To shore up its liquidity and maintain its pace during the commodities downturn, National Fuel Gas Co. (NFG) subsidiary Seneca Resources Corp. has entered into a joint development agreement (JDA) with an affiliate of Dallas-based IOG Capital LP to drill up to 80 Marcellus Shale wells across 10,500 acres in Northern Pennsylvania.
Seneca would operate the properties in Elk, McKean and Cameron counties. Under the terms, IOG would hold an 80% working interest and must participate in the first 42 wells, with a one-time option to participate in the remaining 38 on or before July 1, 2016. At current well costs, IOG's obligation on the first 42 wells is expected to reduce Seneca's capital expenditures by $200 million in its fiscal year (FY) 2016, which started in October.
Seneca would realize another $180 million reduction in expenditures if IOG exercises its option to participate in the remaining wells.
"During this period of lower commodity prices, where we are experiencing decreased cash flow in the upstream portion of our business, the drilling joint development agreement we announced today helps us move forward with our strategy," said NFG CEO Ronald Tanski. “The joint development agreement significantly reduces our upstream capital requirements, yet still allows us to increase production from our acreage that will support continued growth in our pipeline and storage and gathering segments."
Seneca would retain a 7.5% royalty interest and the remaining 20% working interest in the first 42 wells. If IOG participates in the remaining wells, Seneca would then retain a 10% royalty and the remaining 20% working interest. When IOG achieves a 15% rate of return, Seneca's working interest would increase to 85%.
IOG would also share in Seneca's contracted firm sales and firm transportation capacity. Seneca added that an unspecified portion of the first 42 wells included in the JDA have already been drilled or completed. The remainder, the company said, are expected to be developed over the course of FY 2016 and 2017.
As a result of the deal, Seneca's exploration and production budget for FY 2016 has been reduced to $200-250 million from its previously announced $400-450 million. The company's FY 2016 production is now also expected to be in the range of 139-202 Bcfe, down from the previously announced 161-232 Bcfe, reflecting IOG's share of anticipated production from the JDA wells.
Founded in 2014, IOG is a private equity firm partnered with funds managed by affiliates of Fortress Investment Group LLC. The fund's founder and senior managing director, Marc Rowland, formerly served as CFO of Chesapeake Energy Corp. and as CEO of the oilfield services firm FTS International Inc.
Seneca was forced to make price-related curtailments throughout FY 2015. In its fourth quarter alone, the company voluntarily shut in 13 Bcf of natural gas (see Shale Daily, Nov. 17). It has one of the largest acreage positions in the Marcellus Shale, with 790,000 net acres primarily located in the northern part of the state. But like other operators in the region and across the country, its revenues and profits have been hurt in recent quarters by low commodity prices.