National Fuel Gas Company Q2 2023 Earnings Call
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Good afternoon, everyone I would like to welcome you to the National fuel gas company Q2 fiscal year 2023 earnings Conference call.
My name is breaker and that'll be urban specialist operating base quote.
After the Speakers' presentation today, we will conduct a question and answer session.
You ask a question at this point. Please press Star then one on the pad.
If you change your mind and would like to withdraw your question. Please press Star then two.
I'm for operator assistance at any point it starts anyway. Thank you I would now like to hand, the conference over to our age 50 day, Brandon has that director of Investor Relations Sorry, Brandon you May begin your conference call.
Thank you Bree 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, Tim Silverstein, Treasurer, and principal financial Officer, and Justin lowered president of Seneca resources and National fuel midstream.
At the end of the prepared remarks, we will open the discussion to questions.
Our second quarter fiscal 2023 earnings release and May 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.
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 will turn it over to Dave Bauer. Thank you Brandon and good morning, everyone.
Overall, the second quarter was a good one for national fuel with strong operational execution across our businesses.
Seneca and <unk> midstream had a particularly good quarter Seneca continues to see excellent results from its development program, which has driven both production and gathering volumes to record levels.
Spending per unit operating costs were very much in line with expectations.
Pricing was obviously a headwind for the quarter and will likely continue to be challenging in the quarters to come but we are well hedged for the remainder of this year and for next year.
Testing will have a complete update on <unk> operations later in the call.
<unk> was active during the quarter on the land acquisition front as.
As we announced in our earnings release yesterday.
Firing some smaller but highly strategic bolt on opportunities in our eastern development area.
As I've said on past calls our A&D strategy in Appalachia is focused on assets that are geographically contiguous.
They provide an opportunity to leverage our midstream infrastructure and it can be purchased at a reasonable price.
These acquisitions check each of those boxes.
Across the three transactions, we are adding approximately 36000 largely contiguous acres, most all of which are undeveloped.
In addition, we're acquiring approximately 20 million cubic feet per day at flowing production and a PD NP well that can be connected to our Lycoming County gathering system at a relatively low cost.
These assets add approximately 50 to 70 EDA locations and some of the most highly prolific parts of the basin.
In addition, these assets allow us the ability to drill longer laterals off more than 20 of our existing development locations, which should further enhance the capital efficiency and returns of our program.
Although these acquisitions will increase our capital outlay for the year, they should be covered entirely by cash from operations and.
And even considering the transactions our remaining free cash flow is expected to be sufficient to fund our dividend and to make headway in our goal to reduce absolute levels of debt.
Turning to our regulated businesses operationally, our utility and pipeline and storage segments performed well during the quarter. The warmer weather had a negative impact on the utilities financial results.
Higher O&M costs across the board were also a headwind, but the higher costs were expected and are the main reason, we filed a rate case in Pennsylvania, and we'll likely file in New York and with FERC.
Tim will have more to say on this later in the call.
In March we reached a settlement in our Pennsylvania rate case under that agreement the parties agreed to among other things a $23 million revenue increase effective August one and.
And the addition of a weather normalization mechanism.
We've had weather norm in New York for many years, but the Pennsylvania information has only recently begun to adopt them.
This addition is a win win for both our customers and the company, helping to mitigate the volatility in earnings and cash flows resulting from fluctuations in the weather.
The settlement, which was unopposed by the parties to the case was filed with the commission a few weeks ago and is expected to be approved at our summer session.
All in all I think this is a good settlement for everyone and I'd like to thank all of our employees that were involved in this proceeding which was our first rate case in Pennsylvania in over 15 years.
In New York, Despite widespread opposition from the public legislators in Albany continue to pursue natural gas vans.
Siena College recently pulled individuals throughout New York State and the results were clear.
In our service territory about 70% of the population as opposed to any type of natural gas ban whether it be for new construction or an existing homes.
And statewide nearly 90% of the people surveyed are concerned about the costs associated with moving away from natural gas.
Nevertheless, despite this clear message earlier this week the state enacted the budget Bill the bans natural gas equipment and buildings building systems and new construction starting in 2026.
Governor <unk>, who has advocated for gas bands signed the legislation into law.
On the surface this appears to be a significant step towards 100% electrification.
When you dig a little deeper you find the state tacitly acknowledges the public safety risks of Russian electrification.
For one the new rules contain a litany of exemptions, including for backup natural gas generators hospitals medical facilities commercial kitchens, and industrial and manufacturing uses.
Further the measure includes a provision that exempts natural gas for new construction in areas, where the electric grid cannot support the increased load, which at least in the near term maybe much of the state.
