NFG - NYSE

Good morning. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the National Fuel Gas Company Third Quarter Fiscal 2024 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. I will now turn the call over to Natalie Fischer, Director of Investor Relations. You may begin your conference.

Thank you, Brianna, 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, our President and Chief Executive Officer; Tim Silverstein, Treasurer and Principal Financial Officer; and Justin Loweth, President of Seneca Resources and National Fuel Midstream. At the end of today's prepared remarks, we will open the discussion to questions. The third quarter fiscal 2024 earnings release and July 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 Fuel's 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.

Thank you, Natalie. Good morning, everyone. Overall, the third quarter was a good one for National Fuel, one in which we saw a continued operational success across the system. Apart from natural gas prices, our financial results for the quarter were right in line with expectations. Tim and Justin will get into some more of the details of the quarter. So I'll focus my time highlighting our future growth opportunities and the value proposition National Fuel offers to investors. In short, our strong return on capital our visibility to significant growth in earnings and free cash flow and our long-standing commitment to returning an increasing amount of capital to shareholders positions us very well to deliver significant value in the coming years. Last night, we initiated our preliminary guidance for fiscal 2025 of $5.75 to $6.25 per share at the midpoint, a nearly 20% increase over fiscal 2024. And we expect that this will be a system-wide increase in earnings with each of our major operating segments seeing improved results. In addition to our outlook for 2025, we've added multiyear outlooks for several key financial metrics to our updated investor presentation. In particular, as you can see on Page 9 of our updated IR deck, we're now guiding to compound annual consolidated earnings growth of better than 10% for at least the next three years. Importantly, as we expect will be the case in 2025, each of our businesses across the system should contribute to our improved outlook. In our regulated utility and pipeline and storage businesses, we expect a 7% to 10% average annual growth in earnings per share over the next three years. Much of next year's growth will come from the Supply Corp rate case we settled earlier this year, along with the impact of our ongoing New York utility rate case. Now with respect to that case, we are still in settlement discussions, but I am optimistic we'll reach a settlement this quarter. Looking beyond next year, the modernization programs at the regulated companies and expansion projects like Tioga Pathway are expected to drive rate base growth in the 5% to 7% area. As many of you know, we look to the regulated businesses to fund the majority of our dividend and the expected growth in those segments gives me confidence in our ability to continue growing it for many years to come. One quick note on the status of the Tioga project, we're making good progress with it and expect to file our FERC application later this month for a late calendar 2026 in service date. The outlook for growth in our non-regulated upstream and gathering businesses is even better. Seneca's 1- to 2-rig program should grow production and gathering throughput in the low to mid-single-digit percentage area on average. But more importantly, natural gas prices are expected to meaningfully improve in the next several months, which should drive Seneca's earnings higher. Like most in the industry, we expect to see significant demand growth in the year ahead as the next wave of LNG projects come online and additional natural gas-fired power generation is needed to support the increase in electricity demand for data centers and the onshoring of manufacturing. It goes without saying that natural gas prices are volatile, but we expect that our long-standing approach to hedging, which layers in trades over generally a three-year period will allow us to continue to lock in increasing price realizations, providing greater certainty to our longer-term consolidated earnings growth trend. Nevertheless, as you can see from Page 27 of our investor deck, we have significant unhedged volumes in the future that provide considerable upside potential should prices run up. Free cash flow should grow alongside earnings, particularly at our non-regulated businesses. As I've said on prior calls, as we complete our transition to the Eastern Development Area, we should be in the enviable position where we can grow production at the same time as we're decreasing the amount of capital we invest in Seneca's drilling program and one centralized infrastructure and [indiscernible] clients are built out, NFG midstreams as well. The improved capital efficiency, combined with the natural gas – Contango natural gas curve should lead to considerable growth in non-regulated free cash flow over the next three years, as you can see on Page 9 of our IR deck. This should give us significant financial flexibility to allocate capital towards additional growth opportunities, further improve our investment-grade balance sheet or absent either of these return additional capital to shareholders. To that end, in June, our Board approved an $0.08 or 4% increase in our dividend, which continues our impressive streak of paying a dividend for 122 consecutive years and increasing it in each of the last 54. The dividend is a core element of our value proposition. We are one of approximately 50 companies in the country that have increased their dividend for more than half a century, which is a testament to our long history of judiciously allocating capital to projects that generate strong returns in excess of our cost of capital. As you know, in March, we initiated a $200 million share buyback program that we expect to complete by the end of next fiscal year. We're right on track with this program. As of yesterday, we repurchased approximately $45 million of our stock, which has reduced our total shares outstanding by just under 1%. Looking to the quarters ahead, I see this program continuing at a similar cadence. As I said on last call, given the positive outlook for our integrated businesses, we see significant long-term value in National Fuel and view this as a great opportunity to buy back shares at a low point in the commodity price cycle. In closing, I'm excited for the future for the natural gas industry and especially for National Fuel. While there's a vocal minority trying to sway policymakers toward the future without natural gas, the vast majority of people across the globe recognize that natural gas is a reliable, affordable source of energy that is critical to economic prosperity. The future is bright and National Fuel's outstanding group of assets and our long history of strong operational execution makes us well positioned to provide these critical energy supplies for decades to come, and in doing so, generate attractive returns for our shareholders. With that, I'll turn the call over to Tim to discuss the results for the quarter and provide more details on our preliminary guidance for fiscal 2025.

