National Fuel Gas Co. (NFG) - 04-Feb-2022
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04-Feb-2022
National Fuel Gas Co. (NFG)
Q1 2022 Earnings Call
Total Pages: 19
1-877-FACTSET www.callstreet.com Copyright © 2001-2022 FactSet CallStreet, LLCNational Fuel Gas Co. (NFG) Corrected Transcript
Q1 2022 Earnings Call 04-Feb-2022
CORPORATE PARTICIPANTS
Brandon J. Haspett Justin I. Loweth
Director-Investor Relations, National Fuel Gas Co. President-Seneca Resources Company, LLC, National Fuel Gas Co.
David P. Bauer Karen M. Camiolo
President, Chief Executive Officer & Director, National Fuel Gas Co. Treasurer & Principal Financial Officer, National Fuel Gas Co.
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Zach Parham Trafford Lamar
Analyst, JPMorgan Securities LLC Analyst, Raymond James
Holly Stewart Umang Choudhary
Analyst, Scotia Howard Weil Analyst, Goldman Sachs & Co. LLC
John H. Abbott
Analyst, BofA Securities, Inc.
......................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Good day, thank you for standing by. And welcome to the First Quarter 2022 National Fuel Gas
Company Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers'
presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's
conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to Brandon Haspett, Director of Investor Relations. Thank you.
Please go ahead.
......................................................................................................................................................................................................................................................
Brandon J. Haspett
Director-Investor Relations, National Fuel Gas Co.
Thank you, Blu, and good morning. We appreciate you joining us on today's conference call for a discussion of
last evening earnings release. With us on the call from National Fuel Gas Company are Dave Bauer, President
and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and Justin Loweth,
President of Seneca Resources.
At the end of the prepared remarks, we will open the discussion to questions. The first quarter fiscal 2022
earnings release and February investor presentation have been posted on our Investor Relations website. We
may refer to these materials during today's call.
We'd 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.
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Q1 2022 Earnings Call 04-Feb-2022
With that, I'll turn it over to Dave Bauer.
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David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co.
Thank you Brandon, and good morning, everyone. National Fuel had an excellent start to the fiscal year, with
adjusted operating results of $1.48 per share, an increase of 40% from last year. Higher commodity prices and an
increase in Appalachian natural gas production drove the strong results.
On the production side, we leveraged our integrated upstream and gathering operations to bring several wells
online a few weeks earlier than our initial expectations, which allowed us to take advantage of the strong pricing
at the start of the winter. This is largely a matter of timing, moving the pads forward in the schedule does not have
a material impact on our overall production expectations for the year. However, capturing higher prices at peak
initial production rates obviously enhances the return profile for those wells.
As noted in last night's press release, at the midpoint, we're increasing Seneca's fiscal 2022 capital spending
guidance by about $38 million, or 9%. Roughly half of that increase is driven by incremental cost inflation beyond
what was included in our initial guidance range. This should come as no surprise, given the persistent supply
chain issues across the economy.
The other half is incremental capital designed to further optimize the production from our two-rig program, which
we think is a good use of capital, given the strength of natural gas prices and the depth of our drilling inventory.
In particular, we plan to more frequently incorporate a top-hole rig in our operations, which allows us to reduce
drilling time and complete a few more wells each year. We also plan to use tighter stage spacing on a number of
wells throughout the year.
Obviously, this isn't a step change in activity level, but it should improve our growth rate going forward. We've
previously talked about maintenance to low growth at Seneca, but with these tweaks to our development
approach, we now expect a growth trajectory in the mid to high-single digits area on average over the next few
years, which should enhance our cash flow generation, at not just Seneca, but also our Gathering business.
Justin will provide more details on Seneca's updated production and capital plans later in the call.
Turning to our Pipeline and Storage business, in December, we placed our FM100 Project in service on time and
substantially under budget. Total project costs are expected to be $230 million, more than 15% under our initial
cost estimate of $280 million.
As I've said in the past, this project, in conjunction with Transco's companion Leidy South project provides a great
outlet for 330 million a day of Seneca's production and is the perfect example of the benefit of our integrated
business model.
FM100 was the largest project in our company's history and wouldn't have been possible without the hard work
and dedication of the many employees and contractors who worked on it. And I'd like to say thank you to
everyone who made it a reality.
Looking to the remainder of fiscal 2022 and into fiscal 2023, our focus on our regulated pipeline business will be
on system maintenance and modernization. On an annual basis, we expect to spend about $50 million on
maintenance and another $25 million to $50 million per year on average on modernization efforts, including our
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Q1 2022 Earnings Call 04-Feb-2022
emission reduction initiatives. At this level, I expect rate base will grow modestly, say in the low-single-digit area.
