Q3 2023 National Fuel Gas Company Earnings Call
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Ladies and gentlemen, thank you for standing by today's conference call will begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
Please wait the conference will begin shortly.
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Thank you for standing by my name is Kayla Baker and I will be your conference operator today at this time I would like to welcome everyone to the National fuel gas Company Q3 fiscal 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session if you'd like to.
Ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star and one I would now like to turn the call over to director of Investor Relations Brendan Hospice you may begin.
Thank you Kayla 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.
Justin lowest president of Seneca resources and National fuel midstream.
At the end of the prepared remarks, we will open the discussion to questions.
Third quarter fiscal 2023 earnings release in August 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.
National Fuel's expectations beliefs, and projections are made in good faith and I believe 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 the call over to Dave Bauer.
Thanks, Brandon good morning, everyone laughs.
Last night, we reported adjusted operating results for the quarter of $1 one per share while general generally in line with our expectations earnings were down compared to last year.
Appalachian production was up six Bcf versus last year, despite the impact of over five Bcf of curtailments during the quarter.
But this was more than offset by the loss of earnings related to our California properties that were sold last June and sharply lower natural gas prices.
Youll recall that during last year's third quarter, Nymex averaged about $7 <unk> as compared to about $2 10. This year.
Yeah.
Operationally it was a good quarter across the company Seneca continues to see excellent results from its development program, which has driven production to record levels.
Cash unit operating costs were very much in line with expectations.
Pricing as I, just said was obviously a headwind for the quarter and will likely continue to be volatile through the fall, but our robust marketing and hedging portfolio minimize the impact to low and in basin pricing and limited the amount of voluntary curtailments during the quarter.
Longer term, we're constructive on natural gas prices is increasing LNG export capacity that starts ramping up in the next 12 to 24 months should drive increased natural gas demand.
Overtime, our deep inventory of high quality drilling locations positions us well to take advantage of higher pricing.
Our midstream businesses had strong operational quarters as well.
On the nonregulated gathering side NFC midstream saw a record gathering throughput from both Seneca and third party producers.
And our FERC regulated pipelines were able to capitalize on strong interest in short term transportation services.
Over the past few months volatility and locational pricing basis has created opportunities for our shippers and our marketing Department has done a great job optimizing the flows on our system.
Earlier this week supply Corp filed a rate case with FERC.
The filing considers the numerous investments we've made in rate base. The overall increased expenses of our pipeline operations and the ongoing need for supply to invest insist system modernization.
Including both regulatory driven and emission reductions projects.
New rates will go into effect February one subject to refund.
As you know we have a good history of settling our pipeline rate cases, so I'm hopeful we can reach a settlement before then.
Turning to the downstream business in June the Pennsylvania Utility Commission approved the settlement of our recent rate case under that agreement annual base rates increased by $23 million effective August one.
Construction season is well underway at the utility in both jurisdictions are on track to meet their mileage replacement targets.
As a reminder, we have a modernization tracker in New York that allows us to recover in near real time, the investments we make in modernization through September 2024.
In Pennsylvania, we plan to increase the pace of our modernization efforts and will likely seek a similar modernization tracking mechanism to begin recovering that investment.
In June our board of directors approved an <unk> <unk> per share increase to our dividend, which continues our impressive track record we've paid a dividend for 121 consecutive years and increased it in each of the last 53 years.
This is a streak that we're proud of and it's one we plan to continue well into the future.
Based on the outlook for the business I have every confidence we'll be able to do so.
Looking to next year midpoint to midpoint of our initial fiscal 'twenty four earnings per share guidance is nearly 11% higher than our updated 23 guidance.
This increase was driven by a number of factors.
Excuse me, including higher expected production and natural gas price realizations at Seneca.
Higher projected gathering volumes at <unk> midstream and the anticipated.
Related impact of the Pennsylvania and supply Corp rate cases at the regulated companies.
