Seneca Resources Co. LLC plans to again slash spending in response to free falling natural gas prices and lean on an inventory of drilled but uncompleted (DUC) wells in Appalachia to keep production flat in fiscal year (FY) 2021.   

“During last quarter’s earnings call, we discussed the possibility of further reduction in activity should prices not rebound over the winter,” said Seneca President John McGinnis. “Obviously, prices have not rebounded and have in fact continued to decline.”

The company dropped a rig in recent days and plans to drop another over the summer, leaving it with just one for the remainder of FY 2020, which ends in September. McGinnis added that the company would be unlikely to add anymore rigs until gas prices break the $2.50 mark. They’ve been trading under $2.00.

Because activity won’t be reduced until later this year, 2020 production volumes won’t be impacted. But one rig alone won’t hold the company’s production flat next year, McGinnis said.

“We have built up a DUC count, I think we are currently at 14,” he added during a call on Friday to discuss fiscal first quarter earnings. “And by the time we drop that second rig, we will be just above 30 DUCs. Over the next year or so, depending on what gas prices do, we’ll just pace that appropriately.”

Seneca, the upstream subsidiary of National Fuel Gas Co. (NFG), has also elected to postpone some completion activity until fiscal 2021 in its Eastern Development Area, a four county region in Northern Pennsylvania. The reduction in activity, combined with lower oilfield services costs in the basin, now has Seneca guiding for $375-400 million of capital expenditures in fiscal 2020, or a $42.5 million cut at the midpoint of the previous forecast. Overall, that’s a $100 million year/year spending reduction.

“2020 is looking to be a challenging year for natural gas producers,” NFG CEO David Bauer said, adding that the company’s integrated operations, which also include midstream and downstream assets, have helped insulate the business.

But NFG was still forced to lower its FY 2020 earnings guidance due entirely to the decline of natural gas prices. Seneca’s realized average natural price during 1Q2020 was $2.32/Mcf, down 29 cents from the year-ago period. NFG’s revised earnings guidance now assumes benchmark natural gas prices will average $2.05/MMBtu through September, down 35 cents from its previous forecast.

The company has financial hedges and fixed price physical firm sales contracts in place on 60% of Seneca’s remaining FY 2020 natural gas production at an average price of $2.28/Mcf.

Seneca has also aggressively curtailed volumes in the past during low price periods. McGinnis said the company shut-in about 700 MMcf during the fiscal first quarter, but said for now it has no further plans to curb natural gas volumes.

The company produced 58.4 Bcfe in the first quarter, a 19% increase from the year-ago period and a slight decline from 59.1 Bcfe in 4Q2019. First quarter volumes were strengthened by new Marcellus and Utica shale wells that came online and a 5% year/year increase in oil production from the company’s Midway Sunset area in Kern County, CA. Average oil prices during the quarter were $62.92/bbl, up $1.22 from the year-ago period.

NFG’s Empire North project, which would move 205 MMcf/d of Appalachian volumes to New York and into Canada, is under construction and on track to enter service by late summer or early fall, Bauer said. He added that the company’s FM100 project, which would modernize a portion of NFG’s existing pipeline system in the Northeast and create 330 MMcf/d of incremental firm transportation capacity, is expected to receive federal approval later this year.

NFG reported consolidated fiscal 1Q2020 net income of $86.6 million ($1.00/share), compared to net income of $102.7 million ($1.18) in 1Q2019. Consolidated results include the upstream, midstream and utility business segments.

Seneca’s first quarter earnings were $23.9 million, down from $38.2 million in the year-ago period.

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