National Fuel Gas Co (NFG) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2009 National Fuel Gas Company earnings conference call. My name is Ann and I will be your coordinator for today's call. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr. Jim Welch, Director of Investor Relations. Please proceed, sir.

Thank you, Ann. And good morning, everyone. Thank you for 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 Smith, President and Chief Executive Officer; and Ron Tanski, Treasurer and Principal Financial Officer. Joining us from Seneca Resources Corporation is Matt Cabell, President. At the end of the prepared remarks, we will open the discussion to questions. We would like to remind that you today's teleconference will contain forward-looking statements. While National Fuel's expectations, beliefs, and projections, are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on which they are made and you may refer to last evenings' earnings release for a listing of certain specific risk factors.

With that, we will begin with Dave Smith.

Thank you, Jim, and good morning to everyone. The second quarter was a fairly routine quarter for National Fuel. One that was generally consistent with our expectations. We continue to provide steady operational and financial results, while taking steps to ensure continued success into the future. As in the first quarter, the lower crude oil and natural gas prices that were realized in our E&P segment were the principal drivers of our $0.19 per share decrease in earnings. Operationally, Seneca's 10.1 Bcfe of production, which was achieved despite some Gulf gas that was shut-in as a result of Hurricane Ike, keeps us on track to meet our full-year production target of 38 to 44 Bcfe. Just as importantly, our regulated utility, and our regulated pipeline and storage segments, which are not heavily dependent upon commodity prices, delivered another quarter of solid predictable earnings.

National Fuel is in excellent financial shape. We intend to stay that way. As you know, we have a conservative capital structure. Ron will talk about that a little bit later in the call. And as of yesterday, over $300 million of cash on our balance sheet, largely as a result of our very successful $250 million long term debt issuance in April. In addition to refinancing $100 million of debt that matured in March, the proceeds from that issuance should provide us with ample liquidity to weather any further disruptions in the credit markets. It also gives us the financial flexibility to pursue the abundant investment opportunities that are now and will be available as a result of tighter credit markets, lower commodity prices, and the generally weakened economy.

We recognize that the current environment is putting pressure on capital spending plans for 2009, particularly in the E&P industry. Like our peers we have taken a hard look at our capital budget. Last year, we reduced our planned level of E&P spending in the Gulf, where we cut out exploration and in California, where we cut back on accelerated drilling. This quarter, we're lowering our capital budget in Appalachia to reflect two significant changes. First, in light of current gas prices we're lowering our fiscal 2009 Upper Devonian well drilling expectation and target to 200 wells. By proceeding at a more deliberate pace, we can focus on drilling only the highest quality wells with the greatest reserve and return potential. We can also importantly, build an inventory of sites, the drilling of which can be accelerated when prices recover. As we have pointed out in the past, most of our Appalachian properties are either held in fee or held by production. So, unlike many others we're under no contractual pressure to drill wells to hold the acreage.

Second, as we announced last month, we're unable to come to terms with the state of Pennsylvania on the routing of gathering lines needed for two of the four tracks, on which we were the high bidder in last summer's DCNR lease sale. The route proposed by the state was more than double the length of what we had originally contemplated when we submitted our bid and obviously that changed the economics of the project. As a result, we had no choice but to walk away, reluctantly, from those leases. Considering these two changes, we now expect to spend approximately $142 million in Appalachia in E&P in 2009. Most of that, almost $90 million, $89 something, in the Marcellus. We remain very excited about the Marcellus Shale. As Matt will describe further, we're pleased with the initial results of our Seneca-operated program, and expect to have a horizontal rig drilling this summer. If all goes well, we could have production on our Tioga county leases by early fall.

The development in Marcellus, by Seneca and also by other producers, will be a key driver of growth in our E&P, Midstream and Pipeline and Storage businesses. And we fully intend to commit the capital and other resources necessary, to best and most effectively exploit this outstanding opportunity. To that end, NFG Midstream Corporation, a wholly owned subsidiary, that you may remember we formed last year, is developing what we call the Covington Gathering System to deliver our Tioga and Lycoming production, some off of the two leases that we acquired in that Pennsylvania lease sale to market. The Covington System will be about 30 miles of mostly 12-inch steel gathering lines that will connect our acreage with Tennessee Gas, and with UGI. We expect to complete the project in two phases. We're well on the way to completing phase one of the project. The preliminary survey work is completed. 12-inch pipe has been ordered. And we're in the process of finalizing rights of way, almost all of which we have already acquired.

This first phase, which will connect our Tioga acreage, will be in service as early as August 31, 2009, which should be in time to move the production from Seneca's first horizontal wells. The second phase, which will extend to our Lycoming acreage, we expect to be in service by August of 2010. The estimated cost to complete both phases is in the range of $25 to $30 million. Of which we expect to spend about $10 million by the end of fiscal 2009.

