National Fuel Gas Co (NFG) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2015 National Fuel Gas Company earnings conference call. My name is Haley and I am your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Brian Welsch, Director of Investor Relations. Please proceed, sir.

Thank you, Haley, 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 Ron Tanski, President and Chief Executive Officer; Dave Bauer, Treasurer and Principal Financial Officer; and Matt Cabell, President of Seneca Resources Corporation.

At the end of the prepared remarks we will open the discussion to questions. The third-quarter earnings release and August investor presentation have been posted on our Investor Relations website. We may refer to these materials during today's call.

We would also like to remind you that today's teleconference will contain forward-looking statements. While National Fuel's expectations, beliefs and projections are made in good faith, and are believed to have a reasonable basis, actual results may differ materially.

These statements speak only as of the date on which they are made and you may refer to last evening's earnings release for a listing of certain specific risk factors. With that I will turn it over to Ron Tanski.

Thanks, Brian, and good morning, everyone. Operating earnings of $0.55 per share for the third quarter were $0.18 per share lower than last year's third quarter.

If you look at the drivers of that decrease that we breakout on page 11 of the earnings release, it is easy to see that three items in our Exploration and Production segment explain most all of the year-to-year decrease. Those items were: lower commodity prices; decreased production; and offsetting the first two items, a reduction in our DD&A rate.

The decrease in production is largely a result of our shutting in wells in Appalachia when the spot prices are too low. We continue to look for opportunities to sell our spot production at acceptable prices, but there is simply too much gas and not enough pipeline infrastructure to move those supplies to attractive pricing points. As we pointed out in the release, we curtailed approximately 12.5 Bcf of production during the quarter.

Lower commodity prices have obviously been the story for most energy companies this earnings season, and we've seen some firms make major reductions in their capital expenditure budgets. We are watching our spending too, but I will remind everyone that our CapEx plans have always been relatively conservative.

Our current rig scheduling and drilling program are designed to bring on enough production to fill the pipelines that we are building to move that production to better pricing points. We continue to move forward with our plans to build the pipelines to help move production out of the basin, both for our own Seneca Resources and for third-party producers.

Construction is underway on three of our interstate pipeline projects: our Westside Expansion Project along our Line N corridor; our Tuscarora Lateral Project in the more central portion of our system; and our Northern Access 2015 project. All of these projects are moving along on schedule and we expect that they will all be in service in the last quarter -- calendar quarter of this year.

The Northern Access 2015 project will allow Seneca to move 140,000 decatherms per day of gas to Canada at the Niagara interconnection with TransCanada and the Westside Expansion will allow Seneca to flow an additional 30,000 decatherms per day, a portion moving to Canada and the remainder to Texas Eastern.

We've shown Seneca's transportation capacity graphically on page 24 of our Investor Relations slide deck on our website. When combined this 170,000 decatherms of near-term capacity with the 490,000 decatherms per day of capacity that Seneca has in our Northern Access 2016 project, you can see that we have got a substantial growth trajectory moving forward from our current productive capacity of 150,000 decatherms per day at our Western Development Area.

Both Matt and Dave will give some more color on our marketing activities and hedging positions. But I'm pleased to say that our ongoing approach of regularly layering in hedges has put us in good shape with respect to revenue certainty for a good portion of our firm sales for the rest of this year and next fiscal year.

Lower commodity prices have obviously cut into our earnings, but our diversified model continues to produce healthy cash flow. Our balance sheet is in good shape and I don't see any need to alter our strategy to build more pipelines and drill the wells necessary to fill those pipelines.

These investments help us accomplish two goals: they generate significant cash flows for at least the next 15 years; and they provide Seneca with the ability to move gas to a market with significantly better pricing.

This integrated approach to developing our assets, combined with the flexibility offered by our fee mineral acreage position, is allowing us to deal with the current pricing challenges and it puts us in a great position for continued growth.

Our financing requirements for 2015 and 2016 are meaningful, but our outspend is driven almost entirely by our investments in our long-term midstream infrastructure.

Dave will talk about the debt financing we completed in June to cover our 2015 capital program. And looking ahead to next fiscal year, as we have said in the past, the MLP structure is an option that we are evaluating for our midstream business and, given the right market condition, we think it is a very good option.

The MLP market, and frankly the entire energy space, is under pressure right now. But markets go up and down and just because there is a dislocation today doesn't mean it will continue forever.

