As we discussed previously in this series, National Fuel Gas (NFG) noted in its latest fiscal 3Q14 results that its earnings growth was driven by higher earnings in its Midstream and Upstream businesses. But, despite increased production, NFG’s earnings in 3Q14 were hit by lower natural gas prices and a limited pipeline capacity in the Marcellus Basin.
In this article, we’ll discuss National Fuel Gas’ initiatives to manage these challenges.
Agreements for pipeline expansion
NFG’s management noted on the latest 3Q14 earnings call that to deal with the commodity pricing challenge in the near term, its exploration and production subsidiary, Seneca, has entered into “firm sales agreements and pick up transportation capacity” that will help “to mitigate the impact of lower spot pricing.”
Seneca said it signed a precedent agreement for 189,405 dekatherms (or Dth) per day of firm transportation capacity on Transco’s Atlantic Sunrise pipeline expansion project. The project will deliver natural gas to the Mid-Atlantic and Southeast U.S. The company expects this capacity to be available starting in the fall of 2017. The term of the contract is 15 years.
Seneca has also signed precedent agreements to transport natural gas from its WDA in Pennsylvania to markets in Canada with NFG subsidiaries National Fuel Gas Supply Corporation and Empire Pipeline, along with the TransCanada Pipeline (Northern Access 2016 project) and Union Gas Limited. A press release said these agreements provide Seneca with 350,000 Dth per day of firm transportation capacity starting in late 2016 to move natural gas from the outlet of the Clermont Gathering System to the Dawn market hub in Ontario, Canada. By November 2016, Seneca will have more than 550,000 Dth per day of capacity into Ontario, including the above-mentioned project.
Management noted that with these agreements, the company has been successful in “securing long-term markets for a large portion of its future production.”
NFG expects to continue investing in pipeline infrastructure that will accommodate the increasing production. Management said the pipelines would also help move the “growing volume of our production to an alternative market that is quite large and has better pricing than we’re seeing at Dominion South Point or on the Tennessee system.”
Alternate funding could involve the creation of an MLP for midstream or upstream assets
The company noted on the earnings call that its capital expenditure forecast for fiscal 2014 and 2015 was revised, It currently highlights requirements for more than $500 million over the next 15 months. NFG also has ongoing gathering and transmission system build-outs continuing into 2016 and 2017, coupled with Seneca’s drilling activities. These requirements have prompted the company to explore other sources of funding apart from leverage. Management hinted that a “traditional midstream pipeline master limited partnership” or MLP could be one tax-efficient option. They also acknowledged the success of some “recent MLP structures for upstream assets” that could be worth exploring.
Midstream MLPs include Enterprise Products Partners (EPD) and Plains All American Pipeline (PAA). Upstream MLPs include Linn Energy (LINE), BreitBurn Energy (BBEP), Vanguard Natural Resources (VNR), and EV Energy Partners (EVEP). Check out our series on MLP basics here. A low-cost way to gain diversified exposure to U.S. energy MLPs is the Alerian MLP ETF (AMLP).