National Fuel Gas Co.’s exploration and production (E&P) business is just another of many that have been running faster and making less. While production was up in the most recent quarter, earnings were down due to lower commodity prices.

Earnings for the third quarter were $42.9 million (53 cents/share) a decrease of $17 million (19 cents) from the third quarter of 2008. A 33% decrease in average commodity prices in the E&P segment was the main cause of the decrease, the company said.

E&P operations are carried out by the company’s Seneca Resources Corp. Seneca explores for, develops and purchases natural gas and oil reserves in California, in the Appalachian region, and in the Gulf of Mexico. Production in the E&P segment for the quarter increased more than 12% with increases in all three divisions. Appalachian and Gulf of Mexico production each increased 16%. California production increased 7% during the quarter. Total production for the entire 2009 fiscal year is expected to be in the upper half of the previously announced range of 38 to 44 Bcfe, National Fuel said.

“It’s no surprise that the dramatic drop in commodity prices compared to a year ago had a considerable impact on the earnings of our exploration and production segment and pipeline and storage segment, said CEO David F. Smith Friday. “But putting aside the effect of commodity price changes, the third quarter was another strong quarter for the company. Production was up 12% over the prior year, and our regulated operations delivered another quarter of consistent results.”

Seneca and joint venture partner EOG Resources Inc. have completed and flow-tested four horizontal Marcellus Shale wells at an average initial production (IP) rate of 2.3 MMcf/d. Seneca estimates 4-8 Tcf of net risked Marcellus resource potential across an area of 720,000 acres that it considers to be prospective in the Marcellus Shale.

“We continue to execute on our Appalachian growth strategy,” Smith said. “Last month, we spudded our first Seneca-operated Marcellus Shale horizontal well and we commenced construction of National Fuel Gas Midstream Corp.’s first Appalachian region gathering system. While the Marcellus Shale remains our top priority, we believe the current economic climate will create opportunities to invest in additional energy properties, such as our recently announced acquisition of production properties in California.”

For the quarter ended June 30, the weighted average natural gas price Seneca received after hedging for the quarter ended June 30 was $5.94/Mcf, a decrease of $3.79/Mcf.

“Production from our Marcellus program will come on rapidly in fiscal 2010,” said Seneca President Matthew Cabell during a conference call with financial analysts Friday. “We anticipate net production of 20-30 MMcf/d by the end of fiscal 2010, that’s September 2010, and 50-70 MMcf/d by the end of fiscal 2011. With this new Marcellus production coming on in 2010, we are estimating companywide production for the next fiscal year of 42-48 Bcfe. The midpoint of this guidance range is 45 Bcfe, or 10% higher than the midpoint of our guidance for fiscal 2009. In looking further ahead to fiscal 2011 and 2012, we anticipate production increases in those years to be closer to 20% as we accelerate our Marcellus program.”

E&P segment earnings in the third quarter of fiscal 2009 of $27.1 million 33 cents/share) decreased $12.7 million (15 cents) when compared with the prior year’s third quarter. The decrease was primarily due to lower crude oil and natural gas prices realized after hedging, the company said. Higher production across all three divisions, lower lease operating expenses and a lower effective tax rate partially offset the impact of lower commodity prices.

National Fuel revised its earnings guidance range for fiscal 2009 to $1.20-1.30/share. The previous guidance had been 95 cents to $1.10/share. The company’s preliminary earnings guidance for fiscal 2010 is in the range of $2.30-2.60/share. The 2010 preliminary guidance includes oil and gas production in the range of 42-48 Bcfe and is based on an assumed average New York Mercantile Exchange price of $5/MMBtu for gas and $75/bbl for crude oil.

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