However, at this level of spending, we do expect significant free cash flow from this business, in the $100 million
per year area on average.
We will continue to pursue expansions of our system, though in the near term, those will likely be of the smaller
variety on our Line N and Empire systems. The anti-natural gas sentiment of the current administrations in
Albany, D.C. and elsewhere is certainly making larger scale expansion projects challenging. But I firmly believe
new pipeline infrastructure will be needed if the country is serious about achieving its emission reduction goals. All
too often, policymakers pass up actionable projects that can make a real difference today.
There are dozens of electric plants in the Midwest that use coal, and millions of homes and buildings in the
Northeast that heat with fuel oil, all of which could be easily converted to natural gas. And doing so would not just
lower emissions by 30% to 50%, but would also reduce energy bills.
Investing in natural gas infrastructure would also improve electric reliability. Many believe we ought to electrify
everything, but adding electric demand while under investing in base load generation and hoping intermittent
renewables will be there to save the day is slowly eroding the reliability of the electric grid.
The European Union, which is several years ahead of the US in its efforts to decarbonize its economy, clearly
recognizes the importance of natural gas, so much so that it's committing to new pipelines and even proposing to
add natural gas to its taxonomy of "green energy". I'm optimistic the US will one day reach that same conclusion.
And when it does, National Fuel and the rest of the pipeline industry will be there to build the much needed
infrastructure.
Moving on to our Utility business, the weather in the first quarter was warmer than it's been in quite a while, 24%
warmer than normal. But January has been a different story, with weather that's been significantly colder than
normal. Nevertheless, despite the recent bout of cold weather, on balance, we expect the full year will be warmer
than normal, which will cause our utility margin in Pennsylvania to be a little lower than was reflected in our prior
guidance.
On the cost side of things, like many companies and industries, we are seeing some general inflationary
pressures. Costs for materials and services, including contractors, are all contributing to higher than anticipated
costs at our Utility and Pipeline businesses.
We now expect O&M costs at those operations will be about 4% to 5% higher compared to last year. We expect
to see similar increases in the cost of our capital projects. Labor shortages have plagued the broader economy,
but our team has done a great job lining up contractors and as such, we don't have any concerns with our
planned construction schedules.
Switching gears, most of you know that New York State has enacted significant climate legislation with its Climate
Leadership and Community Protection Act that was passed in 2019. This past December, the Climate Action
Council published for comments, a draft scoping plan that describes how the State will go about achieving its
aggressive emission reduction goals.
The full document, including exhibits, totals about 800 pages, but the message can be summed up rather
succinctly, electrify everything at any cost. Transportation, heating, cooking, commercial and industrial processes,
all of it. Putting aside the cost to consumers, which is an incredibly important consideration that the draft scoping
plan largely ignores, what's particularly concerning is the recommendation to begin phasing out affordable,
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Q1 2022 Earnings Call 04-Feb-2022
reliable fuels like natural gas almost immediately, well before the grid itself is green and more importantly, well
before it's clear that the electric grid can actually support the added electric demand that would result.
The scoping plan readily acknowledges that even after an unprecedented build-out of renewable generation and
battery storage, by 2040, there still remains a shortfall of 15 to 25 gigawatts of peak day generation that cannot be
met with existing renewable technology. And that is a startling amount of generation. It's greater than the total
amount of electricity that's being generated in the state as we speak today. If we electrify all of the state's heating
load, the electric peak day will almost certainly shift to the winter. So, it's almost certain that the shortfall in
generation would occur when we need it the most on the coldest days of the winter.
In a state where winters can be brutal, especially in our service territory, where peak day temperatures can be
50% colder than downstate New York, it makes little sense to put all our energy eggs in one basket, particularly if
there are holes in that basket that need to be plugged in order to ensure reliability. Perhaps one day the holes will
be filled, but in the meantime, an all of the above emissions reduction strategy like the one we proposed in our
Pathways to a Low-Carbon Future report, makes a lot more sense.
Through a combination of energy efficiency, selective electrification, hybrid heating solution and the deployment
of low and no-carbon fuels like green hydrogen and renewable natural gas, we can leverage existing utility
infrastructure to achieve significant decarbonization that meets – that not only meets the state's emissions goals,
but also preserves access to low cost, reliable and resilient energy for consumers.
