National Fuel Gas Company

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 National Fuel Gas Company Earnings Conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ken Webster, Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Tamara, and good morning. We appreciate you joining us on today's conference call for a discussion of last evening's earnings release. With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer, Karen Camiolo, Treasurer and Principal Financial Officer, and John McGinnis, President of Seneca Resources. At the end of the prepared remarks, we will open the discussion to questions. The first quarter fiscal 2021 earnings release and February investor presentation have been posted on our investor relations website. We may refer to these materials during today's call. We would like to remind you that today's teleconference will contain forward-looking statements. While national fuels expectations, beliefs, and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on which they are made, and you may refer to last evening's earnings release for a listing of certain specific risk factors. With that, I'll turn it over to Dave Bauer.

Thanks, Ken. Good morning, everyone. National Fuels' first quarter was a great start to our fiscal year, with operating results up 5% year over year. Operationally, we had a really strong quarter, particularly at Seneca and NFG Midstream, where in spite of 4 BCF of pricing-related curtailments, production and the associated gathering throughput was up 36% over last year. Most of that growth was the result of last year's Toyota County acquisition, which continues to trend better than our initial expectations. The team has been focused on high grading our consolidated development program, optimizing our firm sales and transportation portfolio, and driving down unit costs. You can see our success in Seneca's updated guidance. We increased the midpoint of our production range and lowered our forecasted unit costs, all while holding our capital range constant. Seneca added a second drilling rig in January with first production permits scheduled to come online in early fiscal 2022. The goal is to fill our Lighty South capacity as soon as Africa is in service and thereby capture the premium winter pricing in the East Coast markets. The second rate will focus principally on Tioga County, where at $2 net back prices, our consolidated returns on Utica wells are north of 65%. Looking beyond fiscal 22, absent new firm takeaway capacity, Seneca's program will likely average between one and a half and two rigs. which will keep our production flat to slightly growing. Our focus will be on generating free cash flow. As you can see from our updated slide deck, at a 275 NYMEX price, we expect our upstream and gathering businesses will generate approximately $115 to $125 million in free cash flow in 2021. As our production grows in 22 and 23, we expect this level of free cash flow to similarly increase. Obviously, our ability to generate cash is heavily dependent on the direction of commodity prices. As you know, we have an active hedging program and continue to methodically layer in hedges with the goal of protecting our investment in PDPs and locking in the strong rates of return generated by our unique integrated development program. Switching gears, our FERC-regulated pipeline businesses had a great quarter with earnings up nearly 25%. This was driven by by the supply corporation rate case settlement that went into effect last February, coupled with the new revenues from our Empire North expansion project that was placed in service at the end of fiscal 20. Our FM 100 expansion and modernization project is on track to continue this momentum into fiscal 22 and 23. As a reminder, this project will add $50 million in annual revenue once it goes in service, which I expect will occur late in this calendar year. We're waiting on a few remaining state permits, which we anticipate receiving in the next few weeks. All of the necessary federal permits have been received. We've awarded the job to contractors and ordered the necessary long lead time items, including pipeline and compressor units. Once all permits are in hand, we'll file for our notice to proceed with FERC and start construction shortly thereafter. With respect to the recent change in leadership at FERC, we don't see any cause for concern on FM 100. As you know, FM100 is a companion project to Transco's Lighty South expansion, and though the latter project is a little ahead of ours in the permitting process, FERC views them as essentially one project. Just last week, Transco received a notice to proceed from FERC for a portion of their project, which gives us confidence that ours will receive similar treatment when we file for our notice to proceed in the next few weeks. Switching to the utility, warmer than normal weather and the impact of the pandemic on our operating costs weighed on earnings for the quarter. These were somewhat offset by the continued growth in revenues from our New York jurisdiction's system modernization tracking mechanism. As we continue to face the COVID pandemic, the safety and well-being of our employees, customers, and communities are our highest priorities. We remain focused on business continuity and providing the safe and reliable service our customers expect. Our employees have done a terrific job, and I'd like to say thank you to them for all their hard work. With the change in administration in Washington, there's been increased focus on the role of natural gas in the nation's energy complex. Natural gas has already played a significant role in the decarbonization of the economy. The displacement of coal-fired power generation and fuel switching for residential heating drove a 12% reduction in total U.S. greenhouse gas emissions since 2008. The importance of natural gas to the economy cannot be understated. For example, in our New York utility service territory, nearly 90% of households use natural gas to heat their homes. And on a day like today, nearly 50% of New York State's electricity is being generated using natural gas. In the near term, that role is not going to change overnight. But longer term, it's clear we're moving towards a lower carbon world. I firmly believe the cost and reliability advantages provided by natural gas will ensure it has a future serving the energy needs of the country. Heating a home in the Northeast using natural gas costs less than half of what it would using electric heat. And LDCs are incredibly reliable. This past winter, natural gas service at our utility was available 99.9% of the time. It makes little sense to forfeit these benefits in favor of more expensive, less reliable alternatives. But to make sure we have a place in the energy complex, we must dramatically lower our emissions footprint, and National Fuel is committing to do so. How will we get there? Well, in my view, there are three main avenues to pursue. First is improving the emissions profile of our operations. We've already made great progress here. For example, through our modernization program, greenhouse gas emissions on our utility system have dropped