National Fuel Gas Company (NYSE:NFG) Q4 2024 Earnings Call Transcript

National Fuel Gas Company (NYSE:NFG) Q4 2024 Earnings Call Transcript November 7, 2024

Operator: Hello, and welcome to the National Fuel Gas Company Q4 Fiscal 2020 Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. Now, I would like to hand over to Natalie Fisher, Director of Investor Relations. Please go ahead.

Natalie Fisher: Thank you, Elliot, 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 Lewis, President of Seneca Resources and National Fuel Midstream. At the end of today’s prepared remarks, we will open the discussion to questions. The fourth quarter and full-year fiscal 2024 earnings release and November investor presentation have been posted on our Investor Relations website. We may refer to these materials during today’s call. I would like to remind you that today’s teleconference will contain forward-looking statements.

National Fuel’s expectations, beliefs, and projections remain 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. You may refer to last evening’s earnings release for a listing of certain specific risk factors. With that, I will turn it over to Dave Bauer.

Dave Bauer: Thank you, Natalie. Good morning, everyone. As we reported in last night’s release, National Fuel’s fourth-quarter adjusted operating results were $0.77 per share. Natural gas prices were once again a headwind, but our strong hedge book, which delivered a $61 million gain during the quarter, along with the positive results from our regulated businesses, largely mitigated the commodity price impact. Operationally, we continue to execute very well. Our upstream and gathering businesses, all of our drilling, the vast majority of our completions, and midstream development are focused on the Eastern Development Area in Tioga and Lycoming counties, which is our highest returning acreage.

Dave Bauer: The impact of our focus on the EDA is clear, with Seneca Capital down 10%, while production is up 5% year over year, a trend we expect to continue in the coming years. With more than a decade of delineated well inventory in this area, the team is focused on optimizing our development plan to maximize returns and capital. You can see from slide 21 in our IR deck, our half-cycle breakevens are best in class, which allows us to generate strong returns and free cash flow at forward gas prices. Switching to our pipeline and storage business, we continue to see the benefit of our supply corporation rate settlement, which you will recall provided a $56 million annual rate increase that went into effect this past February.

Additionally, in August, we filed the FERC application for our Tioga Pathway project, which will provide 190 million a day of capacity for Seneca to transport its production out of Tioga County. While it is still early in the process, things are moving along as planned. FERC’s recent scheduling notice calls for an environmental assessment study by February 2025. That makes it likely we will receive our certificate for the project by next fall, which would keep us on track to meeting our fall 2026 target in-service date. As you saw in last night’s release, we no longer intend to pursue an extension of the Northern Access project’s FERC certificate, which expires at the end of the calendar year. You may recall that project was our plan A to move Seneca’s growing production out of the basin.

When New York regulators put that project in limbo in 2017, we quickly pivoted to plan B, the FM100 project, which was completed in 2021, and which frankly moved Seneca’s production to a better market on the Transco system. All the while, we continued to pursue Northern Access because we believed the region needed more pipeline infrastructure to serve growing demand, and we had a first dedicated project that would deliver significant volumes in the New York State and connected markets. After several years of litigation on key regulatory approvals, we never put shovels in the ground. Earlier this summer, that litigation was favorably resolved in the courts, which led us to take another look at the project. But at the end of the day, a substantial increase in expected project costs led us to decide to cease further project development efforts.

Turning to the utility, we reached a three-year settlement with parties in our ongoing New York rate case. The joint proposal that was the product of that settlement is a good outcome for both National Fuel and our customers. It calls for a total annual revenue requirement increase of $86 million that phases in over a three-year period. This catches us up for the regulatory lag we experienced from higher operating costs due to the inflation we saw coming out of the pandemic and addresses recovery of our ongoing modernization program.

Dave Bauer: Our New York utility has not had a base rate increase since 2017, and even after new rates go into effect, our delivery rates will still be the lowest in the state. There are a number of other provisions in the joint proposal that protect the interest of our customers, including enhanced customer service and safety performance metrics, and the continuation of our long-standing modernization program, which strengthens the reliability of our system and drives down methane emissions. We anticipate the New York Commission will consider approval of the joint proposal at its December session, so it is possible approval could slip into the new year. Regardless, the proposal includes a standard make-whole provision that allows the company to recover any lost rate increase from the October 1st effective date of the settlement through the date that new rates actually go into effect.

