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NFG Sees Higher Earnings, But Trims Seneca's E&P Capex

National Fuel Gas Co. (NFG) said its midstream business propped its consolidated earnings during the first quarter 2015 fiscal year, but lower oil and natural gas prices forced it to trim capital expenditures (capex) for exploration and production (E&P) subsidiary Seneca Resources Corp.

NFG reported consolidated earnings of $84.7 million ($1.00/share) for 1Q2015, which ended on Dec. 31. By comparison, the company had earnings of $82.2 million (97 cents/share) in the year-ago period.

Both segments of NFG's midstream business -- pipeline and storage, carried out by National Fuel Gas Supply Corp. and Empire Pipeline Inc., and gathering, performed by National Fuel Gas Midstream Corp. (NFG Midstream) -- saw increased earnings in 1Q2015. The pipeline and storage segment brought in $20.8 million (25 cents/share), a $1.6 million (2 cents/share) increase year/year. Meanwhile, the gathering segment earned $11.6 million (14 cents/share) in 1Q2015, up $5.5 million (7 cents/share).

NFG attributed the higher earnings for its pipeline and storage segment to nonaffiliated revenues from the Mercer Expansion project. Higher transportation revenues from additional new transportation contracts were also a factor, as producers and marketers jockey to move gas supplies to higher priced markets. Higher gathering revenues from the Trout Run and Clermont gathering systems boosted the gathering segment (see Shale DailyJune 18, 2012).

In the upstream, Seneca had earnings of $26.7 million (32 cents/share) in 1Q2015, a decrease of $4.4 million (5 cents/share) from a year ago. After hedging, weighted average prices were $3.25/Mcf for natural gas and $78.09/bbl for crude oil in 1Q2015, which translated to decreases of 45 cents/Mcf and $15.91/bbl year/year.

Seneca's overall oil and gas production increased 29.8% (11.1 Bcfe) from the year-ago period, climbing to 48.2 Bcfe. Production from the E&P subsidiary's properties in the Appalachian Basin increased about 33.5% and accounted for 10.7 Bcfe of the increase, which NFG attributed to strong well results in Lycoming County, PA, and in the Clermont-Rich Valley area. The latter Seneca has designated as its Western Development Area, which includes Pennsylvania's Cameron, Elk and McKean counties (see Shale DailyJuly 29, 2014).

NFG said higher natural gas reserve balances helped push per unit quarterly depletion expenses to $1.66/Mcfe, a decrease from a year ago of 26 cents/Mcfe. But lease operating and transportation expenses on a per unit basis climbed 2 cents/Mcfe, to 97 cents/Mcfe, due to higher intercompany gathering and compression costs.

The company's downstream business saw its utility segment bring in earnings of $22.6 million (26 cents/share) in 1Q2015, a decrease of $1.6 million (2 cents/share) from the previous first quarter. Costs associated with a new customer billing system were blamed for the decrease.

In an updated earnings guidance for 2015, the company said it now hopes earnings will range from $2.65 to $2.90/share, versus a previous range of $3.03 to $3.35. The company attributed the change to:

  • Reduced production from Seneca in 2015 -- previously estimated from 180-220 Bcfe, but reduced to 155-190 Bcfe;
  • Marcellus spot pricing averages between $2.00/Mcf and $2.25/Mcf, down 50 cents from the previous range; and
  • New York Mercantile Exchange natural gas prices now assumed to average $3.00/MMBtu for the remainder of the fiscal year, down $1.00 from the previous forecast.

"Looking beyond fiscal 2015, if low gas prices persist, we will continue our development of the Clermont area with a reduced activity level, utilizing two to three rigs and a single frac crew," Seneca President Matt Cabell said during an earnings call Friday. "Even with this lower activity level, we should fill nearly all of our firm capacity, which rises to approximately 570,000 Dth/d in November 2016."

NFG revised its capital expenditure guidance for 2015 as well. The previous total was $1.07-1.28 billion, which included $600-700 million for E&P, $150-200 million for gathering, $225-275 million for pipeline and storage and $95-105 million for the utility segment.

The new capex is set at $990 million to $1.16 billion. That includes $525-575 million for E&P, $125-175 million for gathering, $225-275 million for pipeline and storage and $115-130 million for the utility segment.

Commenting on the company's attempts to reduce costs, Cabell said Seneca has three horizontal drilling rigs deployed, the first of which comes off its current contract at the end of the year, and the other two "are staggered about six months apart" after that.

"Our frac[ture] contract is extremely competitive," Cabell said. "I don't anticipate a big change in the cost of our pressure pumping, but there are numerous other vendors that we are currently negotiating with to reduce their costs."

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