Q1 2025 National Fuel Gas Co Earnings Call
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I'll turn it over to Dave Bauer, Thank you Natalie and good morning, everyone.
We're getting into the quarter I wanted to take a moment to recognize the team of operations employees and contractors, who got us through last week's bitter Arctic blast.
In the face of bitterly cold temperatures.
Talented employees stepped up as they always do to ensure that our system from the wellhead to burner tip performed flawlessly. Thank you for going the extra mile.
Now to the quarter overall, we had a strong first quarter with adjusted operating results up 14% over last year.
As I've said on prior calls our focus has been on execution and our success with that across the system is evident in our results for the quarter.
Of particular note our rate regulated subsidiaries collectively delivered approximately 30% growth in earnings per share.
And as I'll discuss in a moment the positive outcomes in rate proceedings at distribution and supply Corporation over the past 18 months gives us line of sight on continued long term growth in these businesses.
On the regulated side of the company are upstream and gathering business excuse me on the nonregulated side of the company are upstream and gathering businesses. Once again posted solid operating results.
During the quarter production was up 6% sequentially and the strength of our hedge book more than mitigated the drop in pricing, we experienced compared to last year's first quarter.
And over the last six weeks gas pricing has materially improved.
Providing momentum for the balance of the year.
At the same time Senators operational success is driving continued improvement in the capital efficiency of our development program.
As we've discussed on recent calls Seneca has transitioned to the eastern development area has been the principal area of focus.
The results were seeing continue to exceed our expectations, which gives us further confidence in the strength and durability of these assets.
Since fiscal 2023 capital expenditures are down 14%, while production is up 12%.
These capital efficiency trends are best in class unmatched by any of our peers in Appalachia and I am happy to say, we expect to see still further improvement in the years ahead.
Justin I'll have more on this later in the call.
Switching back to the regulated side of the company in December the public Service Commission approved the joint proposal that we filed in September to settle our New York utilities rate case.
This settlement caps off a period of highly impactful ratemaking activity across the system.
Collectively our New York, and Pennsylvania utility rate cases, along with the settlement of our supply Corp rate case last February are expected to provide in excess of $130 million of additional margin compared to fiscal 2023.
New York rate settlement, which extends through fiscal 2027 is a good outcome, both for national fuel and our customers.
The allowed rate of return on equity is nine 7% on a 48% equity layer, which is a significant improvement over the eight 7% from 43% and our prior rate case.
The settlement keeps the margin protection items that we've had in the past, including weather normalization revenue decoupling and a large volume customer revenue tracker.
And it also adds an uncollectible expense tracker for the first two years of our settlement.
As a multi year agreement, we will have two additional rate increases in 2026, and 2027 to account for our ongoing.
Modernization spending as well as expected inflationary increases in our operating costs.
This gives us great visibility to continued earnings growth in our New York, New York utility.
And it's important to note that even with these increases our delivery rates will still be amongst the lowest in the state which is obviously great for our customers.
From a policy standpoint, the record in the case and the Commission's unanimous approval of the joint proposal clearly shows their support for natural gas utilities in New York State.
Of particular note the chairman of the commission emphasized the importance of our continued investment in the modernization of our distribution utility infrastructure.
Despite the rhetoric from elected officials it is clear that the state's energy experts see a long future for natural gas in New York.
Switching to our Pennsylvania utility, we recently received approval to implement a district distribution system improvement charge or desk, which is the Pennsylvania commissions version of our modernization tracking mechanism.
We're permitted to begin the surcharge this month, although the impact will be small in the first year I expect it to grow over the next few years as we make ongoing investments in our distribution system.
And our pipeline and storage business. The Tioga pathway project continues to move ahead. According to schedule and we expect FERC to issue its environmental assessment in the coming months.
Which is a key milestone for the project.
As a reminder, this 190 million a day project will provide an important outlet percentages growing EDA production.
In addition at our Empire pipeline, we've had constructive discussions with our shippers on amending our existing rate settlement.
Which currently requires empire to file a rate case by the end of April.
Based on these discussions we are hopeful that we'll be able to submit a negotiated settlement extension for FERC approval in the next month or so.
