Natalie Fischer; Director of Investor Relations; National Fuel Gas Co
David Bauer; President, Chief Executive Officer, Director; National Fuel Gas Co
Justin Loweth; President of Seneca Resources Company LLC, President of Midstream; National Fuel Gas Co
Timothy Silverstein; Principal Financial Officer, Treasurer; National Fuel Gas Co
Noah Hungness; Analyst; BofA Global Research
Ati Modak; Analyst; Goldman Sachs Research
Presentation
Operator
Hello, and welcome to the National Fuel Gas Company Q4 Fiscal 2024 Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. (Operator Instructions) Now I'd like to hand over to Natalie Fischer, Director of Investor Relations. Please go ahead.
Natalie Fischer
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 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 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. We would like to remind you that today's teleconference will contain forward-looking statements. While 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, 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.
David 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 and 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. At our upstream and gathering businesses, all of our drilling and 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. 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 efficiency. As 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'll 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 to Seneca to transport its production out of Tioga County. While it's 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'll 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 continue to pursue Northern Access because we believe the region needed more pipeline infrastructure to serve growing demand and we had a FERC regulated project that would deliver significant volumes in the New York State and connected markets. Due to 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 the 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 it addresses recovery of our ongoing modernization program. 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, though it's possible approval could slip into the new year. Regardless, the proposal included a standard make-whole provision that allows the company to recover any loss 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 to complete electrification of the economy. But it's 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 5 gigawatts of mostly baseload nuclear and gas-fired generation, but replaced it with only 2 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 cost to consumers are poised to increase further still as the New York Cap-and-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're 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've been advocating since the Climate Act was passed. And 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'm 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'm pleased with our continued strong execution during the quarter, and I'm confident in National Fuel's future. Seneca and Energy 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, which, combined with our long-standing history of returning capital to shareholders via our dividend and share buyback program, should drive significant shareholder value over the long term. And with that, I'll turn the call over to Justin.
Justin Loweth
Thank you, Dave, and good morning, everyone. Seneca and NFG Midstream executed extremely well in fiscal '24, 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 '25 and beyond. With respect to fiscal '24 results, Seneca delivered record production of 392 Bcfe or a 5% increase over fiscal '23 and despite almost 14 Bcf of voluntary price curtailments. Additionally, reserves grew to 4.8 Tcfe as of fiscal year end, which included net additions and revisions of over 600 Bcfe. Taken together, we replaced about 155% of production for the year. Additionally, at NFG Midstream, throughput increased 6% to a record 480 Bcf in fiscal '24 underpinned by growth at Seneca as well as third-party customers. As we look to fiscal '25, 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 TLL 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 '25 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 '25, 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 '24 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 Tioga Utica pad, we drilled in 20% fewer days than originally budgeted, generating a capital savings of about $50 per foot. We also recently placed in service a new produced water pipeline connecting some of our water infrastructure, which 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 '25 capital guidance is $20 million below fiscal '24, and we see continued capital efficiency tailwinds in the future with our prolific EDA focused development program. Our fiscal '25 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, but we expect to see capital increase for the second half of the year as we shift back to a two-rig program late spring or early summer. Our longer-term plan maintains a similar pace of development and activity focused on our highest return areas, which is expected to maximize free cash flow generation while driving low to mid-single-digit production growth. Turning to NFG Midstream. We've 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 line 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 NFE Midstream to optimally focus capital investment on projects that are essential to support coordinated growth while maintaining Seneca status as a low-cost operator. On the sustainability front, I'm 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 Equitable Origin recertification and received a score of A minus under the EO100 standard. This grade represents an improvement of 2 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 and 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 10 years in the EDA with expected PV-10 breakevens of less than $2 per Mcf NYMEX followed by another decade plus in the WDA with expected PV-10 breakevens less than 225 Mcf NYMEX, which is in the top decile of Appalachian well-level returns. Moreover, our marketing strategy and hedge portfolio supports significant near-term cash flow certainty 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'll turn the call over to Tim.