Thanks, Dave, and good morning, everyone. As you saw in last night's release, for the third quarter, National Fuel reported a GAAP loss of $54 million or $0.59 per share. The decline in natural gas prices over the past 12 months caused Seneca to record a noncash full cost ceiling test impairment charge that amounted to a loss of $1.58 per share. Excluding this impairment as well as a couple of other smaller items impacting comparability, adjusted operating results for the quarter were $0.99 per share. Growth from our regulated segments combined with our strong hedge book, mitigated nearly all the impact of lower natural gas prices, which were down approximately $0.20 per MMBtu compared to last year's third quarter. In our regulated segments, we continue to see the positive impact from our recent ratemaking activity. In the utility, we saw an increase in Pennsylvania margin related to our 2023 rate settlement, along with continued growth in revenues related to our two systems modernization trackers in New York. In the Pipeline & Storage segment, this was the first quarter where we saw the full benefit of our Supply Corp rate case, which is expected to increase annual revenues by approximately $56 million. In our non-regulated segments, while natural gas pricing was a headwind, our methodical approach to hedging limited the overall impact. Our hedge book delivered a $75 million gain during the quarter, which more than offset lower NYMEX and in-basin pricing. As we've discussed in the past, when in-basin pricing reaches a certain threshold, we view it as prudent to curtail our spot gas until prices improve. During the quarter, nearly 6 Bcf of production was curtailed due to pricing. Despite this, Seneca's production of 97 Bcf was an increase of 2% compared to last year, which also contributed to growth in our gathering segment revenues. This is a testament to the strength of our integrated development program and specifically the ongoing transition to our Eastern Development Area, where we continue to see strong well results outpacing initial expectations. Justin will have more to say on our E&P and Gathering activities later in the call. Turning to guidance. We've updated our fiscal 2024 earnings projection to be in the range of $5 to $5.10 per share, which incorporates our third quarter results and other modest revisions to our guidance for the balance of the year. We reflected the impact of the third quarter price-related curtailments, which reduced the top end of our production guidance by 5 Bcf. As a reminder, our guidance does not include any future pricing curtailments. So to the extent low natural gas prices continue, we may voluntarily curtail additional volumes. That being said, we only have 5 Bcf of our remaining production exposed to the spot market. We've also updated our NYMEX price assumption to $2.40 per MMBtu. Prices have been volatile as of late. So to the extent NYMEX changes by $0.25 for the fourth quarter, our earnings would change by approximately $0.05 per share. Our guidance excludes any items impacting comparability, such as the ceiling test impairment we recorded in the third quarter. As a reminder, the full cost ceiling test utilizes a historical 12-month average price assumption to assess the future value of our natural gas reserves. Given the current near-term pricing outlook, we expect this trailing 12-month price to decrease, leading to the potential for additional impairments. While the pricing used in the ceiling test is backwards looking, the forward outlook for prices is nearly $1 higher. So the expected economic value of our reserves is well in excess of the carrying value on our financial statements today. On the capital side, we’ve made a few modest tweaks. Most notably, we’ve reduced the top end of Seneca’s range for the second consecutive quarter and are now projecting spending of $525 million to $545 million for the year. Looking ahead, we’ve initiated preliminary guidance for fiscal 2025, where earnings are expected to be in the range