Dave Bauer - President, Chief Executive Officer Karen Camiolo - Treasurer, Principal Financial Officer John McGinnis - President of Seneca Resources Ken Webster - Director of Investor Relations.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020, National Fuel Gas Company Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to your speaker today Ken Webster, Director of Investor Relations. Please go ahead..

Thank you, Kenzey, 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 2020 earnings release and January 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.

National Fuel will be participating in the Scotia Howard Weil Energy Conference in March. If you plan on attending, please contact me or the conference planners to schedule a meeting with the management team. With that, I'll turn it over to Dave Bauer..

Thank you, Ken, and good morning everyone. Overall the first quarter was a good one for National Fuel, earnings were right in line with our expectations and from an operations perspective we continue to execute on the plans we’ve laid out in prior quarters. At Seneca, production for the quarter was up nearly 20% over the last year.

Seneca continues to see excellent results from the Marcellus and Utica wells, it brought on production in recent quarters. Our team has done a great job cracking the code on our Utica development program, both in the WDA and EDA Track 007 in Tioga County.

It's also worth highlighting our California oil production, which was up about 5% over last year, on the strength of our recent Pioneer and 17N developing programs at Midway Sunset. Lower natural gas prices are obviously a concern. Earlier this month we dropped a rig and are currently operating two rigs in our Western Development Area.

Given the challenging pricing environment, as we said in last night's release, we intend to make further reductions in Seneca's activity level in the coming quarters. John will have more to say on Seneca program later on the call. Our lower E&P activity level will also lead to a reduction in Seneca related gathering capital at NFG Midstream.

Having said that, as you can see in last night's release, we're raising the mid-point of our gathering capital spending guidance for the year by $10 million. This increase is driven by capital expenditures related to a new gathering agreement with a third party producer in the vicinity of our Trout Run System in Lycoming County.

This is a nice little project that is expected to add roughly $5 million to $10 million per year in third party revenues starting in fiscal 2021. It's a great example of how we can optimize our existing assets to generate new growth opportunities. The first quarter was fairly routine for our regulated businesses.

Utility Segment continues to perform well, with earnings up a penny a share over the last year. In the fall, we wrapped up another successful utility construction season, and as we have for the past several years, we continue to allocate capital for the modernization of our system.

For the calendar year our modernization program were placed over 150 miles of older distribution pipeline, including 113 miles in New York, where we have a regulatory tracking mechanism that provides us with timely recovery at this rate base investment.

The warmer weather we've experienced in the Northeast will likely lead to lower second quarter earnings in our Pennsylvania jurisdiction where we don't have a weather normalization clause, but on a consolidated basis the impact shouldn’t be overly significant. Our customer should see a real benefit from low natural gas prices.

We expect winter heating bills will be more than 10% lower than last year. In the pipeline storage segment, thought earnings were down due to the lingering effects of the KeySpan contract expiration, looking to next year and beyond the outlook for this business is excellent.

The Empire North and FM100 projects were at a combined $60 million in incremental annual revenue over the next few years. Both projects are proceeding according to plan. Empire North is under construction and on track to be in service late summer or early fall of this year.

If FERC stays on its expected timeline, we expect a certificate for the FM100 project later in the fiscal year. Supply Corp. continues to work through its rate case for FERC and we’ve held multiple settlement meetings with parties and I'm optimistic we’ll reach a settlement.

Our balance sheet is in great shape and our reduction in spending at Seneca will help ensure it stays that way. Just recently S&P affirmed our investment grade credit rating and maintained a stable outlook on our credit.

In the near term we expect a modest out spend as we build the Empire North and FM100 projects, but beyond that we should be generating significant free cash flow. 2020 is looking to be a challenging year for Natural Gas Producers, but National Fuel is well positioned.

We are financially strong and our integrated yet diversified business model provides a large measure of stability to earnings and cash flows. Looking to the future, though we are slowing the pace of our E&P program to match the reality of natural gas prices, our regulated segments remain on track to see meaningful growth.

With that, I'll turn the call over to John for an update on Seneca’s operations. .

Thanks Dave and good morning everyone. Seneca had a solid first quarter. We produce 58.4 Bcfe, an increase of around 19% compared to last year's first quarter and a slight decrease quarter-over- quarter.

