Dave Bauer - President, Chief Executive Officer Karen Camiolo - Treasurer, Principal Financial Officer John McGinnis - President of Seneca Resources Ken Webster - Director of Investor Relations

Ladies and gentlemen, thank you for standing by and welcome to the Q3, 2020 National Fuel Gas Company Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions]. Please advise that today’s conference is bring recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ken Webster, Director of Investor Relations. Please go ahead, sir.

Thank you, Ian, 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, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources. At the end of the prepared remarks we will open the discussion to questions. The third quarter fiscal 2020 earnings release and August 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 are made 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. National Fuel will be participating in the Berkeley’s Energy Conference in September. Please contact me or the conference planners to schedule a meeting with the management team. With that, I'll turn it over to Dave Bauer.

Thanks Ken. Good morning everyone. As with most oil and gas companies, poor commodity prices weighed on the third [Audio Gap] gathering business. However, the remainder of the system had a very solid third quarter with pipeline earnings up nearly 45% on the strength of Supply Corporation’s recent rate settlement and stable utility earnings in spite of the COVID pandemic. All-total, the quarter was another great example of the benefits of our integrated diversified model, where the earnings and cash flows of our regulated businesses provided a strong measure of stability against the more variable earnings of our E&P business. Operationally this was a really significant quarter for National Fuel, one in which we reached several important milestones that make us well positioned to deliver meaningful growth in the years to come. First and foremost, last week we closed on the acquisition of Shell's upstream and midstream properties in Appalachia. This is a terrific opportunity to check all the boxes we were looking for in an acquisition. From start to finish it was the result of the exceptional work of dozens of employees across our upstream and midstream operations; hats off to the team on a job well done. The acquisition meaningfully increases our presence in Appalachia. In fact earlier this week Seneca's gross natural gas production crossed the 1 Bcf per day threshold. This is a great milestone, and to put it in perspective, in fiscal 2018 our average daily production was only about half that. With the added scale, we expect to realize immediate cost synergies and you can see that in our guidance on cash operating costs, which we expect will be down about $0.05 per Mcfe in ‘21. The financing for the transaction is complete. Kudos to our finance team and the banks that supported them…

Thanks Dave and good morning everyone. In echoing Dave’s remarks, we are excited to move forward after successfully closing on the acquisition of Shell's Appalachian upstream and midstream assets last week. At the time of closing, these shallow declining properties were producing around 220 million cubic feet per day net. This additional scale is expected to be immediately accretive to Seneca’s cost structure. And to put this into context, our G&A expense as a result of the Shell acquisition is expected to increase less than 5% in fiscal ’21, while our net production is expected to increase by over 30%. Although our purchase price for these assets, describe no value for the reserves beyond crude producing, we are working towards maximizing the upside as we integrate these assets into our overall development plan. We have now added significant Utica and Marcellus inventory in Tioga County, contiguous to our existing operations, an area we have been active for over a decade and we know very well. In addition, we've also acquired valuable low cost pipeline capacity, including $200 million a day from transport on National Fuel's Empire System and $100 million a day on Dominion. In fact, as a result of this Dominion capacity which provides access to Leidy Hub, Seneca’s in the unique position of being able to flow production from each of its three major producing areas into its FM100 Leidy South capacity. Moving forward, we work closely with our midstream group to determine how to best integrate our development and pipeline activity, then minimize capital deployment, drive operating efficiencies and maximize the value of these assets. Now turning to our third quarter, Seneca had strong operational results producing 56 Bcfe, an increase of around 2% compared to last year's third quarter, despite 7.3 Bcf of price related curtailments.…