In closing, the underlying fundamentals of National Fuel are very strong. Our deep inventory of economic wells,
low cost operations and strong outlook for natural gas prices position us to deliver continued growth at Seneca
and NFG Midstream. At the same time, the completion of FM100 and ongoing modernization of our infrastructure
will provide rate base and earnings growth in our regulated subsidiaries, all of which will lead to significant free
cash flow generation in fiscal 2022 and beyond.
With that, I'll turn the call over to Justin.
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Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co.
Thanks, Dave, and good morning, everyone. Seneca kicked off fiscal 2022 with a strong first quarter. The start-up
of our 330 million per day of capacity on the Leidy South project provides a valuable long-term outlook for
Appalachian production.
With good visibility on project timing, we began ramping up completion activity last year, allowing us to turn in line
24 new wells during the quarter, nearly all of which came online earlier than projected. In addition, operational
curtailments came in lower than forecasted as our team found innovative ways to keep our gas flowing.
For example, we're able to avoid shut-ins during station maintenance, using temporary compression and bypass
loops. This truly coordinated effort between our Upstream and Gathering teams, allowed us to maximize
production and enhance returns during the time of very favorable pricing. These efforts drove production to 85
Bcfe for the quarter, a 7% increase sequentially and allowed us to maximize the value of our Leidy South capacity
from day one.
With our growing base of production, we remain focused on reducing risk while retaining upside through
optimization of our marketing and hedging portfolio. Our focus over the past few months has been on layering in
financial hedges for the near term, while adding firm sales, mostly fixed price, over the longer term. Given recent
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Q1 2022 Earnings Call 04-Feb-2022
natural gas price volatility and favorable skew, our hedging strategy included adding 75 Bcf of costless collars
with floors of $3.20, mostly targeting our fiscal 2023 and 2024 production.
We've also added roughly 75 Bcf of long-term fixed price firm sales contracts for fiscal 2024 and well beyond,
bolstering our existing firm transportation portfolio and locking in strong economics as we move towards modest
growth.
Regarding our overall activity levels, as Dave mentioned, we're maintaining our two-rig program, but have
increased our top-hole rig work, allowing us to accelerate development within our Tioga acreage and further
enhancing expected consolidated returns.
Our top-hole rig program will reduce drill times by three to five days per well, allowing us to drill and complete
more wells per year, while also lowering our drilling costs on a per foot basis. We are also planning enhanced
completion designs for some of our pads, tightening stage spacing from 200 feet to 150 feet. This incremental
investment generates extremely attractive returns that pay back in a matter of months.
Overall, these activities further optimize our development program, increasing our ability to generate long-term,
sustainable free cash flow. The additional top-hole rig activity and completion enhancements are expected to
drive roughly half of our fiscal 2022 capital increase, and we expect to see the majority of the production benefit in
fiscal 2023, with growth in the 10% area compared to this year's forecasted production.
Also, driving our capital guidance modestly higher is inflation. We talked previously about overall inflation in the
context of mid to high-single digits, which we expected to largely mitigate through operational efficiencies. While
we are fully realizing those efficiencies, costs for certain services and materials have risen beyond our prior
estimates and are a continuing headwind.
We now expect our overall drilling and completion expenses to be up 10% to 15% from the prior year, though our
operational efficiencies reduce this impact to the mid to high-single digits. While we've locked in our rigs for
longer-term contracts, costs for labor, trucking, completion spreads and certain materials like tubulars are still
rising.
Despite these challenges, our procurement team has done a tremendous job, tempering cost increases where
possible and ensuring we have material and service availability to keep our operations on schedule. Putting these
items together, we've increased the midpoint of our capital guidance by $37.5 million to a range of $425 million to
$500 million.
Moving to production cadence for the remainder of fiscal 2022, the bulk of our new wells coming online are
scheduled for the spring. As a result, we expect our fiscal second quarter to be relatively flat to slightly up
compared to the first quarter. From there, output is expected to ramp into the third quarter and then level out just
shy of 1 Bcfe per day. We've modestly increased our production guidance to a range of 340 to 365 Bcfe to
account for this revised cadence and incorporating the strong results of our first quarter.
At the midpoint of our updated guidance, we have hedges and fixed price firm sales in place for nearly 80% of our
expected remaining fiscal 2022 natural gas production. We have another 13% with basis protection that is not
hedged, which leaves less than 10% of expected production exposed to in-basin pricing. We've been
opportunistic with our marketing portfolio over the past few months when prices rally, locking in favorable basis
differentials and creating price certainty at great prices.
