8-K: National Fuel Gas Company Reports Third Quarter Fiscal 2024 Results and Issues Preliminary 2025 Guidance

National Fuel Gas Company announced its third quarter fiscal 2024 results, including a net loss due to a non-cash impairment, and provided preliminary fiscal 2025 earnings guidance.

Summary

• National Fuel Gas Company reported a GAAP net loss of $54.2 million, or $0.59 per share, for the third quarter of fiscal year 2024, which includes a $145.0 million after-tax impairment charge.
• Adjusted operating results for the quarter were $91.7 million, or $0.99 per share, compared to $93.4 million, or $1.01 per share, in the prior year.
• The Pipeline and Storage segment saw a 29% increase in net income, primarily due to the resolution of a rate proceeding.
• The Utility segment's net income increased by $2.5 million due to a rate increase in Pennsylvania.
• Seneca Resources produced 96.5 Bcf of natural gas, a 2% increase year-over-year, despite price-related curtailments.
• The company's realized natural gas price was $2.28 per Mcf, a slight increase from the prior year.
• The Gathering segment's net income increased by 3% due to increased throughput.
• The Board approved a 4% dividend increase, bringing the annual rate to $2.06 per share.
• The company repurchased approximately 527,000 shares year-to-date for $29 million.
• Fiscal year 2024 earnings guidance is narrowed to $5.00 to $5.10 per share, excluding items impacting comparability.
• Preliminary fiscal year 2025 earnings guidance is set at $5.75 to $6.25 per share, a 19% increase at the midpoint from fiscal 2024.
• The company expects average annual earnings per share growth to exceed 10% over the next three years.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the strong forward guidance for fiscal 2025 and the commitment to shareholder returns, but the current quarter's net loss and impairment charge temper the overall outlook.

Positives

• The Pipeline and Storage segment experienced a 29% increase in net income due to the resolution of a rate proceeding.
• The Utility segment's net income increased by $2.5 million due to a rate increase in Pennsylvania.
• Seneca Resources increased natural gas production by 2% year-over-year, despite price-related curtailments.
• The company's hedging program mitigated the impact of lower natural gas prices.
• The Board approved a 4% dividend increase, demonstrating a commitment to shareholder returns.
• The company is narrowing its fiscal 2024 earnings guidance to a higher range.
• Preliminary fiscal 2025 earnings guidance indicates a significant 19% increase at the midpoint from fiscal 2024.
• The company expects average annual earnings per share growth to exceed 10% over the next three years.
• The company is seeing significant growth in its regulated businesses due to recent ratemaking activity and modernization programs.
• The transition to the Eastern Development Area is exceeding expectations and improving capital efficiency.

Negatives

• The company reported a GAAP net loss of $54.2 million for the third quarter of fiscal 2024.
• The net loss includes a $145.0 million non-cash, after-tax impairment charge related to exploration and production properties.
• Seneca Resources experienced approximately 5.6 Bcf of price-related curtailments in the quarter.
• The Exploration and Production segment's adjusted operating results decreased by $10.5 million.
• The company's fiscal 2024 net production is expected to decrease by 2.5 Bcf from previous guidance at the midpoint.
• The company experienced a decrease in investment income on marketable securities and corporate-owned life insurance policies.

Risks

• Impairments under the SEC's full cost ceiling test for natural gas reserves could impact future earnings.
• Changes in natural gas prices could affect the company's profitability.
• Changes in laws and regulations related to the energy industry could impact operations.
• Governmental and regulatory actions, including rate cases, could affect the company's financial performance.
• The company faces risks related to estimating emissions targets and reducing reliance on natural gas.
• Economic conditions, including inflation and recessions, could impact demand for the company's products and services.
• The company is exposed to risks related to the creditworthiness of suppliers, customers, and counterparties.
• Financial and economic conditions could affect the company's ability to obtain financing.
• Information technology disruptions and cybersecurity breaches pose a risk to operations.
• The company faces risks related to identifying and producing economically viable natural gas reserves.
• Increasing healthcare costs could impact the company's financial obligations.
• Legal and administrative claims, as well as activist shareholder campaigns, could affect the company.
• Negotiations with collective bargaining units could lead to work stoppages.
• Uncertainty of natural gas reserve estimates and differences between projected and actual production levels could impact results.
• Changes in weather conditions, including those related to climate change, could affect operations.
• Changes in the availability, price, or accounting treatment of derivative financial instruments could impact results.
• Changes in laws, actuarial assumptions, and the interest rate environment related to pension and post-retirement benefits could affect future funding obligations.
• Economic disruptions or uninsured losses from major accidents, fires, severe weather, natural disasters, terrorist activities, or acts of war could impact operations.
• Significant differences between projected and actual capital expenditures and operating expenses could affect results.
• Increasing costs of insurance, changes in coverage, and the ability to obtain insurance could impact the company.