Thank you, John, and good morning everyone. GAAP earnings per share were $0.47 for the third quarter, adjusting for items impacting comparability, including the ceiling test impairment charge recorded in our E&P segment, adjusted operating results were $0.57 per share, a decrease of $0.14 from the prior year. Strong results from our pipeline and storage segment due to the impact of the supply rate case and lower operating expenses were more than offset by lower natural gas and oil price realizations. Last night's release explains the major earnings drivers, so I won't repeat them here. Instead I’ll discuss our expectations for the remainder of the fiscal year and our initial guidance for next year. As it relates to fiscal ’20, our updated earnings guidance is $2.75 to $2.85 per share, a decrease of $0.10 at the midpoint. This change is due to a few main drivers. As John mentioned, the largest decrease can be attributed to price related curtailments during the third quarter and approximately 6 Bcf of additional curtailments expected during the fourth quarter. These curtailments will have a corresponding reduction to throughput in the gathering segment. From a pricing perspective, we've revised our NYMEX gas and WTI oil assumptions, but given our strong hedge position these changes generally offset each other from an earnings perspective. Additionally, we’ve reflected the execution of our permanent financing for the Shell acquisition. Given the market backdrop we completed the necessary financing well ahead of closing and upsized our debt issuance to term out our revolver and enhance liquidity in advance of our December 2021 maturity. As it relates to the rest of our assumptions, there was some movement of expenses between the third and fourth quarter in our regulated subsidiaries, but substantially all of our other guidance items for fiscal ‘20 remain…

[Operator Instructions] Your first question comes from the line of Holly Stewart of Scotiabank. Your line is open.

Good morning gentlemen and Karen.

Hi!

Hi Holly.

My first question is for John. Listen, John I know we've talked about this on past calls, but just as you think about the activity level, I know you've noted before that you wanted to see more than just you know a rally in 2021. We're starting to see that based on you know we're ‘21 and ‘22 strip is heading. So just you know kind of wanted to revisit that topic and see where we go from here in terms of potentially adding capital back to the business.

Yes, thanks Holly. Actually you're exactly right and to tell you the truth, we are approaching prices that make sense. But once we get some visibility related to the online date of Leidy South, I think we would certainly consider adding back that second rig a few months prior, so we are already looking at that. Honestly though, right now it still doesn't make sense to add a rig just to produce into the spot market. It has to be tied to as we grow into these opportunities to get our gas into some premium markets, but we are – this is definitely something we’re evaluating as we speak.

Okay, and as you think – a follow-up to that. I guess as you think about that, would that rig go to work in the EDA?

It most likely would. We're thinking Tioga first and then moving where we need it. We will move the rig after that, where we need it.

Okay, great. And then you know maybe just thinking about the overall FT Capacity; you've got the new Shell capacity that’s come on your existing portfolio, and then the FM100 Project. So I'm assuming you're end market exposure shifts a bit and actually probably improved. So how should we think about those changes to end markets?

Yeah, actually it does improve. We're probably looking at a $0.10 to $0.15 per Mcf improvement, bringing on the new Shell assets, compared to our current or our previous. So we get a $0.10 to $0.15 improvement on that.

Okay, and then – that's great, and then maybe just one more for me if I could. On the pipeline side, the FM100 Project, what's next from the regulatory standpoint before you can begin construction?

Well, we have to wait to get some state permits that are still outstanding. We don't we don't see any issues with them, but the various PA environmental agencies and the army corps have to work through that process and we’d expect that in the calendar fourth quarter of this year. Then after that we will request a kind of list to proceed, which we would expect FERC to grant in short order and then we'd begin construction likely with the tree clearing and call out late winter and then full-on construction next summer.

Got it. Thank you.

Yeah.

Your next question comes from the line of Gordon Loy of Raymond James. Your line is open.

Yes, good morning all and thanks for taking my questions.

Good morning.

I mean just a couple of questions for John. I'm looking at the, call it $300 million in E&P capital for fiscal 2021 and then off of the 32 wells that you guys are trying to bring online, of those 32 wells, I guess what’s the DUC drawdown that's built into that?

Yeah, actually we’re going to be drilling 23 wells total and completing 40. So yeah, we'll be certainly completing more wells than we’re drilling. We’re bringing those 32 on and currently we’re at a DUC count, I think it's around 19 right now, 18 to 20. So we will certainly burn into that DUC count over the next 12 months.

Got it, that makes sense. And then my follow-up is, I mean back when you guys announced the Shell acquisition, you guys had this slide that's talking about having the base declines for Shell and Seneca were both in kind of the low 20% and then the expectation was that the shell asset base decline would decline to sub-20% at closing. I guess I just want to see if I can get an update on kind of where those base declines are and kind of what kind of basic decline is assumed for fiscal ‘21 for the entire business?

