National Fuel Gas Co.'s second-quarter earning tumbled by 42 percent as lower natural gas prices hurt its oil and natural gas drilling business and the warm winter cut into earnings at its utility operations.
Those lower gas prices also are expected to hurt the Amherst-based company's profits in the coming two quarters. The company reduced its earnings forecast for the fiscal year that ends in September by about 6 percent.
National Fuel said its profits plunged to $67.4 million, or 81 cents per share, from $115.6 million, or $1.38 per share, a year ago, when the company had a $31 million gain from the sale of its landfill gas business.
Excluding that sale, as well as the $6.4 million impact during the current quarter from a new fee Pennsylvania is imposing on natural gas wells, National Fuel's operating profits fell by 12 percent and were in line with analyst forecasts. National Fuel's operating profits slid to $73.8 million, or 89 cents per share, from $84.2 million, or $1 per share, a year ago.
With natural gas prices remaining close to their 10-year lows, despite a rebound in the last two weeks, National Fuel said it is further scaling back its drilling program in the Marcellus Shale region in Pennsylvania. The company did not lower its production forecast for the current year of the equivalent of 81 billion to 90 billion cubic feet of gas.
"At current gas prices, the returns don't justify an aggressive development program -- at least not as aggressive as we first outlined," said David F. Smith, National Fuel's chairman and chief executive officer, during a conference call Friday.
National Fuel, which earlier this year reduced the number of drilling rigs it is operating in the Marcellus region from six to four, is dropping another rig during the current quarter, leaving it with three operating rigs. Two of those rigs will be involved in developing new wells, while one will be used to help determine the drilling prospects within the more than 700,000 acres of land that National Fuel controls overlying both the Marcellus Shale and the gas-rich Utica Shale.
"Our primary objective is to safeguard both the long-term value of these assets and the overall strength of our balance sheet," Smith said.
The company revised its earnings guidance for fiscal 2012 to between $2.30 and $2.45 per share, down from its downwardly revised forecast of $2.40 per share and $2.65 per share in February.
Earnings from National Fuel's oil and gas drilling business dropped by a third to $22.2 million, or 27 cents per share, as lower natural gas prices and the new impact fee levied in Pennsylvania offset a 1 percent increase in production. Excluding the impact fee, oil and gas drilling profits fell by 14 percent as production inched up to the equivalent of 18.4 billion cubic feet of gas from 18.2 billion cubic feet a year earlier, when the company still had gas wells in the Gulf of Mexico that it has since sold.
Marcellus production jumped by 28 percent, despite the company's scaled-back drilling program. Excluding the Gulf wells, which National Fuel sold in April 2011, production was up 18 percent.
Profits from the company's pipeline and storage business rose by 17 percent, mainly because of the new pipelines and gathering systems National Fuel built within the Marcellus region in Pennsylvania and began operating last fall.
Earnings from its utility business fell by 15 percent, primarily because of the impact of the warm winter in its Pennsylvania service territory, where the company lacks a weather normalization clause in its rate agreement to smooth out the impact caused by swings in temperatures.
Profits from the company's energy marketing business fell by 47 percent because of lower sales and a reduced benefit from its storage capacity contracts.