National Fuel Gas : Reports Second Quarter Earnings

National Fuel Gas Company (“National Fuel” or the “Company”) (NYSE:NFG) today announced consolidated earnings for the second quarter of fiscal 2014 and for the six months ended March 31, 2014.

HIGHLIGHTS

• Earnings for the second quarter of fiscal 2014 of $95.2 million, or $1.12 per share, increased $9.5 million, or $0.10 per share, compared to $85.7 million, or $1.02 per share, for the prior year’s second quarter.
• Earnings for the second quarter of fiscal 2014 were reduced by adjustments netting to $1.8 million (see table on page 3) that impacted the comparability of the Company’s financial results when comparing the quarter ended March 31, 2014, to the prior year’s second quarter. Excluding these items, consolidated earnings before items impacting comparability (“Operating Results”) for the second quarter of fiscal 2014 were $97.0 million, or $1.15 per share, an increase of $11.3 million or $0.13 per share.
• Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) for the six months ended March 31, 2014, were $528.7 million compared to $446.6 million for the prior year’s six-month period, an increase of 18%.
• Seneca Resources Corporation’s (“Seneca”) second quarter production of natural gas and crude oil was 36.9 billion cubic feet equivalent (“Bcfe”), an increase of 8.0 Bcfe or approximately 28% over the prior year’s second quarter. Average daily production during the quarter was 410 million cubic feet equivalent (“MMcfe”) per day.
• The Company is revising its production guidance range for fiscal 2014 to a range of 155 to 165 Bcfe. The previous production range was 145 to 165 Bcfe. The new range represents a 28% to 37% increase over fiscal 2013 production.
• The Company is revising its GAAP earnings guidance range for fiscal 2014 to a range of $3.40 to $3.55 per share. The previous earnings guidance had been a range of $3.20 to $3.40 per share. This guidance assumes a flat NYMEX price of $4.50 per Million British Thermal Units ("MMBtu") for natural gas and $95 per barrel ("Bbl") for crude oil for unhedged production for the remainder of the fiscal year.
• A conference call is scheduled for Friday, May 9, 2014, at 11 a.m. Eastern Time.

MANAGEMENT COMMENTS

Ronald J. Tanski, President and Chief Executive Officer of National Fuel Gas Company, stated: “National Fuel had an outstanding second quarter, with all of our major business segments contributing to a nearly 13 percent increase in Operating Results over the prior year’s second quarter. Operationally, the challenges of a harsh winter were met with great success by employees across our system, as they ensured both the safety and reliability that are critical to our long-term results. The prolonged extreme temperatures also increased regional demand for natural gas, leading to higher throughput in our regulated businesses and stronger market prices for our exploration and production subsidiary Seneca Resources.

"As expected, Seneca’s production, while up 28 percent from the prior year’s quarter, was flat compared with the quarter ended December 31, 2013. Over the course of the next few months, Seneca expects to commence production from 3 new multi-well pads in our Eastern Development Area. In addition, our development program in the Greater Clermont Area in our Western Development Area is well underway and should begin production this summer. Based on these development activities, we have raised the lower end of Seneca’s production guidance for the entire fiscal year. With about 70 percent and 48 percent of our 2014 and 2015 Appalachian production currently subject to firm sale commitments, we are confident in our ability to continue our growth in production.”

EXPLORATION AND PRODUCTION SEGMENT OPERATIONS UPDATE

Seneca’s activities during the second quarter were primarily focused on multi-well pads in DCNR Tract 100 in Lycoming County, Pa., in the Eastern Development Area (“EDA”) and its Greater Clermont Area in Elk and Cameron counties, located in its Western Development Area (“WDA”).

Recently, Seneca brought 7 new wells on line in Tract 100 with 24-hour peak production rates that averaged 18.7 million cubic feet (“MMcf”) per day per well. These wells had an average lateral length of 5,109 feet. Additionally, the wells were completed using a reduced cluster spacing (“RCS”) design, with an average of 34 stages per well. Procurement initiatives and continued improvements in efficiencies are driving faster spud-to-sales timing and lower well costs, with the average well cost on the most recent pad estimated at $6.0 million per well to drill and complete.

In the EDA, an additional 10 wells located on Tract 100 and 6 wells on DCNR Tract 595 are targeted to commence production during the fourth quarter of this fiscal year.