Moving to energy policy, National Fuel remains a strong advocate for an all-of-the-above approach to energy policy. In New York, policymakers have pursued an aggressive anti-fossil fuel agenda, whose goal is the complete electrification of the economy. But it is becoming increasingly clear that the state’s climate goals will take considerably longer to achieve and cost substantially more than the state envisioned. Take, for example, the Climate Act’s 70% renewable electricity target by 2030. Over the five years since the passage of the act, New York has decommissioned more than five gigawatts of mostly baseload nuclear and gas-fired generation but replaced it with only two gigawatts of intermittent wind and solar. Over the same period, New Yorkers have seen a 40% increase in the average cost of electricity.

And energy costs for consumers are poised to increase further still as the New York Capping Invest carbon pricing program, which is expected to take effect next year, could increase the average residential customer’s annual natural gas heating costs by more than $500. However, we are beginning to see signs that the momentum may be shifting. The Governor has recently spoken out in favor of an all-of-the-above energy strategy, which again is the approach we have been advocating since the Climate Act was passed. Perhaps more importantly, New York recently convened its energy planning board, which on a five-year cycle takes a hard look at energy policy in the state. I am hopeful this forum will carefully assess the current circumstances and potentially reset statewide energy policy based upon the economic realities and technical feasibility of what can be reasonably accomplished.

In closing, I am pleased with our continued strategy execution during the quarter. I am confident in National Fuel’s future. Seneca and NFG Midstream’s integrated development program is delivering enhanced capital efficiencies and increasing levels of free cash flow at forward natural gas prices. At the same time, our modernization program and expansion projects should continue to grow the rate base of our regulated businesses. All of these efforts should lead to growing consolidated earnings and cash flows, combined with our long-standing history of returning capital to shareholders through our dividend and share buyback program, should drive significant shareholder value over the long term. With that, I will turn the call over to Justin.

Justin Loweth: Thank you, Dave, and good morning, everyone. Seneca and NFG Midstream executed extremely well in fiscal 2024, delivering increased production with meaningfully lower capital while navigating a particularly challenging commodity price environment. Overall, the integrated development of our best-in-class assets continues to drive increased capital efficiency. Combining this with our culture of operational excellence and focus on safety and sustainability sets the stage for continued success in fiscal 2025 and beyond. With respect to fiscal 2024 results, Seneca delivered record production of 392 BCFE, a 5% increase over fiscal 2023 despite almost 14 BCF of voluntary price curtailments. Additionally, reserves grew to 4.8 TCFE as of fiscal year-end, including net additions and revisions of over 600 BCFE.

Taken together, we replaced about 155% of production for the year. Additionally, in NFG Midstream, throughput increased 6% to a record 480 BCF in fiscal 2024, underpinned by growth at Seneca as well as third-party customers. As we look to fiscal 2025, Seneca’s production guidance remains 400 to 420 BCFE. As a reminder, our guidance excludes the potential impact of any future price curtailments. As we move through the fiscal year, we expect higher till activity in the winter and spring months, which will drive increasing production levels in each quarter through next summer, before flattening or modestly declining in the fourth quarter. Moving to our outlook on the natural gas macro, we see continued pressure on natural gas prices in the first half of fiscal 2025, with upside potential later in the year.

Over the next six months, we believe high storage levels and resilient production could prolong price weakness, absent a colder-than-normal winter. But the longer-term outlook remains constructive, with LNG project demand expected to begin a multiyear ramp in 2025, which could drive prices higher as early as next summer. To take advantage of this outlook, our marketing team continues to minimize volumes exposed to in-basin pricing, focusing on protecting cash flows and minimizing earnings volatility through physical firm sales and financial hedges. For fiscal 2025, almost 90% of Seneca’s forecasted production is protected by firm transportation and firm sales, limiting in-basin pricing exposure. This positions Seneca to maintain robust production rates and minimize potential curtailments through volatile pricing environments.

Moving to capital, Seneca finished fiscal 2024 toward the low end of the guidance range as our operations team continued to capture cost reductions through operational efficiencies and development planning optimization. One recent example is a Tioga Utica Pad we drilled in 20% fewer days than originally budgeted, generating a capital savings of about $50 per foot.

Justin Loweth: We also recently placed in service a new produced water pipeline connecting some of our water infrastructure. This has the dual and lasting benefits of lower per barrel handling costs and removing trucks from the road. Due to accomplishments like this and expectations for further improvements, the midpoint of our fiscal 2025 capital guidance is $20 million below fiscal 2024. We see continued capital efficiency tailwinds in the future, with our prolific EDA-focused development program. Our fiscal 2025 operations plan utilizes a one to two rig program and dedicated frac crew mostly focused on development in Tioga and Lycoming counties. We anticipate a moderated capital cadence for the first half of the year, though we expect to see capital increase for the second half of the year as we shift back to a two-rig program in late spring or early summer.

