STRATEGIC RATIONALE
- Unique acquisition opportunity builds upon Company’s
diversified, integrated business model, with upstream and midstream
assets that are geographically contiguous and highly synergistic to
existing Tioga County, Pa. operations, and firm transportation
capacity on the Company’s Empire Pipeline system
- Acquisition is accretive to free cash flow (funds from
operations less capital expenditures), and to earnings per share,
with capital expenditure guidance for fiscal 2020 further reduced,
and planned activity levels through fiscal 2021 unchanged
- Post-acquisition, E&P and Gathering businesses expected to
generate combined free cash flow over the following twelve months
at NYMEX prices of $2.00 or higher, and in excess of $100 million
of free cash flow based on existing hedge portfolio, $2.50 per
MMBtu natural gas prices, and $25.00 per barrel (“Bbl”) WTI oil
prices
- Acquiring proved developed producing (“PDP”) natural gas
reserves at less than $0.40 per Mcfe
- Immediately accretive to E&P segment unit costs, with
increased production base expected to reduce cash operating
expenses by approximately $0.05 to $0.08 per Mcfe on an annualized
basis post-closing
- Significant hedge positions executed, minimizing commodity
price risk in fiscal 2021 and 2022
- Financing strategy will include an appropriate mix of equity,
including equity-linked securities, and long-term debt that will be
sized to maintain a strong balance sheet and the Company’s
investment-grade credit ratings
ASSET OVERVIEW
- Approximately 710 billion cubic feet (“Bcf”) of net P90 proved
reserves (100% developed producing) and net production of 215-230
million cubic feet (“MMcf”) per day estimated at closing, along
with 142 miles of gathering pipelines, compression, and related
facilities
- Expected to generate approximately $125 million in incremental
EBITDA in the year following closing, based on existing hedge
portfolio, $2.50 per MMBtu natural gas prices and $25.00 per Bbl
WTI oil prices, of which approximately $35 million is attributable
to the Gathering segment
- Over 400,000 total net acres across Pennsylvania, approximately
200,000 of which holds significant, highly economic development
potential, contiguous to the Company’s existing acreage
footprint
- 300,000 dekatherms per day (“Dth/d”) of attractive firm
transportation capacity, including 200,000 Dth/d of valuable
capacity on the Company’s Empire pipeline system, and 100,000 Dth/d
of capacity to Dominion markets, including the Leidy South project
once placed into service
National Fuel Gas Company (NYSE: NFG) (the “Company”) announced
today that it has entered into a purchase and sale agreement with
SWEPI LP, a subsidiary of Royal Dutch Shell plc (NYSE: RDS.A)
(“Shell”), to acquire Shell’s upstream and midstream gathering
assets in Pennsylvania for total consideration of approximately
$541 million, less closing adjustments that are estimated to reduce
the consideration provided at closing to approximately $500
million. The transaction is expected to close on July 31, 2020,
with an effective date of January 1, 2020, and is subject to
customary closing conditions. The transaction is not contingent on
financing conditions, and the Company has taken appropriate steps
to ensure it has ample liquidity and protections as it pursues
permanent financing for the acquisition.
As part of the transaction, the Company will acquire over
200,000 net acres in Tioga County, with net proved developed
natural gas reserves of approximately 710 Bcf. At closing, these
assets are expected to have flowing net production from both the
Utica and Marcellus shale formations of approximately 215-230
MMcf/d, with shallow base declines and an average net revenue
interest of approximately 86.5%. In addition, the Company will
acquire approximately 142 miles of gathering pipelines and related
compression, over 100 miles of water pipelines, and associated
water handling infrastructure, all of which currently support
Shell’s Tioga County production operations. These gathering
facilities are interconnected with various interstate pipelines,
including the Company’s Empire pipeline system, with the potential
to tie into the Company’s existing Covington gathering system.
Post-closing, the acquired assets are expected to generate net
natural gas production in the range of 70 to 75 Bcf over the
following twelve months. Given their contiguous nature, the Company
expects to fully integrate the assets into its existing operations
in Tioga County, Pa. This is expected to drive immediate operating
cost synergies in the E&P segment, with increased production
expected to reduce cash operating expenses by approximately $0.05
to $0.08 per Mcfe on an annualized basis post-closing. The
gathering and compression facilities included in this transaction
transport the entirety of the acquired production and are expected
to generate approximately $35 million in incremental EBITDA in the
Gathering segment over the same period.
In contemplation of this transaction, and in order to protect
the highly accretive economics of the acquisition, the Company has
executed significant additional NYMEX natural gas hedges. For
fiscal years 2021 and 2022, the Company has entered into NYMEX
hedges equivalent to approximately 75% and 55% of the acquired PDP
production, respectively, at average weighted prices of $2.71 and
$2.54, respectively. Overall, the Company currently has hedges and
fixed price physical sales in place for approximately 75% of its
expected PDP production in fiscal 2021. Further details on the
Company’s updated hedging positions are provided in the Company’s
May 2020 investor presentation.
“National Fuel’s acquisition of these high-quality assets in one
of the most prolific areas in Appalachia will provide the Company
with a unique and highly strategic opportunity to further its
integrated development approach in the region,” said David P.