In its Greater Clermont Area, completion operations are ongoing on a total of 15 wells from its first 2 multi-well pads. The first 9-well pad will be brought on line early in the fiscal 2014 fourth quarter in conjunction with the placing into service of National Fuel Gas Midstream Corporation’s Clermont Gathering System. The remaining 6-well pad will follow late in the fourth quarter.

Combined, Seneca plans to bring 31 wells on line during the fiscal 2014 fourth quarter, which should drive its fiscal year exit production to record highs.

Seneca plans to operate 2 of its 3 horizontal drilling rigs in the WDA for the remainder of the fiscal year. The third rig will be focused on development drilling in the EDA along with several delineation wells targeting both the Marcellus and Utica shales.

SUMMARY OF RESULTS

National Fuel had consolidated earnings for the quarter ended March 31, 2014, of $95.2 million, or $1.12 per share, compared to the prior year’s second quarter of $85.7 million, or $1.02 per share, an increase of $9.5 million or $0.10 per share. The increase is due to higher earnings in the Midstream and Downstream businesses and the Corporate and All Other category. (Note: All references to earnings per share are to diluted earnings per share and all amounts used in the discussion of earnings are after tax unless otherwise noted.)

Consolidated earnings for the six months ended March 31, 2014, of $177.5 million, or $2.09 per share, increased $23.8 million, or $0.26 per share, from the same period in the prior year where earnings were $153.7 million or $1.83 per share.

¹ See discussion of these individual items below.

As outlined in the table above, certain items included in GAAP earnings impacted the comparability of the Company’s financial results when comparing the quarter and six months ended March 31, 2014, to the comparable periods in fiscal 2013. Excluding these items, Operating Results for the current quarter of $97.0 million, or $1.15 per share, increased $11.3 million, or $0.13 per share, from the prior year’s second quarter when Operating Results were $85.7 million or $1.02 per share. Excluding these items, Operating Results for the six months ended March 31, 2014, of $180.1 million, or $2.13 per share, increased $26.4 million, or $0.30 per share, from the same period in the prior year when Operating Results were $153.7 million or $1.83 per share. Items impacting comparability will be discussed in more detail with the discussion of segment earnings below.

DISCUSSION OF RESULTS BY SEGMENT

The following discussion of the earnings of each segment is summarized in a tabular form at pages 11 through 14 of this report. It may be helpful to refer to those tables while reviewing this discussion.

Upstream Business

Exploration and Production Segment

The Exploration and Production segment operations are carried out by Seneca Resources Corporation (“Seneca”). Seneca explores for, develops and produces natural gas and oil reserves in Pennsylvania, California and Kansas.

The Exploration and Production segment’s earnings in the second quarter of fiscal 2014 of $24.4 million, or $0.29 per share, decreased $3.3 million, or $0.04 per share, when compared with the prior year’s second quarter. Earnings for the current year’s second quarter were reduced by a $3.8 million (pre-tax) accrual for well plugging and abandonment costs associated with an offshore Gulf of Mexico mineral lease (High Island 74) that Seneca had previously farmed out to an operator who subsequently filed for bankruptcy. As the original lessee, Seneca has become responsible for a portion of the costs to plug and abandon wells on the lease. In addition, Seneca increased its state deferred income tax liability by $3.0 million to reflect the net impact of its growing presence in Pennsylvania ($5.8 million increase) and a reduction in New York state corporate income tax rates ($2.8 million decrease). Excluding these items, Operating Results in the Exploration and Production segment of $29.8 million, or $0.36 per share, increased $2.1 million, or $0.03 per share, when compared to the prior year’s second quarter.

Overall production of natural gas and crude oil for the current quarter of 36.9 Bcfe increased approximately 8.0 Bcfe, or 27.8 percent, compared to the prior year’s second quarter. Production from Seneca’s Appalachia properties increased approximately 7.5 Bcfe or 31.3 percent. California production of 5.3 Bcfe increased 10.4 percent compared with the prior year’s second quarter.

Lower commodity prices realized after hedging reduced earnings. The weighted average natural gas price received by Seneca (after hedging) for the quarter ended March 31, 2014, was $3.89 per thousand cubic feet (“Mcf”), a decrease of $0.17 per Mcf compared to the prior year’s second quarter. The weighted average crude oil price realized after hedging for the quarter ended March 31, 2014, was $96.85 per Bbl, a decrease of $2.23 per Bbl compared to the prior year’s second quarter.

