Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- National Fuel Gas Co (NFG, Financial) reported a strong return on capital and visibility to significant growth in earnings and free cash flow.
- The company initiated preliminary guidance for fiscal 2025 of $5.75 to $6.25 per share, a nearly 20% increase over fiscal 2024.
- NFG expects compound annual consolidated earnings growth of better than 10% for at least the next three years.
- The company has a long-standing commitment to returning an increasing amount of capital to shareholders, including a recent $0.08 or 4% increase in its dividend.
- NFG's hedge book delivered a $75 million gain during the quarter, mitigating the impact of lower natural gas prices.
Negative Points
- NFG reported a GAAP loss of $54 million or $0.59 per share for the third quarter, primarily due to a noncash full cost ceiling test impairment charge.
- Natural gas prices have been volatile, and the company may face additional impairments if prices remain low.
- The company had to curtail nearly 6 Bcf of production during the quarter due to low pricing.
- NFG's fiscal 2024 earnings projection has been updated to a range of $5 to $5.10 per share, reflecting the impact of third-quarter price-related curtailments.
- The company expects to add incremental leverage to support its dividend and buyback program, which may modestly exceed free cash flow through the end of fiscal 2025.
Q & A Highlights
Q: Can you talk about what NFG is seeing on both efficiency gains and cost deflation? And maybe give us an update on where your leading-edge D&C cost per foot are?
A: Justin Loweth, President of Seneca Resources and National Fuel Midstream, explained that operational efficiencies are largely due to the EDA-focused development plan. The team has optimized planning and execution, leading to cost reductions. Current D&C costs are around $1,300 per foot for Tioga Utica and $1,000 per foot for Marcellus wells, with trends moving downward.
Q: Can you provide your updated views on the M&A landscape and the opportunity set for NFG?
A: David Bauer, President and CEO, stated that NFG is interested in growing through M&A, particularly in regulated assets to balance the system. They are also open to smaller bolt-on acquisitions in the E&P sector, similar to those done last year.
Q: Can you speak about your updated views on hedging in the longer term and how the natural gas landscape has impacted your framework?
A: David Bauer noted that while near-term natural gas prices are challenging due to high storage and production, they expect prices to recover as new LNG projects come online. NFG continues to hedge around 60% of production, taking advantage of the contango curve to increase net price realizations over time.
Q: Do you see Seneca having to ramp activity in the 2026 and beyond timeframe to meet increased demand from LNG and AI?
A: Justin Loweth mentioned that Seneca has a deep inventory and is well-positioned to meet future demand. They are actively evaluating opportunities and have the capacity to accelerate development if needed.
Q: Can you provide your thoughts on well productivity and how you expect it to trend going forward?
A: Justin Loweth explained that well productivity remains strong, particularly in Tioga Utica and Marcellus wells. Some state data may show nuances due to voluntary pricing curtailments, but overall, well performance is in line with or exceeding expectations.
Q: Given the wave of consolidation we've seen, what are your thoughts on the broader macro environment?
A: David Bauer reiterated that NFG is interested in M&A, particularly in regulated assets. They are optimistic about finding deals that align with their growth strategy.
Q: Can you discuss the impact of voluntary pricing curtailments on your production and financials?
A: Timothy Silverstein, Principal Financial Officer, noted that nearly 6 Bcf of production was curtailed due to pricing, but Seneca's production still increased by 2% compared to last year. The hedge book delivered a $75 million gain, offsetting lower NYMEX and in-basin pricing.
Q: What is your outlook for fiscal 2025 in terms of production and capital expenditures?
A: Timothy Silverstein provided guidance for fiscal 2025, expecting production to increase to 400-420 Bcf and capital expenditures to be in the range of $885 million to $970 million. They anticipate significant growth in regulated businesses and a reduction in nonregulated spending.
Q: How do you plan to manage your balance sheet and financial flexibility through fiscal 2025?
A: Timothy Silverstein stated that while the combination of dividends and buybacks may modestly exceed free cash flow, incremental leverage will be offset by growth in funds from operations and EBITDA. They expect to maintain credit metrics near current levels, providing financial flexibility.
Q: Can you elaborate on the expected impact of new LNG projects on natural gas prices and your hedging strategy?
A: David Bauer emphasized that new LNG projects are expected to drive natural gas prices higher in the long term. NFG's hedging strategy aims to balance downside protection with upside participation, positioning them well for future price increases.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
