“In our exploration and production business, even though we achieved our highest ever average daily production rate this past quarter, we were expecting more. It’s a slight disappointment that we modestly lowered the midpoint of our production guidance to the low end of the range that we established last August.” So said National Fuel Gas Company (NFG) CEO Ron Tanski in talking about NFG’s Seneca Resources shale drilling subsidiary on a conference call last Friday.
NGF released it’s second quarter (everyone else’s first quarter) financial and operational numbers late last week.
NFG is a utility company headquartered in Western New York State, operating drilling subsidiary Seneca Resources and pipeline subsidiary Empire Pipeline. Via Seneca Resources, NFG drills wells in northcentral and northwestern PA. Via Empire Pipeline, they build and maintain hundreds of miles of pipelines. Big company. Important company.
As an aside, CEO Ronald Tanski recently announced he will retire in July (see NFG CEO Tanski Retiring in July, Replacement Named).
As for Seneca, second quarter net production was 48.8 billion cubic feet equivalent (Bcfe), or 542 million cubic feet equivalent per day (MMcfe/d). Roughly half a Bcf per day. That’s an increase of 2.7 Bcfe, or 6%, from the prior year. That 542 MMcfe/d number includes gas AND oil production in the Marcellus/Utica and in Seneca’s operational area in California. Natural gas production by itself (no oil) increased 3.3 Bcf, or 8%, in 2Q19 due primarily to production from new Marcellus and Utica wells. Even so, Seneca has lowered its “guidance” (best guess prediction) for 2019 production by 5%, as you’ll read in the comments below.
As for Empire Pipeline, there was quite a bit of activity last quarter, including a FERC certificate for the Empire North project, positive legal and regulatory developments on the Northern Access project, and the start of construction on Empire’s Line N to Monaca project.
Let’s begin with the full, official 2Q19 update, which includes company financials and operational details:
NFG-3.31.2019-Earnings-Release-050219-PDF
…
As for the conference call, we’ll begin with Ron Tanski’s opening/prepared remarks:
Good morning, everyone. Thanks for joining us. As we highlighted in last evening’s release, earnings for the second fiscal quarter of 2019 were fairly consistent with last year and in line with our expectations. Emerging from the winter heating season that was slightly colder than last year in our New York jurisdiction, we saw a slight uptick in earnings in the utility business where throughput was 1.7 billion cubic feet higher than last year’s second quarter.
Because our weather normalization mechanism offsets most of the impact of colder weather, the increase in utility earnings came largely from higher margin, lower interest expense and other minor rate adjustments. The higher earnings in utility helped to offset an expected decrease in the pipeline and storage segments earnings that was caused by the expiration of a shippers transportation contract and our Empire Pipeline system.
As we’ve talked about before, KeySpan had used that capacity to import Canadian gas and transport it to its downstate service territory. The proliferation of Pennsylvania shale production closer to keySpan service territory ultimately made the Canadian gas uneconomic and KeySpan let the contract expire at the end of its term. Today, the capacity on the pipeline is fully contracted to move gas in the opposite direction and that capacity will be further expanded next year.
In our exploration and production business, even though we achieved our highest ever average daily production rate this past quarter, we were expecting more. It’s a slight disappointment that we modestly lowered the midpoint of our production guidance to the low end of the range that we established last August.
Operationally, we’ve experienced longer drilling and completion times on our Utica wells which will shift production that we had planned for this year the fiscal 2020. The delay in well the turn on dates is not expected to materially change the economics of our Utica drilling program. Later in the call John McGinnis, will get into more details of Seneca’s operations and plans.
In our pipeline business, all of our development projects continue to move along on schedule. In March, the Federal Energy Regulatory Commission or FERC issued a certificate for our Empire North project. This is the project that will add the capacity that I talked about earlier and we plan to have it in service during the second half of fiscal 2020.
With the certificate in hand, we’ve placed orders for some of the items, that have longer lead times and we’ve requested a limited notice to proceed from FERC to begin preliminary construction activities during the current fiscal year. Actually last evening, we filed for a full notice to proceed from FERC. Now this will lead to some spending on the project this year and we’ll have a steady ramp up in construction activities and spending through fiscal 2020.
As a reminder, this project will add $25 million per year in annual revenues to the system. We also received another favorable ruling from FERC in our Northern Access Project. As you may recall last August, FERC issued an order finding that the New York Department of Environmental Conservation effectively waived it’s water quality certification authority under the Federal Clean Water Act.
