National Fuel Gas (NFG), which is seeing activism from GAMCO Investors, noted in its latest fiscal 3Q14 results that its earnings growth was driven by higher earnings in the Midstream and Upstream businesses. In the previous part of this series, we focused on the factors driving earnings growth at the Midstream segment. NFG’s Upstream business comprises the Exploration and Production segment. Seneca Resources Corporation carries out this business’s operations.
Overall production grew 19%
Earnings for NFG’s Exploration and Production segment grew 2% to $32.4 million, or $0.38 per share, in 3Q14. Higher natural gas and crude oil production led to growth in earnings. Plus, NFG saw an impact of lower income taxes ($6.7 million) and the reversal of an accrual for certain plugging and abandonment costs associated with offshore properties no longer owned by the segment ($2.7 million) that further increased earnings.
Production driven by Seneca’s Appalachia properties and California fields
NFG said in its earnings release that its overall production of natural gas and crude oil for the fiscal third quarter of 2014 grew 6.5 Bcfe (billions of cubic feet equivalent), or 19.1% to 40.6 Bcfe, compared to the prior year’s third quarter. Production from Seneca’s Appalachia properties increased by approximately 6.0 Bcfe or 20.8%. The increase in Appalachian production was primarily due to increased development within the Marcellus Shale formation, mainly in Lycoming County, Pennsylvania. California production of 5.4 Bcfe rose 9.2%, driven by increased development activities, primarily in the East Coalinga and South Midway Sunset fields.
An update in July noted that Seneca’s Marcellus Shale drilling activity during the third quarter focused largely on the company’s greater Clermont-Rich Valley area. This area is located in the Elk, McKean, and Cameron counties of Pennsylvania, within the Western Development Area or WDA. This finding reflects a shift in operations from Seneca’s prior focus area in Lycoming County, Pennsylvania, in the Eastern Development Area or EDA. Seneca said it had planned this shift after its delineation drilling in the WDA confirmed substantial development opportunity.
Lower natural gas and crude oil prices impact segment earnings
NFG said in its 10Q filing that the higher earnings were offset by lower natural gas and crude oil prices after hedging. Management said on the earnings call that “natural gas pricing continues to be a significant headwind.” They said that Seneca’s weighted average natural gas price for the quarter before hedging was $3.88, down $0.16 from the prior year. The total realized price after hedging was down $0.62 per Mcf.
“The drop in pricing, along with the $3.6 million before tax mark-to-market adjustment related to the ineffective portion of our crude oil hedges, impacted earnings by $0.20 per share compared to last year,” management added.
Segment earnings also saw an impact from higher production costs ($6.5 million), higher depletion ($5.0 million), higher general, administrative, and other expenses ($0.9 million), and higher property and other taxes ($0.6 million).
As we discussed previously in this series, Range Resources (RRC), EQT (EQT), Southwestern Energy (SWN), and Cabot Oil & Gas Corporation (COG) are some of NFG’s peers operating in the Marcellus Shale. Other major players include Chesapeake Energy (CHK), Chevron Corporation (CVX), and Anadarko E&P (APC), which are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).