Taken together, the multi year, New York settlement, and the Pennsylvania desk, along with future rate, making activity at supply Corp, and additional pipeline expansions like Toyota pathway are expected to deliver continued growth in the coming years.
Turning to the broader industry.
Outlook for natural gas is excellent.
During winter storm, Enzo National Daily demand reached record levels for two consecutive days colder.
Colder weather, along with increased industrial and power generation demand is contributing to an expected storage withdrawals for the month of approximately one tcf.
In addition to being a record pull on storage also helps to remove some of the overhang on pricing from recent high inventory levels.
Prices for the remainder of fiscal 'twenty five have hovered in the $3 50 area, which absent abnormally warm weather feels sustainable given the current level of production and the expectations for demand growth stemming from LNG onshoring of industry and the continued growth in gas fired generation.
This improved outlook bodes well for national fuel and the current Nymex strip and assuming the hedge position is set forth in our IR deck.
We expect significant free cash flow in our nonregulated businesses potentially upwards of $1 billion over the next three years.
Over the longer term, there's clear cause for optimism the new administration in Washington is unquestionably supportive of natural gas and while it's still early innings I am hopeful they'll work with Congress to address the permitting and regulatory reform.
The industry, so urgently needs.
Additionally, as we've all read in the press the expected growth in power demand from data centers and artificial intelligence is impressive.
And without question natural gas is a highly reliable base load fuel source.
Play a critical role in meeting this growing need for new generation.
National Fuel's operating footprint in Pennsylvania, as an attractive location for data centers. It has large amounts of available land is situated atop an abundant source of natural gas and its relatively cooler climate can help temporary power consumption.
As an integrated natural gas company National fuel is uniquely positioned to support the needs of data center developers and power generation facilities are highly interconnected pipeline infrastructure long track record of executing on expansion projects and decades of high quality development inventory allows us to offer a range of services to developers from <unk>.
<unk> transportation service to a fully integrated solution underpinned by long term natural gas supply contracts.
Unlike many of our peers, we are in active discussions with the with key players in the data center value chain and are optimistic that this will drive additional growth opportunities in the coming years.
Putting it all together I am excited for the future of National National fuel, we have a great collection of assets located in the lowest cost basin in North America, a great team that's focused on operational excellence and a strong investment grade balance sheet, all of which positions us to deliver significant value to shareholders over the longer term.
Before turning the call over to Tim I want to take a moment to recognize Ron Kramer, our chief operating officer, who as we previously announced is retiring tomorrow.
Speaker Change: Brian has had an incredible 45, plus year career with the company and I wish him nothing but the best in retirement with that I'll turn the call over to Ken.
Speaker Change: Thanks, Dave and good morning, everyone National fuel had great quarter had a great quarter, both operationally and financially for the operating results of $1 66 per share up 14% compared to last year.
Ken: The success, we are seeing in each segment is also driving our improved outlook for the remainder of the year.
Ken: Before moving to that outlook I did want to quickly touch on GAAP earnings during the quarter. We saw the impact of noncash impairments in the E&P segment, the majority of which was due to the ceiling test.
Ken: Given the outlook for higher pricing, we are not anticipating any further impairments for the foreseeable future.
Ken: This outlook for pricing also led us to increase our earnings guidance for fiscal 2025, we now expect adjusted operating results to be in a range of $6 52.
Ken: To $7 per share.
Ken: At the midpoint is a 17% increase from our previous earnings guidance and a 35% increase over fiscal 2024 results.
Ken: This range assumes Nymex natural gas prices averaged $3 50 per btu.
Ken: Btu for the last three quarters of the fiscal year.
Ken: Which as of today is generally in line with the forward curve.
Ken: Pricing continues to be volatile and is likely to be impacted by weather power Gen demand and the timing of new LNG projects, but our hedge book mitigates a lot of this volatility.
Ken: With our recent practice, we've provided sensitivities to our guidance based on different Nymex assumptions.
Ken: Looking at basis differentials. The combination of continued producer discipline and increased demand have led to a modest improvement in the outlook for Appalachian pricing.
Ken: As a result, we've tightened our basis forecast for the remainder of the year, which we now expect to average 60 <unk> below Nymex. Overall. This is a nice tailwind that we do expect seasonality to continue the recent cold snap where the significant tightening in the past few weeks. However, we do expect differentials to try and wider as we exit winter reaching levels closer to our prior guidance.
