demand side. The scoping plan would have new Yorkers electrify almost everything at any cost.
This will cause the demand for electricity to skyrocket electrifying justice space heating demand in our service territory would require near quadrupling of the electric grid.
On the supply side, the scoping plan foresees this increased demand for electricity being met almost entirely with new wind and solar generation.
The scale of what's required is truly unprecedented.
Currently there is approximately two gigawatts of wind and solar capacity in the state which was installed over the course of the last two decades.
To meet its targets the state will need to install on average more than four gigawatts of wind and solar every year for each of the next 18 years.
Stop and think about that it's taken us decades to get to our current two gigawatts of capacity, but will somehow be able to build double that amount each and every year for the next two decades, while many might consider that incredibly aggressive the scoping plan sees it as a sure thing.
And even if the more than 80 gigawatts of wind and solar is built as planned there will still be as much as a 45 gigawatt shortfall in winter electric generation that cannot be met with existing technologies.
Then you have to consider the cost to build the electric transmission infrastructure needed to deliver these increasing power supplies and utilities will need to make unprecedented investments in system modernization upgrade electric service in our neighborhoods and address critical grid constraints that exist across our region today, all of which will almost certainly cause electric prices in New York to climb.
Sharply.
On top of that consumers will bear the cost of converting which could be as much as 50000 hours per household.
With our within our service territory those costs could be crippling with the median income in Erie County at just over $62000 and well below that level in the city of Buffalo.
Despite all of this the scoping plan urges policies to encourage a rapid transformation by specific dates that aren't tied to any reliability milestones.
This is an incredibly irresponsible approach.
It makes no sense to mandate the electrification of ACD in Western New York, when it's uncertain the necessary power and electric infrastructure will be there to meet the increased demand for electricity that will resolve.
Instead, the state should embrace a more reasoned approach to the energy transition one that sets electrification targets that are linked to generation reliability milestones. While also continuously evaluating the cost effectiveness of these actions and their impact on customer affordability.
I could see it happening in phases.
In the near term the focus should be on proving that wind and solar can be built at the pace contemplated by the scope and plan.
And during that period consumers should be free to electrify based on their preferences, but there shouldn't be a mandate to do so.
And in the meantime, policymakers should encourage no regret solutions like energy efficiency and improve building insulation, both of which will be required regardless of the energy used in the home and workplace.
It should also scale existing technologies like renewable natural gas they can achieve significant emissions reductions now.
And I should put support research and development for new technologies, like hydrogen, which will be critical for heart decarbonize sectors of the economy.
Once were satisfied that the wind and solar contemplated is feasible.
They can then move onto another phase where it encourages hybrid solutions for heating at a pace that is consistent with the buildout of generation.
Our own pathway study has shown that by including a hybrid approach to heating and then all of the above energy strategy emissions from our system can be reduced by more than the 85% called for an ear climate legislation.
And most importantly by continuing to leverage the natural gas system. This approach is far less costly and goes a long way to ensuring energy reliability in the winter when it's needed most.
Only once the state has developed a cost effective solution to the 45 gigawatt and winter generation capacity should it even consider moving to full electrification.
Based on current technologies, that's likely many decades away.
Again, forcing electrification before reliability is assured as an incredibly risky proposition.
Edmund during a winter storm with no heat or no reliable means of transportation.
The administration in Albany acknowledges the scoping plan is not a legally binding documents rather it is intended to serve as a blueprint for the future of energy in the state.
The laws and regulations to achieve that blueprint will be written in the months and years to come.
We will be proactive in urging legislators and policymakers to forego the scoping plans risky all in approach that tries to do everything all at once you had snowfalls dangerously short.
And instead embrace a more incremental all of the above approach that sets realistic targets based on existing technologies and builds upon them as technologies improve.
So I've gone on quite a bit on regulatory policy.
Now, let's bring it back to the quarter I will turn it over to Justin for an update on our nonregulated businesses.