Tim will have more on our outlook later in the call.
Consolidated capital spending next year is expected to be modestly lower than in 'twenty three.
Most of the expected decreases at Seneca, where we anticipate capital will be about 7% lower than this year.
During fiscal 'twenty for Seneca will moderate its activity level as we transitioned to a maintenance to low single digit growth rate by fiscal 'twenty five.
We also plan to focus our development program more heavily in the eastern development area.
It's been three years since we completed our large Tayo County acquisition and we recently closed on three additional modest acreage acquisitions in the EDA that bolstered our position.
We like what we see there well results are outstanding and we have more than a decade of high quality inventory. So it makes sense to increase our focus on those assets.
Justin I'll have more to say on this later in the call.
Capital spending at the regulated companies is expected to increase driven in large part by continued cost inflation, coupled with the ramp up in the Pennsylvania modernization program I referenced earlier and the continued investment in modernization and emissions reduction projects at supply Corp.
This is a good use of free cash flow.
As I've said on past calls growing the regulated side of the business as a priority and investment in rate base is a great way to generate durable earnings and cash flows that support our growing dividend.
In closing, we continue to see great operational results across the system as we look to fiscal 'twenty four and beyond we remain focused on the efficient allocation of capital towards investments that deliver strong returns through commodity price cycles, and which generate sustainable earnings and cash flows that allow us to grow our dividend further strengthen our balance sheet.
And improve our overall financial flexibility.
With that I'll turn the call over to Justin.
Thanks, Dave and good morning, everyone.
<unk> midstream wrapped up another strong operational quarter with record production and throughput Seneca reported third quarter production of $94 eight Bcf, an increase of 2% over the second quarter and 7% above last year's third quarter Appalachian production notwithstanding the over five Bcf impact of third party pipeline downtime.
And voluntary pricing related curtailments.
Looking to the balance of the fiscal year, we are revising our fiscal 'twenty three production guidance range to 370 to 380 Bcf.
Seneca is moving forward with its plan to pushback the online timing of two pads to early fiscal 'twenty four to take advantage of higher expected winter pricing.
As a result, we expect fourth quarter production will be slightly down relative to the third quarter.
Through multiple pricing cycles over the last decade, we have maintained a philosophy of curtailing production when spot pricing is depressed and our experienced a detailed analysis still support this approach our reservoir characteristics and coordinated marketing and operations teams allow us to ramp production up and down through volatile periods like the one we're experiencing.
Given our expectation that in basin pricing will continue to be depressed over the next several months, we have locked in additional firm sales for July and August , leaving us with minimal exposure to in basin pricing for the remainder of the year.
I'll note, however that our guidance as usual does not account for the potential impact of further voluntary pricing related curtailments.
Moving to fiscal 'twenty four production guidance, we anticipate a 7% increase to a range of 390 to 410 Bcf.
Targeting 19 wells to be turned in line during November and December and additional pads in January and February which are expected to drive production higher and late Q1 and into Q2 to take advantage of winter pricing.
Overall supply demand dynamics have begun to improve which we expect will set up for a strong natural gas price recovery as a new wave of LNG demand ramps up in late 'twenty four and beyond while.
While the fundamentals are setting up for a more favorable longer term pricing environment, a robust hedge book provides a significant level of downside protection at attractive prices.
Over the past few quarters, we have continued to methodically layer in new hedges as the market is allowed and we currently have over 280 Bcf locked in with a combination of hedges and fixed price firm sales for fiscal 'twenty four.
We also have firm transportation and firm sales covering 88% of production at the midpoint of guidance.
Moving to capital, we are increasing our fiscal 'twenty three capital guidance to a range of $575 million to $600 million.
During the first half of the year, we were running two rigs and an intermittent top hole rig. In addition, we had a spot frac crew operating EBITDA as well as our dedicated Frac crew in the Wpa.
Going forward, we do not have any additional top hole work planned.
