Q4 2023 National Fuel Gas Co Earnings Call
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Good morning, and thank you for joining the National fuel gas Company Q4 fiscal 2023 earnings Conference call. My name is Kate and I will be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now like to turn the call over to your host Brendon hospice.
Erector of Investor Relations you May proceed.
Thank you Kate and good morning, we appreciate you joining us on today's conference call for a discussion of last evening's earnings release.
This 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 lowest president of Seneca resources and National fuel midstream at the end of the prepared remarks, we will open the discussion to questions. The.
The fourth quarter fiscal 2023 earnings release in November Investor presentation have been posted on our Investor Relations website, we may refer to these materials during today's call.
We'd like to remind you that today's teleconference will contain forward looking statements.
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 date on which they are made and you may refer to last evening's earnings release for a listing of certain specific risk factors with that I'll turn it over to Dave Bauer.
Thank you Brandon good morning, everyone.
Fiscal 'twenty three it was a good year for national fuel, both financially and operationally.
And one that positions the company for growth in the years ahead.
Senecas production was up 9% over last year, averaging over one Bcf per day net.
Cash operating costs continued to trend downward as we build scale at Seneca.
Commodity prices were a headwind during the year, but our consistent approach to hedging mitigated a lot of the pricing impacts and protected for substantial portion of our earnings and cash flows.
Earnings at our regulated businesses were down slightly due to cost inflation and the associated regulatory lag, but recent rate proceedings in all three jurisdictions should reverse that trend.
Most importantly, we generated $275 million of free cash flow during the year roughly in line with nearly $300 million of combined free cash flow and proceeds from asset sales in fiscal 'twenty two.
In addition to continuing our long history of returning significant and increasing amounts of capital to shareholders through our dividend the free cash flow we generated over the past two years has funded a $150 million of bolt on acquisitions in our eastern development area. While at the same time contributing to a reduction in our absolute levels of debt.
Given our deep and growing inventory of high returning locations entirely county.
SaaS Summer, we started a multiyear transition of Senators development program to focus more heavily on the <unk>.
While it's early the trends transition is progressing smoothly.
We just brought online a six well Marcellus pad in Tioga County, and expect to bring online in the first quarter, a 13, well Marcellus pad in Lycoming County.
Duction rates drilling and completion costs and the timing of the wells being brought online have all been in line with or better than our expectations.
Overall, we expect substantially higher productivity and IRR in the EDA when compared to our <unk> acreage and with over 10 years of high quality inventory in this area, we expect to see sustained improvement and long term capital efficiency and free cash flow generation that Seneca and energy midstream.
With this increased focus on the EDA.
Seneca and our FERC pipeline businesses have been focused on developing additional outlets percentages growing production entitled County.
To that end last month Seneca executed a precedent agreement for 190000 <unk> per day of firm transportation capacity on supplies Tioga pathway project.
With an expected in service date of late calendar 2026. This project will provide <unk> with access to markets connected both PGP and transco via its existing leidy south capacity.
From a facility standpoint, the project is a combination of new construction and the modernization of existing facilities with a total estimated cost of $90 million.
We're currently working to develop the FERC application for the project and anticipate filing it by next fall.
This is a great opportunity to diversify the <unk> portfolio of takeaway capacity and improves its long term ability to move Tayo county volumes to higher value markets.
Additionally, it provides a layer of long term growth for our pipeline and storage segment above and beyond the near term increase in revenues. We expect from the supply Corp rate case, we filed in July.
That proceeding is moving along according to schedule and settlement discussions should commence by December.
We have a history of settling for a rate cases and are optimistic we'll do so with this case.
We've also been active on the utility ratemaking side.
Our $23 million rate increase in Pennsylvania was approved in June and new rates went into effect August one.
While we saw a modest impact during the fourth quarter, we will see most of that increase reflected in the first and second quarters of fiscal 'twenty four when customer consumption is the highest.
Also as a reminder, as part of this proceeding we implemented a new weather normalization clause, which should help dampen the volatility in our fiscal 'twenty four utility earnings.