The DEC and the Sierra Club subsequently requested rehearing from FERC, and FERC denied those requests in April. In addition, in February, the US second Circuit Court of Appeals issued an order vacating and remanding the DEC’s denial of the water quality certification.
While we’re certainly pleased with the progress that have been made and the legal and regulatory fronts and remain hard at work securing the remaining approvals, necessary to seek a notice to proceed from FERC, we expect the construction is still a few years off. Construction is underway however for longer line and pipeline system in Pennsylvania, where we’re installing a lateral to connect our system to the new Shell petrochemical plant that is also under construction.
We expect our pipeline lateral to be finished by the end of the summer and transportation services provided to Shell will add approximately $5 million in revenue on an annual basis. We’ve included more detail for those projects and our FM 100 Project in our quarterly slide deck, that we have online entering into the summer construction season, we’re pretty well lined up with all our pipeline modernization projects in both the interstate pipeline business and the utility business.
We’re pleased that the New York Public Service Commission approved an extension of our system, modernization tracker through March 2021. This extension allows us to continue to make significant investments in the safety and reliability of our distribution system and provides a line of sight and continued albeit modest growth in the utility for the next couple of years.
As you may recall this tracking mechanism was part of our last rig case and kicked in last December when we exceeded established mileage and plant related targets. It allows us timely rig recovery of incremental investments in pipeline modernization across our New York service territory and was originally scheduled to sunset in March 2020.
On a personal note, you may have seen my retirement announcement for this July. You’ve all gotten to know Dave Bauer over the years and he will become President and CEO, effective July 1. The Board now have full confidence in Dave and the entire management team and we expect that will be a seamless transition. Our succession plan for other management moves on July 1st will likewise consist of the internal shifting of our experienced home-grown talent.
We’re pleased with where our business is headed. We have investment plans and operating procedures to keep both our regulated and gathering pipeline systems safe. We believe that our oil and gas development strategy continues to work and needs no major retooling and we remain confident that we will meet our targeted 15% to 20% average annual production growth over the next few years.*
Seneca Resources President John McGinnis then delivered his prepared remarks:
Good morning, everyone. Seneca experience mixed results in the second quarter. On a positive note, we saw some really nice well results. We brought to production four Utica development wells at DCNR 007, the first new wells since 2016. These wells are looking great and this trust is now producing over 60 million a day. Three other wells are producing at rates of around 15 million a day and our fourth well which is still cleaning up is currently at just over 10 million a day.
Our two new Marcellus wells at DCNR 100 came on as expected as did our most recent Utica pad and the WDA. However, the quarter was not without its challenges. Though we achieved record daily production levels this quarter, we felt short of our expectations. The shortfall relative to our expectations was mostly a result of some operational curtailments.
The impact of our continued testing efforts to optimize our Utica drilling and completion design and the WDA and to a lesser extent, drilling and completion delays at Tract 007 and the EDA. While these operational delays have the effect of pushing production out of the future periods, they are not expected to have a material impact on our ultimate well recoveries or program economics. Looking to the full year, we are lowering our fiscal ’19 production forecast by around 5% or 10 Bcf at the midpoint, to a range of 205 Bcf to 215 Bcf. In addition to the items I discussed pertaining to the second quarter.
Our revised guidance range reflects the expected impact of drilling and completion delays and the EDA on production for the remainder of the year and builds in additional production downtime to reflect the operational realities we experienced in the first half of the fiscal year.
Our updated guidance range also reflects expected production impacts from our WDA Utica drilling and completion optimization efforts for the remainder of the year, as well as the company’s continued trend of drilling longer laterals in both the EDA and WDA. These longer laterals are expected to benefit our overall program economics.
However, the longer drilling completion times will defer the online dates related to future development pads beyond the prior plan. Even with this decrease, we still expect production growth to range between 15% to 20% year-over-year and to continue to grow at that rate for the next several years with our three rig program.
We continue to make excellent progress with our Utica program in the WDA. We brought on line, a total of 11 wells over the past two quarters. Three at the end of November, another four in the last week of December, and four new wells in March.
As we continue to focus on optimizing our drilling completion design in this area, we are testing landing target and several completion design variations that so far have included stage spacing, proper loading and produced fluid blend. During this ongoing testing, we expect to see some variability within our program as we fine tune our well design.