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Q1 2022 Earnings Call 04-Feb-2022
As I discussed last quarter, we've adjusted our development plans to increase activity within our Tioga County
footprint. We recently brought online a four-well Utica pad in Tract 007, which included laterals that extended into
the acquired acreage. Our newly combined contiguous acreage position allowed us to optimize our well spacing
and lateral lengths, and the results speak for themselves. This pad has been producing at almost 80 million a day
since late November.
We have two additional development pads in Tioga expected to come online this spring: a five-well Utica pad in
the northwest; and a six-well Marcellus pad in the southeast. Developing these pads, including modifications to
existing gathering infrastructure less than 18 months after we closed the acquisition is a testament to the
outstanding job our Upstream and Gathering teams are doing. And we have well over a decade of development
running room on this prolific acreage.
While our operations are moving along really well, we've also taken great strides in our sustainability initiatives.
Starting with our California operations, our new South Midway Sunset Solar Plant is expected to go in-service
very soon and will offset 30% of the field's power needs. We are also moving full speed ahead with a new plant at
South Lost Hills and target in-service later this year. And our team has adjusted and refocused our steaming
operations, resulting in approximately 15% less steam fuel consumption, with dual benefits of lower LOE and
reduced CO2 emissions with minimal impact to production, a true win-win.
Moving to our Pennsylvania sustainability efforts, earlier this month, we achieved certification of 100% of our
Appalachian production under Equitable Origin's EO100 Standard for Responsible Energy Development. As a
reminder, this framework has a series of rigorous environmental, social and governance performance targets.
Achieving certification is a validation of our long-standing culture of environmental stewardship and community
engagement, and allows us to differentiate our responsibly sourced gas in the marketplace.
Additionally, we are working with Project Canary to certify 121 wells, which produce approximately 300 million per
day under the TrustWell certification. In November, we deployed Project Canary continuous monitoring devices
on three producing pads. And we expect to complete this certification process in the next few weeks. These
efforts with Equitable Origin and Project Canary are not only important to us from a sustainability perspective, but
we believe they will also benefit our long-term marketing efforts.
In the near term, we think our responsibly sourced gas designation will give us a competitive advantage and allow
us to create value by selling some of our production at a modest premium. Longer term, we think that many
buyers, be it utilities or otherwise, will require this certification from producers to meet their own sustainability
initiatives.
Finally, we've completed our comprehensive emission – study on emissions associated with various types of
completion equipment. This study, done in conjunction with NexTier and U.S. Well Services, has two key
takeaways. First, it confirmed that increasing utilization of natural gas in place of diesel fuel significantly lowers
GHG emissions intensity, with 100% natural gas reciprocating engines being the clear winner of the equipment
tested; second, as we displace more and more diesel consumption with natural gas, the fuel costs of our
completions are expected to be substantially lower.
For example, moving from 100% diesel to 100% natural gas fueled completions would reduce annual fuel costs
by more than 60% for each frac spread. This emission study, along with our assessment of equipment reliability
and cost, will guide our decision-making going forward.
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Q1 2022 Earnings Call 04-Feb-2022
On the heels of this study, we are redoubling our efforts to increase the use of natural gas to fuel our drilling and
completion operations. National Fuel is uniquely positioned to do this more efficiently than many of our peers,
given our focus on consolidated Upstream and Gathering development. Our teams have worked in lockstep to
accelerate the development of key Gathering infrastructure to ensure we can utilize field gas in nearly all of our
operations. We will continue seeing the benefit of increased diesel substitution in our overall emissions intensity in
the years to come. This is just one of the many examples of the National Fuel team collaborating to stay on the
leading edge of emissions reduction initiatives.
In closing, as we look out over the next few years, Seneca is in a great position. The completion of Leidy South
and execution of additional long-term firm sales contracts supports the next leg of growth for Seneca and
Gathering. With a strong natural gas price backdrop and additional takeaway capacity, we are moving forward to
take advantage of our deep inventory of high quality acreage by modestly toggling up activity. This added growth
now expected to be in the mid to high-single digits over the next several years, enhances our capital efficiency
and long-term free cash flow generation. That, coupled with our laser focus on sustainability, positions Seneca for
continued success.
And with that, I'll turn it over to Karen.
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Karen M. Camiolo
Treasurer & Principal Financial Officer, National Fuel Gas Co.
Thanks, Justin, and good morning, everyone. As Dave mentioned, National Fuel's adjusted operating results for
the quarter were $1.48 per share, an increase of 40% from the prior year. The increase was primarily in our E&P
and Gathering segments, driven by both higher commodity price realizations and increased Appalachian
production.