Our longer-term plan maintains a similar pace of development and activity, focused on our highest return areas, and is expected to maximize free cash flow generation while driving low to mid-single-digit production growth.

Justin Loweth: Turning to NFG Midstream, we have made substantial progress over the past quarter on several projects aimed at supporting future Seneca and third-party production growth and increasing our overall development and marketing flexibility in the EDA. During the last few months of calendar 2024, we expect to commission key facilities and gathering trunk lines, which will help link growing Seneca volumes in the EDA to interstate pipelines, improve deliverability, and facilitate better market access. Our integrated approach to development allows Seneca and NFG Midstream to optimally focus capital investment on projects that are essential to support coordinated growth while maintaining Seneca’s status as a low-cost operator.

On the sustainability front, I am proud to highlight some impressive achievements from the quarter. In addition to Seneca surpassing our 2030 methane intensity reduction goal of 40% seven years ahead of schedule, Seneca also renewed its MIQ certification in August, yet again achieving an A grade level, the highest certification level available. Furthermore, NFG Midstream recently underwent Eco Origin recertification and received a score of A- under the EO100 standard.

Justin Loweth: This grade represents an improvement of two notches from NFG Midstream’s initial assessment of all assets owned and operated. In total, these achievements are a great example of National Fuel’s commitment to responsible stewardship of our assets and leadership in sustainability. As we look ahead, we believe Seneca and NFG Midstream have the right team, assets, and integrated model to not only navigate but also thrive in various commodity cycles. We have a deep inventory of highly economic future development locations at our current development pace, including over ten years in the EDA with expected PV10 breakevens of less than $2 per Mcf NYMEX, followed by another decade plus in the WDA with expected PV10 breakevens of less than $2.25 Mcf NYMEX.

This is in the top decile of Appalachian well-go returns. Moreover, our marketing strategy and hedge portfolio support significant near-term cash flow synergy while allowing longer-term upside. Taken together with our best-in-class team, we are poised for considerable success in the years to come. With that, I will turn the call over to Tim.

Tim Silverstein: Thanks, Justin, and good morning, everyone. Focusing first on our operating results, absent Seneca’s voluntary curtailments that we did not forecast, our $0.77 per share was generally in line with our internal projections. Looking at GAAP earnings, we reported a loss of $1.84 per share, which was driven by several non-cash impairments.

Tim Silverstein: As Dave mentioned, we are no longer moving forward with our Northern Access project. As a result, we recorded an impairment of $34 million during the quarter in our pipeline storage segment. Overall, we incurred approximately $80 million in development costs related to the project. However, our team was able to repurpose various assets and land rights for use on other projects, which allowed us to limit the amount of the write-down. We also recorded an additional non-cash ceiling test charge at Seneca. Given the NYMEX settlements for October and November, we anticipate recording an additional impairment in the first quarter of fiscal 2025. Looking at operating results, there was a little bit of noise worth explaining, as there always seems to be in the fourth quarter.

Starting with the E&P segment, LOE came in at $0.74, or an increase of $0.05 per Mcf over the last year. In addition to the impact from lower volumes, most of this increase was timing-related, including certain maintenance work that we complete once every two to three years. This was expected, and for the full year, LOE was right in line with our prior guidance.

Tim Silverstein: Somewhat offsetting this was lower DD&A expense at Seneca, which came in at $0.69 per Mcf for the quarter. Given the impairment charge in the third quarter, we had a lower depletable base of capital, which reduced our DD&A rate on a go-forward basis. In our regulated segments, O&M costs were higher than previously projected. The largest impact relates to our pipeline integrity program, where we saw more O&M-related work than originally planned. This was not a function of more activity, but merely a shift from what was originally expected to be capital that, by the nature of the actual work performed, ended up being charged to O&M. We also saw increased costs related to the timing of leak patrols and restoration work at the utility, the latter of which was impacted by prevailing wage requirements in New York, which, as a reminder, were enacted in 2023.

The future impact of these new requirements was incorporated into our new New York utility joint proposal, and we expect to recover these incremental costs in our new delivery rates. Lastly, on income taxes, there is a bit of noise. After adjusting for items impacting comparability, our effective tax rate for the year was approximately 24%. This was slightly favorable when compared to our prior guidance. The biggest driver was related to state taxes, where we allocate our income amongst state jurisdictions based upon revenue. At the end of the year, we had less revenue in New York and Pennsylvania relative to other jurisdictions, which reduced our overall effective tax rate. Shifting to 2025, we have revised our guidance for adjusted operating results to a range of $5.50 to $6.00 per share, under the assumption that NYMEX prices average $2.80 per MMBtu for the year.

