Highlights:
National Fuel is reporting a loss for the quarter of $42.7 million or $0.53 per share. The loss is due to the previously announced $108.2 million (after tax), non-cash impairment charge to write down the book value of its oil and natural gas producing properties as a result of significantly lower commodity prices at December 31, 2008.
Quarterly operating results, before items impacting comparability (Operating Results) for the quarter were $64.3 million, or $0.80 per share compared to $70.6 million or $0.82 per share for the prior year’s first quarter. The main drivers causing the decrease in Operating Results were lower average crude oil prices realized and lower natural gas production in the Exploration and Production segment during the quarter.
Production of crude oil and natural gas during the quarter ended December 31, 2008 decreased 1.1 billion cubic feet equivalent (Bcfe) compared to the prior year’s first quarter, mainly due to lingering curtailments in the Gulf of Mexico caused by Hurricane Ike. All pre-hurricane production is expected to be back on line by the end of the second quarter. Total forecast production for the entire 2009 fiscal year remains in the previously announced range between 38 and 44 Bcfe.
The company is revising its GAAP earnings guidance range for fiscal 2009 to a range of $1.10 to $1.30 per share. This guidance includes the impairment charge ($1.35 per share) noted above, and assumes flat NYMEX equivalent pricing of $5.50 per MMBtu for natural gas and $45.00 per Bbl for crude oil for unhedged production for the remainder of the fiscal year.
Exploration and Production Segment
The exploration and production segment operations are carried out by Seneca
Resources Corporation (Seneca). Seneca explores for, develops and purchases natural gas and oil reserves mainly in California, in the Appalachian region and in the Gulf of Mexico.
The Exploration and Production segment’s loss in the first quarter of fiscal 2009 of $83.6 million, or $1.04 per share, is a decrease of $117.6 million, or $1.43 per share, when compared with the prior year’s first quarter. The decrease was mainly due to a non-cash charge of $108.2 million to write down the value of Seneca’s oil and natural gas producing properties.
Seneca uses the full cost method of accounting for determining the book value of its oil and natural gas properties. This accounting method requires that Seneca perform a quarterly “ceiling test” to compare the present value of future revenues from its oil and natural gas reserves based on period end spot prices (the ceiling) with the book value of those reserves at the balance sheet date. If the book value of the reserves exceeds the ceiling, a non-cash charge must be recorded in order to reduce the book value of the reserves to the calculated ceiling.
Excluding the impact of the ceiling test charge this quarter, Operating Results in the Exploration and Production segment were $24.7 million or $0.31 per share, compared to $34.0 million or $0.39 per share in the first quarter of the prior year. The decrease was primarily due to lower crude oil prices realized after hedging and lower natural gas production. For the quarter ended December 31, 2008, the weighted average oil price received by Seneca was $64.34 per barrel, a decrease of $8.25 per Bbl, from the prior year’s first quarter. The weighted average natural gas price received by Seneca for the quarter ended December 31, 2008, was $8.90 per thousand cubic feet, an increase of $1.00 per Mcf compared to the prior year’s first quarter.
Overall production for the quarter ended December 31, 2008 was 9.6 Bcfe, a decrease of 1.1 Bcfe compared to the prior year’s first quarter. Hurricane related shut-ins were responsible for most of the 1.2 Bcfe decrease in production of Seneca’s Gulf division.
Two significant producing properties were shut-in for the entire first quarter due to repair work on third party pipelines and onshore processing facilities. Production was also slightly lower in the East division primarily due to compressor downtime and pipeline constraints. Higher production in the West partially offset the decreases in the other divisions.
Other items impacting operating results for the quarter were higher lease operating expenses (LOE) and general and administrative (G&A) expenses. The increase in LOE is mainly due to higher production taxes related to increased production from the High Island 24L and 23L fields located in the Gulf division, higher property taxes and increased well repair costs associated with higher than normal activity in the West, and an increase in the number of producing properties in Appalachia. G&A expenses increased primarily due to a bad debt charge related to a customer’s bankruptcy filing. Additional staffing and associated costs in the East division also contributed to the higher G&A expenses.
Management Comments
David F. Smith, president and chief executive officer of National stated: “The volatility and turmoil in the financial markets and worldwide economy during the past several months have also affected National Fuel and the energy industry as a whole. The continued decrease in commodity prices since July has had a significant negative impact on our financial results, contributing to the large ceiling test write-down as well as the drop in recurring earnings. While there is little we can do to influence global commodity prices, we are acutely focused on operating our assets in the most effective way possible. In that regard, we’ve seen great success, particularly in our regulated segments, which performed flawlessly in the face of significant weather variations, and which delivered stable and predictable earnings that are in line with our last rate awards.
We’ve long believed in our integrated business model. The value of that model has been particularly evident over the past few quarters. When commodity prices peaked over the summer, we enjoyed record earnings. Even though prices have now cycled lower, we still expect that our operating companies will generate sufficient cash to fund our operations and allow us to comfortably continue our dividend payments. Looking to the future, we expect the overall business environment will continue to be challenging. But, more than ever, we believe that the quality and diversity of our operating results, coupled with our long-standing commitment to fiscal discipline, position us to capitalize on future opportunities.”