As it relates to the former, tightening supply/demand fundamentals have strengthened commodity prices. As a
result, our natural gas price realizations were up 18% from last year, while crude oil realizations were up over
25%. Combining this with a 7% increase in total production, which has a corresponding benefit to our Gathering
throughput, earnings between these two segments were up $0.43 per share.
In our regulated segments, earnings were flat compared to last year. As FM100 commenced service in
December, we started to see the benefit of the project show up in our results, recognizing just under $3 million of
revenue during the quarter. As a reminder, the expansion portion of this project is expected to generate
annualized revenues of $35 million. In addition, we have a $15 million per year of revenues commencing in April
related to the modernization component of the project.
At the Utility, we continue to see the growing benefits of our system modernization tracker in New York, adding
about $1 million to margin during the quarter. Going the other direction was the approximately $2 million impact of
warmer weather in our Utility's Pennsylvania jurisdiction, where we do not have the benefit of a weather
normalization clause. Temperatures on average were 8% warmer than last year and 24% warmer than normal in
Pennsylvania.
As we look to the remainder of the year, we are increasing our earnings guidance to a range of $5.20 to $5.50 per
share, and an increase of $0.10 per share at the midpoint. There are a couple of key drivers worth noting. First,
we are truing up our commodity price assumptions to better align with the current forward strip. Our NYMEX
natural gas price has been revised to $4.50 per MMBtu. We previously were guiding to $5.50 from January to
March and $3.75 for the last six months of the fiscal year.
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Q1 2022 Earnings Call 04-Feb-2022
Pricing has had a healthy dose of volatility as of late. For reference, our earnings will move up by $0.06 for every
$0.25 change in pricing for the remainder of the year. We've also moved our WTI price assumption to $80 per
barrel, up $5 from our previous guidance. A $5 change in oil impacts earnings by $0.02.
The other two notable changes are on the cost side of things. First, at Seneca, we are reducing our LOE guidance
by $0.02 per Mcfe, now projecting a range of $0.81 to $0.84. This is largely a function of lower steam fuel costs in
California that Justin referenced earlier.
On the regulated businesses, Dave discussed some of the inflationary headwinds we are facing. We now expect
O&M costs to be up approximately 4% to 5% versus last year. Just to remind everyone, we had a one-time
favorable benefit of about $4 million to Pipeline and Storage O&M in fiscal 2021 that will not recur this year.
Outside of this dynamic, as well as the costs to operate FM100, underlying O&M costs are expected to be up
approximately 3.5%. Moving to capital, given the dynamics Dave and Justin discussed earlier, we have revised
our consolidated capital expenditure guidance to a range of $665 million to $810 million, an increase of $37.5
million, or 5% at the midpoint.
Bringing this all together, the balance sheet is in great shape and our cash flow projections remain strong. We
previously discussed funds from operations exceeding capital spending by $300 million to $350 million. In spite of
the increase in our capital guidance, we still anticipate being in that range, generating free cash flow well in
excess of our dividend. This level of free cash flow will continue to improve our leverage metrics.
For the 12 months ended December 2021, we were approximately 2.5 times levered from a debt to EBITDA
perspective. As our EBITDA grows and we continue to generate free cash flow, we expect this to trend closer to
2.25 times over the next 12 months. While there are no hard and fast rules with the rating agencies, we are well-
positioned to work our way toward mid-BBB metrics over the course of the next year or so, depending on how
commodity prices play out.
In closing, despite the inflationary and weather headwinds, the first quarter was a strong one. National Fuel is
projecting to generate meaningful free cash flow, which will further strengthen our investment-grade balance
sheet and positions us well for the future.
With that, I'll ask the operator to open the line for questions.
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Q1 2022 Earnings Call 04-Feb-2022
QUESTION AND ANSWER SECTION
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Zach Parham with
JPMorgan. Your line is now open.
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Zach Parham
Analyst, JPMorgan Securities LLC Q
Hey, thanks for taking my question. First off, we've seen a delay on a new pipe out of Appalachia, and production
numbers for the basin seem to climb in year end, Seneca is part of that. I know you all mostly locked in near-term
volumes, but just curious on your view on local basis. It looks like you're assuming $0.85 off NYMEX in your
guidance for Appalachian spot, but just any worries on that wiping out further or even the industry is potentially
getting into a situation where some producers have to shut in volumes similar to what we saw a couple of years
ago? Just general thoughts on basis really?
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Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Sure, Zach. We have pretty much locked in at least as much of our in-basin exposure is we feel comfortable with.