Yeah.
Switching to New York This past Tuesday, we filed a rate case in that jurisdiction that is our first since 2016.
We've asked for an $89 million annual increase effective October one 2024.
There are several drivers of the need for increased rates.
As you know we have modernization trackers that have allowed us to stay out of a rate case for the past several years, but the ability to add new investments to those trackers sunsets on September 32024.
Further continued wage inflation and the ongoing cost of complying with both new regulations and the state's climate Act are also driving the need for this proposed rate increase.
Other notable items from the filing include a proposal for a bad debt expense tracker and several initiatives aimed at implementing practical de carbonization solutions that leverage our reliable resilient and affordable natural gas delivery system.
A summary of the filing is included on page 35 of our updated IR deck.
To say next spring as we get through the early stages of the rate case, and see testimony from commission staff and other intervenors.
In closing the outlook for National fuel remained strong with our recent rate making activity, we expect to see significant earnings growth in our regulated businesses over the next two years.
Looking beyond that we expect growth from our Tioga pathway project and from the ongoing modernization of our transmission storage and distribution systems, which in addition to ensuring the safety and integrity of our operations should drive annual rate base growth of at least 5% in those businesses, which in turn should translate into earnings growth in the mid <unk>.
High single digits over the next three to five years.
On the nonregulated side of the outlook for free cash flow generation is robust as we moved fully through the transition to the EEA and further high grade our development program. We expect continued improvement in capital efficiency and returns.
Binding us with the improving outlook for natural gas prices and our strong hedge portfolio that supports increasing price realizations, we expect significant cash flow growth and free cash flow and earnings out of these businesses.
From a value proposition standpoint national fuel is unique amongst our peers, we have a clear line of sight to significant growth in our regulated earnings and assuming the current natural gas strip the potential for very meaningful earnings growth and free cash flow growth in our nonregulated subsidiaries, all of which positions us well to deliver significant value.
To our shareholders in the coming years with that I will turn the call over to Jonathan.
Thanks, Dave and good morning, everyone fiscal 'twenty three was a great year for both Seneca and NFC midstream.
It sets up our Appalachian development program for continued success in the years ahead.
<unk> registered another year of record net production, averaging over one Bcf per day.
Which combined with increasing third party volumes drove record revenues at midstream.
We also began our transition to an EDA focused development plan, which is supported by continued strong well results in Tioga County, and the integration of recent bolt on acquisitions that further bolster our deep inventory of highly economic future development locations.
Our integrated approach to development creates capital efficiency tailwind with Seneca increasingly targeting its highest returning area and midstream leveraging its significant existing gathering trunk lines and centralized facilities.
Starting with midstream we achieved several notable milestones in fiscal 'twenty, three including record throughput and EBITDA.
<unk> increased more than 8% to over one two bcf per day.
With third party gathering volumes, increasing nearly 20% over the prior year.
EBITDA also increased 5% year over year to $186 million.
Looking to fiscal 'twenty four we expect this growth to continue as we focus on the ongoing coordinated infrastructure buildout with Seneca to support it shift to an EDA weighted development program.
Moving to <unk> 23 results, we concluded the year with a strong fourth quarter producing 94 Bcf.
Our team delivered fiscal year production of 372 Bcf, an increase of 6% year over year. These.
These strong results included the impact of six Bcf, a voluntary curtailments due to low invasive pricing.
<unk> reserves also grew to over $4 five tcf as of fiscal yearend.
With net additions and revisions of over 700 Bcf.
Representing an annual increase of 9% and an impressive nearly 200% reserve replacement.
In addition to record production in reserves during fiscal 'twenty, three cynical expanded its highly economic EDA position.
As previously announced we closed on three separate largely contiguous acquisitions in the third quarter and in the first fourth quarter. We added an additional 3000 acres. The majority of which is held in fee.
These transactions added 50 to 70, new development locations with high NRI and significantly increase lateral lengths on over 20 existing development locations.
At a time when much of the industry is facing core inventory exhaustion and moving to develop lower tier acreage.