Bauer, the Company’s President and Chief Executive Officer. “With
significant economies of scale provided by Shell’s large Tioga
County acreage footprint, which is contiguous to our existing
development areas, along with significant, integrated gathering
facilities, and valuable pipeline capacity, Shell’s assets are a
perfect fit for the Company’s diversified business model, and
provide meaningful synergies with our existing operations.”
“We expect this transaction to be immediately accretive to the
Company’s earnings per share and to generate substantial
incremental free cash flow over the next several years while
providing meaningful upside for the Company,” continued Bauer. “We
believe that this cash flow generation, along with our acquisition
of significant flowing natural gas production and reserves at an
attractive valuation, and a financing strategy that protects and
strengthens our balance sheet, will leave National Fuel
well-positioned for the long-term.”
Permanent financing is expected to be comprised of approximately
equal proportions of equity, including equity-linked securities,
and long-term debt, a financing mix that will maintain the
Company’s strong balance sheet and investment-grade ratings. As
part of the equity component of the permanent financing, the
purchase and sale agreement provides the Company with the right to
issue up to $150 million in common equity to Shell at an
agreed-upon price of $38.97 per share, the details of which are
described further in the purchase and sale agreement filed as an
exhibit to the Form 8-K filed with the Securities and Exchange
Commission in conjunction with this press release. In addition, the
Company has made a $27.1 million deposit that will be credited
against the purchase price at the closing of the transaction.
To further enhance its short-term liquidity position, the
Company also closed on a $200 million unsecured 364-day credit
facility arranged by JPMorgan Chase Bank, N.A. This new credit
facility, in combination with the over $500 million currently
available under the Company’s existing multi-year credit facility,
provides significant liquidity as the Company pursues its permanent
financing plans.
J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC are
serving as financial advisors to National Fuel. Kirkland &
Ellis LLP and Jones Day are acting as legal advisors to the
Company.
FISCAL 2020 GUIDANCE UPDATE
The Company is updating its fiscal 2020 production guidance to a
range of 245-255 Bcfe, and its Gathering segment revenue guidance
to a range of $140-$150 million, both to reflect the expected
incremental production from the Shell acquisition during a portion
of the fourth fiscal quarter. Additionally, per unit LOE and
G&A guidance ranges for the Exploration and Production business
have been lowered to $0.84-$0.87 per Mcfe, and $0.26-$0.28 per
Mcfe, respectively, to reflect the benefits of the increased scale
and expected immediate synergies from the transaction. As a result
of these items, the Company is updating its fiscal 2020 earnings
guidance, excluding items impacting comparability, to a range of
$2.80 to $3.00 per share, a $0.05 per share increase from the
midpoint of the Company’s prior guidance range.
National Fuel plans to provide preliminary fiscal 2021 guidance
in connection with its third quarter earnings release. However, the
Company expects this acquisition to be highly accretive to its
earnings per share in fiscal 2021, driven by significant acquired
flowing production and related gathering throughput, further unit
cost reductions, and its strong hedge position.
TELECONFERENCE ANNOUNCEMENT
National Fuel will hold a conference call to discuss the details
on this acquisition on Tuesday, May 5, 2020, at 8:30 a.m.
(ET), followed by a question and answer session.
Representing management will be David P. Bauer, President and Chief
Executive Officer; Karen M. Camiolo, Treasurer and Principal
Financial Officer; and John P. McGinnis, President of Seneca
Resources Company, LLC.
To access the call, dial toll-free 877-255-3077
or 647-252-4453 (toll dial-in), and enter
Conference ID: 5176472.
This teleconference will be simultaneously webcast online in a
“listen-only” mode at the National Fuel
website: investor.nationalfuelgas.com. Go to
the NFG Investor Relations News & Events page, click the link
to the conference call, and “agree” to the terms of the safe-harbor
disclaimer to proceed to the call. An audio replay of the
teleconference call will begin approximately two hours following
the call on Tuesday, May 5, 2020, and play
through the close of business on Tuesday, May 12,
2020. To access the replay, dial
800-585-8367 and provide the conference ID number
listed above.
National Fuel is an integrated energy company reporting
financial results for four operating segments: Exploration and
Production, Pipeline and Storage, Gathering, and Utility.
Additional information about National Fuel is available at
www.nationalfuel.com.
