National Fuel Gas Co (NFG) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2013 National Fuel Gas Company earnings conference call. My name is Katina and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Tim Silverstein, Director of Investor Relations. Please proceed.

Thank you, Katina, and good morning, everyone. 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.

Also a new slide deck was recently posted to our Investor Relations website which we may refer to during today's call. We would 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 we will begin with Ron Tanski.

Thanks, Tim. Good morning, everyone. As you saw in our earnings release, we had a really good quarter both financially and operationally. Consolidated earnings per share were up nearly 20% helped by a 30% increase in earnings in our Pipeline and Storage segment.

Additionally, total production increased 57% as a result of several exceptional new Marcellus wells turned online during the quarter. Once again, we believe that our diversified yet integrated structure helped to drive our performance with improved results coming from each of our operating segments.

Before I move on with the rest of the call I want to remind everyone that Dave Smith has moved up to the role of Executive Chairman of the Board. Therefore he won't be participating in these calls or the day-to-day details of the business. However, don't expect any major change in the strategic course of the Company.

Dave and I have spent a lot of years together here at National Fuel and have viewed the growth opportunities of the Company in much the same way. Under Dave's leadership during the last three years National Fuel has invested more than $300 million on interstate pipeline projects and we've increased our contracted transportation capacity by 1 billion cubic feet per day.

Over the same three years in the Exploration and Production business we've grown our Marcellus production from zero to nearly 100 Bcf this fiscal year. And we have built a Midstream business of smaller diameter, higher pressure gathering pipeline from the ground up.

Looking forward Seneca will continue to focus on the Marcellus where our results continue to improve as evidenced by the outstanding performance of our Tract 100 wells in Lycoming County, Pennsylvania with several wells achieving peak production rates north of 20 million cubic feet per day. These wells continue to exceed our initial expectation prompting us to again increase our production guidance.

In addition to Lycoming County, Seneca's other main priority this fiscal year is the delineation of our Pennsylvania legacy acreage in our western development area. We are increasingly optimistic about the potential of this acreage where initial results in the Rich Valley prospect area are extremely encouraging.

We've kicked off and multi-well pilot development program across the acreage and, assuming we see results that are consistent with our initial well, we could be looking at hundreds of new well locations across this area. In addition to our exploration and production activities we will continue to focus on ways to expand our Midstream businesses.

In this quarter's results you can see the year-over-year earnings impact that our new pipeline projects can have. Today between our various FERC regulated pipeline expansion projects and our two non-regulated gathering projects, National Fuel's system pipeline moved just about 1.4 billion cubic feet a day of Marcellus production.

Each of the projects we placed in service is expandable and our project development team is actively marketing new projects to producers. Some of these projects will be smaller in size costing $10 million to $30 million such as the modest expansions to our Line N system that we have planned for later this year and in fiscal 2014. Others like the Central Tioga extension project will be larger in the $150 million range and consequently have a longer lead time.

Nevertheless, this is a long-term business and we firmly believe the strategic location of our system and our ability to efficiently and timely complete projects to meet the needs of shippers will lead to continued growth.

Our utility business is the only segment that does not have any organic growth. We did have improved results this year because we had a more normal winter compared to the last year that was 26% warmer than normal.

We've continually done a great job in this business controlling costs and delivering great service to our customers. Our delivery rates are among the lowest in the state and our gas costs are generally either the lowest, or among the lowest, in the state.

We've done such a great job that we have caught the attention of the New York Public Service Commission who thought our earnings were too high and seemed interested in having us incorporate an earnings sharing mechanism in our rate along the lines of a mechanism that we had in place a number of years ago.

In March we submitted a proposal with the Commission that included just such a mechanism to become effective June 1. In April, however, the Commission commenced the new proceeding ordering the Company to make a filing by May 8th and show cause why our rates should not be made temporary and subject to refund until the staff had time to more fully review these rates.

Now we have dealt with show cause orders before and they are a typical aspect of our regulated operation, so litigating with the Commission for months and months is not out of the ordinary. What makes this particular order troubling, however, is that the Commission is suggesting that they will invoke Section 66(20) of the Public Service Law to reach back and recover what they consider to be past over earnings.