Thanks, Dave and good morning, everyone, Seneca and energy midstream kicked off the year with a strong quarter Seneca 91 V. C. S. E production was a 3% increase sequentially and an 11% increase when compared to last year's Appalachian production.
We've continued our trend of solid operational execution.
With 17 wells turned in line during the quarter, which was in line with our plan. Additionally, we saw better than expected well performance on these new pads and we boosted PDP production with some additional compression on the trout run system, which was time to capture peak winter pricing.
These results were particularly impressive given the extreme weather we faced in December related to winter Storm Elliot.
The Seneca and midstream operations and marketing teams did a brilliant job managing through this multi day event in spite of sustained windchill temperatures below negative 30 degrees. We saw limited production impacts with any volumes offline, bringing being brought back very quickly.
While the base of experienced significant and sustained production impacts we estimate less than half a bcf impact during the quarter.
This is a testament to the entire team who collectively deserve a huge thank you for keeping our production flowing and very challenging conditions, especially given that the storm occurred when most people should be at home and joined the holidays with their families.
Turning to our future development activity drilling and completion operations are proceeding. According to plan as a result, our production rates should continue at about one Bcf per day net through the second quarter before production ramps up again into the second half of the fiscal year.
With several pads expected to turn in line in the spring and early summer.
This is in line with our prior expectations and as such we are maintaining our full year production guidance of 370 to 390 Bcf.
As previously communicated our first quarter of fiscal 'twenty three had a significant amount of completions activity not only did we have our dedicated frac crew operating in the W. D E. But as planned we also utilized a spot crew entitled a county for the entire quarter.
We have now wrapped up our spot frac activity and going forward, we will only utilize our debt our single dedicated completion crew across our operations.
As a result, our capital is expected to moderate and level out through the remainder of the fiscal year.
Given this is consistent with our prior plans capital guidance remains unchanged at $525 million to $575 million.
As we look out to fiscal 'twenty for Nash.
Natural gas prices will govern our level of spending will.
We will be focused on balancing capital efficiency growth and free cash flow generation across our integrated development program and we'll modify our plans to best maximize these factors longer term, we remain bullish on natural gas pricing, particularly in fiscal 'twenty, five and beyond as new LNG export facilities come online.
Unfortunately, a large percentage of our fiscal 'twenty, three and fiscal 'twenty four production is protected by hedges and fixed price firm sales.
At the midpoint of our guidance, we have hedges and fixed price firm sales in place for nearly 70% of our expected remaining fiscal 'twenty three natural gas production.
We have another 20% with basis protection that is not hedged, which leaves only about 10% of expected production exposed to in basin pricing.
We've been opportunistic with our marketing portfolio over the past few months locking in favorable basis differentials that result in strong realized prices.
For example, we recently locked in long term basis, the basis of Nymex plus 50 cents for some of our leidy south capacity.
We remain committed to building, a marketing and hedging portfolio that deliver strong returns and supports meaningful free cash flow generation.
This positions us well for stability through commodity price cycles, which can be hard to predict.
At midstream, we are focused on system expansion to meet both Seneca and our third party shippers needs with particular emphasis on meeting our customers' turned in line target dates. Additionally for Seneca, we're building out centralized facilities and our Tioga system and ensuring gathering lines are in place to provide fuel gas.
The Senate because E Frac fleet.
Which will allow us to displace substantially all diesel fuel for completion operations with dual benefits of both lower emissions and lower fuel costs.
We also continue to focus on growing our third party shippers throughput with over 400 miles of gathering lines able to connect into multiple Interstate pipelines. There is various opportunities to serve third party producers proximate to our existing systems during.
During the quarter, we signed an updated agreement with a third party shipper and expect additional volumes to flow in our system later this year.
While this project is not a game changer it demonstrates the value of our system and our willingness to develop commercial arrangement arrangements to tie in incremental volumes.
In fiscal 'twenty, three I expect third party volumes will represent about 10% of system throughput up from zero, just three years ago, and we will continue to chase similar third party opportunities to drive value from our midstream systems in the years to come.
Turning to our sustainability practices I want to highlight some of our recent work and achievements.
