National Fuel Gas Company. (NFG)

Q3 2012 Earnings Call

August 3, 2012 11:00 am ET


Timothy J. Silverstein – Investor Relations

David F. Smith – Chairman and Chief Executive Officer

Matthew D. Cabell - Senior Vice President

David P. Bauer - Treasurer and Principal Financial Officer


Andrea Sharkey – Gabelli & Company

Kevin A. Smith – Raymond James & Associates, Inc.

Mark Rogers – Soroban Capital Partners LLC

Timm Schneider – Citigroup Global Markets

Mark Barnett – Morningstar Inc.

Becca Followill – U.S. Capital Advisors LLC

Carl Kirst – BMO Capital Markets



Good day, ladies and gentlemen, and welcome to the third quarter 2012 National Fuel Gas Company earnings conference call. My name is Jeff, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Tim Silverstein, Director of Investor Relations. And you have the floor, Mr. Silverstein.

Timothy J. Silverstein

Thank you, Jeff, 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, Chairman and Chief Executive Officer; Ron Tanski, President and Chief Operating Officer; and Dave Bauer, 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 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 Dave Smith.

David F. Smith

Thank you, Tim, and good morning to everyone. Last night National Fuel reported third earnings of $0.52 per share. Continuing the trend from the first half of the fiscal year, lower realized natural gas prices had a significant impact on our consolidated results. Quarter-over-quarter Seneca’s Natural Gas prices after hedging were $1.55 per Mcf lower, which reduced E&P earnings by about $0.20 per share.

Despite a drop of 28%, and realized natural gas prices. Consolidated earnings overall were down only 7% or $0.04 per share. Thanks in large part to our diversified business model and our continued focus on long-term growth particularly in our midstream businesses.

There were multiple bright spots across all of our major business segments. At Seneca, consolidated production was up 31%. In the Pipeline and Storage segment the Line N and Tioga County extension projects help drive a $0.10 per share increase in earnings.

The Trout Run gathering system was just recently placed in service, and while utility earnings were down slightly by $0.02 per share our employees in both of our regulated business segments did a great job and keeping an eye on spending, which help to limit the overall impact of the 17% warmer than normal winter.

Operationally, National Fuel had a great quarter, as I just mentioned Seneca‘s consolidated production of 22.1-Bcfe increased 5.2-Bcfe or 31% despite a reduction in CapEx. Most of this increase in production occurred in each division where in late May we commenced production on four very good wells on our Tract 100 acreage in Lycoming County.

Despite voluntary curtailments into the constrained and discounted Tennessee 300 Line, we achieved just a few days ago our major milestone of 200 million cubic feet per day of net production from the Marcellus Shale.

We expect production will continue to grow as we bring on additional wells like Lycoming County in the coming quarters. In California, Seneca’s after hedging crude oil prices increased by more than 6%, while production increased by about 7.5% over the prior year. Our California team has done a terrific job of extracting value from those assets. To put the reference into perspective, oil production from Seneca’s California acreage is now at its highest level since 2003. At today prices, these properties continue to generate significant cash flow nearly $175 million of EBITDA for the first nine months of the fiscal year.

Looking ahead to the next year, our Seneca operated program will be largely unchanged from what we presented on our last call. Seneca’s three rig program in Appalachia will focus primarily on a scale down development plan at Tracts 100 and 595, and on Utica & Marcellus delineation efforts in our western development area. Even with this reduced program and considering lower than anticipated production from the joint venture with EOG. We expect Appalachian production will increase by nearly 30% in fiscal 2013.

We think this is the right measured rate at which to grow in the current price environment. Should gas prices further improve, we’ll consider increasing the pace of Seneca’s program. In the meantime, as most of you know, we’re under no pressure to drill up our acreage, most of our natural gas rates are held in fee and the vast majority of our non-fee acreage is either held by production or has several years remaining on its lease term.

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