I think this is a terrible signal from a regulatory policy point of view and it discourages utilities and investors from making discretionary investments in New York State.

In the exploration and production business, however, we're continuing to invest heavily and I will turn the call over to Matt Cabell to update you on those operations.

Thanks, Ron. Good morning, everyone. Seneca produced 28.8 Bcfe in the second quarter of fiscal 2013, a 57% increase over last year's second quarter. Since our last earnings call we've brought on seven new wells at Tract 100 in Lycoming County, Pennsylvania.

Two of these wells came on at rates in excess of 20 million cubic feet per day and of the 14 wells that we've brought on since mid-January six have exceeded 20 million a day. The average seven-day rate for all 21 wells on Tract 100 is 13.3 million cubic feet per day. We expect to add four more Tract 100 wells this summer and another five well pad this fall.

On our Western Pennsylvania legacy acreage the Rich Valley well has been online now for a little more than a month. It hit a peak 24-hour rate of 8.1 million cubic feet per day and averaged 6.7 million over its first 30 days. Consequently we are now estimating an EUR of 7 Bcf. We feel good about the potential of this area and are beginning the first phase of a development program, with two wells drilled but not yet fracked, and seven more planned to be drilled and fracked in fiscal 2014. Given our fee ownership of the gas rights and consequent lack of royalty we believe this area may have economics that are better than our successful Covington development in Tioga County.

We've drilled six Marcellus wells in the Western Development Area since the beginning of the fiscal year, including the aforementioned two Rich Valley/Clermont wells, and have begun to complete them. Most of these wells are in areas where the Marcellus has a very low water saturation. So we will be soaking each of them for at least 30 days.

In addition to Rich Valley we have two wet gas wells at Owl's Nest, one at Church Run and a dry gas well at a prospect we call Ridgway. We will begin seeing test results this summer.

Looking at our current drilling activity, we have two rigs at Tract 100 and our third rig is moving to Mt. Jewett preparing to drill a Utica delineation well. This well will be completed in September and tested in the first or second quarter of fiscal 2014.

In California production for the quarter was down about 6% versus last year primarily due to expected natural decline in North Midway Sunset. In addition, production growth at the Sespe Field was limited by a gas transportation issue. While the Sespe bottleneck is related to gas, it has a more meaningful impact on oil production since the wells we have shut in are oil producers with only a modest amount of associated gas.

We expect to have the transportation issue solved very soon and we will see an increase in West Division production for the balance of the year as we bring all Sespe wells back up to full production and bring on new wells at Sespe, South Lost Hills and South Midway Sunset. Second-half production for the West Division should exceed production from last year's second half and full-year production is anticipated to be similar to fiscal 2012.

We've taken over as operator at the East Coalinga Field and have begun reactivating idle wells. So far 20 wells have been returned to production and we've increased overall production from 230 barrels of oil per day to approximately 350 barrels of oil per day. We've also begun our evaluation drilling program. We have 12 Coalinga wells planned for the fiscal year which will include a comprehensive suite of logs and whole cores through key producing intervals.

At our last earnings call in February we raised our production guidance by 6 Bcf. This quarter we're raising it again, this time by another 7 Bcfe and narrowing the range slightly to a new range of 110 Bcfe to 118 Bcfe. The midpoint of the range is now 36% higher than our production volume in fiscal 2012. The bottom of the range is now higher than what we projected as the top of the range early in the fiscal year.

This is not because we are poor forecasters, but rather it is because we are drilling and completing some outstanding wells and bringing them online ahead of schedule.

Gas prices have improved substantially in the past few months as gas supply has tightened and storage has been depleted to normal levels. Consequently we are now planning to complete a Tract 595 pad in Tioga County that we had temporarily delayed last year when prices were weak.

The six well PAD C will be completed in September and brought online in the first quarter of fiscal 2014. This adds about $25 million to $30 million to our fiscal 2013 spending plan. Therefore we are revising our guidance and narrowing the range to $525 million to $585 million. With this acceleration and the excellent results we've been having lately we are also prepared to revise our 2014 production guidance to a new range of 132 Bcfe to 142 Bcfe.