Ken: Alongside the pricing tailwind. We are also seeing improvements across our operations. We've revised our E&P production guidance range and associated gathering segment revenue higher on the heels of great results at <unk> to start the year in.
Ken: In addition, our DD&A guidance has been revised lower to account for the impact of our Q1 ceiling test impairment.
Ken: Lastly, we are expecting higher consolidated effective tax rate for the year as prices rise our incremental income is taxed at the statutory rate, which is marginally above the midpoint of our prior guidance.
Ken: On the capital spending side, we modestly reduced the midpoint of <unk> guidance range to account for continued capital efficiencies.
Ken: The regulated side of the business with the bulk of pipeline construction season still in front of US we are leaving the remainder of our capital projections unchanged for now.
Ken: One last point on guidance. This was the first quarter, where we saw the impact of the New York rate settlement. The settlement, which was approved in December became effective October one.
Ken: While we didn't start billing customers with new rates until January one the order from the commission included a make whole provision for any foregone revenues starting with the effective date.
Ken: As a result, we recorded the impact of higher rates for the entire first quarter and we expect to collect the associated cash flow over the course of this calendar year.
Ken: As is typical with utility rate cases, particularly in New York.
Ken: There will be some noise in our financial statements over the course of the year.
Ken: We've included a new slide in the investor deck that lays out all the details but.
Ken: But if there are further questions. Please reach out to Natalie to walk through these items.
Ken: Setting that aside the important point to note is that earnings in the utility are expected to increase meaningfully in fiscal 2025 up.
Ken: Up approximately 30% compared to last year.
Ken: And it isn't just growth in the utility as Dave discussed we are also seeing significant growth in each of our other businesses.
Ken: We expect that these higher earnings will translate into higher free cash flow, allowing us to further improve our already strong balance sheet continuing to return cash to shareholders through our long standing dividend and ongoing buyback program.
Ken: As it relates to the buyback to date, we've invested approximately $100 million to repurchase one 8 million shares or 2% of our shares outstanding from last March This puts us right on track to complete the $200 million authorization by the end of the fiscal year.
Ken: Buyback program was designed as an opportunistic means to create value for shareholders and we've seen that play out over the past year.
Ken: Given our confidence in the business and the current strength of natural gas prices. We expect continued free cash flow growth and we'll look to identify the best use of that as we move through time.
Ken: Looking to the balance sheet, we are in great shape that being said, we do have several upcoming debt maturities that we will need to manage with $500 million maturing. This summer and another $500 million early in 2026, we have the flexibility to find the best issuance window to start managing these maturities.
Ken: While interest rates have settled at a higher level over the past year or two credit spreads are near historic lows and the market fundamentals support of taking some risk off the table sooner rather than later.
Ken: In closing, we previously spoke about the company, reaching an inflection point back in mid 2023.
Ken: The outlook for each business was set to significantly improve.
Ken: The three major rate cases behind us and the transition to the EDA exceeding expectations, we have great visibility and a high degree of confidence in achieving the multiyear growth targets, we set last year.
Ken: That doesn't mean, we plan to take our foot off the gas are integrated model with the combination of strategically located infrastructure and long runway of highly economic development locations positions us well to deliver strong growth for years to come.
Ken: This growth will be seen both in the near term from projects already identified as well as over the longer term as demand for natural gas continues to increase.
Ken: Thank you Dr routes this growth will be underpinned by disciplined capital allocation targeting expected returns in excess of our cost of capital.
Ken: With the strength of our long term outlook, we have great confidence in our ability to continue growing our dividend opportunistically buying back shares and further improving our strong balance sheet.
Justin: That I will turn the call over to Justin.
Justin: Thank you, Tim and good morning, everyone.
Dave Bauer: Before I get to the quarter I want to Echo Dave's and take a moment to recognize our Seneca and midstream operations teams and our vendors for maintaining our production with no safety incidents are major disruptions due to the recent extreme cold weather event.
Dave Bauer: Windshield temperatures exceeded 20 degrees below zero. Thank you.
Dave Bauer: Onto the quarter.