In our gathering business, we commenced the Ecmo origin certification process and hope to complete the process by the end of the year and at Seneca, We completed our annual Echo origin re verification assessment in December 'twenty two.
Demonstrating continuous improvement under all five principles of the ear 100 standard for responsible energy development.
We continue to focus on emissions monitoring and have made strides there as well.
We are using lidar and Oh, Gee I equipment mounted aircrafts to identify and measure methane emissions across our operations and we are evaluating the potential to use satellites in the future.
In conclusion, it was a great quarter across the board.
As we look forward lower natural gas prices will impact our near term cash flow, but the combination of growing production holding the line on capital and a robust marketing and hedging portfolio mitigates a good portion of that decrease.
Beyond twenty-three Seneca deep inventory of high quality acreage combined with our LOE cost integrated approach to development positions us very well for strong returns and continued growth with that I'll turn the call over to Karen.
Justin and good morning, everyone last evening National Field reported first quarter fiscal 2023, adjusted operating results of $1 84 per share up 24% compared to last year Dave.
David Justin already hit on the high points for the quarter. So I'll briefly touch on one other item at the utility I want to remind everyone of the impact of an order issued in our New York jurisdiction relating to our pension and postretirement benefit plans.
Based on the fully funded status of these plans we made a filing last summer seeking to temporarily suspend recovering revenue from our customers in connection with these obligations well.
While this order has no earnings or cash flow impact to national fuel. It does lead to a drop of approximately $18 million in EBITDA, which is fully offset by a benefit to non service costs that fall below operating income.
During the quarter the impact to revenue and therefore EBITDA was a reduction of about $4 million. This was correspondingly offset with lower non service costs.
Looking forward, we would expect this EBITDA impact the largest in our fiscal second quarter as the revenue impact mirrors customer volumes, which are highest during these peak winter months.
Turning to guidance, we've lowered our full year earnings guidance to a range of $5.35 to $5 75 per share.
This decrease was almost entirely attributable to the drop in natural gas prices, partially offset by some smaller tailwind across all of our businesses.
We're now forecasting Nymex pricing to average $3.25 per M. M. P to you for the last three quarters of the year.
Somewhat offsetting this is the modest improvement in Appalachian basis, differentials, which we now expect to average a dollar per annum btu for the remainder of the year.
As Justin mentioned, we have firm sales in place for 90% of our remaining expected production and fixed price firm sales our hedges in place for nearly 70% of our remaining expected production.
We also entered into the into some favorable colors during the quarter, adding 11 Bcf of new positions with a $4 75 floor for April through October These were well timed and helped to mitigate some of the impact we've seen with this recent pricing pull back.
While our hedge portfolio at a nice level of protection, we still do retain exposure to movements in pricing.
To that end, a 25 cent decrease primary update at Nymex guidance price.
Will impact earnings by 21 per share for the year keep.
Keep in mind that we do have 65 Bcf of Costless collars. So this impact is not necessarily linear.
As noted in the release and our Investor presentation. The remainder of our earnings guidance assumptions are largely unchanged. We are holding our capital spending forecast the same with a range of $830 to $940 million for the full year.
Moving on to cash flows we are now expecting funds from operations to exceed capital spending by $200 million for the fiscal year.
This is a reduction of about $125 million from our prior estimate.
The impact of lower pricing is being partially offset by a lower expected cash tax rate this year.
Previously we were expecting our cash tax rate to be in the high single digits, but with a lower forecasted taxable income that is now forecasted to be around five 6% for the year.
Well, our <unk> was lower we are projecting a larger source of working capital for the year, principally due to an expected decrease in receivables at Seneca and lower storage and Jackson costs at the utility based upon our lower natural gas price assumptions.
These improvements are expected to keep our total cash flow after capital spending generally consistent with last quarter.
In addition to operating cash flows we also have reduced.
Hedging collateral deposits to zero as of today down from $90 million to start the year.
As a result, we are well positioned to deliver on our near term goal of deleveraging.