And an MLP isn't our only option. There are a number of ways to finance our business. We are certainly aware of our capital needs in fiscal 2016 and will pick the financing option that we think is best for our shareholders.

One thing that's clear; there is a lot of capital looking to be put to work in the midstream space. We have a great set of assets, a great management team and a great plan to grow the business. In the end those are the keys to attracting the best sources of capital. Now I will turn the call over to Matt Cabell to give a Seneca update.

Thanks, Ron, and good morning, everyone. For the fiscal third quarter Seneca produced 36.2 Bcfe, which is 11% or 4 Bcfe less than last year's third quarter. However, during this year's third quarter we sold only our firm volumes in the Marcellus and curtailed 12.5 Bcf, or approximately 140 million cubic feet per day of potential spot sales due to low prices. Absent those curtailments production would have been up 20%.

In California our 2015 drilling programs have had good results and provide attractive returns even at today's low prices. At $50 oil we earn returns of 30% to 40% on wells we drill in the North Midway, South Midway and East Coalinga areas, which represent the majority of our current and fiscal 2016 capital budget.

We are also feeling good about our opportunities to grow California production over the next several years due to opportunities we see at East Coalinga and at two additional farm-in deals that are nearing completion. I hope to have these two deals inked by the next call and will provide some details then.

Moving on to the Marcellus, development in the Clermont-Rich Valley area is going well, with 52 Clermont area wells drilled in the first nine months of fiscal 2015 and 24 completed. Our most recent completion is the north half of our E-9E pad came on at rates ranging from 8.5 to 10 million cubic feet per day. IP rates and EURs have been remarkably consistent in the CRV area.

We also continue to drive down drilling and completion costs. Our average fiscal 2015 development well cost was $5.8 million for a 36 stage well with a 7,000 foot lateral length.

On the marketing front, we continue to take a portfolio approach to our marketing arrangements, optimizing the value of our firm transportation while minimizing risk through a series of firm sales.

For example, this November the Northern Access 2015 project will go into service. We have 140,000 decatherms of firm transport capacity locked up under firm sales contracts with Dawn index pricing. Dawn continues to trade at a premium, so we were able to convert a portion of the Dawn sales contracts to NYMEX plus $0.35 per MMBtu for November 1 through March 31.

In addition, we recently requested proposals to purchase a portion of the gas we will transport of the Northern Access 2016 project. We were pleased with the diversity and number of parties that participated and are currently negotiating a mix of Dawn indexed and fixed-price deals tied to a portion of our capacity on the project.

Our active marketing and hedging program has gone a long way to insulate Seneca from low natural gas prices. For the third quarter our average after hedging sales price was $3.32 per Mcf, which is over $1 higher than the pre-hedged price.

Looking forward to fiscal 2016 we now have 114 Bcf of our gas production locked in, both physically and financially, at an average price of $3.50 per Mcf. So we are well-positioned should low prices persist into next year.

Moving now to the Utica, I'm sure that many of you saw the high rate tests that were announced by our peers in Westmoreland and Greene counties. We have two Utica tests planned that should connect the trend between these recent wells and Tioga County where our recent Utica well tested 22.7 million cubic feet per day.

As I mentioned on our last call, the planned wells will be drilled in conjunction with our ongoing Marcellus development in the Clermont area. The rig has just moved to the E9-M pad where we plan to drill 10 Marcellus wells and 1 Utica.

This will be a 5,500 foot lateral with an expected total cost of about $12 million. We expect to frac this pad in the third quarter of fiscal 2016 and should have a test rate shortly thereafter. Given our large contiguous fee acreage position, a successful Clermont area Utica test could have a major impact on Seneca's overall resource potential.

In summary, our development program continues to show consistent, predictable results. We are driving down costs and locking in margins through firm sales and hedging.

Although we are dropping a rig early in 2016 and reducing our capital spending from 2015 to 2016, we are on track to fully utilize the 700,000 decatherms of firm transportation that we will have in 2017. And, in addition to thousands of de-risked Marcellus well locations, we are optimistic about the potential for Utica development across a broad swath of our acreage. With that I will turn it over to Dave.

Thank you, Matt, good morning, everyone. Ron hit on the major drivers of the quarter's earnings and, other than the impairment charge, there really wasn't anything unusual in the quarter.

Last night's release explains the major variances in earnings, so I won't repeat them again here. Instead I will focus on our expectations for the remainder of the fiscal year and our initial guidance for next year.