Dave Bauer: I can answer your midstream continued their solid operational execution that drove a strong start to fiscal 'twenty. Five are planned production ramp into the core winter heating months coincide with strong natural gas prices and in basin demand.
Dave Bauer: As a result production incentives increased by 6% over the fourth quarter 98 Bcf fee as we brought online some of our most productive pads to date.
Dave Bauer: And in a few midstream throughput increased sequentially to 121 Bcf, which reflects Seneca is higher production and growing third party volumes.
Dave Bauer: Throughout the first quarter, our team delivered greater well productivity and improving capital efficiency.
Dave Bauer: <unk> and WJ optimize well designs and production management strategies led to stronger Utica well performance.
Dave Bauer: In the EMEA, we brought online two of our best pads to date with initial production rates per well that are 25% to 50% higher than our prior titled a Utica development pads.
Dave Bauer: We expect to realize similar results and EBITDA going forward as we employ our gen. Three well design combined with enhanced production facilities and coordinated midstream infrastructure development.
Dave Bauer: Therefore, we have increased our total Utica EUR expectations to two five bcf per thousand feet as highlighted in our investor presentation posted last evening.
Dave Bauer: <unk>, we also achieved our best pad performance to date, and our Beechwood area, which gives us further confidence in the long term value offered by our Wpa acreage.
Dave Bauer: As a reminder is almost entirely held in fee.
Dave Bauer: Taken together the productivity improvements we achieved in both the EDA and WD. This quarter are a testament to our team's ability to capture greater capital efficiencies from the integrated development of our highly prolific asset base.
Dave Bauer: In light of the strong well performance across our development program in the first quarter. We are revising production guidance upward to a range of 410 to 425 Bcf a day.
Dave Bauer: This represents an increase of seven five bcf at the midpoint relative to the previous quarter's guidance range and a six 5% annual increase over fiscal 'twenty for production.
Dave Bauer: For the remainder of the fiscal year, we plan to bring online 14, net additional wells, mostly in Tioga County, and expect production to continue rising through our third quarter before slightly declining in the fourth quarter.
Dave Bauer: We are also updating senecas capital guidance for the year by lowering the high end of guidance by $10 million to a new range of $495 million to $515 million as we continue to capture operational efficiencies and value from our integrated development program.
Dave Bauer: We anticipate capital expenditures to be somewhat weighted towards the second half of the year due to higher activity levels during that period of time looking.
Dave Bauer: Looking forward ahead.
Dave Bauer: Our long term strategy remains unchanged, we plan to operate a similar pace of development turning in line around 20% to 30 wells per year concentrating on our highest returning areas in EDA and delivering low to mid single digit production growth.
Dave Bauer: Turning to natural gas pricing, we remain optimistic for the remainder of the fiscal year given the unique combination of producer discipline ramping LNG exports, increasing electricity demand and declining storage levels.
Dave Bauer: These factors have contributed to a recent rise in pricing that has allowed us to opportunistically layer in incremental swaps and colors, which protect cash flows while maintaining upside exposure.
Dave Bauer: As you can see in our Investor relations materials.
Dave Bauer: We have significant upside to higher prices throughout the year and into 2006 and beyond.
Dave Bauer: With respect to physical sales our marketing team continues to focus on optimizing our sales portfolio.
Dave Bauer: Currently we have nearly 90% of <unk> remaining forecasted fiscal 'twenty five production safeguarded by firm transportation and firm sales agreements and.
Dave Bauer: In addition to providing access to premium markets. These firm sales minimize exposure to in basin pricing and the potential for curtailments that was evident in Q1, where despite lowering basin prices in October and November voluntary price curtailments were minimal.
Dave Bauer: Looking out longer term during the quarter, we were successful in securing 50 million a day of incremental firm transportation capacity that will reach the Gulf coast.
Dave Bauer: Given evolving conditions in North East, Pennsylvania related to both operator activity and firm transportation contract renewals. We believe we will find more opportunities to secure additional long term firm transportation and firm sales.
Dave Bauer: Doing so opens the potential to access premium markets and consider accelerating development to bring forward the value of our deep inventory of highly economic development locations.
Dave Bauer: It isn't a few midstream our activity remains focused on growing throughput by supporting Seneca development, and adding third party volumes.