We originally had $549 million of long term debt maturing next month.
Less fastball, we borrowed $250 million on our 364 day term loan, which matures at the end of June .
Portion was used for working capital needs and the remainder was used for early redemption of $150 million of our March maturity.
Next month, we expect to redeem the remaining $399 million largely with cash on hand, we expect to meet any shortfall using short term liquidity.
This leaves us right on track with our plans in the near term.
Longer term the forward Nymex curve is still averaging near $4 per M. Btu in 'twenty 'twenty four and beyond at that level, we'd expect to see steady growth in our free cash flow based upon our current plans.
Furthermore, our integrated model and consistent and methodical approach to hedging provide a level of stability and predictability that underpin our cash flow outlook.
Combining this with credit metrics that continue to improve and are headed toward the mid triple B area. We expect to have great flexibility as it relates to capital allocation decisions going forward.
With that I'll ask the operator to open the line for questions.
Yeah.
Okay.
Thank you we will now start today's Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad now.
You change your mind. Please press star followed by Jay wanted to ask you question. Please and show your phone is on mute locally.
Our first question today comes from John Abbott from Typhoon Yolanda isn't that lies ahead.
Hey, good morning, and thank you for taking our questions.
My first question is to you David.
Yeah, My first questions yeah.
My first question and that is a potential deal opportunities.
You know in the past debuted you've expressed some interest in.
And potentially adding to your regulated regulated businesses.
Now assuming that something did become available what sort of size would you be sort of thinking about it that if you were to go down that path and how do you sort of thinking about a potential funding of that opportunity if that were to become available.
Yeah, well ideally it would be.
Oversize that that we could do within our within our balance sheet or with a.
I'd call it a modest amount of equity.
That puts it in a in a kind of more more modest sized transaction.
To the extent that we already to look to go bigger than that we'd have to be more creative in how we finance that either with a partner or some other.
Some other means.
I appreciate it and then my second question is for you Karen I mean, I appreciated the color on cash taxes for this year is I think you said about five or 6%.
How do you know if you sort of look peer into the future. Karen you look into 2024, how do you see cash taxes progressing at this point in time based on strip pricing.
So there will it.
There will be an increase but.
Where.
We're largely looking at moving into the call it lower teens.
Current strip prices.
Going out into 'twenty four 'twenty five.
Yep.
That is very very helpful. Thank you for taking our questions.
Yep.
Our next question today comes from trusted Lamar from Raymond James Your line is now open.
Yeah.
Hey, guys. Thanks for taking my questions.
First one kind of centers around Capex, obviously unchanged for the full year and I guess for Justin.
How are you kind of viewing the SaaS environment right now with regards to inflation. Obviously, you know you all are quarter or ahead of most of the Appalachian E&ps and so I was just kind of see maybe.
Maybe Pete.
From 'twenty two levels or are you still seeing kind of a higher rate of inflation similar to last year.
Sure Yeah. So.
Right now with where we sit I would say generally.
The service costs have kind of peaked.
You know, it's always hard to say exactly the peak goes flat from here or maybe we come down depending upon obviously commodity prices but.
If you're thinking more holistically across the industry.
That really means though is anyone entering a new contract is going to be at a higher level, but but from.
From the current levels that people are entering its largely seem to largely be kind of reaching the max of where theyre going on on major services more specific as it relates to Seneca.
We pretty much have have most of our services certainly for the balance of this fiscal year locked in that we have a new new contract. We executed with next here on our R. E Frac fleet as well as working on some of our longer term rig contracts, but generally for the most part this year most of that is locked in so we're.
We're pretty relatively insulated from any further inflation beyond what I've already talked about so we feel confident in our you know in our budget and our guidance that we put forth.
Perfect I appreciate the color on that and then a second question you know can similar to John's question.
Earlier, what about.
Now at this price environment potential bolt on opportunities for Seneca.
Yeah, how how do you all look at that and then yeah.
I guess, what's kind of the bid ask spread has been going around given the recent fall in natural gas, we are seeing more opportunities come available.