of $5.75 to $6.25 per share. At the midpoint, this is a 19% increase from fiscal 2024. Hitting on a few of the highlights. First, we expect to see a second straight year of significant growth in our regulated businesses. In our Pipeline & Storage segment, we will see the full year impact of revenue growth related to our Supply Corp rate case which had rates go into effect in February. This will drive a little more than $20 million in additional revenues year-over-year. Other than the Supply Corp rate case settlement from this year, our fiscal 2025 guidance does not include any additional FERC rate case impacts. At the utility, given our confidence in our ability to reach a settlement in New York, we reflected that in our guidance. While new rates would have been effective October 1 of this year, the suspension period for these rates to be implemented has effectively been extended out to February 1. This is common in New York, and the company has requested a standard make-whole provision that if approved, will allow us to recover any lost rate increases between October 1 and the date of the formal New York PSC approval of any settlement. This could push the financial statement impact of the rate case out until our second quarter. But we expect to see the majority of the annual rate increase hit within fiscal 2025. While the details of settlement discussions are confidential, to the extent we reach an agreement with the parties involved, a joint proposal will be filed with the New York PSC at which point we’d expect to provide updated guidance if necessary. Switching to our nonregulated businesses. We expect fiscal 2025 production to increase to an expected range of 400 Bcf to 420 Bcf, an increase of 4% at the midpoint. Unit costs are expected to remain generally in line with fiscal 2024. Underpinning this forecast is the assumption that NYMEX will average $3.25 per MMBtu for the year, and Appalachian spot prices will average $2.30. To the extent prices are $0.25 higher, we would expect earnings to increase by approximately $0.35 per share. To the extent prices are $0.25 lower, earnings would be reduced by approximately $0.30, which is modestly lower given the benefit of the collars within our hedge book. Turning to fiscal 2025 capital. We expect consolidated expenditures to be in the range of $885 million to $970 million, which is largely in line with fiscal 2024. Driving this is a further reduction in nonregulated spending, in particular, a $25 million or 5% decrease in Seneca’s capital at the midpoint. Offsetting this is modestly higher expected capital at the regulated subsidiaries. In the utility, the bulk of the increased spending is in New York. This is consistent with the capital levels proposed in our rate case and are expected to be recoverable through any potential settlement. In the Pipeline & Storage segment, the increase is largely driven by our ongoing modernization program and the need to meet requirements of the growing number of regulations being implemented at the state and federal level. These investments, which maintain the safety and reliability of our system and reduce emissions contribute to expected long-term growth in rate base of 5% to 7%, which is expected to support a similar level of long-term growth in regulated earnings. Bringing it all together, our balance sheet is in great shape. While the combination of our dividend and buyback program is expected to modestly exceed free cash flow through the end of fiscal 2025, the incremental leverage we expect to add should be offset by growth in funds from operations and EBITDA, such that our credit metrics are expected to remain near current levels. Specifically, we expect to be around 40% FFO to debt and below 2.25x debt to EBITDA through the end of next fiscal year. This gives us significant cushion relative to our downgrade thresholds, leaving us a lot of financial flexibility as we remain focused on opportunistically creating value for shareholders. With that, I’ll turn the call over to Justin.

