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National Fuel to fly solo on expansion; Second joint venture in Marcellus region described as unlikely

National Fuel Gas Co. is likely to go it alone as it expands its drilling in the natural gas-rich Marcellus Shale region in northwestern Pennsylvania, which sent the Amherst-based energy company's shares tumbling Friday.

The company, which had been exploring the possibility of forming a second joint venture to speed drilling efforts, said it was unlikely to reach an agreement with a partner.

While National Fuel came "relatively close" to a deal with two or three potential partners, company executives decided the possible ventures were not much more lucrative than the results it could achieve on its own.

"While they were good and serious offers, we determined they just weren't good enough," said David Smith, National Fuel's chairman and CEO.

Smith said National Fuel "set the bar high" in the joint venture talks because the company is not desperate for funding to expand its Marcellus drilling efforts. "We're not capital constrained. Our balance sheet is strong," he said.

While Smith said joint venture talks are continuing with a few potential partners, National Fuel likely will go it alone in the Marcellus.

"At this point, that's the likely outcome," Smith said during a conference call. "We had some very good, very serious offers. Valuations were reasonable. The offers we had were very diverse. We had some offers from large integrated oil companies and smaller firms."

"We kept evaluating these offers against our own plans," he said. "We decided not to go forward with any of these plans because our own plans were so robust."

National Fuel's stock dropped Friday by nearly 8 percent, or $4.80, to $58.48.

The company, which has a joint venture with EOG Resources, backed away from launching a second joint venture as surging natural gas production from the Marcellus Shale fueled a 10 percent jump in its third-quarter profits.

The earnings topped analyst forecasts, and National Fuel officials said they expect profits, excluding one-time gains, to continue to improve by about 12 percent next year.

The company also increased its profit forecast for the fiscal year that will end next month by almost 5 percent, partly because of the increase in prices for the oil that the company extracts, largely in California.

National Fuel said its profits rose to $46.9 million, or56 cents per share, compared with $42.6 million, or 51 cents per share, a year ago. That was better than the 53 cents per share that Wall Street analysts were expecting.

Most of the increase in earnings came from an 18 percent increase in earnings from its fast-growing oil and natural gas drilling business.

National Fuel's natural gas production from within the Marcellus region more than quadrupled to 10.3 billion cubic feet during the quarter that ended in June. Marcellus production, which topped 100 million cubic feet per day in late March, has grown by about20 percent since then and now averages around 120 million cubic feet per day, said Matthew D. Cabell, who runs National Fuel's oil and gas exploration and production business.

"We have one of the best acreage positions in the industry's hottest gas play," he said, with the company planning to add a sixth drilling rig in the Marcellus in January.

Production from all of the company's drilling operations grew by 28 percent to the equivalent of 16.9 billion cubic feet of gas.

While National Fuel has been producing more gas, the price it has been getting for that fuel has dropped by almost5 percent to $5.48 per 1,000 cubic feet after hedging.

Earnings from the company's pipeline and storage business tumbled by 38 percent, mainly because of higher operating expenses stemming from rising pension costs, compressor station maintenance and early survey work associated with pipeline expansion projects.

Pipeline revenues also were hurt because of the cancellation of some contracts by customers. The company is in the midst of a project that will reverse the flow of some of its pipelines to help it transport more gas from the Marcellus region, rather than bringing more costly gas to the United States from Canada.

The company's utility earnings grew by 7 percent, while profits from its energy marketing business jumped by 38 percent.

National Fuel said it expects to earn $2.85 to $3.15 per share during the fiscal year that will begin in October. That's higher than its forecasted earnings for the current fiscal year of $2.63 to $2.73 per share, excluding a 37 cent-per-share gain from the sale of its landfill gas business earlier this year.