With respect to 2015 our updated earnings guidance is $2.90 to $3.00 per share, excluding ceiling test impairments. That is up from our previous range of $2.75 to $2.90, mostly due to lower expected DD&A expense.

As a result of the third-quarter ceiling test charge, we expect Seneca's per-unit DD&A rate for the fourth quarter will be in the $1.35 per Mcfe area. That will lower the full-year DD&A rate to about $1.55 per Mcfe, at the low end of our previous guidance of $1.55 to $1.65.

Production for the year is now expected to be 155 to 160 Bcfe. The midpoint is the level we should achieve assuming we don't sell any spot volumes in August and September.

We haven't produced above our level of firm sales commitments for the better part of the calendar year and, based on the prices we have seen thus far, we don't think it is likely we will have meaningful spot sales in the remainder of the fourth quarter. However, should prices improve, we have the ability to produce about 4 Bcf per month into the spot markets.

In terms of pricing, we are assuming a Henry Hub price for natural gas of $2.75 per Mcf. However, because all but 2 Bcf of our firm sales for the quarter are hedged, changes in natural gas prices will have a minimal impact on our earnings.

For crude oil we are assuming a WTI price of $50 a barrel. While that is a little higher than the current NYMEX prices, we are better than 60% hedged for the fourth quarter. Looking to next year our preliminary earnings guidance for fiscal 2016 is a range of $3.00 to $3.30 per share excluding any ceiling test impairment charges.

In terms of pricing, we are assuming a Henry Hub gas price of $3.25 per Mcf and a WTI crude oil price of $55 a barrel. In addition, we are assuming we will receive $1.75 per Mcf for Marcellus spot volumes.

There has been considerable volatility in commodity prices, particularly with respect to crude oil, and we expect to refine our pricing assumptions as we move into the fiscal year.

Seneca's production forecast of 158 to 232 Bcfe has a wider than normal range, which reflects the uncertainty around Appalachian gas pricing and our ability to sell spot volumes at an acceptable price.

We are optimistic that Seneca will have spot sales, but want to manage expectations given our recent experience. Therefore we are presenting the full range of potential outcomes. If we sell 100% of our expected spot volumes we will be at the high end of the range, if we don't sell any spot volumes we will be at the low end.

From an expense standpoint the ranges you see on page 25 of last night's release are all based on the 195 Bcfe midpoint of our production forecast. The improvements in per unit LOE, G&A and production tax expenses compared to our third-quarter rates are attributable to the expected increase in Seneca's production volumes.

As you would expect, our DD&A rate will decrease sharply as a result of the ceiling test impairments. Though we excluded future ceiling test charges themselves from our earnings guidance, we have tried to estimate what the DD&A rate will look like post impairments. However, given the number of variables that go into that calculation it is possible the range will change meaningfully in the coming quarters.

As you can see from pages 56 to 57 of our new IR deck, we are well hedged for fiscal 2016. As Matt said earlier, we've locked in 114 Bcf of natural gas production at a price of about $3.50 per Mcf, and that equates to about 80% of our firm sales volumes and, at the midpoint of our production forecast, about 65% of our expected natural gas production.

On the oil side we have about 1.3 million barrels hedged at $93 a barrel, which represents about 45% of our expected oil production.

The Gathering segment's earnings and cash flow should track the increase in Seneca's volumes. For fiscal 2016, assuming the midpoint of Seneca's production forecast, we expect the gathering segment's revenues will be about $95 million, up from the $75 million to $80 million we forecast for fiscal 2015.

As we add compression to the Clermont system, operating and depreciation expenses will increase meaningfully relative to their current levels, but a large portion of the revenue increase should fall to the bottom line.

Turning to the regulated businesses, fiscal 2016 should be a good year for the Pipeline and Storage segment. This fall the Northern Access 2015, West Side Expansion and Tuscarora Lateral projects go into service adding $27 million of incremental revenues in 2016.

However, that increase will likely be offset in part by a variety of smaller items, including some typical re-contracting on both pipeline systems and a decrease in short-term transportation revenues that's somewhat weather-related. And recall that last winter was significantly colder than normal. Our forecast for 2016 assumes normal weather.

Considering those items we expect Pipeline and Storage revenue for fiscal 2016 will be in the range of $300 million to $310 million. We expect O&M expense in the segment will increase to about $85 million to $90 million.

Part of that increase relates to higher operating costs associated with our recent expansion projects and part relates to an expected $4 million increase in retirement benefit costs, which is driven by some anticipated changes in our plan's actuarial assumptions.