By its own exemptions. It appears the state recognizes that natural gas is critical for both energy reliability and economic prosperity, which is encouraging.
In my view, it's not a big leap to see this list of exemptions expanded to include hybrid heating solutions like we've proposed as part of an all of the above approach decarbonization.
Nor is it a stretch to see rules and regulations that consider regional differences in the state of <unk>.
New York is more than 50% colder than downstate and our housing stock is generally older.
Continued use of natural gas in Western New York makes perfect sense, it saves money for consumers and improvement energy reliability.
And the use of the natural gas system to deliver low or no carbon fuels in the future. We will build on the significant emissions reductions we've already achieved in our area of the state.
So how will this legislation affect national fuel.
From a practical standpoint, I don't see any significant impact for the foreseeable future.
For one the bands don't apply to existing buildings and about 90% of the buildings in our service territory already heat with natural gas.
Further Western New York isn't seeing major population growth in fact much of our construction growth is the result of repurposing of older commercial and industrial buildings.
For residential or mixed use facilities now.
And then lastly, as I stated earlier industrial uses of natural gas are exempt from the bands.
While the threat of more bands and other ill advised electrification actions will continue to exist. So long as the legislation remains in session. It's clear that all of the legislators and perhaps even the governor herself are acknowledging the very real fact, then imposing gas bans on an increasingly concerned public, especially when other more pragmatic solution.
Are known and achievable.
Is it best premature and at worst too much of a risk to businesses and residents of New York.
In closing, we continue to execute on our development plans across the system and are seeing great results.
As we look forward, we remain focused on the efficient allocation of capital towards investments that can deliver strong returns through commodity price cycles, and generate significant and sustainable free cash flow that further strengthens our investment grade balance sheet and improves our financial flexibility.
Before turning the call over to Justin I want to take a moment to recognize Karen <unk>, who retired last Friday.
<unk> had a terrific 2009 year career with the company, serving as controller and Chief Accounting Officer for nearly 15 years and CFO for the last four I wish her the very best in retirement.
With that I'll turn the call over to Justin.
Thanks, Dave and good morning, everyone.
Seneca and <unk> midstream had a solid second quarter.
Appalachian natural gas production for the quarter came in at 93, two Bcf, an increase of 3% sequentially and 12% above last year's second quarter production.
This increase was driven by solid operational execution and better than expected production from wells turned online in the first half of the year.
We also eclipsed the one Bcf per day net average for the quarter a milestone for us.
This production growth combined with our third party business drove record throughput at <unk> Midstream. This is a trend we would expect to continue over the near term, particularly with some incremental third party production that came online at the end of March.
This strong production during the quarter offset the headwinds we're facing on the natural gas pricing Brian .
While the long term outlook remains extremely constructive with Nymex futures pricing north of $4 per <unk> in 2025, and beyond the near term supply demand and storage inventory fundamentals will likely pose some challenges through next winter.
We expect in basin pricing will remain challenged over the next couple of months until we get into summer where increased power low demand is expected to provide more support.
As we entered the late summer early fall shoulder season, we expect cash prices to deteriorate again as gas storage levels near capacity.
However, we are well insulated from this expected pricing weakness with over 90% of our remaining production protected by our valuable marketing portfolio, which significantly dampens our exposure.
With price is anticipated to improve by next winter, we are modestly adjusting our operation schedule its target higher production volumes in early fiscal 2024.
This will primarily be accomplished by pushing out online dates of a pattern to by a couple of months, which will bring flush production online in a higher expected winter pricing environment.
This is not anticipated to have a material impact on capital or production during the remainder of the fiscal year.
As it relates to our overall level of capital for the year, we are maintaining our guidance within the range of $525 to $575 million.
As we discussed last quarter, our spot completions crew.
Top hole rig work and online activity was frontloaded in the first half of the fiscal year.
As a result capital naturally moderate for the remainder of the year.
For reference during the last six months of the year, we expect to turn in line, 7% to 13 wells compared to 25 operated in nine non operated wells in the first two quarters.
Despite these adjustments to our operations plan our production guidance remains unchanged at 370 to 390 Bcf.
As the affirmation aforementioned strong well performance is expected to offset a modest amount of production that we plan to push to the first quarter of fiscal 2024 to take advantage of higher winter pricing.
Taking all this into consideration I expect our production will increase again in Q3 before declining in Q4 and into early next year, and then ramp up during the peak winter months.
As a reminder, our guidance does not incorporate voluntary pricing related curtailments.
Regarding inflation, we are seeing signs of a rollover in service and raw material costs, particularly in tubular.