So, we're less than 10% exposed to any sort of massive blowout in basin. And that's in part with our new Leidy
South capacity and it's in part due to some of our efforts along marketing to protect that. It's hard to say exactly
what will happen with basis this summer. So, it depends where we end of course, the winter and what storage
levels look like, and some of it will depend frankly on what other producers are doing.
In terms of our overall activity levels, we're really anticipating production is pretty similar to where we were before,
at least through this year. Longer term, I think the story is the same. It's going to depend on how people, how our
peers in Appalachia, how they handle their overall production levels. If they stick to kind of more the maintenance
or if they decide to grow, but what we've done is we've insulated that risk well beyond 2022. So, with our existing
firm transport and firm sales portfolio that gives us a minimal amount of exposure to that in-basin long-term
because I think we view it as a risk we're not really willing to take and as we've said consistently, we're not going
to grow, just to grow. We want to grow knowing we have a good home for our gas and that is not in-basin.
......................................................................................................................................................................................................................................................
Zach Parham
Analyst, JPMorgan Securities LLC Q
Got it. Thanks for that color. I guess maybe just one follow-up, you mentioned in your prepared remarks, the RSG
certification and potentially getting a premium on some of that gas. Can you talk a little bit about what the market
for RSG looks like and what kind of premium you could potentially get for that gas?
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Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Sure. So, I'd say it's – the market's developing. And what we think – we absolutely think we'll be successful at
selling some of our gas at a modest premium. The premium is not going to be nickels, dimes and quarters. It's
more likely pennies. And I think we're kind of settling in on what the right number is. And just for commercial
purposes, I'd rather not speak specifically to that, but at least order of magnitude that should help guide you on
what we're expecting.
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Q1 2022 Earnings Call 04-Feb-2022
We're definitely seeing a lot of interest. Interestingly, a lot of our gas, we can get it to Canada. And in Canada,
they in particular are very interested in the Equitable Origin certified gas. So, we think there's a great opportunity
for us there as well as into other markets. And we think it will keep developing, particularly at the utility level, as
public utility commissions get onboard with not just asking their utilities to reduce their emissions intensity and
move towards sustainability, but will allow them to recover the cost of buying RSG from a producer like Seneca.
And our hope is that will – that discussion will continue and will ultimately get there in the months and years to
come.
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Zach Parham
Analyst, JPMorgan Securities LLC Q
Thanks for the color. That's all for me.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Holly Stewart from Scotia Howard Weil. Your line is now
open.
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Holly Stewart
Analyst, Scotia Howard Weil Q
Good morning, gentlemen, Karen.
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David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co. A
Good morning.
......................................................................................................................................................................................................................................................
Karen M. Camiolo
Treasurer & Principal Financial Officer, National Fuel Gas Co. A
Hi.
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Holly Stewart
Analyst, Scotia Howard Weil Q
Dave. Maybe I'll start off on a bigger picture question because you talked a lot about electrification and the
reliability of the overall grid. And it looks like a few weeks ago, a Pennsylvania senator invited NFG to relocate its
headquarters to the State of Pennsylvania versus New York. It's actually a very interesting move, given that New
York has made a lot of, let's just say, anti-fossil fuels claims over the last few years. So, maybe just curious as to
your thoughts around this and sort of how the company and you are thinking about this offer.
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David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co. A
Yeah, sure. We've been getting the question a fair amount. I'm not ready to give up on New York just yet. I think
we're solidly in the political phase of climate legislation and the next phase is going to be the more practical
implementation. And I think when you start bringing things like costs into play and electric reliability into play, the
state may come to its senses and decide that it's not all that smart to move at the pace that is currently being
contemplated. So, we're not ready to give up on New York just yet and plan to keep our headquarters here.
......................................................................................................................................................................................................................................................
Holly Stewart
Analyst, Scotia Howard Weil Q
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Q1 2022 Earnings Call 04-Feb-2022
Great, just thought it was an interesting move out of that senator. Maybe just moving on, you highlighted a lot of
free cash flow generation in this year and beyond. I thought maybe we could get your updated thoughts on that
capital allocation. It looks like maybe there's a small maturity that's had a little bit of a higher rate that you could
take out, but other than that, not – doesn't appear to be a lot to do on the balance sheet side of things. So, just
maybe any updated thoughts you can give us?
......................................................................................................................................................................................................................................................
David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co. A
Yeah. As we talked in the past, the first priority is going to be to delever a bit and delevering not just in a lower
debt to EBITDA number, where that's driven by higher EBITDA, but also reducing absolute leverage on our
balance sheet because as you know, our capital structure plays into our rate setting process. And so, lowering
absolute debt makes a lot of sense if rate cases are on the horizon.