Lastly, with respect to the Utility, we are expecting a decline in that segment's earnings in fiscal 2016 for two reasons. First, as I just mentioned, our forecast assumes normal weather. In fiscal 2015 colder than normal weather contributed about $0.05 per share to earnings.

Additionally, as you will recall, in the second quarter of fiscal 2015 an audit in the New York division of the utility resulted in an adjustment that benefited earnings by about $0.04 a share and we don't expect that adjustment will recur in 2016.

Turning to capital spending, page 7 of our new IR deck contains our updated capital spending estimates. For fiscal 2015 we narrowed our consolidated guidance to a range of $990 million to $1.045 billion, at the midpoint of $55 million decrease from our previous guidance.

About half of the decrease is related to the timing of spending between fiscal years in the E&P, Gathering and Pipeline segments. The other half relates to the Utility's Dunkirk project, the timing of which has become less clear. The owner of the power plant that would be served by the project is facing some legal and regulatory challenges with respect to its repurposing of the plant.

We stand ready to build the project once those challenges are resolved. But given the uncertainty we are removing the project from our capital budget.

For fiscal 2016 our consolidated range is now $1.1 billion to $1.3 billion, up modestly from our previous guidance. There aren't any major changes in our spending plans, the variations are mostly attributable to timing.

Given the changes in our earnings and capital spending guidance we now expect an outspend in fiscal 2015 that is just under $400 million. In June we issued $450 million of long-term debt to fund that outspend.

Looking to next year we expect our capital expenditures and dividend will exceed cash from operations in the range of $500 million to $600 million. We have short-term credit facilities to initially financed debt outspend if it is necessary and, as you know, we are evaluating longer-term financing alternatives.

As a placeholder our earnings guidance for fiscal 2016 assumes we use short-term debt and we will obviously update that guidance as we refine our ultimate financing plans. With that I will close and ask the operator to open the line for questions.

(Operator Instructions). Becca Followill, US Capital Advisors.

A couple questions for you. One, I know that you sounded like you have taken off some of the (inaudible) in the short term in the Dawn hedges in favor of a higher NYMEX price. That, what we are seeing so far is with the Rex reversal completion that you are starting to see a big basis blowout in Chicago.

Can you talk a little bit about your capacity going to Dawn and how much you have hedged in the out years -- not so much the short-term, but maybe 2017, 2018, 2019?

Do you have a reference from the slide deck, Dave?

In fact, on page 27 is -- of our IR deck is our hedge positions going out. We don't have a large amount of longer-term hedges in place. For 2016 we have 19 Bcf at Dawn; 2017, 22 Bcf; and then a more modest amount financially hedged at Dawn in 2018.

Is there enough liquidity to hedge out some of those future years?

We are looking at that and we have -- we haven't looked much beyond 2018, but we haven't had really any difficulty executing trades in the closer years.

And what do some of those spreads look like relative to historicals? Are they already reflecting some pressure on that basis?

Well, the trades that we have done have generally been at a premium to NYMEX. Obviously as you go further out the liquidity discount gets to be a bit greater. So, for example, in the near years we may be doing it a full year call it NYMEX plus 10 to 20 or so.

But then as you move out towards the 2018 time period, that erodes to more a NYMEX flat type level. And as you move beyond that we do get indicative levels, but the liquidity premium tends to increase quite a bit.

Thank you, that is helpful. On the well cost for Utica, the $12 million that you talked about, the new well that you are going to drill. What is the depth on that?

And some of the early wells that we have seen, I know you have drilled a couple already, but some of the early ones that we have seen from EQT and Consol are coming in much, much higher than that.

Yes, Becca, the depth for our Clermont Utica wells is on the order of probably 10,500 feet, true vertical depth.

Okay, so much shallower.

So it is a little shallower, but I would say the bigger factor is that we are drilling this on a Clermont -- existing Clermont Marcellus pad, so the infrastructure is there, it is sharing pad costs with 10 other wells. Our water handling is all in place, we don't have to truck water from a long distance.

So there is a big, big benefit to developing something like this as part of an existing development rather than a one-off well that is far from everything else.

Got you, thank you. And then, will that $12 million include some of the normal science costs that happen with early wells that drive that up a little bit higher?

There isn't a whole lot of additional science in this particular well. And I would also say that that well cost estimate is probably on the conservative side. I hope we can do it cheaper than that.