While we continue to see strong operational results with drilling and completion activity on our recent pads coming in ahead of schedule, given the current natural gas price environment, we are reducing our fiscal ‘20 activity level and associated capital.

As Dave mentioned, this last week we dropped one of our rigs after drilling a four well Utica pad in Tioga County. We now have two rigs operating in the basin, both of which are in the WDA.

Additionally, during last quarter's earnings call we discussed the possibility of a further reduction in activity should prices not rebound during the winter, and obviously prices have not rebounded and in fact have continued to decline.

As a result, we are now planning to drop a second rig this summer and differ some of our EDA completion activity until the next fiscal year. We're lowering our fiscal ‘20 CapEx guidance around $42 million or 10% at the midpoint, to now range between $375 million to $410 million.

This reflects approximately a $100 million reduction or 20% and Seneca’s expected physical ’20 capital expenditures versus 2019 level. Because this further activity reduction will occur relatively late in our fiscal year, we do not expect to see a significant production impact in fiscal ‘20.

As to production timing, last quarter I had mentioned that we expected to see increases during our second and fourth quarters. We still expect to see increased production in our second quarter as we turned in line 12 wells in late January and expect to turn in line another six wells later next month.

However by deferring some EDA completion activities into next year, we now expect to see flat, slightly declining production during our third and fourth quarters. Overall our production guidance for fiscal 2020 remains unchanged with our strong first quarter results largely offsetting our lower production expectations in Q4.

Moving to our marketing and hedging portfolio, we remain well positioned for the remainder of the year. We have approximately 102 Bcfe or 60% of our remaining fiscal ‘20 East Division Gas production locked in physically and financially at a realized price of $2.28 per Mcf.

We have another 43 Bcf of firm sells providing basis to production to over 85% of our remaining forecasted gas production that’s already sold. In California we have produced around 600,000 barrels of oil during the first quarter, an increase of around 5% over last year's first quarter.

This increase was due primarily to a recent drill activity in both Pioneer and 17N, both located within our Midway Sunset field. These properties are now producing around 800 barrels a day and as we look out for the remainder of fiscal ‘20 we expect Q2 oil production to be down modestly from our Q1 production level, and relatively flat thereafter.

And finally, over 70% of our oil production for the remainder of the year is hedged at an average price of around $62 per barrel. And with that, I'll turn it over to Karen. .

Thank you, John, and good morning everyone. National Fuel’s first quarter operating results were a $1.01 per share, down $0.11 per share quarter-over-quarter. Lower natural gas price realizations were the largest driver of the decrease.

In addition, the expiration of a significant contract on our Empire pipeline late in last year's first quarter and an increase in our effective tax rate contributed to the drop in earnings. Our higher effective tax rate was driven by two factors.

As mentioned on previous calls, the Enhanced Oil Recovery tax credit that was in placed last year is no longer available due to the current crude oil prices. And second, the difference between the book and tax accounting rules and expensing of stock based compensation grants can lead to effective tax rate impact on the periods in which they settle.

Last year we had a large favorable impact resulting from this, which did not recur this year. Looking to the remainder of the year, our earnings guidance has been revised downward to a range of $2.95 to $3.15 per share, a decrease of $0.10 at the mid-point.

This is primarily related to the reduction in our natural gas price outlook, which now reflects a $2.05 /MMBtu NYMEX price and $1.70 for /MMBtu appalachian spot price assumptions for the remainder of the year. This is partially offset by stronger first quarter pricing and production relative to our expectations.

The remainder of our major guidance assumptions are unchanged. Given that our earnings guidance range is based upon the forward strip at a given date, and the recent volatility and commodity prices, I'll provide some earnings sensitivities for your reference.

A $0.10 change in NYMEX pricing would change earnings by $0.04 per share, a $0.10 change in spot pricing would impact earnings by $0.02 per share and a $5 change in WTI oil pricing would also impact earnings by $0.02 per share.

On the capital side, taking into account our reduced activity level, our new consolidated guidance is in the range of $695 million to $785 million, a decrease of approximately $33 million at the mid-point.