I believe that the worst of the inflationary headwinds are behind us and we may see a flat to modest deflationary trend going into fiscal 2024.
Looking out longer term, while our existing firm transportation and firm sales portfolio supports our development plans over the next 12 to 18 months beyond fiscal 'twenty four we may look to shift our activity to maintenance mode absent.
Absent securing additional firm transportation capacity or the execution of significant new long term firm sales, we plan to move towards maintenance production levels in fiscal 2025 and beyond reducing our spending levels.
Given the integrated nature of our development plans. This is also expected to result in opportunities to lowered long term capital investment levels at <unk> midstream.
As we optimize plans and continue to focus on consolidated returns.
As communicated previously Seneca and <unk> midstream planned to increasingly focus our development and capital allocation and our eastern development area tailored County in particular, which will allow us to maximize capital efficiency and free cash flow generation in the years to come.
On that note over the last few months, we've had various long pursued eastern development area of bolt on acquisitions all come together at the same time.
As Dave mentioned, we announced three separate transactions that will further deepen our core inventory of Toyota and Lycoming development locations.
With our large core operating position in the eastern development area.
We believe we can integrate these assets and create differentiated value.
First Seneca has entered into agreement with southwestern energy to acquire approximately 30000 net acres entitled and Potter County.
It also includes approximately 20 million cubic feet per day flowing net production.
This acreage is contiguous to our existing titles that position, allowing significant operational efficiencies.
We also we've also executed two smaller contiguous bolt on acquisitions entitled and Lycoming counties totaling about 6000 net fee and lease acres with a modest amount of production and one proved developed non producing well. We're excited to close these bolt ons and we'll be looking at opportunities to integrate these assets with national fuel's existing.
Midstream infrastructure.
Turning to our sustainability initiatives I would like to highlight a program. The Seneca construction team is moving forward with which we have named our surface footprint neutral initiative.
Through this initiative, we plan to restore enhance and protect biodiversity by returning one acre of land to its natural state for every acre of pad and road development disturbance required for our operations through a variety of conservation projects.
We also continue to make significant progress on our ongoing emissions reduction efforts. Examples include our aerial facility scale monitoring nomadic device conversions at Seneca and facility modifications at <unk> midstream and we look forward to sharing more details on our progress when our corporate responsibility report is published later this year.
In conclusion, our team continues to successfully execute our plan and despite the current natural gas pricing headwinds are robust marketing portfolio and integrated development supports long term free cash flow generation.
Looking beyond fiscal 2023, our integrated operations deep inventory of high quality development acreage and strong culture of safety and sustainability puts us in a great position for continued success throughout all stages of the commodity price cycle.
With that I'll turn the call over to Tim.
Thanks, Justin and good morning, everyone last evening National fuel reported second quarter GAAP earnings of $1 53 per share excluding items impacting comparability. Our adjusted operating results were $1 54 per share a decrease of 14 from last year's second quarter.
There were three principal drivers of this decrease with the largest being related to the sale of our California assets, which closed in June of 2020 to.
Last year, California contributed approximately 13 cents in earnings during the quarter.
In addition, we also experienced higher operating costs in our regulated subsidiaries and 11% warmer weather in our utility.
Somewhat offsetting these decreases or <unk> higher production and associated throughput in our gathering business.
With respect to weather and regulated operating costs I'll take a few minutes to address our plans to mitigate their impacts.
As Dave mentioned, we reached an agreement with parties in our Pennsylvania rate case on a $23 million revenue increase.
The settlement agreement was filed in April and we expect a decision from the commission that would put new rates into effect on August one and.
In addition to the rate increase the inclusion of a weather normalization mechanism with a dead band of plus or minus 3% will help reduce year to year volatility.
With this settlement, we expect to continue to have among the lowest if not the lowest rates in the Commonwealth.
Which is a great outcome for our customers. This will go a long way to support our ongoing modernization program further reducing emissions on our system, while mitigating the inflationary pressures we are currently experiencing.
In addition to the positive progress in Pennsylvania in March The New York Public Service Commission approved a new system improvement tracker.
<unk> with our current modernization tracker this permits us to recover costs associated with new modernization investments.
The newly approved tracker allows us to continue recovering costs associated with system modernization investments placed in service from April one of this year through September 2024.
For all of fiscal 2023, we expect incremental revenues of up to $5 million associated with these two mechanisms, which will go a long way to improving earned ROE in New York.
In conjunction with the new tracker. We also agreed to a short stay out provision with respect to a potential rate case.
At least we could file with this fall.
Given the ongoing inflationary headwinds and the continued growth in rate base from our modernization program. This is the path. We are currently proceeding on.