Thanks, Tim, and good morning, everyone. Seneca and NFG Midstream delivered solid results for the quarter as our transition to an EDA focused development program continues to exceed expectations. All Seneca pads turned in line in the first half of the year have demonstrated strong productivity trends, and we are seeing increased capital efficiency across our operations, allowing Seneca to reduce its fiscal 2024 capital guidance for the second quarter in a row. Starting with production. Tim hit on the high points for the quarter and our updated guidance assumptions. So I’ll take a minute to discuss the underlying operational plan and production cadence. Our operations plan remains unchanged. With only a few wells expected to be turned in line before the next fiscal year. As such, we expect a modest decline in production in this year’s fourth quarter. As we look out to fiscal 2025, we plan to turn in line 17 wells during the first half of the year to take advantage of expected stronger pricing as winter arrives, and LNG exports ramp up. Overall, we expect production for fiscal 2025 to increase over the winter and spring months than modestly decline by the end of the year. Turning to natural gas pricing. We believe longer-term fundamentals are setting up for a favorable price environment despite near-term headwinds. Over the next few quarters, we expect that the combination of resilient production and persistently high inventory levels will continue to constrain natural gas prices likely into the fall. In order to limit our pricing risk during this period, we have methodically layered in both physical firm sales and strong financial hedges over the past several years, which provides a balance of downside protection and upside price participation. For the remainder of fiscal 2024, we have downside pricing protection covering more than 70% of our expected production through a combination of swaps, costless collars and fixed price firm sales. With a weighted average floor price of $3.32 per MBtu [ph], we are well positioned relative to the current forward prices for the remainder of the year. Looking ahead to fiscal 2025, almost 90% of forecasted production is protected by firm transportation and firm sales, limiting in-basin pricing exposure. Additionally, roughly 60% of expected fiscal 2025 production is protected by a swap collar or fixed price firm sale. This hedge position is more heavily weighted to the first half of the year where we see a bit more risk to pricing, given some of the uncertainty around the exact timing of LNG demand growth. Our portfolio approach has remained consistent, with the goal of balancing downside protection if prices remain depressed, while allowing upside participation as expected demand growth materializes in the next 12 months to 18 months. With the average floor price sitting comfortably above the forward curve, we are in a great position to see increasing after hedge price realizations going into next year. Moving to capital. Our second consecutive decrease in fiscal 2024 capital is a testament to our team’s ability to drive down costs and increase efficiencies in excess of our prior estimates. Given this strong momentum, we are initiating Seneca’s fiscal 2025 capital guidance range of $495 million to $525 million. At the midpoint, a reduction of $25 million versus fiscal 2024 and a $78 million reduction versus fiscal 2023. The year when we began our transition to an EDA focused development plan. Seneca’s fiscal 2025 development plan includes operating between one and two rigs, periodic top hole rig activity and our dedicated frac fleet throughout the year. Drilling and completion activity will focus primarily on development in Tioga and Lycoming Counties. Across our nonregulated businesses, we are focused on capturing increased capital efficiencies by continuing to prioritize our highest return assets while maintaining operational flexibility. At NRG Midstream, our team is executing extremely well. We continue to make long-term investments in centralized facilities while adding greater connectivity and additional deliverability to attractive interstate markets, all of which will help support the development of Seneca’s highly prolific acreage for many years to come. During Q3, throughput on NFG Midstream’s gathering systems remained relatively flat compared to the previous year’s third quarter, largely driven by voluntary marketing curtailments at Seneca. Project development and construction activity for the remainder of fiscal 2024 and for the next few years, will remain focused on supporting Seneca’s EDA development and significant future production growth expected in this region. NFG Midstream’s fiscal 2025 capital is expected to remain in line with fiscal 2024 with an estimated range of $95 million to $110 million, with approximately 90% of NFG Midstream’s capital invested in projects in Tioga County. In Northwest Tioga, dehydration equipment at the Keeneyville compressor station will be commissioned this month, capable of handling 400 million a day of production. The first pad utilized in these facilities is expected to turn in line early next year. During fiscal 2025, we also plan to connect more than $150 million of flowing production and over 20 future development locations on Track 100 to our robust Tioga gathering system, which will allow this production to flow into preferential gas markets. As we look to the future, National Fuel supplies Tioga Pathway project will provide further deliverability out of this area. In addition, NFG Midstream continues to create opportunities for third-party business. Last month, we placed a new third-party interconnect in service and expect throughput to increase early next fiscal year. Putting it all together, we continue to execute our EDA focused development plan and are well positioned to weather near-term price volatility, while capitalizing on expected increases in the natural gas strip. Our integrated model allows us to operate at the low end of the cost curve while ensuring seamless co-development of our best-in-class assets. Moreover, our culture of operational excellence and focus on leadership and safety and sustainability alongside our strong asset base and execution sets us up for considerable success in fiscal 2025 in the years to come. With that, I'll ask the operator to open the line for questions.