With our revised earnings projections and lower capital spending plan for the year, we now expect our funds from operations and capital expenditures to be roughly in line with each other. Adding our dividend, we expect a financing need of approximately $150 million for the full year.

We started the year with nearly $700 million of liquidity available under our revolving credit facility and we plan to use that as the first source of financing. Given the favorable conditions in the capital markets, we will remain opportunistic as it relates to long term financing needs and nearer term maturity.

As John and Dave said, operationally things are moving along in line with expectations. While natural gas prices are challenged, financially we are in a good spot to whether this period of low commodity prices and remain flexible to take advantage of opportunities when they are available.

With that, I'd like to turn the call over to the operator for questions. .

[Operator Instructions] Our first question comes from the line of Holly Stewart with Scotia Howard Weil. Your line is open. .

Good morning all. .

Hi Holly..

You know maybe start John with the rig reduction and just help us think through, I think you mentioned in your prepared remarks about fiscal third quarter and fourth quarter sort of flat to declining volumes.

Can we just or maybe give us a little bit of color on the one rig program as we approach the end of fiscal 2020? I know you guys have a decent amount of DUC inventory, but maybe the balance between those two things given that – I don't believe that one rig could probably hold production flat. .

No, you're right. It takes one to two rigs in terms of how we view our maintenance mode. But you're right Holly, is we have built up a DUC count.

I think we're currently at 14 and we will – by the time we drop that second rate, we will be just above 30 DUCs and so we will – yeah, over the next year or so depending on what gas prices do, we’ll just pace that appropriately, which is why we're deferring some of our completion activity into next fiscal year. .

Okay, so it wouldn't be appropriate then to just assume, you know extrapolate I guess that one rig program in fiscal ‘21. .

No, yeah we've built up fairly decent DUC account and so we'll keep that one rig, we’ll certainly look into fiscal ‘21 depending what gas prices do, we’ll obviously begin to reconsider how we look going forward. .

Yep, yep, okay perfect, that's super helpful. And then maybe just generally about production shut-ins, is there anything in the 2020 guide for production shut-ins. I know that you guys have – when gas prices have fallen significantly have certainly pivoted quickly and shut in production volumes.

So just trying to think through the guidance and then how you are thinking about that currently. .

Yep, you know our first quarter, we had a little bit of curtailment in October, I think it was 0.7bs net. In terms of our guidance we do not – we are not forecasting any other curtailment. .

Okay, and then maybe just – sorry, one more for John. Maybe just John big picture. I know you and I have talked about your interest in M&A given the market here today, and assuming that Northeast PAs a potential target for your guys.

As you think about that market and knowing NFG is you know a very integrated story, are there positions in that area right now that are free of mid-stream commitments that would interest you?.

I would – from that perspective there hasn't been a lot of change since the last quarter, but Holly as we talked many times, we are always looking for opportunities in the EDA. But we still see the same mid-stream attachments that we've seen historical. .

Okay, okay. That’s all I had. Thank you guys. .

Our next question comes from the line of Gordon Loy from Raymond James. Your line is open. .

Hey, good morning all and thanks for taking my questions. .

Good morning. .

So kind of the first question I had kind of following up on Holly was, it seems like the one to two rig was kind of mentioned as like a maintenance level of activity spending, but that's – so I guess given that initially you guys currently have this buffer of DUCs.

So with that kind of trend as far as maintenance level of going forward be closer to a two right program and I guess I'm just trying to think about what that will translate to in terms of spending going forward?.

Yeah, it’s a bit early to be discussing fiscal ’21, but having said that, you know we've just until recently been at three rigs, which has allowed us to build this DUC inventory. I do not view going into next year as a maintenance mode per se. We’re looking to keep production generally flat, maybe CapEx that $350 million range, plus or minus.

But I want to make sure or insure that we are prepared when gas prices rebound, that we'll be able to react quickly. So I really wouldn't call this a maintenance mode per se, but it's more just to pull back and wait till we see gas prices improve. .

Got it, that makes sense. And I guess just to kind of, this may be over simplistic, but in your previous guidance was assuming kind of a 240 NYMEX and the two rig program.