And in late May Seneca move to a single dedicated electric Frac crew.
This crew is currently operating in the EDA, where we recently completed a six well pad and are now completing a 13 well pad.
While overall capital spending has moderated our water management costs have trended higher which is now reflected in our fiscal 'twenty three and 'twenty four estimates.
Moving to fiscal 'twenty four capital is forecasted to decrease by 7% versus the midpoint of our updated fiscal 'twenty three guidance. It's important to note that fiscal 'twenty. Four includes a few onetime investments totaling over $35 million, which are expected to offset.
What would otherwise be a more pronounced capital decrease these include a seismic shoot in Tioga long term investments in water infrastructure that will provide cost and efficiency benefits to our future development program.
And a large land larger land driven budget.
Driven by a 2500 acre lease in Lycoming County that we expect to close during the quarter.
Regarding service costs, we're seeing cost moderate and expect a slight tailwind next year tubular pricing is trending down in both rig and frac rates seem to have peaked earlier this year and are holding steady or decreased from those levels.
So costs are still elevated compared to long term contract pricing from a year ago.
Looking out longer term based on current forward Nymex prices and consistent with prior plans, we expect to moderate activity and we will target maintenance to low single digit long term production growth in fiscal 'twenty five and beyond.
Further we expect to continue to transition to primarily EDA development, which is supported by over a decade of highly prolific development inventory.
While returns on our <unk> wells are strong the expected well productivity in the EDA is superior to that of the wells in the <unk>.
The transition to an EDA focused development program is expected to drive long term capital efficiency and higher free cash flow as we continue to focus on optimizing well costs and development plans.
We are fortunate to have almost entirely fee acreage and the <unk> that will never expire, allowing us to prioritize the EBITDA, where we can develop our most economic acreage now while preserving the ability to develop our WD acreage once additional out of basin takeaway capacity is available whether through peer inventory exhaustion or the construction of new <unk>.
Estate pipelines.
Turning to midstream, we continue to develop opportunities to grow third party volumes by fully utilizing our significant wholly owned gathering systems, we're having a terrific year with third party system throughput at record levels exceeding 16, DCF in the third quarter.
We also have significant construction underway in <unk> County, as we build out infrastructure to support <unk> long term development plans in the EDA.
Overall, our Appalachian development program remains well positioned to generate sustained free cash flow focusing on prudently deploying capital through commodity price cycles by leveraging our integrated model and maintaining our focus on cost structure, while steadfastly promoting our safety culture and sustainability initiatives. We're set up for continued success.
In the years to come with that I'll turn the call over to Tim.
Thanks, Justin and good morning, everyone yesterday National fuel reported third quarter GAAP earnings of one dollar per share.
Excluding some minor items relating to unrealized gains that impact comparability. Our adjusted operating results were $1 one per share a decrease of 53 from last year's third quarter.
Dave hit on the major drivers that I did want to note that last year's third quarter reflected approximately <unk> 15 per share of earnings related to our California assets.
We closed on that sale in June 2022, So this will be the last quarter, where we see a year over year impact.
The remainder of the results for the quarter were relatively straightforward and discussed in detail in last night's earnings release given.
Given that ill spend some time talking about our outlook for the remainder of this year and for fiscal 2024.
Starting with this year, we've narrowed our earnings guidance to a range of $5 15 to.
To $5 25 per share this.
This reflects the price related curtailments, Justin discussed and modest tweaks to some of our other guidance assumptions.
We are well hedged for the remainder of the year with approximately 80% of our production protected from pricing changes.
Additionally, we have firm sales in place for approximately 95% of our expected remaining production.
This leaves us with minimal exposure to in basin pricing, eliminating the risk of near term price related curtailments.
As we look to fiscal 2024, the outlook is strong across the company where each of our segments is expected to see meaningful earnings growth.
We are initiating earnings guidance with a range of $5 50.
