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National Fuel Gas Company (NYSE:NFG) Q1 2024 Earnings Call Transcript

National Fuel Gas Company (NYSE:NFG) Q1 2024 Earnings Call Transcript February 8, 2024

National Fuel Gas Company isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone and welcome to the National Fuel Gas Company First Quarter Fiscal 2024 Earnings Conference Call. My name is Bruno, and I’ll be operating your call today. [Operator Instructions] I will now hand over to your host, Natalie Fischer, Director of Investor Relations. Please go ahead.

Natalie Fischer: Thank you, Bruno and good morning. We appreciate you joining us on today’s conference call for a discussion of last evening’s earnings release. With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Tim Silverstein, Treasurer and Principal Financial Officer; and Justin Loweth, President of Seneca Resources and National Fuel Midstream. At the end of prepared remarks, we will open the discussion to questions. The first quarter fiscal 2024 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 would like to remind you that today’s teleconference will contain forward-looking statements.

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While National Fuel’s expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on which they are made, and you may refer to last evening’s earnings release for a listing of certain specific risk factors. With that, I’ll turn it over to Dave Bauer.

Dave Bauer: Thank you, Natalie. Good morning, everyone. Before starting, I’d like to take a moment to welcome Natalie as our new Director of Investor Relations. While she is new to the company, she isn’t new to the industry, having worked in PwC’s power and utilities practice early in her career. I’d also like to thank Brandon for his hard work over the past 3 years and wish him well in his new role within our finance organization. Turning to the quarter. Last night, we reported adjusted operating results of $1.46 per share. It was a fairly routine quarter, one in which we continue to see strong execution across our operations. In our Upstream and Gathering businesses, production and throughput were up 11% and 15% respectively compared to last year, on the strength of several great new wells in the EDA.

In addition, the benefit of our disciplined approach to hedging was evident this quarter, with our strong book of swaps, collars and firm sales, helping to mitigate the impact of lower natural gas prices on earnings and cash flows. At the regulated businesses, we started to see the impact of new delivery rates in our utilities Pennsylvania jurisdiction, which helped contribute to the 12% increase in year-over-year utility earnings. Looking forward, our plans remain on track in each of our businesses. In the Upstream business, Seneca’s transition to the EDA is going smoothly. Results in Tioga County continue to exceed expectations and were the primary reason for the increase in our production guidance range for fiscal ‘24. We are very excited about the long-term opportunity in this area.

At a point in time when many of our peers are moving down the acreage quality spectrum or pursuing M&A to manage depleting inventory, we are in the fortunate position of having many years, well over a decade of inventory in the EDA that is highly economic. We expect that the ongoing transition to Tioga will be the driver of improving capital efficiency and strong returns for many years to come. Additionally, we have a great hedge book in fiscal ‘24 and ‘25 with downside protection well above the forward curve and collars that retain a good portion of the upside. Given the inherent volatility in natural gas prices, we think this is the right approach. Turning to the regulated businesses, settlement discussions and our supply core rate case are ongoing, and I hope to have more to say on that process next quarter.

At the utility, last fall, we filed a rate case in our New York jurisdiction, requesting new rates effective October 1 of this year. Testimony from commission staff and other parties is due next month. And once that’s on file, I expect settlement discussions will ensue over the course of the spring and into the summer. Before leaving the utility, a quick word on New York’s energy policy. As you all know, downstate politicians and environmental activist groups continue to push an agenda that seeks to electrify everything as soon as possible, including space heating. And they want to do it solely with new renewable generation despite the high cost and inherent intermittency of wind and solar. Putting the partners in rhetoric to the side, we are at least starting to see a more reasonable approach to the energy transition from some of the policymakers in Albany.

In December, the New York Commission issued an order on the plan we submitted in their long-term planning proceeding. Our proposal advocates in all of the above approach to energy that employs enhanced weatherization, hybrid heating solutions and the use of low and no carbon fuels like hydrogen and RNG. The planned balances, affordability, reliability, resiliency and emission reductions and clearly demonstrates that a standalone gas utility can meet the goals of Climate Act. As we expected, given the political environment in Albany, the commission stopped short of approving the plan in full. But it was supportive of many of the most important pillars to our approach, including weatherization and the continued evaluation of hybrid heating and alternative fuels.