Is that kind of where you guys would want to see gas recover to, to kind of go back to maybe two rigs?.

No. I think it would have to be a bit better than 240. I think we would begin to have that conversation if we saw that 250 to 275 range and that and those were volumes that we could hedge. I think 240 would still be a bit light. .

Got it, and then sorry just one more question. I guess so we’re trying to figure out, you guys had previously mentioned like a 10% CAGR for the – in terms of guiding revenue. So we are just trying to figure out if there's any – you guys have any assessment to that given kind of the shift in terms of your activity level.

I know what that will mean going forward. .

Well, it should generally follow Seneca’s production cadence, but then layer on top of that the third party opportunity that we had that again is in the, call it $5 million to $10 million annual range. .

Okay, that makes sense then. That’s all I have. .

Our next question comes from the line of Chris Sighinolfi with Jefferies. Your line is open. .

Hey, good morning guys. .

Hey Chris. .

I wanted to also follow-up on I guess previous questions.

If I look maybe to inform – what I'm asking, if I look at your slide presentation you guys published last night, slide eight, on the right hand side of that you have sort of the forecast of gross production trend and then built up with it the physical elements of your portfolio in terms of take away and security of flow.

And so John, I’m just curious, if we think about that then, is the sort of flattish line that we see throughout much of calendar ‘21 just that idea of completing those DUCs and maybe keeping the one right program and using the DUC inventory to sort of hold that production. .

Yeah, that's exactly right Chris. If we didn't have the DUC count, we wouldn't be able to hold our production flat at a one rig pace. .

Right and then I guess there is 30 DUCs that you were talking about with Holly, having sort of anticipated to be in place by the time you drop down to a one rig program. Just out of curiosity, how many pads is that broken across, because I'm assuming you'd make a decision around completion on a pad basis. .

Yeah, honestly Chris, I don't know that answer. I can – let me talk to Ken and we’ll get that back to you. I'm not sure how many pads that includes. .

Okay. And then is there anything as I look at this – obviously you've had the wedge here for a while. The idea was let's try and fill in some in-basin and firm sales. What if prices – and those opportunities are appropriate, sort of further de-risk our exposure.

Obviously the wedge is lower now with a lower production profile, but are there other things John you can do to maybe pull forward contracts that are in the future at different points and you know as sort of your production profile not only is lowered, but maybe the location of it is shifted a bit. .

Yeah, you know some of our fixed price deals we can certainly push those around depending on what pipe we need them on, but we're not going to be pulling forward I guess future's pricing into – at least within this fiscal year. I just don't see us doing that. .

Into fiscal ’20?.

Yeah, yeah exactly. Yup, yup, exactly. .

But where that wedge exists perhaps in ‘21, that's an option you’ll look to depending on what's available perhaps..

Absolutely, yup. .

Okay, and I guess staying on this slide eight and following up on the previous question, if I look at the left side of the slide, we've had the reduction. The 2020 guidance obviously includes half the fiscal year, the two rig program, and you’ve sort of noted what a rig costs on an annual basis, but I'm just curious, the completion side of it.

Are you seeing benefits there or you know has a lot of producers in the region scaled back or should we just look at prior comments about completion cost and sort of extrapolate from there what the budget might be. .

Yeah, actually in December we saw significant reduction, both in our rig rates and what we're paying on the completion side. On the completion side we saw almost upto 20% reduction, but those are baked into a lot of our guidance already. So I don't see us being able to drive that down further, I'm not sure I want to.

I want to make sure we keep this rig crew busy and that they don't head out to another basin, but having said that we've seen a lot of that reduction already and we will keep a rig crew busy through the remainder of this year. .

Okay, all right and then if I could, just one final question Dave. You had mentioned the third party gathering opportunity maybe within the EDA and modest amount of capital, which sort of implies that you are leveraging some iron in the ground or steel in the ground already. I'm just curious, you know I hadn’t seen this from you guys in a while.

Just what's that opportunity set like? Are your commercial teams out there sort of hunting across the basin for these opportunities? Is that something that sort of came to you given installed capacity located close to where this operator is operating or can you just give us a sense of how can it be and what the opportunity set might be..

