Quarterly / Earnings Reports | First Quarter (1Q) Update
National Fuel Touts Seneca Resources Performance in 1Q
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National Fuel Gas Company has reported consolidated earnings for the first quarter of its 2014 fiscal year (the quarter ended December 31, 2013).
Highlights:
- Earnings for the first quarter of fiscal 2014 of $82.3 million, or $0.97 per share, increased $14.4 million, or $0.16 per share, compared to $67.9 million, or $0.81 per share, for the prior year’s first quarter. The increase is due to higher earnings across all segments.
- Adjusted earnings before interest, taxes, depreciation and amortization for the first quarter of fiscal 2014 were $253.7 million compared to $203.5 million for the prior year’s first quarter, an increase of 25%.
- Seneca Resources Corporation’s first quarter production of natural gas and crude oil was 37.1 billion cubic feet equivalent, or 404 million cubic feet equivalent per day, an increase of 12.6 Bcfe or approximately 51%, over the prior year’s first quarter.
- The Company is reiterating its previous fiscal 2014 production guidance range of 145 to 165 Bcfe. This represents a 20% to 37% increase over fiscal 2013 production.
- The Company is revising its GAAP earnings guidance range for fiscal 2014 to a range of $3.20 to $3.40 per share. The previous earnings guidance had been a range of $3.10 to $3.40 per share. This guidance assumes a flat NYMEX price of$4.00 per MMBtu for natural gas and $90 per Bbl for crude oil for unhedged production for the remainder of the fiscal year.
- A conference call is scheduled for Friday, February 7, 2014, at 11 a.m. Eastern Time.
Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: "National Fuel’s financial and operating results for the first quarter reflect the quality of our assets and the focused work of our employees. Growth across all of our business segments contributed to a 21 percent increase in consolidated earnings over the prior year’s first quarter.
"Seneca Resources delivered significant growth, increasing production 51 percent compared to the prior year’s first quarter and 12 percent compared to the fourth quarter of last year. Notwithstanding Seneca’s tremendous operating performance, ongoing volatility in natural gas prices in the Appalachian region dampened Seneca’s financial results. Since these regional pricing issues are expected to persist for the next few years, Seneca and our midstream subsidiaries continue to evaluate long-term solutions to help deliver natural gas to markets with more stable pricing that correlates more closely with long-term NYMEX pricing. To that end, during the quarter, Seneca acquired long-term firm transportation capacity on Tennessee Gas Pipeline’s Niagara Expansion project, which is designed to export Marcellus Shale production to Canada, in part by using new capacity that our Supply Corporation will build and lease to Tennessee.
"Our Utility employees remained focused on safe and reliable service during a winter that has been much colder than recent years, and our midstream subsidiaries have easily handled the increased throughput resulting from our ongoing pipeline capacity expansion. Combined with Seneca’s substantial production growth, fiscal 2014 is off to a strong start.”
E&P Segment Update
Seneca’s activities during the first quarter were primarily focused on multi-well pads in DCNR Tract 100 in Lycoming County, Pa., in the Eastern Development Area and its Greater Clermont Area in Elk and Cameron counties, located in its Western Development Area.
Recently, Seneca brought 6 new wells on line in Tract 100 with 24-hour peak production rates that averaged 15.6 million cubic feet per day per well. These wells, which were spud in early fiscal 2013, had an average lateral length of 4,872 feet. Each well was completed using a reduced cluster spacing design, averaging 32 stages per well with an average of 10 stages completed per day. The estimated capital cost to drill and complete each of these wells averaged $6.9 million.
In its Greater Clermont Area, Seneca drilled all 9 wells on its first multi-well development pad in the WDA. These wells had an average lateral length of approximately 5,600 feet, and will be completed prior to the Clermont Gathering System going in service, which is targeted to occur in the fourth quarter of fiscal 2014.
Today, Seneca has two horizontal drilling rigs operating in the WDA, with one currently located on a 6-well development pad in the Greater Clermont Area, and the other drilling the first of 5 delineation wells scheduled for fiscal 2014. A third rig, located in the EDA, remains focused on development drilling in Lycoming County.
Results Summary
National Fuel had consolidated earnings for the quarter ended December 31, 2013, of $82.3 million, or $0.97 per share, compared to the prior year’s first quarter of $67.9 million, or $0.81 per share, an increase of $14.4 million or $0.16 per share. Higher earnings across all segments contributed to the increase. (Note: All references to earnings per share are to diluted earnings per share and all amounts used in the discussion of earnings are after tax unless otherwise noted.)
DISCUSSION OF RESULTS BY SEGMENT
The following discussion of the earnings of each segment is summarized in a tabular form at pages 8 and 9 of this report. It may be helpful to refer to those tables while reviewing this discussion.
Upstream Business
Exploration and Production Segment
The Exploration and Production segment operations are carried out by Seneca Resources Corporation. Senecaexplores for, develops and produces natural gas and oil reserves in Pennsylvania, California and Kansas.
The Exploration and Production segment’s earnings in the first quarter of fiscal 2014 of $31.1 million, or $0.37 per share, increased $4.4 million, or $0.05 per share, when compared with the prior year’s first quarter.