To $6 per share an increase of 11% at the midpoint.
Starting with our regulated businesses, we are anticipating significant earnings growth, primarily driven by top line revenue increases in Pennsylvania. Our recent rate case settlement is expected to increase annual margin by $23 million.
We've also agreed to a new weather normalization mechanism that will dampen volatility during the winter heating season.
In New York, we are projecting an $8 million margin increase from our two pipeline modernization trackers.
Our ability to add new.
Investments to our original system modernization tracker ended in March. However, we are still able to recover the investments made prior to the sunset date.
That tracker was supplemented with a new system improvement tracker, which allows us to recover on the investments made after March 31 of this year.
Lastly, as Dave mentioned in our pipeline and storage segment, we filed for a rate increase at supply Corporation, we'd expect to have new rates in effect February of next year and that is reflected in our initial guidance.
On the O&M side, we are projecting a 5% increase in our regulated businesses versus the prior year.
This is driven by ongoing increases in labor expense expanded regulatory compliance costs at both the state and federal levels and the inflationary impacts on contractor and material costs <unk>.
Notwithstanding these projected cost headwinds, we still expect to deliver significant regulated earnings growth.
Our fiscal 2024 guidance assumes a $3 25 per M and Btu average Nymex natural gas price.
While this represents a 35% decrease from this year the value of our hedge book increases meaningfully next year as a result, we expect our average realized natural gas price will be approximately <unk> higher than fiscal 2023.
Pricing continues to move around so for reference a 25 cent change in Nymex equates to a 28% change in earnings per share.
When coupling higher realized prices with an expected 25 Bcf increase in natural gas production at the midpoint of our guidance Seneca is positioned to deliver meaningful earnings growth next year. The growth in production also accrues to the benefit of our gathering segment, where our midpoint to midpoint revenues are expected to increase by $20 million.
On the cost side of things, we are expecting senecas cash unit cost to remain relatively were roughly flat.
On a per unit basis modestly higher LOE is expected to be largely offset by lower other taxes related to the Pennsylvania impact fee, which is based on average calendar year Nymex prices.
We also expect a <unk> <unk> per Mcf increase in projected DD&A expense. This is in line with our expectation of DD&A trending towards our long term F&B rate of approximately <unk> 70 per Mcf.
Turning to capital we've increased our 2023 guidance range by approximately $50 million at the midpoint, principally driven by the increase at Seneca adjusted discussed earlier.
Changes are minor and are largely related to the timing of construction activity with our fiscal year end occurring in the middle of the pipeline construction season, many projects straddle fiscal years and the timing of capital can move around.
Looking at fiscal 2024, we've initiated capital guidance with a range of 865 million to $975 million.
This represents a 2% decrease from fiscal 2023 at the midpoint.
Overall, the decrease expected in our nonregulated businesses is largely offset with anticipated increases in spending in our regulated utility and pipeline and storage segments.
Given the importance of safety and reliability and the substantial system integrity and emissions focus.
Requirements for these operations, we believe it is prudent to continue to invest significantly in our modernization programs in each of our jurisdictions.
We expect that this pipeline of investments funded with our internally generated cash flows will drive mid single digit rate base growth over the next several years, providing stable predictable returns for our shareholders. We believe this is an attractive way to deliver value and supports our ability to continue to grow our dividend over the long term.
Bringing it altogether, we are now expecting this year's cash flow from operations to exceed capital expenditures by approximately $325 million. This is more than sufficient to cover our dividend and $150 million of upstream acquisitions this fiscal year.
Looking to fiscal 2024, we expect our cash from operations to exceed capital spending by $165 million. The primary reason for the decrease relative to 2023 is an expected to return to more normalized level levels of working capital.
As you May recall, we are projecting a large source of working capital this year given the decrease in natural gas prices.
This cash flow profile will leave our balance sheet in a good spot we would expect to end this year with debt to EBITDA in the low two times area and will likely remain in that range over the course of fiscal 2024.