This would put new rates into effect at the start of fiscal 'twenty five.
And our pipeline and storage segment.
Under our previous rate settlement at supply Corporation, we can file for a rate increase as early as the end of July .
Given our ongoing focus on pipeline modernization and compliance with new regulations, including safety and emission reduction measures. We continue to see rate base growth and cost increases pressuring our returns as a result, we expect to file a rate case in the summer such that new rates could be an effect as early as next February .
Collectively as the busy time on the rate case front, but the continued need to focus on system modernization and emission reductions combined with ongoing inflationary headwinds supports rate increases at our regulated subsidiaries.
As we look into fiscal 'twenty four 'twenty five we expect the resolution of these proceedings to contribute to improving earnings and cash flows.
Turning to the outlook for the remainder of fiscal 'twenty three we have revised our earnings guidance to a range of $5 10.
To $5 40 per share a decrease of 30.
Our 5% at the midpoint.
This is driven by three major factors the largest of which is the lower expected natural gas price realizations for the remainder of the year.
Also contributing to the reduction is the effect of warmer weather on our utility business during the second quarter and higher projected interest expense.
The latter is due to a larger near term financing need that will result from the expected closing of <unk> bolt on acquisitions combined with higher interest rates than previously forecasted.
Other than these items the rest of our guidance assumptions for the full year remain unchanged.
With respect to natural gas prices, our new guidance reflects a nymex price of $2 50 per <unk> for the remaining six months of the year.
Which is a 75% reduction from our prior guidance.
Offsetting some of this impact is the benefit from favorable hedges added during the quarter for.
For the remainder of the year, we're 77% hedged. This includes 12 Bcf of new Nymex swaps at a price of $3 25.
For reference a 25 cent change in pricing would impact earnings by <unk> <unk> per share.
As a reminder, we have 47 Bcf of Costless collars in place. So this impact is not necessarily linear on.
On the physical side, we've also been actively locking in near term sales at the midpoint of our guidance range. We have approximately 92% of our remaining fiscal year volumes tied to a firm sale.
Which limits the amount of production exposed to in basin pricing.
We remain committed to our hedging program and will continue to be methodical and adding new hedges.
Given the contango in the natural gas forward curve, we see the opportunity to layer in additional hedges in the coming quarters at strong prices with a particular focus on 2024 and 2025.
And with the hedges added during the past few months, we are well positioned for next year, where we already have approximately 265 bcf of hedges in place at good prices.
Lastly, I want to discuss our outlook for free cash flow you will see that we switched the presentation of this metric in our IR deck to focus on cash from operations as opposed to funds from operations.
Changes in working capital can drive more volatility under this approach. We believe this gives investors a more complete picture.
For the year, we now expect free cash flow inclusive of working capital to be $410 million before the impact of our recently announced acquisitions accounting for approximately $145 million related to these acquisitions, we are left with $265 million to cover our dividend.
With the risk with the rest expected to be directed towards debt repayment.
From a financing perspective, we redeemed $549 million of long term debt earlier this year through a combination of short term debt and cash on hand as a result, our short term borrowings increased to approximately $400 million at the end of March these.
These borrowings were split between commercial paper and a $250 million term loan that matures at the end of June .
Given the inverted yield curve and the more challenging bank market over the past two months, we will likely term out a large portion of this short term debt through a long term debt issuance.
This will help reduce near term interest expense and free up capacity under our $1 billion multiyear revolver. This.
This leaves us with the liquidity to navigate potential macroeconomic challenges and natural gas price volatility in the near term.
With long term nymex prices trending above $4 our outlook for free cash flow generation remains strong and is supported by our near term hedge book and valuable long term firm sales and firm transportation portfolio.
This positions us well to execute on our ongoing deleveraging plans and growing our long standing dividend all while retaining the flexibility to strategically invest in further growth opportunities or return additional capital to shareholders.
That I'll ask the operator to open the line for questions.
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Thank you.
Like to ask a question. Please press Star then one on your telephone keypad.
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We have a first question on the phone lines from traffic Nomura of Raymond James.
Hey, guys good morning.
Alright.
I guess my first question for Justin.
Kind of surrounding 'twenty four Capex I know, it's early but you mentioned.
Some costs plateauing or even decreasing specifically on the tubular side.
But what about.
Specifically surrounding service cost deflation what are you all seeing there on.
The Reagan crack side.
Sure so at.
At this point.
Yes.
The biggest change that we've seen and so over the last couple of months or so is just that there is significantly more availability of services. So specifically, you're fracking and your rig services.
We were very very tight if you go back six to nine months ago. That's opened up in that in our view is really the first step towards some reductions.
