Market Overview

National Fuel Reports Second Quarter Earnings and Provides Operational Update

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WILLIAMSVILLE, N.Y., May 03, 2018 (GLOBE NEWSWIRE) -- National Fuel Gas Company ("National Fuel" or the "Company") (NYSE:NFG) today announced consolidated results for the second quarter of its 2018 fiscal year and for the six months ended March 31, 2018, and provided an update on the Company's upstream and midstream operations.

FISCAL 2018 SECOND QUARTER SUMMARY

  • GAAP earnings of $91.8 million, or $1.06 per share, compared to $89.3 million, or $1.04 per share, in the prior year
  • Excluding a $4.0 million, or $0.05 per share, adjustment to the initial remeasurement of deferred taxes from federal tax reform, Adjusted Operating Results were $95.8 million, or $1.11 per share (see non-GAAP reconciliation below)
  • Consolidated Adjusted EBITDA of $217.9 million (non-GAAP reconciliation on page 24)
  • Net natural gas and oil production of 46.1 Bcfe, up 1% from the prior year and up 15% from the first quarter
  • Average natural gas prices, after the impact of hedging, of $2.52 per Mcf, down $0.44 per Mcf from the prior year
  • Average oil prices, after the impact of hedging, of $58.31 per Bbl, up $5.39 per Bbl from the prior year
  • Utility segment earnings increased 30% on colder weather in Pennsylvania and new rates in New York
  • Due to the reduction in the fiscal 2018 federal statutory rate as a result of the 2017 Tax Reform Act, the Company realized net earnings benefit for the quarter of $10.3 million, or $0.11 per share
                 
                 
    Three Months Ended   Six Months Ended
    March 31,   March 31,
(in thousands except per share amounts)   2018   2017   2018   2017
Reported GAAP Earnings   $ 91,847   $ 89,284   $ 290,501     $ 178,191
Items impacting comparability                
Remeasurement of deferred income taxes under 2017 Tax Reform   4,000     (107,000 )  
Adjusted Operating Results   $ 95,847   $ 89,284   $ 183,501     $ 178,191
                 
Reported GAAP Earnings per share   $ 1.06   $ 1.04   $ 3.37     $ 2.07
Items impacting comparability                
Remeasurement of deferred income taxes under 2017 Tax Reform   $ 0.05     $ (1.24 )  
Adjusted Operating Results per share   $ 1.11   $ 1.04   $ 2.13     $ 2.07
 

UPSTREAM AND MIDSTREAM BUSINESS OPERATIONS UPDATE

Earlier this week, the Company's exploration and production subsidiary, Seneca Resources Corporation ("Seneca") entered into a precedent agreement with Transcontinental Gas Pipeline Company, LLC ("Transco") for 300,000 Dekatherms (Dth) per day of new firm transportation capacity.  The incremental capacity will allow Seneca to move natural gas supplies from its Clermont-Rich Valley producing area in the Western Development Area ("WDA") and its Lycoming County acreage in the Eastern Development Area ("EDA") to premium markets connected to Zone 6 of Transco's interstate pipeline system.  Seneca will be an anchor shipper on the to-be-announced Transco project.  While the size, scope, and facilities associated with Transco's expansion have yet to be finalized, Seneca's transportation rate is expected to be competitive with other expansion project rates in its current transportation portfolio. The in-service date is anticipated in the first half of fiscal 2022.

In order to provide Seneca with a complete transportation path extending from its WDA to these Zone 6 markets, Transco is expected to lease approximately 300,000 Dth per day of new capacity from National Fuel Gas Supply Corporation ("Supply Corporation"), a pipeline and storage subsidiary of the Company.  The lease is expected to provide Transco with a path from the Company's Clermont Gathering System in McKean County, Pa., to Supply Corporation's existing interconnection with Transco in Leidy, Pa.  This new capacity on the Supply Corporation pipeline system is expected to be created via an expansion component that will be added to Supply Corporation's FM100 Modernization Project. The preliminary cost estimate for the entirety of the FM100 Modernization Project, including the proposed expansion, is approximately $250 million to $300 million. Supply Corporation is currently in the pre-filing process with FERC on the FM100 Modernization Project, which is also expected to upgrade 1950's era facilities.