This gives us a great deal of flexibility and positions us well to navigate challenges or execute on potential opportunities that come our way.
As we look beyond 2020 for the outlook for our business remains strong.
Lower prices for natural gas around $4 per <unk>.
We continue to layer in hedges to lock in the high returns we generate at these prices.
<unk> capital is expected to decrease in the modernization programs in our regulated businesses provide the path towards steady value accretive growth for many years to come with this outlook, we are well positioned to increase our long standing dividend further improve our leverage profile and deliver long term value to our shareholders.
With that I'll ask the operator to open the line for questions.
And at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
We will take our first question from you Meng <unk> with Goldman Sachs. Your line is open.
Hi, good morning, and thank you for taking my questions.
Good morning, good morning.
My first question was on this.
Hi, creating which are doing towards the eastern development program.
You have this one time impact of $25 million next year, but as you think about the program from a might be a basis can you talk us through what kind of efficiency gains we should expect from the from the outlook and then also.
Just kind of near term.
Any color you can provide in terms of the capex.
Capex increase.
For FY2023 thank you.
Sure.
I'll start with the.
I'll start with the near term just kind of some of the increase we've seen here of late.
Really.
The drivers behind fiscal 'twenty, three going up as the first half of the year, we had a significant amount of <unk>.
Significant program going on with in particular spot completion activity.
That was at a time when rates were quite high so our capital is running.
A little a little bit high but.
But ultimately as we work through the second half of the year, we've been seeing additional costs, particularly related to what I noted on the water management, mostly related to increased water hauling as we continue have more operations in the EMEA some elevated trucking rates.
These costs.
View them as transitory and evolving over time.
So kind of pivoting into the longer term plan and how the move to the EDA will really benefit our long term efficiency gains in.
Capital levels.
Over time.
We have significantly.
Better well productivity and our EDA Utica in particular, where we have a very deep inventory following the acquisitions. We've completed over the last few years and we've really validated the well performance there and the quality of our position and what we should expect going forward.
So moving to an area with with more well productivity. Both in terms of the deliverability of the wells early in their life holding flat at restricted rates of.
15% to 20 million a day for many months.
Higher <unk> will really benefit us over time, and we will be shifting.
Good a good chunk of our.
Activity in development into the EBITDA here over the next.
Year to two as that ramps up there are some onetime costs associated with doing that.
And largely related to the continued build out of infrastructure that will benefit us for many years to come.
So mentioned.
Water related infrastructure project, and then also I've been talking about some of the projects at our gathering business, where we're investing in things like centralized compression and dehydration, which.
Some of initial upfront capital, but really benefit O&M over time, so big picture of putting it altogether, we would expect.
And as we move into more of a maintenance.
Then we would expect capital overall capital levels for Seneca and gathering to shift down.
$50 million to $150 million below fiscal 'twenty three levels.
And just to be sure that exclude excluding the $35 million of one time charges right. So.
$5 million.
Taking all of the $35 million as well, which is up one time in nature in 'twenty four.
Yes, so 24 will be down relative to 'twenty three.
It would've been down even more had it not been for those those one times when I talk about kind of a long range view on capital I'm referencing off 23 as a as an initial point.
So definitely down.
Down quite a bit of what we see here in 'twenty three between Seneca and gathering.
Very helpful. Thank you.
And then would love your thoughts around M&A and M&A opportunities outside the.
The upstream space more on the regulated side.
Which you are seeing which is interesting for the company and how youre thinking about bad.
Balancing the portfolio between the regulated business in the nonregulated business longer term.
Yes, so I've said on past calls that growing the <unk>.
<unk> side of our business is.
As a priority.
But getting getting more balance quick.
Quickly would likely come through M&A.
Those deals tend to.
<unk>.
Every once in a while and we keep our eye out for for what's out there and.
We'll see a deal happen.