In our Pipeline and Storage segment, Supply Corporation continues to pursue projects related to Appalachian production. The most immediate of these are the Bristoria and Lamont projects. The Bristoria project is a pipeline and compression project at the southwestern end of our system that would move 150 million a day of market constrained Marcellus production, much of it from Range Resources, to an interconnection with Spectra Energy and ultimately off-system.

Draft precedent agreements have been sent to prospective shippers, and while we're working out some gas quality issues, we are confident that this project will be put in service. At Lamont, Supply Corporation is proposing to build a new 2,000 horsepower compressor station in order to provide takeaway capacity and interconnection with Tennessee. Supply is working with three interested producers, including Seneca, to take that added capacity. If all goes well, the Lamont project should be in service by 2010 and the Bristoria project in service shortly thereafter, most likely in 2011. Now,while neither of these projects are large by pipeline standards in terms of capital dollars or through-put, we view them as the first of many such projects to come in Appalachia, and as a further validation of the strategic location of our pipeline and storage network. In the long-run, we anticipate these projects will complement the larger scale West-to-East project, which we have talked about previously. We remain optimistic about that project, although the weak economy and low commodity price environment likely mean a 2012 in-service date.

In conclusion, I am excited and confident about the future of National Fuel. While commodity prices have caused, and will continue to cause, volatility in our E&P results, earnings from our regulated segments have been stable, and provide the foundation for a long-standing dividend. Our balance sheet is very strong, and it puts us in a position to not only endure the challenges of the current economic cycle but also to execute on our plans for future growth. Thanks for listening, and I look forward to seeing many of you this week, later, actually Sunday, -at the AGA in Las Vegas.

With, that I will now turn the call over to Matt, for an update of our E&P operations. Matt?

Thanks Dave. Good morning, everyone. Production for the quarter was 10.1 Bcfe, down 2.5% versus last year's second quarter. California and Appalachia were both up versus a year ago, but Gulf was lower by 0.7 Bcfe. The decline was due to continued delays in third party pipeline repairs related to Hurricane Ike. As of mid May, however, pipeline repairs were completed and Gulf of Mexico production was over 50 million cubic feet per day. I expect both Gulf of Mexico production and overall Seneca production for the third quarter to be substantially higher than third quarter 2008. The current 50 million cubic feet per day rate in the Gulf, includes a net 13 million cubic feet per day, from the Cyclops field which came on line March 25th.

Production from California, our West division, continues to outperform last year. Reflecting the impact of our Monterey Shale drilling at Lost Hills, our Marvic drilling at Midway Sunset. Our SESPE trade from last year, and perhaps most significantly, our improved steaming efficiency at Midway Sunset. In Appalachia, our East division, production for the quarter was up 7% versus last year. As gathering system and compression projects are completed, I expect to see the East division production continue to increase.

Moving on to our activity in the Marcellus Shale. I am pleased to report that we have completed another horizontal well with our joint venture partner EOG. The well was frac'd in 12 stages across a 5,000-foot interval. Microseismic data indicate an effective frac, and we're anticipating a good initial flow rate. As of this morning, we are drilling out the frac plugs, and I hope to have an initial production data by early next week. Two more joint venture wells are planned to be frac'd and tested in the next few months and another has just finished drilling. Regarding our Seneca-operated vertical drilling program, we're currently drilling our fourth well. The first three wells met all expectations, encountering 120 to 160 feet of high quality Marcellus Shale. We cut whole core through the Marcellus in two of these three wells and are awaiting detailed analysis.

Many of you may have seen our recent press release, in which we announced that we're drilling on our DCNR leases, which we recently acquired from the state of Pennsylvania. We acquired a total of 15,600 acres from the state. There were another two leases which had combined acreage of 8,400 acres, on which we were the high bidder. But ultimately chose not to finalize due to pipeline routing issues. Our Seneca-operated horizontal program is scheduled to begin in July, with our initial focus in Tioga County. NFG Midstream has ordered pipe and is obtaining rights of way for this area. We hope to have our first Seneca-operated Marcellus production this fall and obtain a rate of 30 million to 40 million cubic feet per day within 24 months.

