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National Fuel Gas Co. Fiscal Third Quarter 2020 Results

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   |    Thursday,August 06,2020

National Fuel Gas Company reported results from its fiscal third quarter 2020.


  • GAAP earnings of $41.3 million, or $0.47 per share, which includes a $13.2 million after-tax impairment of oil and gas properties, compared to GAAP net income of $63.8 million, or $0.73 per share, in the prior year
  • Adjusted operating results of $50.0 million, or $0.57 per share, compared to $61.8 million, or $0.71 per share, in the prior year (see non-GAAP reconciliation on page 2)
  • Adjusted EBITDA of $171.9 million compared to $182.9 million in the prior year (non-GAAP reconciliation on page 24)
  • Pipeline & Storage Adjusted EBITDA of $50.5 million, an increase of 35% from the prior year, driven primarily by the successful resolution of a National Fuel Gas Supply Corporation rate proceeding, and reduced O&M expense
  • E&P segment net production of 56.0 Bcfe, an increase of 1.3 Bcfe from the prior year
  • 7.3 Bcf of price-related natural gas curtailments due to sustained low Appalachian pricing
  • Average natural gas prices, after the impact of hedging, of $1.92 per Mcf, down $0.44 per Mcf from the prior year
  • Average oil prices, after the impact of hedging, of $50.70 per Bbl, down $12.22 per Bbl from the prior year
  • Gathering Adjusted EBITDA of $27.8 million, largely unchanged from the prior year despite the impact of price-related curtailments

David P. Bauer, President and Chief Executive Officer of National Fuel Gas Company, stated: “The benefits of our integrated, diversified business model are evident as we move through fiscal 2020, with strong results from our rate-regulated subsidiaries providing an important measure of stability in the face of commodity price headwinds.  To the latter point, our Exploration and Production segment activity level dropped to a single rig in mid-June and we continue to voluntarily curtail a portion of our Appalachian spot market volumes, which we anticipate will continue while low prices persist through the remainder of the summer.

"Turning to fiscal 2021, as we integrate our recently-closed, highly-accretive Appalachian acquisition into our longer-term plans, we expect our Upstream and Gathering operations to immediately generate significant free cash flow. Additionally, we have line of sight on meaningful growth in our Pipeline & Storage business, driven largely by near-term expansion and modernization projects, including our Empire North project which we expect to come online in the next few months.  Overall, National Fuel is well-positioned to grow our earnings and cash flows, maintain the strength of our balance sheet, and generate strong returns for our shareholders in the years ahead.”

Sale of Timber Properties

The Company has executed a purchase and sale agreement to divest substantially all of its Pennsylvania timber assets for approximately $116 million, subject to customary closing adjustments.  The transaction is expected to close on or before November 1, 2020.  The Company intends to use the proceeds from this sale to complete the permanent financing of its recently-closed Appalachian acquisition.

Guidance Update

National Fuel is revising its fiscal 2020 earnings guidance to reflect the impact of revised commodity price assumptions for the balance of the fiscal year, projected price-related Appalachian production curtailments, and the results of the fiscal third quarter. The Company is now projecting that earnings, excluding items impacting comparability, will be within the range of $2.75 to $2.85 per share.

The Company is assuming that NYMEX natural gas prices will average $1.85 per MMBtu for the remainder of fiscal 2020, down $0.20 per MMBtu from the previous guidance. Based on current forward differentials between NYMEX and regional spot prices for natural gas, the Company is assuming that its remaining approximately 6 Bcf of fiscal 2020 Appalachian production volumes exposed to the spot market will be curtailed.  Taking into account these assumed curtailments, as well as the Company’s 7.3 Bcf of natural gas curtailments in the third fiscal quarter, the Company is decreasing its production guidance range to 240 to 245 Bcfe for fiscal 2020. Additionally, the Company is now assuming that WTI oil prices will average $40.00 per barrel (Bbl) for the remainder of fiscal 2020, an increase of $17.50 per Bbl from the $22.50 assumed in the previous guidance.  The Company’s other guidance assumptions remain largely unchanged from the previous guidance.

The Company is also initiating preliminary guidance for fiscal 2021.  National Fuel is projecting that its fiscal 2021 earnings will be within a range of $3.40 to $3.70 per share, or $3.55 per share at the midpoint of the range, an increase of approximately 27% from the midpoint of the Company’s updated fiscal 2020 guidance range. The Company’s fiscal 2021 earnings projections are being driven largely by an increase in Seneca’s forecasted natural gas production and the associated impact on Gathering segment revenues resulting from the Company’s recent Appalachian acquisition, as well as the expected commencement of full service on the Company’s Empire North project in late fiscal 2020. 

Seneca’s fiscal 2021 net production is expected to be in the range of 305 to 335 Bcfe, an increase of 77.5 Bcf versus fiscal 2020.  This expected increase is driven by the aforementioned acquisition, which includes significant flowing natural gas production, all of which will be gathered by Company-owned facilities.  As a result, the Company expects Gathering segment revenues to be in the range of $185 million to $200 million, an increase of $50 million from the midpoint of the Company’s fiscal 2020 guidance. 