Yeah, it’s really both right, where we try to keep a relationship with producers in and around our acreage and try and leverage our existing investment. You know in this case we were – we’re dealing with state lands and it was just far cheaper and efficient to build on to our system than to cut through the forest. .

And then I guess the capital pickup, modest capital pick up for fiscal ’20, does that have an extension into ’21.

Should we expect some spending modestly on this arrangement as well?.

Yeah, it'll be – it's really modest. .

Okay. Alright, well thanks a lot for the time this morning guys. I appreciate it..

You bet..

Our next question comes from the line of Tim Winter with Gabelli. Your line is open. .

Good morning guys and thanks for taking my question.

Mark, going back to the big picture, you know what the political challenges in the state and sort of the view toward natural gas and New York and now surrounding states, you guys considered branching out into other states or maybe getting into the renewable development business or evolving you know some of the business into you know some business with less political challenges.

.

Yes. Certainly if you look at the way we’re spending our capital on the pipeline side, most of our future spending is in Pennsylvania as opposed to New York and you know as we’ve said on other calls, we’re always looking at different opportunity sets, you know whether it be on the gas side or other businesses.

You know I guess at this point I don't really have anything to comment on beyond that, but we're always mindful of other opportunities. .

Okay, okay.

Has the change in drilling activity and the sort of the ongoing low gas prices impacted your interest or the economics of building the northern access pipeline?.

Yeah, well the biggest challenge we face on northern access in the near term is on the litigation front. You know we're going to wait for that to play itself out. You know right now the DEC has sued FERC in U.S. court and that proceeding is going to play out into – you know call it the middle to second half of 2021.

So that's you know in the near term the biggest challenge, but then you know, I mean you're certainly right with prices where they are and the reduction in Senecas program. Having a delay in that project is not the worst thing in the world. .

Okay, thank you. .

You bet..

Our next question comes from the line of Ryan Levine with Citi. Your line is open. .

Good morning..

Good morning..

What are your current thoughts around your leverage targets in this environment as you go out a couple of years and what's your plans around the refinancing in two to three years. .

Yes, so our intent is to remain investment grade credit. Our leverage ratios are well within the yard sticks or goalpost, whatever analogy you want to use of what the agencies have laid out for us.

You know with bringing Seneca’s spending in, that business should be – it is not going to be generating any sort of outspend, so the growth in leverage over time is going to be linked mostly to the pipeline side of our business and so we have two good sized projects that’ll be built this year and then next year it'll cause our leverage to tick up modestly and then after that even its re-pricing, we should be generating really meaningful free cash flow thereafter.

.

If production or gas prices were to deteriorate further, what levers would you be prioritizing to achieve that investment grade?.

Well, I think it would be mostly on the E&P capital side, further scaling back our activity. .

Okay, and then I guess last one on that side is in terms of the distribution or dividend policy, you know whether the longer term outlook there and how you can continue to reiterate it stable and growing dividend in your press release and presentation, shouldn’t we read into anything with that?.

Yeah, so as we’ve said in the past, we generally view our dividend in light of the earnings of our regulated businesses, and so if you look over time between the modernization programs and modest customer growth on the utility side and the bigger pipeline projects on the FERC regulated jurisdictions, we'd see earnings in those businesses continue to grow and continue to fund an increase in our dividend.

.

Okay, and then last question for me.

In terms of the gathering CapEx increase, could you comment on a build multiple associated with that spend?.

Yeah, for competitive reasons I guess I prefer not to. It's really not a large amount of capital as you can see from the release and we gave you the revenue guidance. .

Okay, I understand. Thank you..

Yeah, you bet. .

This concludes the Q&A session for today. I will now hand the call back to Ken Webster for closing comments. .

Thank you, Kenzey. We like to thank everyone for taking the time to be with us today. A replay of this call will be available at approximately 3:00 PM eastern time on both our website and by telephone and will run through the close of business on Friday, February 7.

To access the replay online, please visit our investor relations website at investor.nationalfuelgas.com and to access by telephone call 1800-585-8367 and enter conference ID number 8154487. This concludes our conference call for today. Thank you and good bye..

This concludes today’s conference call. Thank you for your participation. You may now disconnect..