So haven't seen a lot of new stuff come available.
You know, it's always tricky in a in a rapidly increasing or declining market on trying to find meet in the middle on on what what value makes sense.
We remain very interested in opportunities that kind of fit us nicely and so when I talk about that.
Proximate or contiguous with our existing acreage.
Ideally have some element of takeaway capacity, we love it if it has a gathering midstream angle.
So we're continuing to look at opportunities that offer us those those kind of.
Some or all of those attributes.
And really we'll kind of watch to see as the prices evolve I'm hopeful that oh.
That there'll be more that'll come available, but there's definitely.
Bid asks are white, just given how much volatility we've seen.
On the way up and it would probably be hard for people to.
To accept a lower price given what they they could've done if they just executed say three months ago.
Yeah that makes perfect sense, okay. Thank you so much and congrats on a great quarter.
Thank you.
Yeah.
Okay.
Our next question today comes from that you mined Chowdhry from Goldman Sachs. Your line is now open.
Okay.
Hi, good morning team and thank you for taking my questions.
My first question was Ah Hey.
Hey morning. My first question was Ah I really appreciate your comments around the scoping plan then.
Let's do the extent you can shed any insights.
And Colorado regarding on the discussions that you're having with the regulators or the policymakers about managing the need to decarbonize rollouts have maintaining reliability of service.
It would be appreciated and then just to bolt on to that question. How are you thinking about your business mix longer term.
As to grow EPS and dividend, while managing the shell potentially.
Which could potentially be at equity crude restaurant.
Yeah, Yeah, so on the.
Our engagement with regulators.
The New York Public Service Commission has got a series of proceedings.
On on the future of of not just the gas business, but also the the.
All of the.
The utility business in the state and we've we've been active participants with that and have made a number of of.
Filings that.
That we've gone back and forth on with the with the state I mean, it's still it's still really early innings.
Earnings on this but.
The discussion so far it has been constructive.
And in terms of the long term business mix.
Now I'd like to see a balance between regulated and nonregulated.
And at times, we may be higher on the on the nonregulated side than regulated but I think over time, we'll be able to achieve that.
That balance and the.
The utilities will be an important part of that.
Gotcha, that's really helpful.
And then I guess, just a follow up on that pretty risk.
Discussion.
It sounds like a lot of your rig and completion crews are under contract here.
And to your point you are hedged out and then you're done.
So I was wondering if there's any price levels at which you wouldn't you wouldn't look at look back at your activity levels for this year and be like maybe it's been appreciate it pushed the completions out by a quarter or two quarters because of the pricing is a little bit more favorable down the road because we agree with you that long term outlook is much more favorable favorable with the LNG coming.
On Madden and crane for any five and beyond.
We are not.
While we've spoken to and I've mentioned this on a number of calls that our longer term plans envision continued growth in kind of the mid to single digits at least for the the overall call the near to intermediate term.
That's not something that we can evolve and so we're going to be very mindful of the price environment, we're going to try to really balance.
Capital efficiency growth and free cash flow generation, we want to achieve the best mix of those three things and if that means.
To make some delays or slow things down and then that that'll make the most sense. So really what I, what I guess I would just want to make sure. It's really clear is we're going to strive to find the optimal balance of those three things and if if we have a view or were locking in longer term pricing that we think makes sense to defer some things then will be will be very.
Open to evaluating that and incorporate into our longer term operations plan.
Gotcha, that's really good.
Thank you.
Yeah.
Just to reiterate if you would like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by <unk>.
Yeah.
So we have no further questions at this time, so I will hand, you back over to Brendan Hospital for closing remarks.
Okay.
Thank you drew 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 February 10.
To access the replay online please visit our Investor Relations website at Investor day at National fuel gas Dot com and to access by telephone call 1866188139403, and enter conference I'd number 856816. This concludes our conference call for today, Thank you and goodbye.
Okay.
That concludes today's national fuel gas company Q1, FY 2023 earnings Conference call. You May now disconnect your lines.