In addition, the Company is projecting its natural gas price realizations after hedging to increase by approximately $0.10 per Mcf from its estimated fiscal 2020 realizations, driven in large part by higher expected NYMEX and regional spot prices for natural gas.  Through physical firm sales contracts in place with third parties, as well as its firm transport capacity, Seneca currently has secured marketing outlets for 278 Bcf, or approximately 91%, of its projected fiscal 2021 Appalachian production. Approximately 202 Bcf of these sales, or 66% of the Company’s projected fiscal 2021 Appalachian production, are either matched with a financial hedge, including a combination of swaps and no cost collars, or were entered into at a fixed price. 

As a result of the Company’s increased production base, as well as the highly synergistic nature of the Company’s Appalachian acquisition, fiscal 2021 Exploration and Production segment operating costs are expected to be reduced by approximately $0.10 per Mcfe based on the midpoint of the respective LOE, G&A, and DD&A guidance ranges.

Based on the Company’s current activity level, which includes a single drilling rig and completion crew in Appalachia and reduced activity in California, the Exploration and Production segment’s fiscal 2021 capital expenditures are expected to be in the range of $290 million to $330 million, a $75 million reduction versus fiscal 2020 at the midpoint.  Gathering segment capital expenditures are expected to be $30 million to $40 million in fiscal 2021, a decline of $30 million at the midpoint.

Pipeline and Storage segment capital expenditures are expected to be in the range of $250 million to $300 million.  The $100 million increase at the midpoint of the range is due primarily to spending on the recently-certificated $280 million FM100 expansion and modernization project that is expected to add approximately $50 million in annualized revenues and is anticipated to be placed in service in late calendar 2021.  Utility segment capital expenditures are expected to be modestly increased as compared to fiscal 2020 at $90 million to $100 million as the Company continues to invest in the modernization of its gas distribution systems, and expects a return to spending levels in fiscal 2021 consistent with those experienced prior to the COVID-19 pandemic.

In total, the Company’s consolidated capital expenditures in fiscal 2021 are expected to be in a range of $660 million to $770 million, essentially flat versus fiscal 2020 at the midpoint of the respective ranges.

Additional details on the Company's updated forecast assumptions and business segment guidance for fiscal 2020 and fiscal 2021 are outlined in the table on page 8.

COVID-19 Response

Mr. Bauer added: “During these unprecedented times, the safety and well-being of our workforce, customers, and communities in which we operate is our top priority.  We continue to support our employees through a number of initiatives, including providing a safe work environment, offering flexible work arrangements to meet the child care needs of our employees, and the avoidance of workforce reductions and furloughs.  While National Fuel, like so many companies across the globe, has encountered new challenges in connection with the COVID-19 pandemic, I am proud to say that, to date, the Company has not experienced significant operational or financial impacts during this crisis – a testament to the diligence and commitment of our approximately 2,100 employees, who continue to meet and exceed the challenges of this ‘new normal'. 

Furthermore, with operations that span the entirety of the natural gas value chain, we see firsthand the critical role that our business, and the energy industry, plays in meeting the daily needs of our communities – producing, gathering, transporting, and ultimately delivering critical low-cost energy supplies to the homes that have become our offices, schools, and gyms, and the manufacturing facilities that produce our food, supplies, and personal protective equipment.”

Results by Segment

The following earnings discussion of each operating segment for the quarter ended June 30, 2020 is summarized in a tabular form on pages 9 and 10 of this report (earnings drivers for the nine months ended June 30, 2020 are summarized on pages 11 and 12).  It may be helpful to refer to those tables while reviewing this discussion.  As of the quarter ended September 30, 2019, the Company is no longer reporting the Energy Marketing operations as a reportable segment.  The Energy Marketing operations have been included in the All Other category in the disclosures and tables that follow below.  Prior year segment information has been restated to reflect this change in presentation.

Note that management defines Adjusted Operating Results as reported GAAP earnings adjusted for items impacting comparability, and Adjusted EBITDA as reported GAAP earnings before the following items: interest expense, income taxes, depreciation, depletion and amortization, other income and deductions, 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 Company, LLC ("Seneca").  Seneca explores for, develops and produces natural gas and oil reserves, primarily in Pennsylvania and California.

Seneca’s third quarter GAAP earnings decreased $32.9 million versus the prior year, which includes the impact of a non-cash, pre-tax impairment of Seneca’s oil and natural gas reserves. 