National Fuel also remains committed to building its federally authorized Northern Access pipeline project. Northern Access, a planned expansion of the Supply Corporation and Empire Pipeline, Inc. ("Empire") interstate pipeline systems, will provide Seneca with 490,000 Dth per day of incremental capacity from the WDA in Pennsylvania to diverse markets in New York state, Canada and the Midwest U.S.  Legal challenges relating to the New York State Department of Environmental Conservation's review of a state environmental permit remain pending.

Seneca has continued to advance its Utica appraisal and optimization program in the WDA.  In the second quarter, Seneca brought on three additional Utica wells off a Marcellus development pad in Clermont-Rich Valley and one Utica appraisal well on its Boone Mountain prospect in Elk County, Pa., approximately 30 miles to the south of the Clermont-Rich Valley area.  Initial production results on the Boone Mountain well were consistent with the best WDA Utica well that Seneca has completed to date and, based on other geologic information, suggests that as much as 160,000 acres in the WDA is economically viable for future Utica shale development.  Much of this Utica position overlaps with Seneca's core Marcellus acreage, where Seneca has identified as many as 125 well locations on existing Marcellus well pads that allow for the utilization of the Company's Clermont Gathering System. The redevelopment of these locations requires minimal additional investment in gathering infrastructure, which will provide significant uplift to the program's consolidated returns.

Seneca meanwhile continues to make progress on the marketing of its near-term natural gas production, augmenting its existing firm transportation portfolio with firm sales at in-basin receipt points that lock in a significant portion of its projected production volumes at attractive net-back pricing while reducing local spot market exposure.  As Seneca looks to grow into this future firm capacity and capitalize on the Company's integrated strategy to enhance the consolidated upstream and midstream returns of the Appalachian drilling program, Seneca will add a third horizontal drilling rig to its Appalachian operations in the third quarter of fiscal 2018.  The additional rig will be primarily dedicated to the redevelopment of Seneca's Clermont-Rich Valley acreage for the Utica Shale.

While the additional drilling rig will not lead to an immediate production increase this fiscal year, Seneca expects now to grow its production at a 15 to 20 percent compound annual growth rate through fiscal 2022, which will also benefit the Gathering segment's throughput.  Due to the minimal gathering capital requirements, as well as Seneca's existing firm capacity and financial hedge portfolio, peer leading cost structure, and royalty-free economics in the WDA, the Company expects the combined Exploration and Production and Gathering segments to live within cash flows at current natural gas strip pricing over the next three years.  The addition of a third rig is also expected to be accretive to the Appalachian program's overall consolidated earnings and yield a higher return on invested capital relative to the current two rig activity level, while  providing economies of scale, operational flexibility, and other benefits to drive further efficiencies.

Additionally, on May 1, 2018, Seneca closed on a sale of its Sespe oil and natural gas assets in California for $43 million. The divestiture of Sespe, the Company's sole asset in Ventura County, is part of Seneca's strategy to focus on and grow production from its core California assets in the San Joaquin basin, in particular recently acquired leases in the Midway Sunset field. The Sespe field produces approximately 900 net barrels of oil equivalent ("boe") per day and was expected to contribute approximately $0.05 per share of earnings for the remainder of fiscal 2018. Under full cost accounting rules, the Company will not record any gain or loss with respect to the transaction.

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: "We're pleased to report another quarter of solid financial results across all of our operating segments.  A return this year to a more normal heating season in our New York and Pennsylvania operating regions increased throughput across our utility pipeline system.  Notwithstanding the weather that was colder than the two previous heating seasons, our customers continue to benefit from the low cost of natural gas supplies that are being produced from the Appalachian basin and safely delivered to them through our interstate and utility pipeline systems.

"We are also excited about recent updates to our near and longer-term operating plans that will allow us to continue the growth of our upstream and midstream businesses in Appalachia.  Our ongoing transition to Utica shale development in the WDA is moving along quite well.  Early results indicate that we have a large inventory of additional Utica locations in and around our core Marcellus footprint that will generate stronger consolidated returns, particularly in areas where new Utica production can use existing gathering infrastructure that was built during our Marcellus development.  With a newly developed pipeline expansion project planned to be in place, we now expect to have the exit capacity and end-market diversity to tap and bring forward the value of our significant, stacked-pay acreage position in Pennsylvania, while also continuing to grow the earnings and returns of our Gathering and Pipeline and Storage segments and capitalize on the strategic benefits of our integrated business model."

DISCUSSION OF RESULTS BY SEGMENT

The following discussion of the earnings of each segment is summarized in a tabular form on pages 9 through 12 of this report.  It may be helpful to refer to those tables while reviewing this discussion.  Note that management defines Adjusted EBITDA as reported GAAP earnings before the following items: interest expense, income taxes, depreciation, depletion and amortization, interest and other income, impairments, and other items reflected in operating income that impact comparability.