Thank you. [Operator Instructions]. Our first question comes from

Thanks for taking my questions. I guess first, Justin, one for you. We've heard from a lot of E&Ps about efficiency gains in the field and also hearing about some modest cost deflation. Can you talk about what NFG is seeing on both efficiency gains and deflation? And maybe give us an update on where your leading-edge D&C cost per foot are?

Sure,

And any color on D&C cost and kind of where those are now?

Sure. Yes, happy to. So I was just getting there. In terms of D&C, the Tioga Utica costs are in the vicinity of around $1,300 a foot, Marcellus wells there are more like around $1,000 a foot, maybe lower, depending upon the exact lateral length. And that's where the majority of our activity will be focused. So those will be the two most relevant areas. And we see continued trends on both of those moving downward as we go forward.

Thanks. And just on my follow-up, I wanted to ask on well productivity, which you mentioned in your prepared remarks, if I look at the state data, it does look like your well productivity took a modest step down on the lateral foot adjusted basis in 2023 versus prior years. Some of that's in the WDA, but also to some extent in the EDA. I know the state data is perfect and there are probably some curtailments impacting the data. But can you just give us your broader thoughts on well productivity and how you would expect productivity to trend going forward?

Sure. So I think your comment there is exactly right. Within the state data, there can be some nuances to look at, if you focus on really where, as I've said, I mean, the vast majority of our activity is going to be, which would be Tioga Utica, Tioga, Marcellus and also in Lycoming on Marcellus wells, we're – we've had the other – those areas are all looking very good. They're right in line and in some instances, in excess of what we would expect. I think some of the nuances you're seeing in data is probably related to, frankly, the voluntary pricing curtailments we pursue at time, which can obviously impact what you're seeing versus what we're really seeing in terms of the pressure drop over time. But the wells we have are all looking really good to us. And I think you'll see as additional months and quarters of data come out, you'll just continue to see those trends moving exactly as we laid out in our investor deck.

Thanks, Justin. Really appreciate the color.

Sure.

[Operator Instructions]. Our next question comes from Greta Drefke with Goldman Sachs. Please go ahead.

Good morning and thank you for taking my questions. Given the way of consolidation we've seen so far, I was wondering if you could provide your updated views on the M&A landscape, the opportunity set you see for NFG? And your thoughts on the broader macro environment? Thank you.

Sure. Well, we're interested in very much interested in continuing to grow the company and M&A is certainly a way that would be interesting for us to do it. I think looking at our company, as I've said on previous calls, I think doing a regulated – adding to our regulated assets would be a priority in the near term to kind of balance out the system. But having said that, we do continue to look at, call it, smaller bolt-on acquisitions on the E&P side, similar to the ones that we did last year where we were consolidating our acreage position. So I'm optimistic that deals will come along that will be of interest to us.

Got it. Thank you. And my next question is, you've added your 2026 hedging position and have been hedging through 2028. Can you speak a bit on any updated views to your outlook on hedging in the longer term? And how your thoughts on the natural gas landscape more broadly has impacted your framework? Thank you.

Yes. I mean just broadly on the natural gas macro, I think, in the near term, things are going to be pretty challenging. We've got high storages, kind of higher production. Weather it doesn't really seem to be driving things very much, but it obviously can be variable. But the longer term, as we move into next year and beyond, we're confident that prices are going to recover as new LNG comes online. But obviously, the timing of when that supply comes online relative to demand, probably isn't going to be exactly lined up. So there could be some volatility. So we feel good about our hedge book being kind of that 60% area. As you point out, we continue to add positions in taking advantage of the Contango curve, which will, over time, cause our net price realizations to increase.

Thank you.

Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead

Hey, good morning. Thank you for including me. Justin, I just got a big picture question for you. There are different estimates out there regarding the potential LNG and AI demand opportunities. But overall, the estimates point to higher demand for natural gas. I'm not looking for your specific view on what that demand will be, but when you look at the differing estimates, do you see Seneca having to ramp activity in the 2016 and beyond time frame to meet this demand? Or how do you see – what do you think the call on D&C activity will be to meet it? Any thoughts?

Sure, John. Happy to talk about that. So we've looked at this. We have active dialogue with a number of parties to try to better assess exactly what this demand could look like, where it could be both talking downstream on these hyperscalers and then also looking at other opportunities more approximate. I guess the way I would characterize kind of our company's stance and view on it is that, we have a really deep inventory. We're an investment-grade credit. We're a great counterparty for anyone interested in getting long and building a plant that relies on reliable, sustainable, affordable natural gas. So we've got the ability to do that. We're going to be very active in those dialogues. We've also got capacity that connects to markets that should be net-net increasing demand centers. So I think the company is favorably positioned. We'll continue to be evaluating it. But I'd also just say it's early days. I think this is really an evolving story and something that your point about maybe it's on 2026, 2027 is out there. But our operations team and flexibility and depth of resource are going to be standing by to take advantage.

Okay. But simplistically, when they – and maybe don't speak for Seneca yourself. But it would seem – as you look at a lot of the comments from the E&P industry right now, is essentially calling for flattish activity next year, right, because of efficiency gains and so forth. And I'm just wondering if we're setting up for a challenge in 2026 because the industry is not ready to push down the accelerator, if you will, in terms of [indiscernible] activity. That's all. It's just a thought.

Sure. Yes. It's hard for me to speculate on others too much. But certainly, within our business, we have ample capacity to accelerate, and we're really benefited by the fact of having an integrated model in – with the midstream business and FERC pipes as well. So I'm not exactly sure how others can respond to it, but I feel really good about our depth of resource and the other kind of factors I mentioned earlier.

I appreciate the response and let me in the call.

Thank you.

There are no further questions at this time. I will now turn the call back over to Natalie Fischer for any closing remarks.

Thank you, Brianna. We'd like to thank everyone for taking the time to be with us today. A replay of this call will be available this afternoon on both our website and by telephone and will run through the close of business on Thursday, August 8. Please feel free to reach out if you have any follow-up questions. Otherwise, we look forward to speaking with you again next quarter. Thank you, and have a nice day.