On a per unit basis, depletion expense of $1.88 per thousand cubic feet equivalent (“Mcfe”), decreased $0.17 per Mcfe due to higher natural gas reserve balances at March 31, 2014, compared to the prior year’s second quarter. On a per unit basis, lease operating and transportation expenses (“LOE”) at $1.08 per Mcfe increased $0.11 per Mcfe compared to the prior year’s second quarter due to higher transportation costs associated with production from Tract 100 in Lycoming County, Pa., and higher steam fuel costs in California. General and administrative expenses (“G&A”) decreased $0.13 per Mcfe compared to the prior year’s second quarter, also due to higher production. Operating Results were also impacted by higher property taxes in California and a higher Pennsylvania impact fee due to increased well activity.

The Exploration and Production segment’s earnings were $55.5 million, or $0.65 per share, for the six months ended March 31, 2014, compared to earnings of $54.4 million, or $0.65 per share for the six months ended March 31, 2013. Excluding the accrual for well plugging and abandonment costs and the increase to state deferred income taxes discussed above, Operating Results in the Exploration and Production segment of $61.7 million, or $0.73 per share, increased $7.3 million or $0.08 per share, when compared to the prior year’s six-month period.

Overall production of natural gas and crude oil for the six months ended March 31, 2014, of 74.0 Bcfe increased approximately 20.6 Bcfe, or 38.6 percent, compared to the prior year’s six-month period. Production from Seneca’s Appalachia properties increased approximately 20.1 Bcfe or 46.1 percent. California production of 10.3 Bcfe increased 5.3 percent compared with the prior year’s six-month period.

Lower commodity prices realized after hedging in the current six-month period reduced earnings. The weighted average natural gas price received by Seneca (after hedging) for the six months ended March 31, 2014, was $3.79 per Mcf, a decrease of $0.33 per Mcf compared to the prior year’s six-month period. The weighted average crude oil price realized after hedging for the six months ended March 31, 2014, was $95.47 per Bbl, a decrease of $2.39 per Bbl.

On a per unit basis for the six months ended March 31, 2014, depletion expense of $1.90 per Mcfe decreased $0.18 per Mcfe due to higher natural gas reserve balances at March 31, 2014, LOE of $1.02 per Mcfe increased $0.02 per Mcfe due to higher transportation costs, and G&A of $0.44 per Mcfe decreased $0.15 per Mcfe compared to the prior year’s six-month period, also due to higher production. Operating Results for the six months ended March 31, 2014, were reduced by higher property taxes in California, a higher Pennsylvania impact fee, and higher interest expense due to a higher outstanding debt balance.

Midstream Businesses

Pipeline and Storage Segment

The Pipeline and Storage segment’s operations are carried out by National Fuel Gas Supply Corporation (“Supply Corporation”) and Empire Pipeline, Inc. (“Empire”). The Pipeline and Storage segment provides natural gas transportation and storage services to affiliated and non-affiliated companies through an integrated system of pipelines and underground natural gas storage fields in western New York and Pennsylvania.

The Pipeline and Storage segment’s earnings of $21.4 million, or $0.25 per share, for the quarter ended March 31, 2014, increased $4.6 million, or $0.05 per share, when compared with the same period in the prior fiscal year. The increase in earnings is mainly due to higher non-affiliated transportation revenues from new transportation contracts. As a result of colder weather and the ongoing pricing basis differentials in the Marcellus basin, the Pipeline and Storage segment continues to see increased demand for transportation services from producers and marketers. Earnings for the quarter also benefitted from lower pension and other post retirement benefit costs.

The Pipeline and Storage segment’s earnings of $40.5 million, or $0.48 per share, for the six months ended March 31, 2014, increased $6.8 million, or $0.08 per share, when compared with the same period in the prior fiscal year. The increase was mostly due to higher non-affiliated transportation revenues from the Northern Access and Line N 2012 Expansion projects and lower pension and other post retirement benefit costs. Earnings for the current six-month period were reduced by a lower allowance for funds used during construction due to the completion in the prior year of the expansion projects mentioned above.

Gathering Segment

The Gathering segment’s operations are carried out by National Fuel Gas Midstream Corporation’s (“Midstream”) subsidiary limited liability companies. The Gathering segment constructs, owns and operates natural gas pipeline gathering and processing facilities in the Appalachian region and currently provides the critical gathering infrastructure for transporting Seneca’s Marcellus Shale production to the interstate pipeline system.