Great, thank you. And then on the financing for 2016, the shortfall of $500 million to $600 million, I know, Dave, you said you were going to -- right now in the plan it's short-term debt. But at what point or what is the timeframe for looking to make a decision on whether or not you will finance it differently?

Well, as Ron said, we have been evaluating an MLP and other structures. And as we move through the year and start to spend dollars on Northern Access we will be announcing our definitive financing plans.

Have the changes in what has happened with MLPs lately in the downturn caused you to rethink that in any way?

Well, not really, Becca. I mean just given the previous schedule we have talked about with respect to receiving the FERC certificate and when construction activities actually begin hasn't changed. So we have got some time. Obviously the market is going to do something, what it is going to do we are not sure.

But we think -- no one is going to try to call a bottom here anytime soon, but we may have already passed that. But that is far enough out that to talk about it in any kind of detail would just be a little bit premature.

Understand. Thank you, guys.

Thank you, we have no further questions. (Operator Instructions). Holly Stewart, Howard Weil.

Matt, maybe just one or two for you. Several of your peers I guess have been talking about deferring completions as they are heading into 2016 just to have that baseline of production growth. I mean you have got quite a bit of volume curtail, but curious how you are thinking about deferred completions as you kind of exit the year and into 2016.

Yes, so as I mentioned in my prepared comments, at Clermont we have drilled 52 wells, only completed 24. We expect to end the year, to end 2016 with about 50 wells that are drilled and not completed, although I think that number may include a handful that are completed and just not online at that time.

Is that in 2015 or in 2016? Sorry.

Into fiscal 2015. At the end of fiscal 2016 our best guess is about 65 wells that are drilled but not completed. Recognizing that with Northern Access 2016 coming on at the end of the year, we'll probably have a fairly big slug of completions in that timeframe just right after the end of fiscal 2016.

Okay, so then that is what kind of bridges that gap if you look at slide 18 I think it is where it says the firm sales and the future FT capacity and going from the 220 to 660 Mdth/d so that's really what's helping get you up to that rate as you enter into Fiscal 2017 I'm assuming.

I'm finding the reference on the slide. You mean the gap from Fiscal 2016 to Fiscal 2017, yes, there is a big slug of completions for us and the other thing that happens is that we go from an assumption of some curtailments of spot volumes to not really having to curtail anymore spot because we've got the firm transportation in Fiscal 2017.

Yes, okay, perfect. And then maybe just kind of along those same lines, just kind of curious as to your macro view of -- you've obviously got a lot shut in. But you also have from a spot sales standpoint there is the potential to shut in a lot more in 2016.

So, is there anything that you are seeing out there as you look into your crystal ball into 2016 from a Northeast PA standpoint that there could be some pricing relief?

Yes, as we look at the projects coming on, there is two projects that come on kind of late this year, sort of at the beginning of the winter, that should debottleneck Northeast Pennsylvania to some degree. And our view is that winter spot pricing, given normal weather, may at least be acceptable such that we will be selling some spot this winter.

It is difficult to predict that, Holly, but that would be our best guess. I would expect that that would be a winter phenomenon though, not necessarily for the full year.

Yes, okay, great. Thanks, guys.

Chris Sighinolfi, Jefferies.

This is actually Chris Tillett on for Sighinolfi, how are you? Just a follow-up on Becca's question. Obviously the MLP has been on a lot of investors' minds recently. And given kind of the turn in outlook in that market, I would just be curious to hear your thoughts on some of the alternatives you are considering in how you think about approaching that process in a non-MLP world?

Well, I think if you -- obviously it is a rather recent phenomenon with respect to the MLP market, but our thinking on that really hasn't changed all that much. And as I said, it really would be premature to be talking about us pulling the trigger on any particular type of financing since we -- given our schedule and given our timing, we have plenty of time to see how the market sorts itself out. So I guess that is about all I'm -- prepared to say at this point.

Okay. Well, thanks, that is helpful and that is it for me.

Thank you, we have no further questions. I would now like to turn the call over to the Mr. Brian Welsch for closing remarks. Thank you.

Thank you, Haley. We'd like to thank everyone for taking the time to be with us today. A replay of this call will be available at approximately 3 PM Eastern Time on both our website and by telephone and will run through the close of business on Friday, August 14, 2015.

To access the replay online please visit our Investor Relations website at investor. NationalFuelGas.com; and to access by telephone call 1-888-286-8010 and enter pass code 97670814. This concludes our conference call for today. Thank you and goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.