We have meaningfully expanded our core inventory position and shifted our focus towards our highest returning areas, which will drive improving capital efficiency going forward.
Looking to fiscal 'twenty four our capital guidance remains unchanged at $525 million to $575 million and expected decrease of 6% versus fiscal 'twenty three capital expenditures at the midpoint of guidance.
With respect to production, we are maintaining our guidance of 390 to 410 Bcf.
Up 7% at the midpoint relative to fiscal 'twenty three we.
We expect the cadence of development activity and capital spend will be weighted towards the first half of the year to bring new pads and flush production online during the winter months with 2007 <unk> planned in Q1 and Q2.
As a result, we expect relatively flat production in Q1 over the prior quarter with significant growth into Q2 production and then shallow declines throughout the back half of the year.
Longer term <unk> development plan remains unchanged, we expect to continue to focus our investments in the EDA and will target maintenance to low single digit production growth.
As we make this transition beginning in fiscal 'twenty five we expect the combined annual capital expenditures for Seneca and midstream will be $50 million to $150 million below fiscal 'twenty three levels.
Turning to our marketing and hedging plans, we expect continued price volatility in the near term and has positioned our portfolio accordingly and.
In fiscal 'twenty, four we have downside pricing protection for approximately 70% of our expected production through a combination of swaps costless collars and fixed price firm sales in.
In addition, we have takeaway capacity through firm transport and firm sales for nearly 90% of expected 24 production.
Our longer term marketing efforts are focused on basis protection.
And we will look to mitigate basis risk while working to capture the upside we anticipated natural gas pricing based on the forward curve and market fundamentals.
We also continue to evaluate additional takeaway capacity to support our development plans.
This quarter, we made significant headway on that front as Dave said, we committed to the $190 million of data over pathway project, which will transport growing Tiger County production into more favorable markets on Tennessee and directly into our leidy south capacity.
This project has a targeted in service date in late calendar 2026.
Moving to safety and sustainability.
I'd like to highlight some impressive achievements.
As described in our corporate responsibility report, which we released in September Seneca in midstream have achieved 27% and 14% reductions, respectively, and methane intensity as compared to the 2020 baseline.
Additionally in August <unk> was re certified under the <unk> standard for methane emissions performance with an a grade the highest certification level available.
Similarly in September midstream attained certification on 100% of its assets under <unk> EUR 100 standard <unk>.
Making it the first natural gas gathering entity to obtain certification under this process.
Also in fiscal 'twenty, three midstream and Seneca each completed another year with zero Dart injuries.
<unk> Street, we will work hard to continue.
These achievements collectively demonstrate our focus on safety and continuous improvement and the sustainability of our operations.
In conclusion, Seneca and energy midstream are well positioned for continued success in the years ahead, our long term development plan prioritizes returns capital efficiency and increasing free cash flow generation and is supported by a strong portfolio of takeaway capacity and a deep inventory of EDA and WD development locations.
We have the talent the assets and the operational track record to continue to successfully execute while maintaining the highest standards for sustainability and safety with that I'll turn the call over to Tim.
Thanks, Justin and good morning, everyone last night National fuel reported fourth quarter adjusted operating results of <unk> 78 per share the decrease in earnings compared to last year was largely driven by lower realized natural gas prices for the quarter Nymex prices averaged $2 55 per M btu compared to more than $8 and last.
Years fourth quarter, however, our hedge portfolio mitigated a significant portion of those price decrease.
In addition to pricing there are a few other items that I want to hit on with respect to our reported results in fiscal 2020 for guidance.
First capital spending for fiscal 2023 came in slightly above the high end of our guidance range.
Breaking it down by segment, our upstream and gathering businesses came in right on top of the midpoint of their respective ranges. However, we finished the year above our spending guidance ranges for both of our regulated segments.
Construction activity came in ahead of schedule in the fourth quarter.
With rate cases on file in our New York utility and supply Corp subsidiary and the availability of our system improvement tracking mechanism in our Pennsylvania utility we've been working hard to ensure that our monetization program stays on track and the associated capital is placed in service efficient as efficiently as possible.