We experienced some of this variability last quarter where two of our Utica wells underperformed compared to the remaining wells brought to production. Our early assessment of these two wells indicate that the poor performance is attributable to a high produced fluid blend percent used during the completion operations. Of the 21 CRV Utica wells brought online to date, our poorest performers were either brought online to aggressively, or completed with a 95% or greater produced fluid blend.
Though a limited data set results so far suggest that the percent produced fluid blend maybe nearly as impactful to well performance as our restricted drawdown management practice. Therefore based on our learnings going forward, we will employ a lower produced fluid blend in our completion design on future WDA Utica wells. Our most recent Utica pad brought online in March, utilize the fluid blend ranging between 75% to 85% on all four wells and are producing consistent with our Type curve. The 21 WDA Utica wells now online, we continue to be incurred by overall results.
Our Type Curve remains at 1.7 Bcf per 1,000ft, we have another six Utica wells scheduled to come online late in fiscal ’19 and as stated last quarter, once all 27 wells have been producing for a few months, we’ll provide an updated Type Curve and additional insight related to our drilling completion design optimization.
The WDA Utica is tremendous potential for our company and combined with the co-development of our Marcellus and full ownership of the midstream-gathering, we envision strong integrated returns from our WDA assets for many years to come. For the remainder of the year, we plan to bring to production six additional Utica wells and six Marcellus wells on the WDA and 10 Marcellus wells in the EDA. Five of the EDA wells, however, are scheduled to come online very late in the fourth quarter. Our fiscal ’19 CapEx guidance remains the same with capital expenditures ranging from $460 million $495 million.
Moving forward, we have locked in approximately 79 Bcf of firm sales in Pennsylvania at an average realized price of $2.42 per Mcf, and another 14 Bcf for production was basis production to our firm sales portfolio. Therefore we have locked in physical sales for almost 90% of our remaining fiscal ’19 production. We currently estimate around 11 Bcf available for sale into the spot market and as we see opportunities, we’ll continue to layer in additional sales.
Spot prices remained strong during the second quarter and have recently fallen into the plus or minus $2 range at each of our three receipt points. Fortunately, we have minimal spot exposure, but please recall our production forecast assumes no marketing curtailments for the remainder of the year.*
Here’s a copy of the slide deck used during the conference call:
NFG-Q2-2019-Investor-Presentation-FINAL
…
We located the following passages of interest from the Q&A portion of the call.
First up, will Seneca continue to operate three rigs through the balance of 2019?
Holly Stewart
Maybe I guess on that note, recognizing you’re pretty locked in on the firm sales for 2019. But given pricing overall for NYMEX is kind of trending toward multiyear lows here. How are you thinking about that three rig program as we move into the back half of 2019 and beyond?
John McGinnis
Yes, well, we’ve committed to firm capacity on pipe. And so we have — we’ll stay at three rigs, we’ve committed to (???), it’s 330 million a day and so our goal in the short term, at least over the next couple of years is to make sure that when that pipe comes online that we can fill it.*
Is there an opportunity for Seneca (or Empire) to develop a water business alongside its drilling (or pipeline) business?
Holly Stewart
Okay, great. And then maybe just one to other one we’ve heard a lot I think this quarter about just water in general, whether it’s impacting the LOE or whether it’s actually water infrastructure assets for sale. So it’s been pretty topical, can you maybe help us think through your water handling both in the EDA and the WDA and if there is an opportunity for your midstream business, I guess it would be particularly in the EDA on third quarter water volumes?
John McGinnis
Yes, it’s actually a tough question. We have a very large Central Water Facility in the WDA. In the EDA, it’s much smaller because the volumes that we see being produced in the East or just not what we see in the West. So we do — we have a very large water facility. We typically do bring in third-party produce water when it is necessary.
When we need the water, but we also will supply water to other operators, when they need it. I’m not sure it’s a business, I want to get into. We view it as a means in which to drive down our water costs.*
How long are Seneca’s laterals?
Gordon Loy
Good morning, all and thank you for your time. So I just had kind of two quick questions, but the first one in the opening remarks. You guys mentioned that there is a continued trend towards drilling longer laterals and I just wanted to get a sense of, I guess what’s the average lateral length that the company is drilling now and where do you guys foresee that going to.
John McGinnis
Sure. Let’s start in the WDA, six months — nine months ago, we’re drilling 6,000 foot roughly plus or minus a thousand foot appraisal wells in the Utica. Today we’re drilling eight, nine, even over 10,000 foot Utica wells. Our Marcellus wells, we just recently drilled Marcellus pad. We typically average 6,000 to 7,000 foot, most of those wells were 8,000, 9,000, 10,000 foot. well, so we’re seeing an increase of anywhere from 2,000 to 3,000 feet collateral, at least in the WDA.