Gotcha and in the meantime, you have this modernization spend and other rate cases, which could help grow the right the regulated business and over the next year, Okay Alright.
Alright.
Yep.
And your next question comes from the line of John Abbott with Bank of America. Your line is open.
Hey, good morning, and thank you for take care questions.
Just going back John Devine.
Just going back to the E&P business and understanding the shifts.
Whats your western development area to eastern development area.
And so no meaningful shifts in that overall rate over multiple years.
Foreseeing.
I appreciate it and the second question I missed part of your opening remarks here on this question would be for Tim.
Tim just with the regulated business that range that you gave for next year, how do you think about that capex level over a multiyear horizon.
Yeah. It's a good question, John I think as Dave alluded to with the goal of trying to continue to grow the regulated businesses organically.
I would expect to see the pipeline business in the $100 million to $150 million area are really focused on the monetization efforts and emission reduction efforts.
And that I think it generates rate based growth in the call. It low to mid single digit area on the utility side I would say, it's a flatter capital trends of $125 million to $150 million area.
Continuing to grow the Pennsylvania side in terms of our modernization program given the availability of the disc mechanism there.
And continuing to replace 110 miles or so in New York each year.
And so that translates into about $125 million to $150 million per annum.
That's very helpful. Thank you for taking our questions.
You bet.
And again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Our next question comes from the line of Trafford Lamar with Raymond James Your line is open.
Hey, guys.
<unk> to color on Capex for Justin I was going to ask tenants.
Should we view production cadence in 'twenty four I think you mentioned.
<unk> will find its finishing out.
Yes, I'm, just trying to get any color would be great.
Sure so as we as we kind of.
Enter 'twenty four.
So call it <unk>.
October comes around.
I would say, we're not we're not really quite ramping that should be part of the shoulder months. So really our plans are designed around ramping into the winter pricing. So in that kind of November December timeframe. So we will see.
Our expectation is right now we will see production meaningfully start going up as we get into November and then throughout December and continuing to increase in January and February .
And then over the balance of the year that.
That will trend so youll have a lot of growth kind of going into Q2.
And then and then over the balance of the year that kind of flattening out and then declining again into the end of the year and we really try to to sculpt and as best we can manage our development plans to really take advantage of the seasonal pricing.
One of the few things in gas prices, you can somewhat rely on and so we really try to work hard to sculpt our development plans around that.
Great, Yes that makes sense and then for.
For 24 with.
With activity is shifting to the E.
You mentioned slightly higher cost per lateral foot.
For cost per foot for 24, and then any color on what that kind of looks like once that transition is completed assuming lets just stay flat plateau falls.
Yes, so our.
Our Tiger Utica wells.
So.
Our our kind of unique when you think about most northeast producers they are developing Marcellus wells we're developing.
These.
Deeper.
Utica wells more more akin to what you see over and say.
<unk> kind of deep southern Utica play and that's that's the kind of cost structure that we see.
Kind of in terms of an overall well cost ballpark that's in the fortune 500 to $600 per foot that's an all in number.
Which is somewhat comparable to what you would see for operators kind of in that same same zip code over there.
In the <unk>.
The reason those are the.
The balance to that is kind of what you see out of these wells and so you get a <unk>.
Generally a very very high pressure and youre able to flow. These wells at sustained rates for many months.
Before beginning to decline and EUR setter in excess of <unk> <unk> per thousand and we're drilling.
Would expect that to begin trending down those overall well cost per foot.
That's great. Thank you so much.
And there are no further questions at this time, Mr. Hospice I'll turn the call back over to you.
Thank you Kayla, 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 August 11.
The replay online please visit our Investor relations website at Investor Dot National fuel gas Dot com and.
Access by telephone call. One 870, 702030 and provide access code 4700 96 months. This concludes our conference call for today. Thank you Goodbye.
This concludes today's conference call you may now disconnect.
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