Certain statements contained herein, including statements
identified by the use of the words “anticipates,” “estimates,”
“expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects,”
“believes,” “seeks,” “will,” “may” and similar expressions, and
statements which are other than statements of historical facts, are
“forward-looking statements” as defined by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve
risks and uncertainties, which could cause actual results or
outcomes to differ materially from those expressed in the
forward-looking statements. The Company’s expectations, beliefs and
projections contained herein are expressed in good faith and are
believed to have a reasonable basis, but there can be no assurance
that such expectations, beliefs or projections will result or be
achieved or accomplished. In addition to other factors, the
following are important factors that could cause actual results to
differ materially from those discussed in the forward-looking
statements: the Company’s ability to complete planned acquisitions,
including the planned acquisition of Shell’s upstream and midstream
gathering assets in Pennsylvania, as well as successfully integrate
acquired assets and achieve expected cost synergies; impairments
under the SEC’s full cost ceiling test for natural gas and oil
reserves; changes in the price of natural gas or oil; financial and
economic conditions, including the availability of credit, and
occurrences affecting the Company’s ability to obtain financing on
acceptable terms for working capital, capital expenditures and
other investments, including any downgrades in the Company’s credit
ratings and changes in interest rates and other capital market
conditions; the length and severity of the COVID-19 pandemic,
including its impacts across our businesses on demand, operations,
global supply chains and liquidity; changes in economic conditions,
including global, national or regional recessions, and their effect
on the demand for, and customers’ ability to pay for, the Company’s
products and services; the creditworthiness or performance of the
Company’s key suppliers, customers and counterparties; changes in
laws, regulations or judicial interpretations to which the Company
is subject, including those involving derivatives, taxes, safety,
employment, climate change, other environmental matters, real
property, and exploration and production activities such as
hydraulic fracturing; delays or changes in costs or plans with
respect to Company projects or related projects of other companies,
including disruptions due to COVID-19, as well as difficulties or
delays in obtaining necessary governmental approvals, permits or
orders or in obtaining the cooperation of interconnecting facility
operators; governmental/regulatory actions, initiatives and
proceedings, including those involving rate cases (which address,
among other things, target rates of return, rate design and
retained natural gas), environmental/safety requirements, affiliate
relationships, industry structure, and franchise renewal; changes
in price differentials between similar quantities of natural gas or
oil sold at different geographic locations, and the effect of such
changes on commodity production, revenues and demand for pipeline
transportation capacity to or from such locations; the impact of
information technology disruptions, cybersecurity or data security
breaches; factors affecting the Company’s ability to successfully
identify, drill for and produce economically viable natural gas and
oil reserves, including among others geology, lease availability,
title disputes, weather conditions, shortages, delays or
unavailability of equipment and services required in drilling
operations, insufficient gathering, processing and transportation
capacity, the need to obtain governmental approvals and permits,
and compliance with environmental laws and regulations; increasing
health care costs and the resulting effect on health insurance
premiums and on the obligation to provide other post-retirement
benefits; other changes in price differentials between similar
quantities of natural gas or oil having different quality, heating
value, hydrocarbon mix or delivery date; the cost and effects of
legal and administrative claims against the Company or activist
shareholder campaigns to effect changes at the Company; uncertainty
of oil and gas reserve estimates; significant differences between
the Company’s projected and actual production levels for natural
gas or oil; changes in demographic patterns and weather conditions;
changes in the availability, price or accounting treatment of
derivative financial instruments; changes in laws, actuarial
assumptions, the interest rate environment and the return on
plan/trust assets related to the Company’s pension and other
post-retirement benefits, which can affect future funding
obligations and costs and plan liabilities; economic disruptions or
uninsured losses resulting from major accidents, fires, severe
weather, natural disasters, terrorist activities or acts of war;
significant differences between the Company’s projected and actual
capital expenditures and operating expenses; increasing costs of
insurance, changes in coverage and the ability to obtain insurance;
or the Company's ability to complete planned acquisitions, as well
as successfully integrate acquired assets and achieve expected cost
synergies. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after
the date thereof.
This news release contains certain non-GAAP financial measures.
The Company believes that its non-GAAP financial measures are
useful to investors because they provide an alternative method for
assessing the Company’s ongoing operating results and for comparing
the Company’s financial performance to other companies. The Company
uses these non-GAAP financial measures for the same purpose, and
for planning and forecasting purposes. The discussion of non-GAAP
financial measures is not meant to be a substitute for financial
measures prepared in accordance with GAAP.
The Company defines EBITDA as GAAP earnings before the following
items: interest expense, income taxes, depreciation, and depletion
and amortization. The Company defines Free Cash Flow as Funds from
Operations less Capital Expenditures. The Company is unable to
provide a reconciliation of projected Free Cash Flow and projected
EBITDA as described in this release to their respective comparable
financial measure calculated in accordance with GAAP without
unreasonable efforts. This is due to our inability to calculate the
comparable GAAP projected metrics, including operating income and
total production costs, given the unknown effect, timing, and
potential significance of certain income statement items.
With respect to earnings guidance, while the Company expects to
incur additional ceiling test impairment charges in the remaining
quarters of fiscal 2020 and likely in the first quarter of fiscal
2021 as well, the amount of these charges is not reasonably
determinable at this time. The amount of any ceiling test charge is
determined at the end of the applicable quarter and will depend on
many factors, including additions to or subtractions from proved
reserves, fluctuations in oil and gas prices, and income tax
effects related to the differences between the book and tax basis
of the Company’s oil and gas properties. Some or all of these
factors are likely to be significant. Because the expected ceiling
test impairment charges and other potential items impacting
comparability are not reasonably determinable at this time, the
Company is unable to provide earnings guidance other than on a
non-GAAP basis that excludes these items.
Analyst Contact:
Kenneth E. Webster
716-857-7067
Media Contact:
Karen L. Merkel
716-857-7654
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