Dave Bauer: Last quarter I discussed the commissioning of several value enhancing projects that support development entitled The County.
Dave Bauer: Incremental interconnection capacity with the eastern system has allowed Seneca to increase deliveries into this outlet and take advantage of marketing optimization and price arbitrage opportunities are.
Dave Bauer: <unk> Keville facility that went in service in October 2024.
Dave Bauer: Gone from zero to over 300 million per day of throughput and less than three months Seneca brought online two prolific pads.
Dave Bauer: Further leveraging the benefits of our integrated model when we focus on consolidated midstream incentive economics, we recently completed a multiyear compressor swapped and unit reduction plan upgrading facilities and equipment acquired in 2020.
Dave Bauer: This initiative allowed midstream to lower suction pressure for Seneca PDP wells and the rate of decline for <unk> production.
Dave Bauer: Altogether. These projects drove Toyota system gathering throughput growth of 18% sequentially to a record 51 Bcf in Q1 and I expect these investments will support the development of Senate is highly prolific acreage for many years to come.
Dave Bauer: Looking ahead, we believe Seneca and <unk> midstream are well positioned for long term growth and sustained success, our talented workforce integrated business model and deep inventory of highly economic future development locations differentiate us in today's market.
Dave Bauer: We believe our culture of operational excellence and focus on leadership in safety and sustainability alongside our strong asset base and execution sets us up for considerable success in fiscal 'twenty, five and the years to come.
Dave Bauer: With that I'll ask the operator to open the line for questions.
Dave Bauer: Thank you.
Dave Bauer: To ask a question. Please press star followed by one on your telephone keypad.
Dave Bauer: If you would like to withdraw your question. Please press star followed by two.
Dave Bauer: When preparing to ask a question. Please ensure your device and muted locally.
Noah: Our first question comes from Noah <unk> with Bank of America.
Dave Bauer: Your line is open. Please go ahead.
Noah: Good morning, guys I guess, the first question I had was on.
Noah: Was on if you could provide any incremental color on the types of conversations you are having around data centers and really how far along those conversations are and maybe any tiny rough timing when we could think we could hear an announcement.
Noah: Yes, I'd say.
Noah: I'd say, we're still relatively early innings.
Noah: On those types of discussions, but we do have a team thats very active in meeting as I said in my remarks across the value chain and.
Noah: We get a lot of interest because we are unique in that we can provide.
Noah: Our suite of different services too.
Noah: To developers so.
Noah: The thing to announce now but were.
Noah: We're working on it.
Noah: Got you and then for the second question.
Noah: I kind of wanted to better understand your thought process here.
Noah: Using to grow production.
Noah: And versus maybe taking the gains that you guys had seen and hold that production flat and take that incremental capex savings and if this was enabled by the 50 million a day of additional egress that you guys captured.
Noah: Sure no I'm happy to speak to that so.
Noah: The production increase is really a result of just the outstanding results that we experienced in the first quarter.
Noah: Noted in my remarks, we had been making continual changes to our well design entitled Utica, as we get more and more development.
Noah: Those changes have resulted in enhanced both near term productivity. So we're seeing the ability to flow. These wells at higher rates for long sustained flat periods as well as higher EUR estimates over time and so.
Noah: This recent increase in production is really just driven by.
Noah: The great results as opposed to any sort of change in our overall level of activity as we look forward as I've noted many times in the past.
Noah: We will only grow our production to the extent, we have access to takeaway markets. There is a level of spot that we're very comfortable with but we like to have a very good portfolio of firm transportation and firm sales.
Noah: The recent.
Noah: Transaction or firm transport that we were able to enter into.
Noah: Which starts next year.
Noah: Part of that.
Noah: But at this point, we're not inflicting our growth any more than we've previously related so expect kind of that that low to mid single digits with a continued improvements in capital efficiency and looking to drive capital down even further into the future.
Speaker Change: Hey, Justin Tim Thanks, so much for answering our questions.
Noah: Thank you.
Speaker Change: As another reminder, if you'd like to ask a question. Please press star one on the telephone keypad now.
Speaker Change: We now turn to aggressive Jessica with Goldman Sachs. Your line is open. Please go ahead.
