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Seneca Transitioning to Utica Development in Northwest Pennsylvania

National Fuel Gas Co.'s (NFG) exploration and production subsidiary, Seneca Resources Corp., said after a year of testing the Western Development Area (WDA) in northwest Pennsylvania, the Utica Shale assets are derisked, with full development ready to begin.

Seneca plans to leverage existing infrastructure to maximize Utica growth. Management said that would help NFG offset the losses suffered since the New York State Department of Environmental Conservation (DEC) denied a water quality certification for the Northern Access expansion, delaying the project by two years or longer. NFG is looking to its subsidiaries for other growth opportunities as it works through the delay.

"We are now planning to move to full WDA Utica development by the end of our next fiscal year," Seneca President John McGinnis said Friday during the company's fiscal third quarter earnings call. "Our Utica development program will begin on currently producing Marcellus Shale pads in order to leverage our existing upstream and midstream infrastructure to drive capital, operational and marketing efficiencies.

"The ability to return to existing pads to drill Utica development wells, while utilizing existing midstream infrastructure, is a tremendous economic advantage for our company," he said. "We now expect to flow anywhere from two to three times as much gas through our gathering system versus original estimates."

Seneca had already been developing the Utica in its Eastern Development Area (EDA) in north-central Pennsylvania, and it now has five Utica wells producing in the WDA. The latest well has been online for two months, and McGinnis said it is the best the company has ever drilled across the 715,000 acre development area. The company has since established a Utica type curve of 1.6-2 Bcf/1,000 feet of lateral.

Seneca recently added a rig in the EDA to ramp-up Marcellus development in Lycoming County ahead of the 190,000 Dth/d it expects to begin flowing on Atlantic Sunrise when that project comes online next year. It also plans to drill more 100% working interest wells. Those moves prompted an increase in capital expenditures to $230-250 million from $210-250 million.

Seneca is now guiding for 185-200 Bcfe of production in fiscal year (FY) 2018, which begins in October, compared with the previous FY2018 guidance of 170-180 Bcfe.

Beyond the upstream segment, NFG said the Empire System expansion is on track for an in-service date of November 2019, which would add 205,000 Dth/d to the system. The NFG Supply System expansion is also on track to come online in phases between the end of this year and 2019, which would add another 210,500 Dth/d.

In the meantime, management remains committed to Northern Access. In addition to filing a petition for review in the U.S. Court of Appeals for the Second Circuit to challenge the DEC's decision, the company filed a request earlier this year at the Federal Energy Regulatory Commission for reconsideration or rehearing of the order approving Northern Access.

If FERC acts favorably for the company, it could accelerate the project's timeline, management said. It remains unclear when or if that might happen. The Commission's quorum was restored on Thursday after the U.S. Senate confirmed Neil Chatterjee and Robert Powelson.

"Without a quorum for the last six months, there's a pretty big backlog," CEO Ronald Tanski said of FERC's workload. "I would expect their first order of business would be getting through the certificate proceedings before they start reacting to the rehearing orders." He said the company is also litigating the other permit denials in state court and said the company does not expect a decision from the second circuit until next spring. He cautioned that if NFG's subsidiaries have to take the matter into full litigation, those proceedings could last until 2020.

Seneca produced 42.7 Bcfe in its fiscal 3Q2017 down 3% from the year-ago period and 6% sequentially. The company attributed the decline to lower average revenue interest on production from its joint development agreement in the WDA with IOG Capital LP and natural Marcellus production declines in the EDA. Average prices including hedges, were $2.94/Mcf for natural gas and $53.02/bbl, up 8 cents/Mcf and down $5.77/bbl from a year ago.

Net income totaled $59.7 million (69 cents/share), compared with year-ago net income of $8.3 million. Revenue was $348.8 million for the quarter, versus $335.6 million a year ago.

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