Overall production of natural gas and crude oil for the current quarter of 37.1 Bcfe increased approximately 12.6 Bcfe, or 51.4 percent, compared to the prior year’s first quarter. Production from Seneca’s Appalachia properties increased approximately 64.4 percent and accounted for the entire 12.6 Bcfe increase, largely because of Seneca’s strong well results in Lycoming County.California production of 5.0 Bcfe was consistent with the prior year’s first quarter.
Lower commodity prices realized after hedging also impacted earnings. The weighted average natural gas price received bySeneca (after hedging) for the quarter ended December 31, 2013, was $3.70 per thousand cubic feet (“Mcf”), a decrease of $0.49per Mcf compared to the prior year’s first quarter. The weighted average crude oil price realized after hedging for the quarter ended December 31, 2013, was $94.00 per Bbl, a decrease of $2.69 per Bbl compared to the prior year’s first quarter.
On a per unit basis, depletion decreased $0.20 per thousand cubic feet equivalent due to higher natural gas reserve balances at December 31, 2013, compared to the prior year’s first quarter. On a per unit basis, lease operating and transportation expenses at $0.95 per Mcfe decreased $0.10 per Mcfe compared to the prior year’s first quarter due to higher production. General and administrative expenses decreased $0.18 per Mcfe compared to the prior year’s first quarter also due to higher production. Earnings were also impacted by higher interest expense due to a higher outstanding debt balance.
Midstream Businesses
Pipeline and Storage Segment
The Pipeline and Storage segment’s operations are carried out by National Fuel Gas Supply Corporation and Empire Pipeline, Inc. 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 earnings of $19.1 million, or $0.23 per share, for the quarter ended December 31, 2013, increased $2.2 million, or $0.03 per share, when compared with the same period in the prior fiscal year. The increase in earnings is mainly due to higher non-affiliated transportation revenues from the Northern Access and Line N 2012 Expansion projects, which were placed in service in the prior year’s first quarter, and lower operating expenses due to lower pension and other post retirement benefit costs. Earnings were reduced by a lower allowance for funds used during construction due to the completion of the expansion projects mentioned above.
Gathering Segment
The Gathering segment’s operations are carried out by National Fuel Gas Midstream Corporation’s subsidiary limited liability companies. The Gathering segment constructs, owns and operates natural gas pipeline gathering and processing facilities in the Appalachian region and currently provides the critical gathering infrastructure for transporting Seneca’s Marcellus Shale production to the interstate pipeline system.
The Gathering segment’s earnings of $6.1 million, or $0.07 per share, for the quarter ended December 31, 2013, increased $4.2 million, or $0.05 per share, when compared with the same period in the prior fiscal year. The increase in earnings is mainly due to higher gathering revenues from Midstream’s Trout Run gathering system in Lycoming County, Pa.
Downstream Businesses
Utility Segment
The Utility segment operations are carried out by National Fuel Gas Distribution Corporation, which sells or transports natural gas to customers located in western New York and northwestern Pennsylvania.
The Utility segment’s earnings of $24.2 million, or $0.28 per share, for the quarter ended December 31, 2013, increased $1.3 million, or $0.01 per share, when compared with the same period in the prior fiscal year. Colder weather in Pennsylvania was a major reason for the increase in earnings in the current year’s first quarter. Temperatures in Pennsylvania were 11.2 percent colder in the quarter ended December 31, 2013, than in the prior year’s first quarter. In New York, the impact of weather variations on earnings is mitigated by that jurisdiction’s weather normalization clause. Lower interest expense (mainly due to a lower outstanding debt balance) and regulatory true-up adjustments also contributed to higher earnings in the Utility segment. Higher operating expenses, consisting mostly of higher pension related costs, which were the result of the settlement of the rate proceeding in New York, reduced earnings in the current year’s first quarter.
Energy Marketing Segment
National Fuel Resources, Inc. comprises the Company’s Energy Marketing segment. NFR markets natural gas to industrial, wholesale, commercial, public authority and residential customers primarily in western and central New York and northwestern Pennsylvania, offering competitively priced natural gas to its customers.
The Energy Marketing segment’s earnings for the quarter ended December 31, 2013, of $1.6 million increased $1.1 millioncompared to the prior year’s first quarter earnings of $0.5 million. The increase in earnings is due to the impact of recording unbilled revenues and related margins as of December 31, 2013. In prior periods, revenues and related purchased gas costs for the Energy Marketing segment were recorded when billed, resulting in a one month lag.
Corporate and All Other
The Corporate and All Other category primarily includes corporate operations. The category also includes the remaining operations of Seneca’s Northeast division that markets high quality hardwoods from Appalachian land holdings.
The Corporate and All Other category earnings of $0.1 million, for the quarter ended December 31, 2013, compares to a loss of$1.0 million for the prior year’s first quarter. The increase in the earnings is largely due to the receipt of insurance proceeds and higher proceeds from the sale of certain timber stumpage tracts by Seneca’s land and timber division in the current year’s first quarter.
Earnings Guidance
The Company is revising its GAAP earnings guidance range for fiscal 2014 to a range of $3.20 to $3.40 per share. The previous earnings guidance had been a range of $3.10 to $3.40 per share. This guidance includes forecast oil and gas production for fiscal 2014 in the range between 145 to 165 Bcfe, hedges currently in place and a flat NYMEX price of $4.00 per MMBtu for natural gas and $90 per Bbl for crude oil for unhedged production for the remainder of the fiscal year.