Looking at our E&P capital spending, we are now forecasting total fiscal 2009 CapEx of $196 million. Consisting of $19 million for the Gulf of Mexico, $35 million for California, and $142 million for Appalachia. The most significant change is a $31 million reduction in Marcellus lease acquisition costs, due to the DCNR leases which I mentioned earlier. Additionally, due to low natural gas prices, we are reducing our Upper Devonian drilling plans for 200 wells for this fiscal year. To summarize, second quarter production, as compared to last year, was up 7% in California and in Appalachia, but down 19% in the Gulf, due to final Hurricane Ike repairs. However, current production rates are up substantially, and I expect overall third quarter production to be about 5% higher than last year. By the end of this calendar year, I expect meaningful production from both the EOG joint venture, and our Seneca Marcellus operations. And we are targeting net Marcellus production of 30 to 40 million cubic feet within 24 months. While Seneca's overall production for fiscal 2009 will be relatively flat versus 2008, I anticipate significant production growth beginning in 2010, as the Marcellus Shale becomes a major contributor.

And with that, I will turn it over to Ron.

Thanks Matt, and good morning, everyone. As Dave said earlier, it was a pretty routine quarter. The drop in commodity prices from last year is the largest driver in the quarter-to-quarter decrease in earnings. The commodity price decline had the biggest impact in the Exploration and Production segment, but those lower prices also affected the pricing of efficiency gasin the Pipeline and Storage segment. As you can see in the table on page 11 of last evening's release, however, increased transportation revenues, from the first full quarter of operation of the Empire Connector, more than offset the decrease in efficiency gas revenues.

Looking at pricing for the remainder of the fiscal year, it seemed appropriate to adjust our forward pricing assumption for unhedged production, to be more in line with the recent NYMEX forward strip. We decreased prices from $5.50 per MMBtu to $3.50 per MMBtu, and that drove the decrease in the earnings guidance range.

One item that I would like to comment on in the Utility segment is the operation of our Conservation Incentive Program and the revenue decoupling mechanism in our New York jurisdiction. For the 12 months ended March 2009, we estimate that residential normalized customer usage in New York decreased by approximately 3% for the entire revenue class. In Pennsylvania, where we don't have a revenue decoupling mechanism, or a Conservation Incentive Program, normalized usage only decreased by 0.6%.

At average billing rates during the quarter, we calculated that conservation by our New York residential and small commercial customers saved them almost $7 million during the quarter. On an individual basis, customers that install high efficiency furnaces, could see ongoing savings of up to $300 per year, plus be eligible for up to a $400 rebate depending on the type of equipment being installed. At the same time our customers achieved that $7 million in savings, the RDM preserved $851,000 of revenue at the utility during the second quarter. We believe that the RDM provides a win-win for the customers and the Company, and will be an ongoing stimulus for energy conservation.

At the consolidated level, we elected to take some debt refinancing risks off the table, and we issued $250 million of 10-year notes in early April. It was a successful offering, and we had orders of over $570 million for the issue. If you adjust the balance sheet in the back pages of the release by this new debt issuance, the equity component of our capitalization stands at 57%.

In addition to the strong balance sheet, we've got plenty of liquidity with our syndicated committed credit facility and all our bi-lateral lines of credit available to us.

While Dave and Matt mentioned the cut back in the shallow Appalachia drilling program, we're nonetheless bullish on our Appalachia properties and we intend to keep our drilling crews active. Even though we decreased our projected capital spending with the lower commodity prices that we've used in the forecast on a consolidated basis we may be slightly cash-flow negative for the year, but we have the cash and credit available to fund both our drilling activities in the E&P segment, and to buy and inject gas into storage for our utility customers for the 2009-2010 winter season. With that, Operator, we're ready to open up the line for questions.

Okay. Operator Instructions) And the first question comes from the line of Jim Harmon with Barclays Capital. Please proceed.

Hi, good morning, guys.

Good morning, Jim.

Just a housekeeping note. On page 4 of your press release, you talked about the other operating expenses and bad debt, and we outlined plugging costs in excess of amounts previously accrued and a mark-to-market adjustment. Can you quantify what those were?

On an individual basis, --

Or even aggregate. I am just trying to see if it was a material impact in the quarter.

I guess the easiest thing to do would be to look at the table on pages 11 and 12.

Okay.

10 and 11.

I checked that -- I could have missed it.

Just, for example, the P & A expense in excess of what we had already accrued was $1.6 million.

Okay was that pretax, after tax?

That was pretax.

Okay. And the mark-to-market swing?

Oh, -that we've got --

I think I see it here on page 9, is that it? $1.1 million?

We do have that number available, Jim, but we can maybe go on to another question --

Yes, be on --

That's it. I just tried to keep it simple today.

It was the $1.1 million that Matt mentioned.

Okay, great, thanks very much.

Jim, all that is on page 10 --.

I got my press release from one of our internal service so my pages don't quite match yours. Thank you very much.

And the next question comes from the line of Becca Followill with Tudor, Pickering, Holt. Please proceed.

Good morning. Several questions for you. First on the JV with EOG, you said you expect to get results on a well early next week. Does that mean that you'll put it out in a release, or will you guys wait until the next quarter to do it, or what are your plans on that?