Perfect example in the East is we’re now at a pad, in the Gamba Lycoming area, where we had assumed or expected that we’d be drilling 4,500 foot lateral. We just finished that well and it ended up being I think north of 55 if I remember correctly. And so just to give you a sense of perspective let’s go to the West. For every 2500 foot of lateral, probably adds — let’s say we have four wells on a pad that may add four or five days to drill time and it may add, obviously it’s going to add additional completion time, because we are going to be have more stages. So every four, five, six well pad for drilling that greater of a lateral, if I add anywhere from three to four weeks just to get that that pad online,
Gordon Loy
Got it, that makes sense. And then my follow-up is — I’m looking on Slide 19 and you have kind of the well cost estimate for the Utica CIB and it’s currently at about 95 per lateral foot. Is that kind of the expected well cost when it — when you guys into more development mode or is that just what it’s kind of averaging right now?
John McGinnis
That’s essentially, it’s kind of what it’s averaging right now. Early on, we try to make forecasts on that. And then as we get more and more wells, then we tend to look at what the averages or contracts, obviously that are associated with it.*
What about DUCs?
Chris Sighinolfi
The final question for me would be then, you mentioned I think in the WDA, six Utica, six Marcellus and then the EDA 10 Marcellus for the remainder of the year. I’m just curious given the program, so the time profile with longer laterals, et cetera. What sort of DUC inventory do you envision at the end of your fiscal year setting up for next?
John McGinnis
Yes, any DUCs that we…really have that significant will be in the WDA, where we have two rigs running. In the EDA, as soon as we’re done drilling on a pad, we have a spot moving in to get that pad completed.
Chris Sighinolfi
Okay. So the delay in the timing, didn’t meaningfully change. I guess that year-on-year cadence in terms of where your inventory to complete in the West might be the –
John McGinnis
Yes. No, it just pushes us back a month and a half is really what the delay is still.*
Why are you projecting lower production for 2019? Please ‘splain it again.
Becca Followill
Good morning, guys. Following up on Chris’ question. The third part of the rationale for the lower guidance, the trending toward drilling longer laterals, what has changed from the prior guidance. I mean — are you — was it a prior guidance ex-lateral and now its ex or what’s the different?
John McGinnis
Yes, we set our guidance, our range, very early obviously before– back in August I think is when we set it. And as we move forward and begin to better understand some of these areas we’ll permit them long and if we have the opportunity to continue to drill them longer, we’ll do so.
Historically when we drilled Marcellus wells, we’ve drilled — we permitted them long and have always ended up being maybe a 1,000, 2,000 feet shorter than what we have permitted because of structural complications and we’re just not finding that in the Utica. So in terms of our forecast and we’ve tended to under forecast what our final laterals will be based on what we’ve done to date.*
We’re not really interested in the following question, but we are interested in the answer, which reveals how many Marcellus wells and how many Utica wells Seneca has drilled. It’s obvious in the response that the Utica has caught Seneca’s eye.
Becca Followill
Because it’s still, I mean you’re still really early in the development at this play with the number of wells you drilled compared to how many you plan to. So when you do your forecast for 15% to 20% growth, how much do you factor into there, the fact that the mix is going to change and some wells are not going to work and you’re still kind of in science. So how do you risk-adjust that 15% to 20%.
John McGinnis
That’s a great question. We’ve drilled 350 Marcellus wells and we’ve really gotten that we have fine-tuned our forecasting related to that program. The Utica, we drilled a whopping 26 wells and so we’re still learning as you just mentioned and we try to be a bit conservative on our forecasts.
But having said that, maybe at least during this early period, as we’re trying to understand and optimize our drilling and completion. It’s going to little — typically a little slower than we envisioned. But I think as we continue to drill these wells, we will begin the lock down at least a more accurate forecast going forward. So there is a lot of noise early, we try to be conservative, but I think because we’ve been drilling Marcellus wells for long — for such a long time for pushing 10 years, we under-appreciated the learning curve related to some of these new areas.*
*Seeking Alpha (May 3, 2019) – National Fuel Gas Company (NFG) CEO Ron Tanski on Q2 2019 Results – Earnings Call Transcript
This post appeared first on Marcellus Drilling News.