Let me close with a few comments about Seneca's longer-term plans for the Marcellus. We will be drilling and completing wells on Tracts 100 and 595 for another two years. As I mentioned, we are also beginning development of our Rich Valley area and could possibly have multiple rigs running in that area in fiscal 2015.

The immediate Rich Valley/Clermont area has about 180 well locations. Current and future delineation work could very possibly extend this area into a larger trend and add another 300 to 500 locations. We've also drilled three delineation wells in the wet gas portion of our acreage which will be tested this summer and fall. Positive results in the wet gas region could lead to another significant development area with hundreds of well locations.

So, while our immediate focus remains Lycoming and Tioga County, you should all understand that we are becoming increasingly confident of our continued robust production growth for the rest of this decade or longer. With that I will turn it over to Dave Bauer.

Thank you, Matt, and good morning, everyone. Second quarter was another outstanding quarter for National Fuel. Consolidated earnings of $1.02 per share were up $0.16 or almost 20% over the prior year's adjusted operating results, and that is in spite of a $0.66 per Mcf drop in the average after hedging natural gas price realized by Seneca.

Colder weather on the Pennsylvania service territory of our Utility was the biggest driver behind the earnings increase. If you recall, the winter of 2012 was the warmest on record in our service territory which weighed heavily on last year's earnings. The weather this year was much closer to normal which allowed our Utility earnings and cash flows to return to more historic levels.

Earnings in the Pipeline and Storage segment were up almost a third on the back of our recent line in 2012 and Northern Access Expansion Project. Consistent with our prior forecast these projects will add $23 million in annual revenues per year, about $21 million of which will fall within fiscal 2013.

Seneca had another great quarter with adjusted EBITDA up by $23 million or 25%. And again, that is after a $0.66 per Mcf drop in realized natural gas prices which impacted Seneca's cash flows by about $16 million.

Operationally all of Seneca's performance metrics, including DD&A, LOE and G&A in particular, showed significant improvements during the quarter. These cost structure improvements, which will drive enhanced profitability for Seneca in the future, reflect the evolution of Seneca's Marcellus program from the initial ramp-up phase to our current high-growth mode.

Starting with DD&A, Seneca's per unit DD&A expense of $2.05 per Mcfe dropped significantly from both the $2.30 rate from last year and the $2.12 rate in the first quarter. This decrease was caused by a combination of better than expected reserve adds and our continued focus on driving down drilling and completion costs, particularly at Tract 100. As a result we are revising our full-year DD&A guidance to a range of $2.05 to $2.15 per Mcfe.

Seneca's $0.97 per Mcfe of LOE expense for the quarter was down $0.17 year over year, or about 15%, and down $0.08 compared to the first quarter. This decrease is reflective of our growing base of low-cost Marcellus production.

However, the drop from the first quarter is also partially a timing issue. You will recall that a number of well workovers in California were front loaded in the first quarter. I expect our full-year LOE will be in the middle of the range of $0.95 to $1.05 per Mcfe.

When evaluating Seneca's LOE expense it's important to remember that the $0.97 per Mcfe for the quarter includes gathering costs that are paid to Seneca's sister company, NFG Midstream, which is included in the All Other category in our earnings release.

The growth in Seneca's production has started to make a meaningful impact on Midstream's bottom line. Approximately $0.04 per share of earnings and over $7 million of adjusted EBITDA for the quarter. Seneca's G&A expense was $0.59 per Mcfe, an impressive $0.19 lower than the prior year's quarter.

In nominal dollars the nearly $17 million of G&A expense for the quarter was a little higher than you might have expected given our guidance, but this is largely a timing issue associated with how we record certain expenses across the fiscal year. I expect our full-year G&A will be in the range of $60 million to $62 million.