While it wasn’t exactly what we wanted, the level of support we received from the very agency that oversees utility reliability and affordability lends credence to the notion that if policymakers are rational and consider the facts natural gas utilities can very much be part of a permanent solution that achieves the state’s emission reduction goals. Bringing you back to the quarter. In conclusion, while near-term commodity prices are somewhat of a headwind the longer term outlook for our business remains strong. We have a deep drilling inventory in one of the most prolific areas in Appalachia and a marketing and hedging portfolio that supports our ability to generate sustained free cash flow. In our regulated businesses, we have line of sight to increasing earnings and the ability to deploy ongoing growth capital.

On top of that, we have a strong balance sheet that allows us to be opportunistic in allocating capital. Taking these all together, I believe the outlook for National Fuel is outstanding. With that, I will turn the call over to Justin.

Justin Loweth: Thanks, Dave and good morning, everyone. Seneca and NFG Midstream both had an excellent start to the fiscal year, driven by strong operational results. Record production of 101 Bcfe, an 8% sequential increase exceeded our estimates. We turned in line 27 wells during the quarter, 19 of which were in the EDA and all of which came online ahead of schedule and collectively, their productivity exceeded expectations. The operational successes that drove Seneca’s increased production, when combined with growing third-party volumes, led to record throughput at NFG Midstream as well. In light of this solid performance in the first quarter, we are increasing our production guidance range to 395 to 410 Bcfe. For the remainder of the year, we expect to turn in line 11 more wells, including a 5-well tiled to Utica pad that is just beginning to flow back and a WDA Utica pad scheduled to flow back towards the end of the fiscal year, likely August or September.

A large oil and gas production plant with pipelines leading to tanker truck and storage tanks.
A large oil and gas production plant with pipelines leading to tanker truck and storage tanks.

Given the majority of turn-in-line activity will occur in the first half of the year, average daily production is expected to peak in Q2 before declining in each of the last two quarters prior to the next wave of pads coming online this fall and into the winter. Turning to natural gas pricing. Our robust marketing and hedging portfolio is well positioned to dampen the impact of lower near-term pricing. For the remainder of fiscal 2024, we have downside pricing protection covering more than 70% of our expected production through a combination of swaps, costless collars and fixed price firm sales. With a weighted average floor price of $3.34 per MMBtu for our NYMEX swaps and collars, we are well positioned relative to current forward prices over the balance of the year.

Additionally, we have firm transportation and firm sales in place for over 90% of our expected production, leaving less than 10% of our gas exposed to index in pricing. We continue to focus our marketing and hedging efforts on mitigating downside risk, optimizing the price received for our production and generating free cash flow throughout the commodity price cycle. Moving to capital for fiscal 2024. While first quarter capital came in slightly below our expectations, we are maintaining Seneca’s capital guidance range of $525 million to $575 million. As I previously mentioned, our turn-in-line and development activity is front end loaded and we expect to drop to 1 rig this spring, a level which we plan to maintain for at least a couple of quarters.

So capital will moderate over the remainder of the year. Overall, we see more tailwinds than headwinds on capital for the year. And once we have another quarter under our belt, we will look to tighten our capital guidance range. Longer term, Seneca’s development plans remain unchanged. We are moderating our activity levels and continuing our transition to the capital-efficient EDA, where we have more than a decade of highly prolific inventory. Our fiscal ‘24 capital is decreasing over last year. And this downward capital trend is expected to continue into fiscal 2025. Putting it altogether, we are right on track to meet our long-term capital reduction targets. Regarding our sustainability initiatives, Seneca and NFG Midstream continued to demonstrate its leadership in this area through our proactive emissions reduction efforts and best practices.

Last month, Seneca was recognized as best-in-class with the independent reverification of 100% of our assets under the EO100 Standard for responsible energy development. We are the first and only public operator to have attained an A grade demonstrating scores of 98% or higher across all 5 principles of the standard. In conclusion, we are off to a great start to the fiscal year. Our integrated upstream and midstream model remains core to our success. Allowing us to pursue a coordinated development plan focused on enhancing returns and optimizing our cost structure. Further, our ongoing transition to the EDA, solid operational execution and robust hedging and marketing portfolio sets us up for enhanced capital efficiency and growing free cash flow generation in the years to come.

With that, I’ll turn the call over to Tim.