Upstream Business

Exploration and Production Segment

The Exploration and Production segment operations are carried out by Seneca Resources Corporation ("Seneca").  Seneca explores for, develops and produces natural gas and oil reserves, primarily in Pennsylvania and California.

       
  Three Months Ended   Six Months Ended
  March 31,   March 31,
(in thousands except per share amounts) 2018   2017   Variance   2018   2017   Variance
Net Income $ 26,537   $ 33,769   $ (7,232 )     $ 133,235   $ 68,849   $ 64,386  
Net Income Per Share (Diluted) $ 0.31   $ 0.39   $ (0.08 )   $ 1.54   $ 0.80   $ 0.74  
Adjusted EBITDA $ 78,770   $ 93,970   $ (15,200 )   $ 158,264   $ 196,447   $ (38,183 )
                                       

The Exploration and Production segment's second quarter earnings declined $7.2 million, as the positive impacts of higher production, better realized crude oil prices, and a lower effective income tax rate were more than offset by a decline in realized natural gas prices and higher operating expenses.

Seneca's second quarter net production was 46.1 billion cubic feet equivalent ("Bcfe"), an increase of 0.5 Bcfe, or 1 percent, from the prior year due mainly to higher natural gas production in Appalachia.  Net natural gas production increased 0.5 billion cubic feet ("Bcf") versus the prior year and 6.0 Bcf, or 17 percent, versus the fiscal 2018 first quarter.  The year over year increase was primarily due to higher net production in the WDA from new Marcellus and Utica wells completed and connected to sales during the past year.  The 17 percent sequential increase over the first quarter of the fiscal year was due mostly to production from new wells brought on-line this quarter (including the first development pad brought to sales in the EDA since fiscal 2016), and an increase in Marcellus production from other EDA locations after price-related and operational curtailments experienced during the previous quarter (Seneca did not have any significant curtailments in the second quarter of fiscal 2018).  Seneca's oil production decreased 11 thousand barrels ("Mbbl"), or 2 percent, versus the prior year.

Seneca's average realized natural gas price, after the impact of hedging and marketing and transportation costs, was $2.52 per thousand cubic feet ("Mcf"), a decrease of $0.44 per Mcf from the prior year.  The decline in Seneca's realized natural gas price is primarily attributable to the expiration of physical firm sales and financial hedge contracts over the past 12 months that had favorable pricing relative to firm sales and hedges settled in the current quarter. Seneca's average realized oil price, after the impact of hedging, was $58.31 per barrel ("Bbl"), an increase of $5.39 per Bbl.  The improvement in oil price realizations was due primarily to higher market prices for West Texas Intermediate (WTI) crude oil during the quarter and stronger price differentials relative to WTI at local sales points in California.

Seneca's operating expenses increased $5.2 million during the second quarter.  Lease operating and transportation expense ("LOE") increased $1.3 million due to higher natural gas production in Appalachia, which resulted in higher gathering and transportation costs, and an increase in well workover activities and steaming costs in California.  Depreciation, depletion and amortization ("DD&A") expense increased $3.1 million due to the increase in production and a higher per unit DD&A rate, which increased by $0.06 per thousand cubic feet equivalent ("Mcfe") to $0.69 per Mcfe due mainly to a higher depletable fixed asset balance at March 31, 2018.

The decrease in the segment's effective tax rate was mostly due to the 2017 Tax Reform Act, which reduced the Company's federal statutory corporate tax rate in fiscal 2018 from 35 percent to 24.5 percent and benefited Seneca's second quarter earnings by $3.5 million, or $0.04 per share. The current period benefit was offset partially by a $0.8 million revision to the remeasurement of deferred income taxes that was recorded in the first quarter.

See page 21 for additional comparative information on the Exploration & Production segment's production, realized pricing and per unit operating costs.

Midstream Businesses

Pipeline and Storage Segment

The Pipeline and Storage segment's operations are carried out by National Fuel Gas Supply Corporation ("Supply Corporation") and Empire Pipeline, Inc. ("Empire").  The Pipeline and Storage segment provides natural gas transportation and storage services to affiliated and non-affiliated companies through an integrated system of pipelines and underground natural gas storage fields in western New York and Pennsylvania.

       
  Three Months Ended
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