The Gathering segment’s earnings of $7.3 million, or $0.09 per share, for the quarter ended March 31, 2014, increased $4.2 million, or $0.05 per share, when compared with the same period in the prior fiscal year. The increase in earnings is mainly due to higher gathering revenues from Midstream’s Trout Run gathering system in Lycoming County, Pa.

The Gathering segment’s earnings of $13.5 million, or $0.16 per share, for the six months ended March 31, 2014, increased $8.4 million, or $0.10 per share, when compared with the same period in the prior fiscal year. The increase in earnings is mainly due to higher gathering revenues from Midstream’s Trout Run gathering system in Lycoming County, Pa.

Downstream Businesses

Utility Segment

The Utility segment operations are carried out by National Fuel Gas Distribution Corporation (“Distribution”), which sells or transports natural gas to customers located in western New York and northwestern Pennsylvania.

The Utility segment’s earnings of $35.5 million, or $0.42 per share, for the quarter ended March 31, 2014, increased $1.0 million, or $0.01 per share, when compared with the same period in the prior fiscal year. Colder weather in Pennsylvania was a major reason for the increase in earnings in the current year’s second quarter. Temperatures in Pennsylvania were 21.2 percent colder in the quarter ended March 31, 2014, than in the prior year’s second quarter. In New York, the impact of weather variations on earnings is mitigated by that jurisdiction’s weather normalization clause. Higher operating expenses, consisting mostly of higher pension related costs, and an accrual for earnings sharing, which was primarily the result of the settlement of the rate proceeding in New York, reduced earnings in the current year’s second quarter.

The Utility segment’s earnings of $59.8 million, or $0.70 per share, for the six months ended March 31, 2014, increased $2.4 million, or $0.02 per share, when compared with the same period in the prior fiscal year. Colder weather in Pennsylvania was a major reason for the increase in earnings in the current year’s six-month period. Temperatures in Pennsylvania were 17.4 percent colder in the six months ended March 31, 2014, than in the prior year’s six-month period. In New York, the impact of weather variations on earnings is mitigated by that jurisdiction’s weather normalization clause. Lower interest expense due to a lower outstanding debt balance also increased earnings. Higher operating expenses, consisting mostly of higher pension related costs, which were primarily the result of the settlement of the rate proceeding in New York, reduced earnings in the current year’s six-month period. Higher income taxes, due to a non-recurring tax benefit recorded in the prior year six-month period, also reduced earnings.

Energy Marketing Segment

National Fuel Resources, Inc. (“NFR”) comprises the Company’s Energy Marketing segment. NFR markets natural gas to industrial, wholesale, commercial, public authority and residential customers primarily in western and central New York and northwestern Pennsylvania, offering competitively priced natural gas to its customers.

The Energy Marketing segment’s earnings for the quarter and six months ended March 31, 2014, of $3.8 million and $5.4 million, respectively, were largely unchanged from the equivalent periods in the prior year.

Corporate and All Other

The Corporate and All Other category primarily includes corporate operations. The category also includes the remaining operations of Seneca’s Northeast division that markets high quality hardwoods from Appalachian land holdings.

The Corporate and All Other category earnings of $2.8 million, for the quarter ended March 31, 2014, compares to a loss of $0.7 million for the prior year’s second quarter. The comparability of the quarterly results is impacted by a $3.6 million gain recognized on corporate-owned executive life insurance policies. Excluding this item, Operating Results for the quarter, a loss of $0.8 million, compares to a loss of $0.7 million in the prior year’s second quarter. The lower Operating Results were due to higher operating expenses.

The Corporate and All Other category earnings of $2.9 million, for the six months ended March 31, 2014, compares to a loss of $1.7 million for the prior year’s six-month period. The comparability of the six month results is impacted by a $3.6 million gain recognized on corporate-owned executive life insurance policies. Excluding this item, Operating Results for the six-month period, a loss of $0.8 million, compares to a loss of $1.7 million in the prior year’s six-month period. The improved Operating Results were due to higher margins from the Company’s timber operations.