Timothy 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 noncash impairments. 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 and 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 noncash 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 is 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. 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 wasn't a function of more activity, but merely a shift from what was originally expected to be capital work 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 lead 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 York utility joint proposal, so 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 among 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've revised our guidance for adjusted operating results to a range of $5.50 to $6 per share under the assumption that NYMEX prices averaged $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. And 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've seen the curve trade down. This has led to a wide dispersion among our sell-side estimates, all of which are using natural gas price assumptions that are well above the current strip. To provide additional transparency, we've included multiple sensitivities for our 2025 adjusted operating results at various NYMEX prices. Hopefully, 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 '25 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 at an average swap price of more than $0.35 above the current forward curve. For the year, we are now 63% hedged with an average floor price of $3.44 or nearly 25% above the strip. We've also added positions in future years, which are 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've made good progress on our $200 million buyback that was authorized in March. To date, we've repurchased 1.4 million shares at an average price of $57 per share. We look to the free cash flow of our nonregulated 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 '25. 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 '26. 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. In summary, fiscal '24 was a solid year for National Fuel, and 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 nonregulated 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'll ask the operator to open up the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Noah Hungness, Bank of America Merrill Lynch.
Noah Hungness
I guess just the first question here is, if I could get your latest thoughts on the regulatory environment and maybe how that's 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?
David Bauer
Sure. I guess I'll say, first and foremost, that we design our business and run it in such a way that it thrives regardless of who's in power. But having said that, some administrations are better to work with than others. Looking at the change at the federal level, it's obviously still early days, but I think there's a good chance that the Trump administration will be good for the energy industry, generally a better regulatory environment to operate in. At the state level, there really hasn't been much of a change. New York and PA, we expect to stay exactly -- the balance of power to stay exactly where it was beforehand.
Noah Hungness
Appreciate that color. And then for my second question, as you guys mentioned in the opening remarks, the 2025 adjusted EPS guidance was revised lower due to the natural gas pricing assumption. But if we assume the $3.25 that was given last quarter, then actually the adjusted EPS would 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?
Timothy Silverstein
Sure. The biggest driver is the change in the DD&A rate that we laid out in our guidance. That's 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're small in aggregate, so they don't 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, 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?
Timothy Silverstein
I guess what I would expect is likely to be revised slightly lower. As I alluded to, we're expecting an additional ceiling test impairment from an accounting perspective in the first quarter of fiscal '25, which will have the same effect as it had going from our original guidance to future guidance, where we're essentially writing off a portion of our assets, so we have less of an amount to deplete over time. So I would expect it to go lower, more so than higher.
Operator
(Operator Instructions) Ati Modak, Goldman Sachs.
Ati Modak
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. So the short answer is we absolutely always retain some flexibility within our plan, both ways to accelerate if there's a good price signal. So for example, I mentioned in the remarks that we're very constructive on the longer-term macro environment on natural gas prices. But look, if we end up with a colder than normal winter, hasn't started that way, but things can change quickly. We'll have some flexibility and capability to move faster into that. Conversely, if we see sustained lower prices, there's 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've got about almost 90% of our fiscal '25 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've definitely got levers on capital to bring it down as needed, but also see a lot of positive leverage to the upside and how we've structured the combination of the operations as well as the marketing and hedging book.
Ati Modak
All right. 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 variance or the CapEx range for the next year?
Justin Loweth
Sure, happy to. There's two principal drivers that we're very focused on. The first one is just driving further efficiencies in our plan and in our operations. 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're drilling average TLLs of 13,000, 14,000 feet. So that's north of $0.5 million per well. So that's 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 has dual benefits and most importantly, very lasting benefits. So that will create lower cost on handling and deliverability of fluid that will continue for not just months, but years to come. So there's a number of tailwinds like that, that we see in our business. The second piece I would really talk to is just our planning. We're 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 interstate pipeline. And so the natural movement of what we're doing and as we get smarter and better within the Tioga area in particular, is we're 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's really what I'm getting at is we're continuing to iterate that plan and get better and better. And that's allowed us to drive down capital significantly from '23 to '24 to guide to another $20 million reduction here in '25, and we see continued tailwinds related to that guide for '25 that we'll keep working on and communicating in the coming quarters.
Operator
We have no further questions. So this concludes our Q&A. I'll now hand back to Natalie Fischer for any final remarks.
Natalie Fischer
Thank you, Elliot. I'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, November 14. 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 has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.