While this push us above our previous guidance range. It was important to get this plant in service in order to ensure that we are able to earn a timely return on these investments.
Next our DD&A rate of 65 per Mcf for the fiscal year was above the high end of our guidance range. This was driven principally by our ongoing transition towards an EDA focused development program, where well productivity and returns are superior to our western development area.
Despite this return profile. These wells tend to carry a higher F&D cost and those and the WD. In addition, we added 40 proved undeveloped locations to our reserves this year totaling in excess of 500 Bcf.
These reserve adds were more than previously projected which is a positive indicator of the success. We are seeing in the EDA. However, this does drive our DD&A rate up as those reserves initially carry a higher implied depletion rate until they are fully developed.
Together these factors impacted the fourth quarter and are the main driver behind the projected increase in our fiscal 2024 DD&A rate.
Despite this <unk> outlook for capital spending and free cash flow generation over the next few years remains unchanged.
Switching to income taxes earlier in the year. The IRS released long awaited guidance related to the treatment of certain capital expenditures to maintain and improve natural gas transmission and distribution property.
We recorded an initial estimate of the impact of this guidance in our fourth quarter results. This provided a nice earnings tailwind during the quarter that will carry into future years looking specifically at fiscal 2024, we are estimating a 50 basis point reduction to our overall effective tax rate, which is now expected to be in the range of 25% to 25, 5%.
This updated IRS guidance is expected to provide a meaningful benefit to our cash taxes, which has been reflected in our revised free cash flow outlook for 2024.
With these few changes incorporated into our fiscal 2024 projections, we have updated our earnings guidance to a range of $5 40.
The $5 90 per share, which at the midpoint represents a 9% increase in earnings compared to fiscal 2023.
Our Nymex price assumption of $3 25 per M and Btu remains unchanged and for reference a 25 cent change in pricing would impact earnings per share by approximately <unk> 27.
Additionally, with the tailwind on our expected cash tax rate in 2024, we are now expecting free cash flow to be approximately $200 million for the year, an increase of roughly 20% compared to our prior estimate.
This expected level of free cash flow more than covers our increasing dividend rate projected for the year and positions us well as we target significant free cash flow growth in the years that follow.
From a balance sheet perspective, given where we exited fiscal 2023 and the outlook for 2024, we project our credit metrics to trend towards two times debt to EBITDA and in excess of 40% <unk> to debt over the next 12 months.
This gives us significant cushion relative to our existing downgrade thresholds and more importantly would be very close to the upgrade thresholds established by the rating agencies.
We also have adequate liquidity with no long term debt maturities until mid 2025, and approximately $700 million available under our committed credit facility, which does not mature until 2027 and.
In conclusion national fuel is positioned to create meaningful value well into the future.
Whether it is additional organic growth opportunities such as the Toyota pathway project further highly strategic bolt ons in our nonregulated segments or opportunities to rebalance our business mix by acquiring regulated assets at a fair price. We are focused on maintaining our track record of making strategic investments that deliver returns well in excess of our cost of capital.
Over the long term.
Our ability to leverage a strong balance sheet and long term outlook for free cash flow generation provides us with the flexibility to pursue the best value creating opportunities for our shareholders.
With that I'll ask the operator to open the line for questions.
Absolutely we will.
We'll now begin the question and answer session.
Like to ask a question. Please press star followed by a one on your telephone keypad.
Any reason you would like to remove your question. Please press star followed by Hai.
As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question again to ask a question at a star followed by a one day.
The first question will be from the line of Yamana Q dry with Goldman Sachs. Your line is now open.
Hi, good morning, and thank you for taking my questions.
Let me start with the Tiger project, where you plan to add 190 Mcf per day of capacity coming online in <unk> 26.
I wanted to get a sense in terms of how you plan to.
What are the plans around the upstream segment do you plan to grow production to fill in the capacity.
And if any color you can provide in terms of potential uplift in net backs to the project.
Sure.
Thanks for the question.
So yes. This is all part of our longer term strategic growth plans and Toyota and creating additional takeaway capacity that will allow for the growth that we have planned.