EARNINGS GUIDANCE

The Company is revising its GAAP earnings guidance range for fiscal 2014 to a range of $3.40 to $3.55 per share. The previous earnings guidance had been a range of $3.20 to $3.40 per share. This guidance includes forecast oil and gas production for fiscal 2014 in the range between 155 to 165 Bcfe (previous guidance 145 to 165 Bcfe), hedges currently in place and a flat NYMEX price of $4.50 per MMBtu for natural gas and $95 per Bbl for crude oil for unhedged production for the remainder of the fiscal year.

EARNINGS TELECONFERENCE

The Company will host a conference call on Friday, May 9, 2014, at 11 a.m. Eastern Time to discuss this announcement. There are two ways to access this call. For those with Internet access, visit the investor relations page at National Fuel’s website at investor.nationalfuelgas.com. For those without Internet access, access is also provided by dialing (toll-free) 1-877-280-4957, using passcode “82946243.” For those unable to listen to the live conference call, a replay will be available at approximately 3 p.m. Eastern Time at the same website link and by phone at (toll-free) 1-888-286-8010, using passcode “28597692.” Both the webcast and telephonic replay will be available until the close of business on Friday, May 16, 2014.

National Fuel is an integrated energy company with $6.6 billion in assets comprised of the following five operating segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. Additional information about National Fuel is available at www.nationalfuelgas.com.

Certain statements contained herein, including statements identified by the use of the words “anticipates,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects,” “believes,” “seeks,” “will,” “may” and similar expressions, and statements which are other than statements of historical facts, are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company’s expectations, beliefs and projections contained herein are expressed in good faith and are believed to have a reasonable basis, but there can be no assurance that such expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors, the following are important factors that could cause actual results to differ materially from those discussed in the forward-looking statements: factors affecting the Company’s ability to successfully identify, drill for and produce economically viable natural gas and oil reserves, including among others geology, lease availability, title disputes, weather conditions, shortages, delays or unavailability of equipment and services required in drilling operations, insufficient gathering, processing and transportation capacity, the need to obtain governmental approvals and permits, and compliance with environmental laws and regulations; changes in laws, regulations or judicial interpretations to which the Company is subject, including those involving derivatives, taxes, safety, employment, climate change, other environmental matters, real property, and exploration and production activities such as hydraulic fracturing; governmental/regulatory actions, initiatives and proceedings, including those involving rate cases (which address, among other things, allowed rates of return, rate design and retained natural gas), environmental/safety requirements, affiliate relationships, industry structure, and franchise renewal; changes in the price of natural gas or oil; changes in price differential between similar quantities of natural gas or oil sold at different geographic locations, and the effect of such changes on commodity production, revenues and demand for pipeline transportation capacity to or from such locations; other changes in price differentials between similar quantities of natural gas and oil having different quality, heating value, hydrocarbon mix or delivery date; impairments under the SEC’s full cost ceiling test for natural gas and oil reserves; uncertainty of oil and gas reserve estimates; significant differences between the Company’s projected and actual production levels for natural gas or oil; changes in demographic patterns and weather conditions; changes in the availability, price or accounting treatment of derivative financial instruments; delays or changes in costs or plans with respect to Company projects or related projects of other companies, including difficulties or delays in obtaining necessary governmental approvals, permits or orders or in obtaining the cooperation of interconnecting facility operators; financial and economic conditions, including the availability of credit, and occurrences affecting the Company’s ability to obtain financing on acceptable terms for working capital, capital expenditures and other investments, including any downgrades in the Company’s credit ratings and changes in interest rates and other capital market conditions; changes in economic conditions, including global, national or regional recessions, and their effect on the demand for, and customers’ ability to pay for, the Company’s products and services; the creditworthiness or performance of the Company’s key suppliers, customers and counterparties; economic disruptions or uninsured losses resulting from major accidents, fires, severe weather, natural disasters, terrorist activities, acts of war, cyber attacks or pest infestation; significant differences between the Company’s projected and actual capital expenditures and operating expenses; changes in laws, actuarial assumptions, the interest rate environment and the return on plan/trust assets related to the Company’s pension and other post-retirement benefits, which can affect future funding obligations and costs and plan liabilities; the cost and effects of legal and administrative claims against the Company or activist shareholder campaigns to effect changes at the Company; increasing health care costs and the resulting effect on health insurance premiums and on the obligation to provide other post-retirement benefits; or increasing costs of insurance, changes in coverage and the ability to obtain insurance. The Company disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date thereof.