So, we've got our next maturity and in February of 2023 I think it is. That's in the $500 million range. So, we'll
likely use some of our excess free cash flow to pay down that maturity and add to a smaller issuance.
Then longer term, certainly free cash flow will grow in 2023 as we have all of the revenues from FM100 and we
have lower capital, really no change in our thinking. We'd really like to continue growing the company and find
opportunities either organically or through acquisitions, but if those don't arise, return capital to shareholders in
some way.
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Holly Stewart
Analyst, Scotia Howard Weil Q
Okay. That's great. Maybe flipping to Justin, and Justin, pardon me if I missed the comments, I know you're
talking about a few more pads and kind of enhancing that I guess completion design and just some of your
spacing and whatnot. Can you just give us maybe what you had in plan for [ph] TILs (00:36:47) for 2022, which –
and in that updated number now today with the new capital in terms of those [ph] TILs (00:36:58) for 2022?
......................................................................................................................................................................................................................................................
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Sure, Holly. So, we brought on 24 wells in the first quarter. Our [ph] TILs (00:37:10) on the – for the balance of the
year don't really change. The incremental kind of completion in top-hole that I spoke about, so on the completion
side, it's more about a more enhanced design where we're doing tighter stage spacing. And we've got a lot of data
and a lot of history through our kind of development over time and optimization. And at where prices are today
and what we see out there, the returns on investing that incremental capital over the balance of the fiscal year
payout – I mean, we're talking for the most part, these are 100% plus IRRs on that incremental capital and
payouts that are just you can count the months on your hand.
So, that's more of a, I'll call it an optimization enhancement of our plan and we'll really see the benefit – we might
see a little bit of that benefit towards the very tail end of the year, there's one pad in particular, but most of that will
spill into fiscal 2023.
Similarly, on the top-hole, we're just going to employ our top-hole rig more frequently and likely top-hole really all
of our pads. And that – what that does is it's – that that has kind of the impact of accelerating how quickly we can
bring wells on in the sense that you drill incrementally three, four, five, six, maybe four to seven incremental wells
per year with our two larger rigs. It just – it speeds those up and has the benefit of lowering our costs. Again, that
mostly will spill into fiscal 2023 benefits from a production perspective.
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Q1 2022 Earnings Call 04-Feb-2022
Holly Stewart
Analyst, Scotia Howard Weil Q
Okay. And sorry, I don't have that number at my fingertips with – in terms of just the total [ph] TILs (00:39:02)
expected for the year.
......................................................................................................................................................................................................................................................
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
I don't have that number, right off the...
......................................................................................................................................................................................................................................................
Holly Stewart
Analyst, Scotia Howard Weil Q
Okay. I can follow up with Brandon on that.
......................................................................................................................................................................................................................................................
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
...top of my head but we can follow up.
......................................................................................................................................................................................................................................................
Holly Stewart
Analyst, Scotia Howard Weil Q
Okay, great.
......................................................................................................................................................................................................................................................
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Perfect.
......................................................................................................................................................................................................................................................
Holly Stewart
Analyst, Scotia Howard Weil Q
And then, Justin, sorry, I'll stop here, but last one and a little bit, maybe more in the [ph] weeds (00:39:21), it looks
like from a Midstream perspective, the ratio of sort of gathered volume to Seneca volume has been rising and
particularly the last two quarters and maybe the fee is subsiding a bit. So – and I'm sure that's just based on mix
or gross versus net or I'm not sure how to think about it. So, I guess that's my question is what's driving that? And
then should we think about that trend here going forward in the forecast?
......................................................................................................................................................................................................................................................
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Sure. So, it's a couple things driving and you're kind of dialing in on them. So, one is just simply the difference
between the gross and the net of Seneca for the throughput. The other one is exciting in the sense that we now
are – have added meaningful volume – third-party volumes and third-party revenues to our – through our
gathering systems. It's something we've been working on for a long time. And this quarter was the first quarter
where some of that started to show up. And you should absolutely anticipate those benefits continuing through
the balance of the year and into the future.
......................................................................................................................................................................................................................................................
Holly Stewart
Analyst, Scotia Howard Weil Q
Okay. Great. Thank you all.
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Q1 2022 Earnings Call 04-Feb-2022
David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co. A
Yeah.
......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of John Abbott from Bank of America. Your line is now open.
......................................................................................................................................................................................................................................................
John H. Abbott
Analyst, BofA Securities, Inc. Q
Good morning. Thank you for taking our questions.