During the third quarter, Seneca recorded a non-cash, pre-tax impairment charge of $18.2 million ($13.2 million after-tax) to write-down the value of Seneca’s oil and natural gas reserves under the full cost method of accounting. The full cost method of accounting requires that Seneca perform a quarterly “ceiling test” to compare the present value of future revenues from its oil and natural gas reserves based on an unweighted arithmetic average of the first day of the month oil and gas prices for each month within the 12-month period prior to the end of the reporting period (“the ceiling”) with the book value of those reserves at the balance sheet date.  If the book value of the reserves exceeds the ceiling, a non-cash impairment charge must be recorded in order to reduce the book value of the reserves to the calculated ceiling.  It is anticipated that the current low commodity price environment will lead to significant non-cash impairments during the fourth quarter of fiscal 2020 and likely in the first quarter of fiscal 2021 as well. 

Excluding this item, as well as the net impact of non-cash mark-to-market adjustments recorded in the prior year relating to hedge ineffectiveness (see table above), Seneca’s third quarter earnings decreased $18.9 million as the positive impacts of higher production and lower operating expenses were more than offset by the negative impacts of lower realized natural gas and crude oil prices and higher interest expense.

Seneca produced 56.0 Bcfe during the third quarter, an increase of 1.3 Bcfe, or 2%, from the prior year. Despite approximately 7.3 Bcf of price-related curtailments, natural gas production increased 1.3 Bcf, or 2%, due primarily to production from new Marcellus and Utica wells in Appalachia. Net production increased 3.2 Bcf to 27.0 Bcf in Seneca’s Western Development Area ("WDA"), primarily due to the ongoing development program in the region. Net production decreased 1.9 Bcf to 25.1 Bcf in the Eastern Development Area ("EDA"), primarily due to natural declines in the EDA-Tioga area, partly offset by higher production in the EDA-Lycoming area where increased production from new pads exceeded price-related curtailments.  Oil production for the third quarter increased 8,000 Bbls, or 1%, from the prior year as new production continues to come on-line from Seneca’s development of the Pioneer assets in the Midway Sunset area of California, as well as the Coalinga assets.

Seneca's average realized natural gas price, after the impact of hedging and transportation costs, was $1.92 per Mcf, a decrease of $0.44 per Mcf from the prior year. This decline was largely due to lower NYMEX prices and lower spot pricing at local sales points in Pennsylvania. Seneca's average realized oil price, after the impact of hedging, was $50.70 per Bbl, a decrease of $12.22 per Bbl compared to the prior year.  The decline in oil price realizations was due primarily to lower market prices for crude oil during the quarter and reduced price differentials at local sales points in California.

Lease operating and transportation (“LOE”) expense decreased $1.6 million primarily due to a decline in well repairs, workover activity and steam fuel costs in California, partly offset by higher transportation costs in Appalachia due to increased production.  LOE expense includes the fees paid to the Company’s Gathering segment for gathering and compression services used to connect Seneca’s Marcellus and Utica production to sales points along interstate pipelines.  Depreciation, depletion and amortization (“DD&A”) expense decreased $0.7 million due largely to the ceiling test impairment recorded in the second quarter, partially offset by higher production. Seneca’s general and administrative (“G&A”) expense decreased $1.7 million despite a modest increase in production primarily due to lower personnel costs. On a unit of production basis, G&A, LOE and DD&A expenses during the quarter collectively decreased $0.11 per Mcfe, or 6% decrease, on combined G&A, LOE and DD&A expenses during the quarter.

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.

The Pipeline and Storage segment’s third quarter GAAP earnings increased $6.8 million versus the prior year primarily driven by higher operating revenues and lower operation and maintenance (“O&M”) expenses, partially offset by higher DD&A expense.  The increase in operating revenues of $8.8 million, or 13%, was largely due to an increase in Supply Corporation's transportation and storage rates effective February 1, 2020, in accordance with Supply Corporation's rate case settlement, coupled with new demand charges for transportation service from Supply Corporation's Line N to Monaca expansion project, which was placed in service on November 1, 2019.  O&M expense decreased $4.8 million primarily due to lower compressor and facility maintenance costs, lower pipeline integrity costs and lower personnel costs.  The increase in DD&A expense of $3.2 million was primarily attributable to an increase in Supply Corporation's depreciation rates associated with its rate case settlement.

Gathering Segment

The Gathering segment’s operations are carried out by National Fuel Gas Midstream Company, LLC’s limited liability companies. The Gathering segment constructs, owns and operates natural gas gathering pipelines and compression facilities in the Appalachian region, which currently deliver Seneca’s gross Appalachian production to the interstate pipeline system.

The Gathering segment’s third quarter GAAP earnings increased $0.6 million versus the prior year. The increase was primarily driven by higher operating revenues and the impact of a lower effective income tax rate, which were partially offset by higher O&M expense.  Operating revenues increased $0.4 million primarily due to a 0.6 Bcf increase in gathered volumes from Seneca’s Appalachian natural gas production. The reduction in the Gathering segment's effective tax rate was primarily due to deferred state tax adjustments that reduced income tax expense in the current quarter.  The $0.4 million increase in O&M expense was due to an increase in compressor facility and maintenance activity during the current quarter.

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