Well, Becca, if we have it for AGA we will announce it then.

Okay, perfect.

But if we don't I guess we haven't really discussed whether we would make a release or not.

Okay. And then, you said there are two more wells over the next few months, another you just finished. What is the full program. Can you just remind us again what is the full program for 2009?

Sure. We expect 10 wells from the EOG joint venture in 2009.

Calendar 2009?

Yes, that is actually calendar 2009. But it may be 10 in fiscal 2009 as well.

Okay, and how many of those are done now?

Let's see. We have drilled -- I think five that would fall in the fiscal year.

Okay.

Now, the completions depend on several things. One of course is getting the wells drilled, but another is timing of completion crews, and also, the infrastructure to flow that gas. So, in other words, unlikely to complete a well, frac and complete a well that we wouldn't have a pipeline outlet, for six months or so unless the pipeline outlet looks reasonably close, we'd wait on that one.

Okay. And then, they selected their acreage. Are you guys going to disclose or are they going to disclose where that acreage is and what the plan is maybe for longer term.

I will show it on a map at AGA.

Okay, I'm not going to be there so I guess I will have to look on the internet.

I guess it will be - on the web.

On the web, okay. And then on the vertical -- I mean the horizontal program, you guys are already planning infrastructure for that, yet you haven't drilled your first well?

We haven't drilled our first horizontal

You have drilled enough vertical.

We have drilled three verticals.

You think you have enough well control --

There is enough activity in the area that we have a lot of confidence it will be a good area for us.

So the 12-inch line can handle what kind of capacity out of Tioga and Lycoming.

It can handle 100 a day.

And it is all for you guys or is there any third party that would flow into it.

There may be third parties, Becca, but right now I think Seneca is contemplating using all of it, but we are talking with third parties and we may end up increasing the size of that line.

Okay and then on the CapEx budget, the decline down to $142 million in Appalachia, can you remind us what it was before.

Matt, I don't know if we actually broke it out in terms of division --

Yes, well, we have been as high as, early in the year we might have been at what Ron, was it $220 million?

Yes, it was $285 million overall for the --

Yes, I meant just for Appalachia. But -- $30 -- remember, Becca, $31 million of that was --

Yes, we made a few adjustments Matt but I think -- it was in the $220s and then an adjustment, and then another adjustment. So it started a while back when prices were $9, $10, $11, in the mid $220s, Becca.

Okay.

And then I mean most recently at the -- for the year-end when we're at our year-end conference discussing our CapEx looking forward, it was $196 million, for the 2009 budget.

Okay. And then I have got one more question that one of my guys is asking me to ask so if I sound like I'm crazy, forgive me. The Monterey Shale. What kind of F & D and operating expenses are you guys seeing there?

F & D in the Monterey shale program?

Yes.

I don't know it off the top of my head Becca. But it's --

Okay.

It's -- let me put it this way. Those wells make a lot of sense when oil prices are -- say, somewhat above $50 a barrel.

Okay.

So -- those wells were drilled early in the year. We're not drilling them right now, but we're kind of at the point where you could justify drilling them, but they are relatively marginal economics at today's prices.

And how big of an inventory do you have?

Oh, there is probably another half dozen that we could drill.

Okay. Perfect, thank you, guys.

And the next question comes from the line of Faisel Khan with Citigroup. Please proceed.

Hey, guys it is actually Timm Schneider for Faisel. Just a quick question. You mentioned there were some, I think, gas quality issues with respect to Range's production, can you tell us what those were?

That was -- it is just --really they have relatively hot gas they process thatI think its like at 1800. They get it down to 1160. But pipeline quality is usually lower than that. So, it is not significant in this - but it is fairly typical, and -- and that's why we say we will be able to work our way through it. It is Texas Eastern standards that -- I think presently there is a waiver for, so there is a discussion, with respect to that, right now. We don't see that as a major problem. But it is -- that is the kind of detail that you have to work your way through ultimately to have this project come to fruition.

Okay. Thank you, that's it.

(Operator Instructions) And we have no further questions at this time. I would now like to turn the meeting back over to Mr. Jim Welch for closing remarks.

We would like to thank everyone for taking the time to be with us today. A replay of this call will be available at approximately 2:00 P.M. on both our Web site and by telephone, and will run through the close of business on Friday May 8, 2009. To access the replay online, visit our investor relations web site at investor.nationalfuelgas.com . To access by telephone call 1-888-286-8010. And enter pass code 32497080. We also would like to remind everyone that we will be making a webcast presentation at the American Gas Association financial forum. This presentation will be made on Monday, May 4, at approximately 4:40 P.M. eastern standard time. To listen to this webcast live, or to access the replay, please visit our Investor Relations website. This concludes our conference call for today. Thank you and

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day!