Future Outlook

The company anticipates strong long-term growth in earnings and free cash flow, with average annual earnings per share growth expected to exceed 10% over the next three years. The company expects to see further improvements in capital efficiency due to the transition to the Eastern Development Area and growth in regulated businesses due to recent ratemaking activity and modernization programs. Fiscal 2025 earnings guidance is set at $5.75 to $6.25 per share, a 19% increase at the midpoint from fiscal 2024.

Management Comments

• David P. Bauer, President and Chief Executive Officer, stated that National Fuel's solid third quarter adjusted operating results were bolstered by increased earnings from rate-regulated businesses and a disciplined hedging program.
• He also noted that the company's long-term outlook for growing earnings and free cash flow remains strong.
• Bauer mentioned that the ongoing transition to Seneca's Eastern Development Area continues to exceed expectations and positions the company well for further improvements in capital efficiency.
• He also highlighted significant growth in regulated businesses due to recent ratemaking activity and ongoing modernization programs.
• Bauer stated that the company expects to deliver greater than 10% average annual growth in earnings per share over the next three years.
• He emphasized the company's commitment to returning an increasing amount of capital to shareholders through dividends and share repurchases.

Industry Context

This announcement reflects the ongoing challenges and opportunities in the natural gas industry, including price volatility, regulatory changes, and the need for infrastructure modernization. The company's focus on hedging, cost management, and strategic development aligns with industry trends aimed at mitigating risks and enhancing profitability. The company's growth in regulated businesses is also consistent with the industry's focus on stable, predictable returns.

Comparison to Industry Standards

• National Fuel's adjusted operating results of $0.99 per share are comparable to other integrated natural gas companies, but the GAAP net loss due to the impairment charge is a significant deviation.
• The 29% increase in Pipeline and Storage segment net income is a strong performance compared to peers, reflecting the positive impact of the rate case resolution.
• The 2% increase in Seneca's natural gas production is modest, but the company's focus on the Eastern Development Area and capital efficiency improvements is a positive sign.
• The company's hedging program appears to be effective in mitigating price volatility, which is a common strategy among natural gas producers.
• The 4% dividend increase and share repurchase program are in line with industry trends of returning capital to shareholders.
• The preliminary fiscal 2025 earnings guidance of $5.75 to $6.25 per share is a significant increase and suggests a positive outlook compared to some peers.
• The company's capital expenditure plans are consistent with the industry's focus on infrastructure modernization and development of new production areas.
• Companies like EQT Corporation and Southwestern Energy also operate in the Appalachian basin and are comparable to Seneca Resources. EQT has also been focused on operational efficiencies and cost reductions.
• Other integrated gas companies like ONEOK and Williams Companies have similar pipeline and storage operations, and their performance can be used as a benchmark for National Fuel's midstream business.
• Utility companies like Consolidated Edison and NiSource can be compared to National Fuel's utility segment, particularly in terms of rate case outcomes and system modernization efforts.

Stakeholder Impact

• Shareholders will benefit from the increased dividend and share repurchase program.
• Employees may see increased job security due to the company's growth plans.
• Customers may benefit from improved service reliability due to system modernization.
• Suppliers may see increased business opportunities due to the company's capital expenditure plans.
• Creditors may view the company's strong forward guidance as a positive sign.

Next Steps

• The company will continue its transition to the Eastern Development Area.
• The company will proceed with the rate case filed in late 2023 in its New York jurisdiction.
• The company will continue its multi-year build out of key centralized infrastructure in the Tioga County region.
• The company will host a conference call on August 1, 2024, to discuss the announcement.

Key Dates

Keywords

natural gas, exploration and production, pipeline, storage, utility, earnings, financial results, rate case, hedging, dividend, share repurchase, capital expenditures, production, EBITDA, impairment