Definitely I think the leading edge is that there may be some modest decreases around that.
But we think thats really going to play out over the next.
Three to six months and will significantly relate to the amount of activity.
And gas basins, but frankly also in the oil basins. So our bias on the service side is kind of flat to modestly declining if you look out.
Six to nine.
Or so.
Okay perfect appreciate the color on that and then next question because Dave and Tim.
Looking at the balance sheet.
You all repaid your 'twenty three maturities.
And have leverage right around to ask and you mentioned, possibly issuing a longer term maturity to payoffs with shorter term debt.
But with leverage at two <unk> you all are investment grade.
How do you kind of look at it.
Target leverage figure moving forward, especially at this low price cycle environment.
Yes, it's a.
A good question. So I think the way to think about it is in the high ones low twos is probably the right area for us to be and obviously, making sure that we can.
Maintain our metrics comfortably within the bounds that the rating agencies have said through the lower points of the cycle and if you look at where we're at right now.
Got lots of room within our current guidelines. So I would say, where we are at today and trending into the high ones over the next year or two as is the spot for us.
Okay perfect. Thank you guys.
Yep. Thank you.
Thank you as a reminder, its star one if you'd like to ask a question today.
We have had no further questions registered so I'll hand, it back to Andy.
Final remarks.
John .
We do have a follow up question on the.
A line from traffic demand.
Hey, guys. Thanks for letting me get one more in here.
I guess last thing I have is really on on free cash flow and it's if you all really considered.
Working in buybacks too.
Shareholder return framework, obviously, you'll have you'll have the base there, but I just wanted to get your thoughts on potential buybacks moving forward.
Yes, certainly there would be the potential for that.
Down the road are first.
First goal is to get.
Our absolute levels of leverage.
Down so not just our our metrics like <unk> to debt and.
And debt to EBITDA, but actual total leverage down once we hit that.
Evaluate different different opportunities. Our hope is that something would come along that allow us to grow the company rather than shrink it through a buyback, but but absent those opportunities a buyback is something that we would we would certainly consider.
That makes sense okay. Thank you.
You bet.
Thank you we have no further questions from the line.
We now have a question from Timothy <unk> with Gabelli <unk> company.
Good morning, and thanks for taking my question I was wondering if you could just talk a little bit more about.
The plane decision to go to a maintenance mode.
Whats.
Sort of underlying that.
That plan and what would maintenance mode look like from a capital expenditure.
And production.
Guidance look like.
Sure. Thanks, Thanks for your question Tim.
But what really underpins, our our development plans and our production growth has remained consistent for a long time now and it's the ability to reach premium markets and so we've been fortunate we've had a really solid firm transportation portfolio and if you recall.
16 months ago, now we were able to.
Our sister companies from 100, and the Leidy South project came online, giving us a significant leg of growth.
Opportunity in the strong markets and we've augmented that plus our other firm FTE with with firm sales.
So as we look to the future.
We don't anticipate any newbuild infrastructure is going to get announced and get built by 2025.
There is the possibility of of capacity turn backs and we've been successful at a couple of those over the last last year.
And there is there is the potential also additional long term firm sales, which has been our practice of ours for a long time.
But our view is very much.
We don't have a premium market that will move the vast majority of our gas to.
On the right the right answer is to moderate our capital levels and moderate our production to basically match our long term takeaway.
Takeaway and then of course augmenting all of that with R. R.
Long standing policy around methodically entering hedges.
As it relates to capital.
Nothing has really changed much with the prior discussion on that.
They're there.
The general view is that you would kind of have excluding any sort of inflation or service cost changes in kind of Apple Apple.
The comment, but generally I would expect Seneca and midstream capital would be 50, excuse me $75 million to $150 million.
<unk> per year.
Below current levels and so.
There'll be a little bit about <unk>.
Noise in that range and we may have a large midstream infrastructure projects or something like that in a given year that can move you around or an extra pad being completed and so forth but.
That would be the general view on the long term long term trend and it's something we'll be talking more about in the coming quarters.
Okay, great. Thank you that's very helpful.
Okay.
Thank you.
It is star one to ask any further questions today.
As we have no questions registered I'll hand, it back.
That key brand enhancement for any final remarks.
Thank you breakup and 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 Thursday May 11, two.
To access the replay online please visit our Investor Relations website at Investor Dot National fuel gas dot com and to access by telephone call. One 806 6839403 provide access code 300 13864.
This concludes our conference call for today, Thank you Goodbye.
Thank you for joining I can confirm that does conclude today's call. Please have a lovely day and you may now disconnect your lines.
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