When you look at our production rates today.
Over over a Bcf a day net.
And a lot of that production will continue to shift one we intend to continue growing and then a lot of that production will shift to being coming out of <unk>. So it's important for us to have access to <unk>.
Diverse markets and also.
The best pricing, we can get the type of the pathways project achieved both of those.
Both of those opportunities for us so we will be able to move gas to markets, where we do anticipate getting an uplift relative to what we could sell into.
Into the markets that are available to us today, just right entitled.
And then on top of that it will allow for growth and diversification. When we think about how much gas will be producing out of tioga as we get out a couple or three years from now and then continue that.
That development plan for many many years beyond that.
That's helpful. Thank you.
And then would love your updated views around the M&A landscape in the broader macro.
Any color you can provide there would be helpful. Thank you.
Sure happy to hit on that.
Obviously, theres been a tremendous amount of activity.
Recently, more really big transactions and certainly more generally speaking Permian focus.
Our view is that there could be additional M&A, but.
But certainly there's nothing that we don't see necessarily a wave kind of coming across Appalachia that would that would consolidate the industry, perhaps at some point that will happen but.
These other recent deals that we've seen seem to be more more focused in <unk>.
Definitely the Permian continues to be the area, where I think we'll continue to see the most M&A focus.
Got you anything on the utility and the regulated side.
Where do you see.
Potential adi's switch.
B.
Our focus for the company longer term I guess.
Yes, I think over time, we'll see we'll see assets come on the market.
As I've said in the past our interest is in properties that would be.
Nearest and proximity.
To us.
<unk>.
So it's a long term business.
We're going to we're going to stay focused on.
<unk> evaluating properties that come on in the market.
Excellent. Thank you.
Thank you.
The next question will be from day line of Zach <unk> with Jpmorgan. Your line is now open.
Hey, guys. Thanks for taking my question.
Tim maybe just a follow up for you on your prepared remarks, just on cash taxes over the longer term.
I think in the past you've talked about high single digits. In 2024 is that still the case and maybe could you provide some thoughts on what longer term cash taxes might look like.
Yes, I would say, where we sit right now that high single digit 10% area for 2024.
It feels like the right number.
The new repairs guidance may make that move around a little bit as we go through time longer term over the next say two or three years I would expect us to trend a bit ratably up to the low 20% area and then hold that run rate over the long term.
Okay.
Thanks, that's great color and then just maybe just one for you on the E&P business could you just give us an update on how things are going with your equally I know you added at around the mid year.
Maybe just any color on efficiency or cost gains you've seen thus far.
Sure happy to so.
We're currently completing our third pad with the new fleet it's.
It's gone very well and.
One of the things.
Most happy to see is that we are achieving approximately 90% diesel displacement at this point out of that that fleet, which is what we were hoping to do.
That is an.
An additional benefit which is diesel prices are starting to move upward and our exposure to that is much more limited than it would be if youre using a tier two tier four fleet.
So overall positive and.
We're prosecuting the development plan and intend to continue continue using it enable to use our own gathering system to provide the gas which is a dual benefit.
Thanks, guys.
Thank you.
The next question will be from deadline of John Abbott with Bank of America. Your line is now open.
Hey, Thank you very much for taking our questions. So.
This question May be for Tim here, it's on the utility rate case that was filed for New York.
And the $89 million increase that youre that youre looking to obtain.
When you sort of look at other I mean, when you look at that number.
Look at what other.
Peer utilities have asked for within the state.
What's your sort of confidence on that sort of number.
Yes.
It's a good question.
I think we're starting right now from a position of very low delivery rates for the lowest delivery rate company in New York State.
All of the other utilities have been and they're facing the exact same cost pressures that we're seeing.
So while on the surface, it's a larger increase that the fact that we've stayed out of a rate case since 2016, and our delivery rates really haven't been unchanged unchanged since 2008 for the most part.
I think we're hopeful we get a good settlement.
That allows us to earn the returns and recover the cost that we have.
