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National Fuel E&P Unit Growing in Marcellus Shale

National Fuel Gas Co. posted reduced fiscal 2009 fourth quarter earnings due mainly to the impact lower commodity prices had on its Exploration & Production (E&P) segment. However, the diversified company's upstream segment has ambitious plans for the Marcellus Shale play for next year, executives said last Friday.

"While commodity prices certainly impacted the level of earnings in our Exploration and Production segment, we had an outstanding quarter from an operating point of view, with production up 20% over the prior year," said National Fuel CEO David F. Smith.

"More importantly, we continue to make great progress on our strategic initiatives in Appalachia. We have now completed two Seneca [Resources Corp.]-operated horizontal wells in the Marcellus [Shale] and are very pleased with the results of each of the wells. Just as significant, we are also completing construction of the Covington Gathering System, which will get that production to market, and expect to place it in service by mid-November."

National Fuel had consolidated earnings for the quarter ended Sept. 30, of $27 million (33 cents/share), a decrease of $16.3 million (19 cents), from the prior year's fourth quarter. The E&P segment's earnings in the fourth quarter of fiscal 2009 of $28.1 million (34 cents/share) decreased $10.1 million (12 cents) when compared with the prior year's fourth quarter.

"The Marcellus is undoubtedly critical to the future growth of National Fuel, and we plan to exploit this exceptional opportunity as quickly and as effectively as we reasonably can," Smith told financial analysts during an earnings conference call.

E&P operations are carried out by Seneca in California, in the Appalachian region and in the Gulf of Mexico.

Crude oil and natural gas production of 11.3 Bcfe represented an increase of more than 20% compared with the prior year's fourth quarter. Production increased 29% in Appalachia, 38% in the Gulf of Mexico and 6% in California. The increase in Appalachia is largely due to the continued development by Seneca of its Upper Devonian acreage. The increase in Gulf of Mexico production is mostly due to the return to production of wells that were shut in due to hurricanes in the fourth quarter of fiscal 2008. The increase in California production is mainly due to the acquisition of Ivanhoe Energy's U.S. oil and gas subsidiary.

In spite of higher production, lower crude oil and natural gas prices realized after hedging caused earnings to decrease. The weighted average oil price received by Seneca (after hedging) was $71.39/bl, a decrease of $15.90/bl from the prior year's quarter. The weighted average gas price was $6.00/Mcf, a decrease of $3.41/Mcf.

Seneca recently flare tested its second company-operated Marcellus Shale horizontal well at an average rate of 4.7 MMcf/d over a seven-day period. Seneca has drilled four horizontal Marcellus Shale wells and fracture stimulated and tested two, at a combined rate of more than 10 MMcf/d, the company said.

Seneca President Matthew D. Cabell said Marcellus capital spending will increase by about 50% in fiscal 2010 to about $180-200 million. "I expect a much greater increase in Marcellus spending in 2011 as we add rigs and begin development of additional focus areas," he said during the conference call.

National Fuel revised its earnings guidance for fiscal 2010 to $2.30-2.65/share from the previous $2.30-2.60/share. "This guidance includes an increase in the upper end of our oil and gas production range for the E&P segment. The production range is now 42-50 Bcfe and is based on an assumed average [New York Mercantile Exchange] price, exclusive of basis differential, of $5/MMBtu for natural gas and $75/bbl for crude oil. The previous production range was 42 to 48 Bcfe," the company said.

"During fiscal 2009 we continued to take steps, particularly in the development of our vast Marcellus Shale, that will ensure continued growth in the future," Smith said. "On the regulated side of our business, the performance of our utility and pipeline and storage segments was rock solid...Our regulated operations are much less sensitive to commodity prices or to macroeconomic cycles. Their stable, reliable earnings and cash flows, particularly important in troubled times, serve as the foundation for our long-standing dividend."

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