Other than pricing, the only noteworthy change was to reduce our expected DD&A rate to account for the impairment recorded in the fourth quarter. Had natural gas prices remained consistent with last quarter, our guidance would have increased from the previous range. However, as you know, gas price volatility has been elevated, and given the slow start to winter, we have seen the curve trade down. This has led to a wide dispersion among our sell-side estimates, many of which are using natural gas price assumptions that are well above the current strip. To provide additional transparency, we have included multiple sensitivities for our 2025 adjusted operating results at various NYMEX prices. This helps everyone triangulate on where we expect our results to trend as the pricing outlook evolves.

While the natural gas strip has meaningfully declined, our hedge portfolio moderated a large portion of the impact. While we already had approximately 60% of our fiscal 2025 production hedged as of last quarter, we stuck to our disciplined approach to hedging. Over the past few months, we added another 3% layer to our hedge book for fiscal 2025.

Tim Silverstein: An average swap price of more than $0.35 above the current forward curve. For the year, we are now 63% hedged at $3.44, nearly 25% above the strip. We have also added positions in future years at prices that we expect will generate strong returns for our development program. This approach of methodically transacting through the cycle has proven to be a very effective strategy, which we believe has created meaningful value for shareholders. In addition to protecting the downside in challenging environments like we are in now, our hedging program also supports our investment-grade rating and allows for us to be opportunistic in times of heightened volatility, such as in 2020, where we were able to acquire Shell’s Appalachian Upstream and Gathering assets, which has proven to be extremely valuable.

We are also creating significant value through our ongoing return of cash to shareholders. In addition to our long-standing dividend, we have made good progress on our $200 million buyback that was authorized in March. To date, we have repurchased 1.4 million shares at an average price of $57 per share. We look to the free cash flow of our non-regulated segments to fund the buyback, and even at the current strip, we expect our hedge portfolio and strong balance sheet will allow us to complete this buyback authorization in fiscal 2025. Sticking with our balance sheet, our credit metrics remained relatively stable over the course of the fiscal year. At approximately 2.25 times debt to EBITDA and 37% FFO to debt, we have ample cushion relative to the downgrade thresholds set by the rating agencies.

We expect these to remain relatively consistent, if not modestly improve, as we move through the year. This cushion affords us great flexibility to allocate incremental capital to the extent we see additional value-accretive opportunities. We also have some refinancing activity ahead of us, with $500 million of long-term debt maturing next summer and an additional $800 million by the end of fiscal 2026. Given our access to the investment-grade debt capital markets, we expect to have flexibility over the next couple of quarters to find the best issuance window to start managing these maturities.

Tim Silverstein: In summary, fiscal 2024 was a solid year for National Fuel, and it has set us up for even stronger performance in the coming years. Combining the growth outlook in our regulated businesses, which is supported by clarity from our recent rate proceedings, along with the ongoing improvements to capital efficiency in our non-regulated businesses, we are confident in our ability to deliver strong free cash flow and greater than 10% compound annual earnings growth through fiscal 2027. Adding this to our commitment to return cash to shareholders through our dividend and buyback, National Fuel is positioned to deliver significant value to shareholders in the coming years. With that, I will ask the operator to open up the line for questions.

Q&A Session

Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. The first question comes from Noah Hungness with Bank of America Merrill Lynch. Your line is open. Please go ahead.

Noah Hungness: Morning all. I guess just the first question here is if I could get your latest thoughts on the regulatory environment and maybe how that has changed over the past 72 hours or so with the election results. And does that at all make you more comfortable to invest in expansion projects?

Dave Bauer: Sure. Good morning. I guess I will say, you know, first and foremost, that we design our business and run it in such a way that it thrives regardless of who is in power. But having said that, some administrations are better to work with than others. Looking at the change at the federal level, it is obviously still early days, but I think there is a good chance that the Trump administration will be good for the energy industry. Generally, a better regulatory environment to operate in.

Noah Hungness: At the state level, there really has not been much for change. New York and PA, we expect to stay exactly, you know, the balance of power to stay exactly where it was beforehand. Really appreciate that color. And then for my second question, as you guys mentioned in the opening remarks, I see the 2025 adjusted EPS guidance was revised lower due to the natural gas pricing assumption, but we assume the $3.25 that was given last quarter, then, actually, the adjusted EPS should be $0.25 higher. Could you just talk about what was driving that and what would drive that improvement assuming a flat natural gas price?