......................................................................................................................................................................................................................................................
David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co. A
Hey, John.
......................................................................................................................................................................................................................................................
John H. Abbott
Analyst, BofA Securities, Inc. Q
Our first question one – hey. So, our first question is on maintenance CapEx. I mean, David, you addressed some
of this in your opening remarks but you are seeing cost inflation, and granted, you are going to grow over the next
several years, it sounds like. But when you think over a multi-year period of time, what are your latest thoughts on
maintenance CapEx across your various segments?
......................................................................................................................................................................................................................................................
David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co. A
Yeah. On the pipeline side, like I said, it was in the $50 million range and that would take into account the cost
inflation that we've seen, at least to-date. On the Utility side, I would say in the, let's say, $60 million to $70 million
range for true maintenance, right, so excluding modernization and replacement of older pipe. And then on the
Gathering side, it's very, very small given the age of the system. It's more preventative maintenance and the like,
which falls into O&M. And then, Justin, do you want to hit Seneca?
......................................................................................................................................................................................................................................................
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Sure. So, in Seneca, our plans aren't quite maintenance, so I'll baseline you on what they look like. So, going into
next year, we'd expect capital to come down. It'll still be – it will come down, say, in the $400 million to $450
million, but then as we think about long term, if we just continue at that mid, high-single digits, it's [ph] probably
(00:42:22) more closer to $400 million, and if you think about just maintenance off of that, you'd subtract another
$50 million to $75 million per year if we went to truly just flat production.
......................................................................................................................................................................................................................................................
John H. Abbott
Analyst, BofA Securities, Inc. Q
That is very helpful. And then the second question, it was touched on earlier about basis differentials, but when
you [ph] thought (00:42:43) you've been adding marketing contracts, when you think about Appalachia post 2023,
how are you thinking about your long-term differential in Appalachia? I mean, the majority of your gas is being
sold out of basin. But how are you thinking about that long-term differential at this time?
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Q1 2022 Earnings Call 04-Feb-2022
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Well, in terms of gas that would be exposed in-basin pricing depends a lot on where NYMEX is, which will drive
overall activity levels and gas supply. But I would say it's in a range of kind of $0.70 to a $1. And I know that's
pretty wide, but it will be highly variable depending on how much production is growing or not growing within the
basin. There's certainly other than MVP, which has had some setbacks recently, there are no large infrastructure
projects with gas getting out of the basin. So, unless you have a great firm transportation portfolio and augment it
with some firm sales on top of that, I think people are going to have to generally stay – keep their production in
check. And that'll result in kind of that range I'm talking about long term kind of $0.70 to $1 off of NYMEX.
......................................................................................................................................................................................................................................................
John H. Abbott
Analyst, BofA Securities, Inc. Q
And that's for in-basin, correct?
......................................................................................................................................................................................................................................................
Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
Yes.
......................................................................................................................................................................................................................................................
John H. Abbott
Analyst, BofA Securities, Inc. Q
When you layer in your marketing contracts, where do you see the differential sort of potentially shaking out for
you long term?
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Justin I. Loweth
President-Seneca Resources Company, LLC, National Fuel Gas Co. A
So, I guess what I would point you to is in our slide deck, we have – we show what our long-term basis looks like.
It's slide 29 of our deck. And if you take a look at fiscal 2023, where we just show in average, that would give you
a pretty good assessment. If you look at our NYMEX contracts our Dawn contracts, our other contracts to go
through Transco and into some of the northern New York off Empire markets, that gives you a really good flavor
and some more specifics. I would expect us to be in those general ranges. And it'll just evolve over time. But all –
what I'm describing, there are realizations that are better than what we would see if we were in-basin overall. And
in some cases, meaningfully better.
......................................................................................................................................................................................................................................................
John H. Abbott
Analyst, BofA Securities, Inc. Q
That is very helpful. And if I could squeeze one more in here, so with inflationary pressures, just for the regulated
businesses, how does this influence the timing of potentially a rate case for those businesses? How does that sort
of factor in the inflation? And maybe how does that work?
......................................................................................................................................................................................................................................................
David P. Bauer
President, Chief Executive Officer & Director, National Fuel Gas Co. A
Yeah. I mean, it certainly is a driver of rate cases. On the Pipeline side of things, we have a stay out in both pipes
for at least another year. On the Utility side of the business, we can file – I think we can file in both jurisdictions
now. We're earning good returns, but obviously inflation eats into that. And I think we're likely approaching the
point where you'll see us file a rate case in the next year or two.
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