by more than 60% from 1990 levels. But we're not done. At the current pace of the program, we expect a more than 80% reduction by 2040. Second is conservation. We have to encourage our customers to use less. Thankfully, the state commissions have given us the tools to do so. Our conservation incentive program has resulted in end-use emissions reductions of over 1.3 million metric tons since its implementation in 2007. And lastly, we need to embrace technology across all aspects of our business, including our own operations, the equipment used by our customers, and alternative fuels like RNG and hydrogen. We're proud to be an anchor sponsor of the Low Carbon Resource Initiative, which is researching new technologies that lower the carbon footprint of pipelines, LDCs, and their customers. I'm excited for the future of natural gas. We have some work to do, but at the end of the day, I'm very confident natural gas will have a prominent role in meeting our country's energy needs and that national fuels operations, from the wellhead to the barn or tap, will remain an important part of the energy solution. In closing, National Fuel had a great first quarter. As I've said on prior calls, fiscal 21 should be a big growth year for us. The first quarter delivered on that expectation, and the outlook for the remainder of the year continues to be strong. Gas prices have been volatile, but our strong hedge book helps protect from those swings. As we look towards 22 and beyond, we're well positioned for both growth and meaningful cash flow generation, a combination that many of our peers cannot match. Our balance sheet is in great shape, and our integrated yet diversified business model provides a level of downside protection to help us navigate the edging flows that we'll inevitably face. Before turning the call over to John, I want to take a minute to acknowledge two upcoming retirements. As you've probably seen, John McGinnis is retiring effective May 1st of this year. Over the course of his 14 years with the company, John has been instrumental in the growth of Seneca, taking it from a small conventional operator that produced less than 50 BCFE annually to the key player in the Appalachian Basin that Seneca has become. Also, John Pistolka, our Chief Operating Officer, is retiring effective May 1st. There isn't an individual that I've met who's been more dedicated to the company and the industry. Over his 47-year career, he led by example and was a main driver of our corporate culture, particularly as it relates to employee safety. I wish them both the best in retirement. While they'll be missed, I'm certain the company won't miss a beat under the leadership of Ron Kramer, who will assume the role of COO, and Justin Loweth, who will become the new president of Seneca. With that, I'll turn the call over to John McGinnis for an update on our upstream operations. Thanks, Dave, and good morning, everyone. Seneca had a strong first quarter. We produced a company record 79.5 BCFE, despite approximately four BCF with price-related curtailments in October and early November. Our nearly 40% production increase in Appalachia was largely due to the company's fourth quarter fiscal 2020 acquisition of upstream assets in Tioga County, as well as production from our ongoing development program. We continue to see the benefits of our recent acquisition, with increased scale and operational synergies driving a collective 10 cents per MCFE decrease in GNA and LOE expenses from the prior year's first quarter. With about six months of operations now under our belt, we are seeing additional cost reductions above our initial expectations. As an example, LOE reductions of over $50,000 a month have been realized by releasing unneeded equipment rentals and contract services on the acquired assets. Additionally, we achieved between $300,000 to $500,000 per well in reduced water costs on our recent Tioga 007 pad completions through the use of acquired water withdrawal points and storage facilities. In line with our plans discussed on last quarter's call, we added a second tool rig in early January, which will focus on our EDA assets, including the deep inventory of acquired Utica locations in Tioga. This activity will allow Seneca to bring online additional volumes in early fiscal 22, commensurate with the expected availability of our capacity on the Lighty South project, reaching premium markets during the winter heating season. We expect Seneca's other rig to remain focused in the WDA, maintaining relatively balanced activity between these two operating areas longer term. Although pricing in fiscal 21 has not been as strong as we initially projected during this winter, the supply and demand fundamentals, weather notwithstanding, remain constructive over the next 12 to 18 months. Looking out beyond the current year, the fiscal 22 strip is around $2.80 in MCF, a price where we realize strong returns from our Appalachia program. As always, we have maintained our disciplined approach to hedging and are already well positioned in fiscal 22 with over 180 BCF of fixed price firm sales, NYMEX swaps, and cost those callers in place. This provides Seneca with downside protection and leaves the potential to generate significant additional free cash flow should prices move up. We'll keep a close eye on pricing dynamics and look for opportunities to layer in additional hedges as we move through this fiscal year closer to the in-service date of Lighting South. We are maintaining our fiscal 21 CapEx guidance, which remains in the $350 to $390 million range. Based on our strong first quarter well results and solid execution by our operations team, We are revising our production guidance to a range of 310 to 335 BCFE, a two and a half BCFE increase at the midpoint. Most of our production growth in fiscal 21 should occur during the first half of the year with flat to slightly declining production during the back half as we defer completion and flow back activity until the winter season when our new FT capacity is targeted to be in service. For the remainder of the fiscal year, we have 186 BCF, or around 80% of our East Division gas production, locked in physically and financially. We have another 30 BCF of firm sales providing basis protection, so over 90% of our forecasted gas production is already sold. We currently estimate that we'll have around 17 BCF of gas exposed to the spot market, so as always, these volumes are potentially at risk for curtailment. And in California, we have around 67% of our remaining oil production is hedged at an average price of around $57 per barrel. And finally, as indicated in our press release last month, I plan to retire from Seneca effective May 1st. Justin Loeth, our senior VP of Seneca, will be promoted to president. Justin has been with Seneca for 10 years and has been instrumental in much of our success over the past decade, and I am confident in his ability to lead the company forward. We pay a lot of attention to our succession planning across the organization, and I am pleased to be leaving Seneca with an experienced and strong management team. And with that, I'll turn it over to Karen.