Tim Silverstein: Sure. The biggest driver is the change in the DD&A rate that we laid out in our guidance. You know, that is a function of our impairment that we took in the fourth quarter. But we also had a couple of other tailwinds on some operating costs across the system. They are small in aggregate, so they do not really stick out amongst our individual guidance ranges. But the collective between the lower DD&A rate and some other small improvements across the system provide a nice tailwind to allow us to, I guess, quote-unquote, increase guidance if you were to hold pricing constant.

Noah Hungness: And just like a quick clarification question. Is there a chance that that DD&A rate for 2025 could be revised up?

Tim Silverstein: I guess I would expect it is likely to be revised slightly lower. As I alluded to, we are expecting an additional ceiling test impairment from an accounting perspective in the first quarter of fiscal 2025. It will have the same effect as it had going from our original guidance to future guidance, where we are essentially writing off a portion of our assets so we have less of an amount to deplete over time. I would expect it to go lower more so than higher.

Noah Hungness: Sounds good. Now turn to Addy Modak, with Goldman Sachs. Your line is open. Please go ahead.

Addy Modak: Hi. Thank you. Good morning, team. Quick question on the activity cadence. You gave us some cadence for next year. Can you talk about the sensitivity of that timing in your plans? Does that become a tool for managing production based on where gas prices are, or is that pathway relatively decided upon?

Justin Loweth: Sure. Hi. Good morning. So the short answer is we absolutely always retain some flexibility within our plan both ways to accelerate if there is a good price signal. So, for example, I mentioned in the remarks that we are very constructive on the longer-term macro environment on natural gas prices, but look, if we end up with a colder-than-normal winter, it has not started that way. But things can change quickly. We will have some flexibility and capability to move faster into that. Conversely, if we see sustained lower prices, there are a number of levers within our plan that we can look to evolve through the course of the year to address that. And then the other thing I would just note is our team has done a fantastic job also of really insulating us from a lot of those changes.

We have about almost 90% of our fiscal 2025 gas locked in from a physical perspective, so very little exposure. And on top of that, have a really attractive hedge book over the balance of the year that positions us with a great floor and quite a bit of upside. So I think holistically, we have definitely got levers on capital to bring it down as needed, but also see a lot of kind of positive leverage to the upside in how we have structured the combination of the operations as well as the marketing and hedging book.

Addy Modak: Got it. That makes a lot of sense. And then you mentioned CapEx was at the low end of the guidance range for this year. Maybe you can talk about the efficiencies or service cost expectations or any other drivers particularly as we think about the CapEx variance or the CapEx range for the next year.

Justin Loweth: Sure. Happy to. You know, there are two principal drivers that we are very focused on. The first one is just driving further efficiencies in our plan and in our operations. You know, I mentioned an example of a recent Tioga Utica pad where we drilled the wells in 20% fewer days. That has an impact of about $50 per TLL of cost savings. So if you think about that, big picture, we are drilling average TLLs of 13,000 to 14,000 feet. So that is north of a half million dollars per well. So that is pretty meaningful. And we see efficiencies like that across a lot of our different elements of our operations. Similarly, on water management, I spoke to a recent produced water line that we put in place. It has dual benefits and, most importantly, very lasting benefits.

And, you know, so that will create lower costs on handling and deliverability of fluid that will continue for not just months, but years to come. So there are a number of tailwinds like that that we see in our business. You know, the second piece I would really talk to is just our planning. We are always looking to optimize the development within our plan, both at Seneca and NFG Midstream. Effectively looking to deploy the minimal amount of capital possible to put the most amount of gas into our gathering system and ultimately into an interstate pipeline. And so the natural movement of what we are doing and as we get smarter and better within the Tioga area in particular, is we are finding ways to drive that capital lower to achieve the same amount of production or even incremental production.

So when I talk about the tailwinds, that is really what I am getting at.

Justin Loweth: We are continuing to iterate that plan and get better and better. And that has allowed us to drive down capital significantly from 2023 to 2024. To guide to another $20 million reduction here in 2025. And we see continued tailwinds related to that guide for 2025 that we will keep working on and communicating in the coming quarters.

Addy Modak: Got it. That is very helpful. Thank you, guys.

Operator: We have no further questions. So this concludes our Q&A. I will hand back to Natalie Fisher for any final remarks.

Natalie Fisher: Thank you, Elliot. We would 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, November 14th. Please feel free to reach out if you have any questions. Otherwise, we look forward to speaking with you again next quarter. Thank you, and have a nice day.

Operator: Ladies and gentlemen, today’s call is now concluded. We would like to thank you for your participation. You may now disconnect your lines.