Speaker Change: Good morning, and thank you for taking my question as we think about the outlook for capital returns from here how would you characterize your view on the potential for incremental return of capital through increasing the share repurchase authorization relative to dividends. Alternatively do you expect incremental debt reduction to become a larger focus in the next year or two how should we be thinking about decent free cash flow generation.
Speaker Change: 25 26.
Speaker Change: Yes sure Greg.
Speaker Change: As we think about the buyback program.
Speaker Change: Mentioned in my remarks, we're about halfway through so we still have about $100 million remaining on our existing authorization.
Speaker Change: I think the good thing is the strength of the business and the outlook for gas prices certainly supports incremental free cash flow generation and so as we go through the course of this year and get closer to wrapping up our existing buyback program look for the best use of that capital obviously, we have our longstanding dividend.
Speaker Change: And we have a great balance sheet, so to the extent it makes sense to continue.
Speaker Change: That buyback beyond this year, we will evaluate that and communicate that to the street over time.
Speaker Change: It makes all of a sudden thank you and then I guess I'm Gonna has remained very top of mind for the energy investing universe, how would you frame your outlook for M&A in the industry more broadly as well as the role for M&A for RFG, specifically is the preference still directed potentially towards scaling the regulated segment of the business.
Speaker Change: Yeah really no change from our.
Speaker Change: Our previous discussion with us where we'd we'd like to be.
Speaker Change: A bigger company.
Speaker Change: Adding on the regulated side.
Speaker Change: We think would make sense, but.
Speaker Change: That doesn't rule it out from looking at call it smaller bolt on acquisitions on the.
Speaker Change: On the E&P side of the business.
Speaker Change: Thank you.
Timothy Winter: We now turn to Timothy Winter with Gabelli <unk> Company. Your line is open. Please go ahead.
Timothy Winter: Good morning, and congratulations on a solid quarter guys.
Speaker Change: I was wondering Dave if you could follow up a little bit more on the data center and when you say you offer a full suite.
Timothy Winter: Suite of products or services.
Speaker Change: Can you provide a little more color are you talking like.
Speaker Change: Maybe helping to site or construct to gas fired plant or.
Speaker Change: Our marketing or what are some of the suite of services Youre talking about.
Speaker Change: Yes, so at the most basic level it would be providing incremental pipeline transportation capacity.
Speaker Change: To a developer, but then moving.
Speaker Change: Back to the wellhead, we could also do a long term supply contract.
Speaker Change: Or we can do.
Speaker Change: Pipeline.
Speaker Change: Contract with a long term supply contract that's in the most.
Speaker Change: The most basic level, we're also talking with with the.
Speaker Change: Power developers to potentially partner.
Speaker Change: To offer a.
Speaker Change: A single.
Speaker Change: Source of of energy if you will.
Speaker Change: To the.
Speaker Change: To the plants that's those are the.
Speaker Change: The principal ways that we're thinking about it.
Speaker Change: Okay, great Great and then.
Speaker Change: On the <unk>.
Speaker Change: Improved sentiment for gas and maybe some.
Speaker Change: I'll help green lining development.
Speaker Change: Is there any thought of northern access coming back and being a potential.
Speaker Change: Our project to you.
Speaker Change: To get production out of a out of.
Speaker Change: Appalachia.
Speaker Change: Yes, not in the near term.
As you May recall, we did not file for certificate extension.
Speaker Change: And earlier I.
Speaker Change: I guess later last year.
Speaker Change: That being said the.
Speaker Change: The project is is conceived and we do have rights away and whatnot. So to the extent that there was interest we could.
Speaker Change: We could restart it and do it but that would take a bit of time, so we'll see how that.
Speaker Change: That plays out over time.
Speaker Change: Okay.
Speaker Change: Okay. Thank you guys.
Speaker Change: You bet.
fischer: We have no further questions. So I'll now hand back to an SME Fischer for any final remarks.
Speaker Change: Thank you Elliot 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 February six.
Speaker Change: Please feel free to reach out if you have any follow up questions. Otherwise, we look forward to speaking with you again next quarter.
Speaker Change: And have a nice day.
Speaker Change: Ladies and gentlemen, today's call is now concluded wed like to thank you for your participation you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yeah.