As you saw in last night's release, we are increasing our fiscal 2013 earnings guidance to a range of $2.95 to $3.10 per share, at the midpoint of a $0.15 per share increase. The increase reflects our strong second-quarter results and assumes Seneca's updated production guidance of 110 Bcfe to 118 Bcfe and a flat $4 per MMBtu NYMEX price for our un-hedged production for the remainder of the fiscal year. Our $85 crude oil price assumption is unchanged.

Our guidance also assumes a full fiscal year effective income tax rate in the range of 40% to 41%. As you can see in last night's release, our effective rate for both the quarter and six months was a little more than 39%. During the quarter we had two adjustments that served to lower the effective rate for the first six months of the year. We don't expect any similar items in the second half of the year.

With regard to capital spending, our consolidated capital budget for 2013 is now a range of $710 million to $820 million, which reflects the new Seneca budget that Matt described earlier. Our capital budgets for the other segments have not changed from our previous guidance.

In terms of cash flows, we expect the incremental net revenues from Seneca's increased production forecast should fund most of its increased capital budget, therefore assuming a midpoint of our earnings and capital spending guidance, we still expect our full-year fiscal 2013 capital spending will just about equal our cash from operations.

Turning to our hedging program, as gas prices rallied we added positions to our hedge book for fiscal 2013 and 2014. For the last six months of fiscal 2013 we are a little more than 70% hedged for natural gas at a price of $4.49 and a little less than 60% hedged for oil at a price of $94.92.

For fiscal 2014 we now have about 63 Bcf of gas hedged at $4.28 and 1.6 million barrels of oil hedged at $100.26. At the midpoint of our production guidance those positions translate to an overall hedge percentage of slightly over 50%.

Switching to our financing activities -- in February we issued $500 million of the new 10-year notes, the transaction went extremely well. The order book was more than three times oversubscribed and the 3-3/4 interest rate on the new bond is by far the lowest in our debt portfolio.

Proceeds from the issuance were used to fund a $250 million maturity that occurred on March 1. A good portion of the remainder was used to pay down short-term debt. With the March maturity behind us we now have a nearly five-year window into our next maturity which occurs in April of 2018.

From a liquidity perspective we are in terrific shape. As of today we have approximately $100 million in cash on hand and full availability under our more than $1 billion of short-term credit facilities.

In closing, it was another great quarter for National Fuel. We continue to execute on our Marcellus opportunity set and our 20% growth in earnings and cash flows for the quarter is strong evidence of our success. Operator, can we please open the line for questions?

(Operator Instructions). Andrea Sharkey, Gabelli.

Congratulations on a great quarter. I was just curious, maybe talking about the Rich Valley, it seems like you guys are getting a lot more excited about that. And so, as that ramps up how are you planning on handling I guess Midstream gathering take away capacity and then also the bigger pipeline capacity? Will you have to go to a third party for that or will you do that yourselves? And I guess maybe help us just think about how that will progress?

Yes, Andrea, I think the first thing to understand is we can probably handle about 70 million a day with only some minor gathering lines put in. The National Fuel Line FM 120 runs basically right through that Clermont area. So again, we can get up to about 70 million a day.

Beyond that we need a line that will -- more of a trunkline built. And as we kind of get through this pilot development stage we will be sizing that and figuring out exactly when and where and how we want to build it. That would likely be our Midstream company (technical difficulty).

Okay, great. And then I guess thinking about CapEx plans for beyond 2013 and looking at fiscal 2013, how much higher do you think it could go if this $4 or better natural gas environment holds. Both -- I know it will affect both your E&P Seneca spending and also maybe potentially move some pipeline projects faster. I guess how should we maybe think about that and how you would handle funding of a significant increase in 2014 or beyond?

Well, I mean certainly we could be looking at spending a good amount more than our $770 million to $945 million that we have got for our fiscal 2014 forecast. In terms of funding it, certainly higher gas prices help with that and I think our balance sheet in the near term certainly can take on some additional leverage. That would be the first lever that we would look to.

Okay, great, I will let somebody else have a turn.

Timm Schneider, ISI.

First question, in Lycoming County are you guys restricting wells at all?

No. We don't bring them on as fast as possible, but we are not curtailed at all there.