But it's early on in the proceedings I don't want to speak to exactly the direction of travel that will take but hopefully that gives you some color.
But then you just spoke to the.
The trajectory of cash taxes.
But you know that new that new tax rate guide of 25 to 25, 5%.
Is there a catch up in that.
Guide.
From 2023.
And I guess my question is is that the applicable rates post 2024 or does it tick up towards the higher end of that range.
How does that kind of work there Tim.
Yeah. So there is no effective rating.
The impact of the catch up that all happens as.
A temporary difference from a tax perspective.
So that that isn't driving it.
It's largely driven by the nature of of our Pennsylvania jurisdiction on how they treat.
<unk> and this deduction specifically sorry.
So I would expect this effective tax rate.
Ultimately too.
Maintain relatively consistent levels, but it will depend on the level of capital that we deploy.
In Pennsylvania, and ultimately how much of that is eligible for this deduction versus being capitalized from a tax perspective.
All of that was very helpful. Thank you for taking our questions.
Yes.
Thank you.
As a reminder, if you would like to ask a question. It is star followed by a one on your telephone keypad.
The next question will be from the line of <unk> with Raymond James Your line is now open.
Hey, guys I guess my first one is probably for Justin.
Just looking at the EMEA I was wondering if you could touch on maybe.
Well productivity comparison between the Marcellus and Utica and kind of how you all viewed the two targets from a planning and development standpoint, deciding which ones to drill.
Yes sure Trafford.
The well productivity, we see is just higher deliverability out of the Utica.
The pressures we have there are quite a bit higher so what we can achieve out of those wells are are sustained rates that are 15 to 20 million a day and sustaining that those rates for.
Many months, so you get a lot of gas you hold you hold pressure so that.
You get a lot of gas at a sustained rate for quite a long period of time.
And given the contiguous nature of our development, we're able to drill very long laterals.
Much all of our laterals are north of 10000 feet.
Probably the average is in the 11 to 13000 foot CLO.
The Marcellus wells are great. They don't have quite the pressures.
The deliverability, we have entitled.
<unk> is very good with benefits those is there a little bit lower cost, they're lower pressure there with shallower so less money to drill.
And the completion designs on those wells are a little bit less intense bringing the cost down. So they are both excellent targets for us from an economic perspective, we're happy to go to either one.
And really our development plan is guided by what makes the most sense collectively between Senate and midstream as we work to develop across that entire position.
Ultimately looking to deploy as a few dollars as possible between the two entities.
And kind of marching through the the acreage we have and so that's what really will guide at both both targets Marcellus and Utica are excellent.
So we're we're going to keep working through through all the inventory we have over.
The next many many years.
Perfect I appreciate the color on that and then one quick one on the two two bcf of price related curtailments I was that was that the was it.
Largely via pipe maintenance I'm assuming.
No so I'm not counting pipeline maintenance in that.
That is purely.
There were times in the last quarter, where gas prices were terrible the in basin gas pricing even.
Even below a dollar.
Lesson there is times when prices are very low like that we will we will voluntarily curtail so.
We maintain a small portion of our overall production.
That is exposed to in basin pricing that's intentional.
And so like I spoke for 'twenty four we have about 90% of our production that has access to firm transport or firm sales that leaves about 10% in there and so when I talk about that too because what I'm, what I'm really getting at is.
That layer is it doesn't necessarily have a home if you will.
We see prices that are extremely depressed call it below a dollar or in that vicinity.
We choose not to sell that gas and we will simply curtailed well choke the wells back shut them in for a period of time.
And then wait for better pricing like we're starting to see now as we start to see the beginnings of winter.
And find that to be a far better economic answer for our company.
Perfect I appreciate that thank you.
Thank you.
At this time there are no further questions in the queue. So I will turn the call back over to Brendan for final remarks.
Yeah.
Thank you Kate.
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 November nine.
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, <unk> hundred 39403 provide access code 690 307 hundred for.
This concludes our conference call for today, Thank you and goodbye.
That concludes.
Today's conference call. Thank you all for your participation you may now disconnect your lines.