National Fuel Gas Co.'s (NFG) exploration and production (E&P) subsidiary Seneca Resources Corp. gained ground during its fiscal 2017 first quarter when better Appalachian spot prices allowed it to open wells and get more production flowing. But it needs more pipeline capacity to keep the momentum.
"Our biggest opportunity to increase the value of the company hinges on the installation of more pipeline infrastructure to move gas out of both our Western Development Area (WDA) and our Eastern Development Area (EDA)," CEO Ronald Tanski said of Seneca's top assets in north-central, Northeast and Northwest Pennsylvania. "The current capacity constraints in our producing regions puts us at risk for high basis differentials at various points during the year."
Tanski's comments on the company's first quarter earnings call came about a week after it announced another in-service delay for its Northern Access pipeline expansion project. The company said unanticipated delays at FERC forced it to push back the project's in-service date from November to fiscal 2Q2018. The company said it would have more clarity about its 2018 plans once it gets Federal Energy Regulatory Commission (FERC) approval to secure the remaining rights-of-way, finish clearing trees and ultimately move forward with construction.
On Friday morning, management was holding out hope that the commission would issue an order for its project during a flurry of last minute activity ahead of Commissioner Norman Bay's resignation at the end of the day. Bay announced on Jan. 26 that he would resign, hampering the commission's ability to vote on important projects or rules.
"A pressing issue for us is the current status of [FERC],” Tanski said. “With the resignation of Commissioner Bay at the end of today, the commission will be down to only two members and won't have a quorum to issue certificate orders, like the one we need from FERC for our Northern Access project."
The project would expand the National Fuel Gas Supply Corp. and Empire Pipeline systems to transport more than 490,000 Dth/d from wells operated by Seneca in Northwest Pennsylvania to Northeast markets. Seneca is also constrained in its Eastern Development Area, where it's waiting on more than 189,000 Dth/d of capacity to come online with the Atlantic Sunrise project, which isn't expected to be in-service until next year. FERC approved Atlantic Sunrise in the late afternoon on Friday. The 3.25 Bcf/d Rover pipeline received its certificate late Thursday to begin construction, which puzzled NFG management, who said their project was ahead in the FERC queue. It was possible as this newsletter went to press late Friday that FERC still had a few moves to make before Bay’s last day ended.
"I wish we knew, given the fact that once you've filed, you can't have direct or individual conversations with the FERC staff," Tanski said about the order of FERC's decisions and how long it might take to get approval for Northern Access. "We don't have a real good handle on their thought process." Bay's resignation leaves FERC with just two commissioners and three empty seats. Tanski said of the other empty seats that "the whole industry thinks that we'd like to get it filled up. It's always nice to get a full complement."
The first quarter appeared a welcome relief for NFG, which has been forced to curtail volumes on falling prices over the last two years and recorded steep impairments during the same time. The company curtailed 34.6 Bcf of volumes throughout fiscal 2016 and recorded $948.3 million in impairments. There were no impairments during the first quarter, and it curtailed just 3.5 Bcf of natural gas production, compared to 14.6 Bcf in the year-ago period.
Average natural gas prices in Appalachia were $2.35/Mcf, compared to $1.98 in the year-ago period. Pre-hedge prices were also up over the same time, reflecting improvements that have been reported across the region by other Appalachian operators this earnings season.
Seneca produced 44.9 Bcfe in the first quarter, up 18% from the year-ago period and 13% from the fourth quarter. It produced 7.1 Bcf into local Appalachian markets during the period, a drastic improvement from the 7.5 Bcf of local volumes in sold during all of fiscal 2016.
The company continues to move forward with its Utica Shale appraisal program in Northwest and north-central Pennsylvania. It plans to drill eight wells by the end of this fiscal year and have five of them online. It will add a second rig this summer in the EDA in Lycoming County, PA, ahead of the Atlantic Sunrise in-service. In 1Q2018, the company said it would add a third rig to build a well inventory in the WDA ahead of the Northern Access in-service.
Consolidated revenue was up at NFG during the first quarter to $422.5 million from $375.2 million in the year-ago period on better utility, E&P and gathering segments performance. The company reported net income of $88.9 million ($1.04/share) for the first quarter, compared to a net loss of $189.1 million (minus $2.23) in 1Q2016.