Got it. And then how many wells do you guys have in inventory right now that are completed that are just not hooked up yet?

You mean specifically at 100 or everywhere?

Everywhere.

We really only have one pad, that PAD C that I mentioned, that is just sort of been drilled and sitting there. Everything else is sort of natural inventory. So let's see, at Tract 100 there is the four PAD P wells, we've probably drilled all five of the PAD E wells, that would be nine there at Tract 100.

But they are not -- it is not as though we are making a decision not to complete them, they are just -- it is just a matter of timing; as you drill up a pad you have got to wait until the whole pad is drilled before you can begin the fracking operation.

Got it.

At WDA we've got another probably seven wells that are not producing today. It's just a matter of time before we have them fracked and we have the flow lines built so we can get them into production.

Okay, got it. And this one is I guess a bigger picture question. You guys said that for a majority of the Western acreage you needed kind of the $4.50 -- $4.50-plus gas to really go into high ramp mode. Has that changed at all with you guys -- you guys know the acreage now, you guys are becoming more efficient, service costs are kind of trending down. Is that -- what do you think the chances are that that $4.50 because a $4 or a sub $4 over the next couple years here?

Well, I guess what I would say, Tim, is we are feeling pretty good about this Rich Valley/Clermont area at say a $4 gas price, particularly as we manage to drive down our costs in full development mode. That said, we are drilling wells -- well, we have got two wells that are already drilled that need to be fracked and put online in that area. It would be nice to have a few more data points be tied to just this one well or we could say for certain that this area is going to look great at $4.

And just real quick on the pipeline side, how much gas are you guys flowing to Canada right now -- or on your system I guess?

Right now the system is only flowing up minor amounts. While we have got the connection for our Northern Access moving a fair amount of gas northward, a lot of that is getting dropped off with the El Paso or the Tennessee system and some also into the Millennium system right now.

The overall amount that is going to be going into Canada anytime soon we can't say. TransCanada is working on some bottlenecks that they have up at Parkway to be able to get a bunch more of their production up further closer to Toronto.

What do you guys think the long-term opportunity set for National Fuel Gas specifically is with respect to moving gas to Canada?

Oh, to try to put a number over and above the capacity that we have available with our Empire system and the legacy connections at Niagara would take a major pipeline across Lake Erie or so. So I -- looking maximum right now with existing infrastructure you're probably looking at 600 to 650 a day, maybe up to 700 a day with some more compression.

Okay, thank you. All right, I will get back in queue, thanks, guys.

(Operator Instructions). Tim Winter, Gabelli & Company.

Sorry to tag team you here, guys, but I was wondering if we could talk a little bit more about the New York utility and the over earning issue. What I'm trying to get to is maybe what the potential earning sensitivity is here.

On slide 38 you have shown on a trailing 12-month return of 12.6% allowed at 9.1%. Maybe what is the trailing 12 months earnings there at the New York utility and where there is a 100 basis point change and return on equity? Can you provide some color there?

Yes, well, I mean certainly on the 100 basis point change in return on equity would be a few cents per share for the Company. I think it -- we are probably too early in the process to really say what we think the overall impact is going to be because we haven't really even sat down to start to talk with them about what a new arrangement might look like.

Yes, Tim, it is very, very early in this whole proceeding. So there is a lot of talking to be done. It is possible that we could even kick off or pick up again with the discussions regarding our settlement proposal or our earnings sharing mechanism that we had filed back in March. So it really needs to cook a little bit here with the Commission and we're going to have to wait to see what happens at their June session before they've fully reviewed our order to show cause filing.

Okay, thank you.

With no further questions at this time I would now like to turn the call back over to Mr. Tim Silverstein for any closing remarks.

Thank you, Katina. 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 p.m. Eastern Time on both our website and by telephone and will run through the close of business on Friday, May 10, 2013. To access the replay online visit our Investor Relations website at investor. NationalFuelGas.com, and to access by telephone call 1-888-286-8010 and enter pass code 25230200. This concludes our conference call for today. Thank you and goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.