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National Fuel Bringing Marcellus Wells Online, But Profits Down on NY Case

Despite higher oil and gas production in the Marcellus Shale, National Fuel Gas Co. (NFG) reported a 2% decline in profits during its fiscal fourth quarter, after the company set aside a reserve of $4.7 billion to possibly settle an ongoing rate case in New York State.

NFG announced Thursday that consolidated earnings for 4Q2013 and the full fiscal year 2013 totaled $47.8 million (57 cents/diluted share) and $260.0 million ($3.08/share), respectively. By comparison, the preceding fourth quarter earnings were $48.8 million (58 cents/share) and full-year 2012 earnings were $220.1 million ($2.63/share).

Last March, regulators with the New York State Public Services Commission began a case (No. 13-00657) to determine whether NFG's gas rates were too high. During an earnings call Friday to discuss 4Q2013 results, NFG Treasurer David Bauer indicated that the case could be settled soon.

"The only unusual item in the quarter was the charge we recorded in connection with our utilities rate proceeding in New York," Bauer said. "Confidential settlement negotiations with parties to the case are ongoing and, therefore, we really can't say anything more about it. However, we are making progress and hope to reach a settlement in the near future."

Last month, Seneca Resources Corp., NFG's exploration and production (E&P) subsidiary, reported a 35% increase in total production for the company's fiscal fourth quarter, which ended on Sept. 30 (see Shale Daily, Oct. 23, 2013).

During Friday's call, Seneca President Matthew Cabell said the subsidiary had brought a new five-well pad -- Pad E -- online at its DCNR 100 tract in Pennsylvania, in Lycoming County's Lewis Township.

"This winter, we will add Pad M, a six-well pad that includes five Marcellus wells and one well in the Upper Devonian Genesee, followed by the seven-well Pad R, and by mid-summer, we should see production from the 10-well Pad T," Cabell said. Seneca will bring 23 additional wells online at the DCNR 100 tract during fiscal 2014.

Cabell added that in the last 12 months, Seneca has added approximately 4,700 acres to its position around the DCNR 100 tract, and in Lycoming's Gamble Township.

"We have a total of 100 to 120 locations in the area, with 30 wells producing, 20 drilled but not yet completed, another 50 remaining to be drilled on existing leasehold and 20 more with only minimal additional leasing," Cabell said. "We expect to be active in this area through mid-2016, assuming we keep one rig in the area."

In Seneca's western development area (WDA) of the Marcellus, Cabell said the subsidiary had tested two west gas wells at the Owl's Nest prospect area in Elk County, PA. The wells had peak 24-hour production rates of 6.1 MMcf/d and 3.4 MMcf/d.

"The lower-rate well had a shorter lateral and tested a few modifications to our [hydraulic fracturing] design," Cabell said. "The better well, with a 6,100-foot lateral, is more representative of our expectations for the area. We are commissioning the condensate-handling facilities for this pad and expect to float sales by the end of the month."

Cabell said Seneca was working with NFG Midstream to build a new 1 Bcf/d capacity gathering system to support the WDA, and expects to deliver into Tennessee Gas Pipeline Co.'s 300 Line by August 2014. By the end of fiscal 2014, Cabell said Seneca should have 15 wells online in the WDA.

"In the somewhat challenging gas price environment, we all recognize the importance of successfully executing our plan with efficient and effective operations," Cabell said. "The latest DEP [Pennsylvania Department of Environmental Protection] data showed that Seneca is a leading operator in the counties where we are most active.

"In Lycoming County, Seneca's average production per well over the last DEP reporting period was nearly double that of the second best performer. And in Tioga County, we were essentially tied for the top spot. When the next six months of data come out, I expect our Elk County results will be three or four times the next best competitor."

NFG plans to deploy three rigs in the Marcellus during the 2014 fiscal year. During the Q&A session, Cabell said Seneca had about 2,000 potential drilling locations in Pennsylvania's Cameron and Elk counties. He said gas prices would need to stay near $4/Mcf in order for the locations to stay economical.

Bauer noted that the company is updating its Marcellus pricing basis assumptions to reflect more current market conditions. “In particular, we're now assuming Dominion South Point will trade at a $0.30 to $0.40 discount to Nymex,” he said. “Our previous guidance had been minus $0.10 to minus $0.20. This change will impact our realized pricing on our Dominion-based firm sales contracts and on our Dominion-based hedges.”

In addition, Bauer added that for the company’s “approximately 25 Bcf of Eastern development area production that's not subject to firm sales agreements, we're assuming an average discount to Nymex of minus $0.75 per Mcf. And previously, our assumption had been minus $0.25. Obviously, pricing basis in the Marcellus has been volatile. And it's our hope that the recent expansion projects in the region will alleviate some of the weakness in the market. We're starting to see the initial impacts of that new capacity this week as basis has tightened up a bit. But for now, we're being conservative and we'll revisit these assumptions as we move through the fiscal year.”

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