Tim Silverstein: Thanks, Justin, and good morning. National Fuel’s first quarter adjusted operating results were $1.46 per share. Dave hit on the high points, but I did want to touch on a few other drivers. Starting at the utility, we are seeing the benefit of a $23 million annual rate increase in Pennsylvania that went into effect last August. The bulk of this increase hits in the winter months when consumption is the highest. Partially offsetting this was the impact of warmer weather relative to last year. With weather normalization mechanisms in both of our utility jurisdictions, we will be largely insulated from weather-driven volatility in the future. Also in the utility, as a result of the long-awaited IRS guidance last year, we saw the benefit of the expanded treatment of certain maintenance capital expenditures related to natural gas transmission and distribution property.

With the ability to deduct a larger share of our capital in the year it’s placed in service, we had a nice tailwind on both cash taxes and our effective tax rate. Switching to our non-regulated businesses. As Justin mentioned, from an operational perspective, Seneca and NFG Midstream are firing on all cylinders. Cash operating costs trended lower than expected during the first quarter. And despite modest price-related curtailments in October, our production guidance for the full year is moving higher. There is one atypical item during the quarter. We accrued $3.5 million in expense related to estimated plug-in costs for certain California wells, which we no longer own. These wells were divested in 2004 and are unrelated to our recent exit from the region.

The operator of the abandoned wells is no longer in business, so the liability will likely revert to Seneca. Turning to guidance for the year. We are revising our earnings range which is now expected to be between $4.90 and $5.20 per share. Our outlook for lower LOE and higher production were more than offset by the near-term drop in natural gas prices, which we now assume will average $2.40 per MMBtu for the remainder of the fiscal year. Since last quarter, we entered a tranche of $3 swaps to our hedge book, which further improved our downside protection. At the midpoint of guidance, we now are 72% hedged for the remainder of the year. As Justin mentioned, we were also active on the marketing front and have reduced our spot exposure to approximately 30 Bcf, and we expect to further chip away at this in the coming months.

Given the volatility in pricing for reference, a $0.25 change in NYMEX prices for the balance of the year will impact earnings by approximately $0.17 per share. As it relates to capital for fiscal ‘24, we’ve increased our spending guidance for the utility while maintaining the prior outlook for our other segments. The change relates to a new prevailing wage requirement for utility contractors in New York State that was enacted late last summer. The newer rule requires contractors to pay prevailing wages to non-union employees for any project that requires a permit to operate in a public right of way. This encompasses a large portion of our utility modernization activity. We are still assessing the final impact, but as of now, we expect to increase our utility capital by $20 million to $25 million this year.

While this will have a near-term effect on cash flows, it has the benefit of increasing rate base and longer-term earnings growth. We’ve updated our pending New York rate case proceeding to account for this, and we expect to obtain recovery of these costs when new rates go into effect at the start of fiscal ‘25. Bringing this all together, the impact of higher utility capital spending and lower natural gas prices are driving our expected fiscal ‘24 free cash flow to be $70 million lower than we previously projected. Despite this, our ability to generate free cash flow in the future remains strong. We have growing regulated earnings and cash flows. In the near-term, this is driven by ongoing rate-making activity and longer-term as a result of the continued need for modernization and the potential for further interstate pipeline expansions, such as our Tioga Pathway Project.

Adding this to the outlook for higher prices and further expected capital reductions in our Upstream and Gathering businesses, we remain confident in our ability to generate durable free cash flow generation over the long-term. In addition, our balance sheet remains in great shape. Both S&P and Moody’s recently reaffirmed our investment-grade rating and upgrade thresholds. We are very close to reaching these thresholds. However, the broader natural gas macro will likely push out any potential rating improvements into the future. In the meantime, we have significant financial flexibility, which positions us well to make prudent capital allocation decisions as we move through the coming quarters and years. In conclusion, the combination of meaningful growth in our regulated businesses and the improving capital efficiency of our non-regulated assets should drive mid- to high single-digit compound earnings growth over the next 3 to 5 years, assuming the long-term outlook for natural gas prices.

Coupling significant growth and strong returns with our investment-grade balance sheet and outlook for increasing free cash flow, we are positioned to extend our track record of returning a growing amount of capital to investors while continuing to prudently invest in growth opportunities. Taken together, we believe this will drive long-term value for our shareholders. With that, I’ll ask the operator to open the line for questions.

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