Yeah, absolutely. Yeah, currently the Shell wells are around the 20% decline, so pretty much in line with what we're thinking. And our Seneca add-on, so all-in including the Seneca assets we're looking at maybe 20% to 22% base decline.

Go it, that’s helpful. That’s all I had, thank you.

[Operator Instructions] Your next question comes from Chris Sighinolfi of Jefferies. Your line is open.

Hey everyone, this is Ryan on for Chris. First, John I know you touched on this a bit in your prepared remarks, but wanted to ask you about the CapEx guidance of $290 million to $330 million. I believe on last quarter’s call you gave a soft guide of $350 million, so I’m just wondering what's changed and if there’s in the Shell acquisition that will be driving capital efficiencies. And similarly we noticed unit costs are expected to come down about 6% year-over-year, so anything you can offer on those two things would be great.

Okay sure, thank you. Yeah our costs, our drill efficiencies have improved dramatically. We’re drilling a lot of our Utica wells a lot quicker than we used to. We're seeing efficiencies actually across the entire board on a completion as well. So we've been able to drive down costs as a result of that, so that's one of the movers. Another reason for it is, earlier this year we had drilled four Utica wells in 007 and had decided that we would defer completing those until sometime next year, but based on the pricing that we're seeing moving into this winter, we decided to accelerate that and we're currently completing those wells and we should see those, I'm thinking that will come on line later first quarter of fiscal – move some capital from fiscal ‘21 into fiscal ‘20. In terms of our per unit cost, really the big driver there is the G&A as I stated in earnings increase as a result of that. Like I said, you know we're increasing our G&A by 5% related to the Shell acquisition, but our production is increasing by well over 30%.

Okay, perfect. Speaking of cost, we know it's a relatively large step-up in ‘09 at the utility versus a pretty steep drop off at the pipeline and storage business. So I'm just curious, sort of what was going on with utility and if there’s anything that could typically be capitalized, but wasn't and the source of the expense due to you know work stoppages or anything like that?

Sure. At the utility what we're seeing is some elevated expense related to the pandemic, right, so it comes in a couple of forms. One is higher PPE for the folks out in the field on the one hand, and then in the second quarter we had a dynamic where – and I suppose to an extent in the third quarter as well, where because a part of our workforce was idled. The cost of that labor was hitting O&M as opposed to being capitalized, because that contingent would normally be working on capital projects, so that boosted O&M expense a bit. I think when you look an overall trend as Karen said in her remarks, it should be relatively stable you know may be in that low single-digit inflation area, looking at – it tends to be – except for the second quarter, it tends to be pretty stable. So the third quarter notional O&M rate is probably a good proxy for our run rate going forward. Again, the second quarter during the winter is usually quite a bit higher, you know maybe 20% or 25% higher, but we wouldn't expect a big amount of cost to increase from our current baseline. In fact, hopefully if the pandemic calms down, we'll see a moderation in expense. On the pipeline side we're looking at some timing issues as to how – a couple of ways how expenses fall between quarters on the one hand, and then when you look at our compressor overhaul work, sometimes we're able to capitalize those costs if the jobs are really big, other times we have to expense it and we got this dynamic where last year we had a lot of O&M compressor work and this year it happens to be more capital, so you get that dynamic. I think when you consider pipeline O&M looking at the last trailing 12 months is probably a good proxy for a baseline, but then add to that, I'd say somewhere in the maybe $2 million to $3 million related to the growth that we've seen, particularly, the Empire North project, and then as we begin to hire people to staff, the compressor stations in the FM100 project. So that's a really long answer, but I'm happy to be more specific on it if I can.

No, that was great. Thank you for all that. And just one last one if I could. Karen I know you mentioned that you didn't expect to need additional financing in fiscal ’21, that was one of my questions, but just an update on cash tax expectations next year if you could.

Yeah so, we are not expecting to be in a cast tax paying position next year, nope.

Okay, perfect. That's awesome.

There are no further questions over the phone lines at this time. I'll turn the call back over to Ken Webster for closing remarks.

Thank you, Ian. We'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 Friday August 14. To access the replay online, please visit our Investor Relations website at investor.nationalfuelgas.com and to access by telephone call 1-800-585-8367 and enter conference ID number 90-86-223. This concludes our conference call for today. Thank you and good bye.