National Fuel Gas Co.’s deal with a Texas investment firm will help it keep drilling the natural gas wells that it is counting on to fill the new pipeline network it is building in the Marcellus Shale region in Pennsylvania.
With low natural gas prices making capital tight, National Fuel signed a deal to partner with IOG Capital to fund the development of as many as 80 natural gas wells in Pennsylvania, the Amherst-based energy company said Thursday.
The deal, which will give the Dallas-based firm an 80 percent stake in each of the wells, will reduce National Fuel’s cash needs during a time of low natural gas prices, while allowing it to continue to fund the development of new wells that are needed to fill up the expanding network of pipelines that National Fuel is building to move gas from Pennsylvania to markets in Canada, Western New York and elsewhere.
But because National Fuel will get only about 26 percent of the revenues produced by the wells drilled under the first portion of the agreement, the deal also will weaken the company’s earnings during the current fiscal year, reducing its expected profits by about 5 percent, or 15 cents per share.
The joint development agreement will cut National Fuel’s capital spending within its oil and gas drilling business almost in half from what the company initially had planned for the current fiscal year. With IOG now providing most of the funding for as many as 80 Marcellus wells, National Fuel now expects to spend about $225 million on new wells this year, down from its earlier forecast of about $425 million.
Ronald J. Tanski, National Fuel’s president and CEO, said the deal will allow National Fuel to continue to develop new wells on the land it controls in the Marcellus region at a time when it also is working on several projects to expand its pipeline capacity within the region. The production from the wells with IOG will provide much of the gas that will be moved through National Fuel’s expanded pipeline network.
The agreement “significantly reduces our upstream capital requirements, yet still allows us to increase production from our acreage that will support the continued growth in our pipeline and storage and gathering segments,” Tanski said in a statement.
National Fuel said it now expects to earn between $2.70 and $3 per share during the current fiscal year, down from its earlier forecast of $2.85 to $3.15 per share. The company’s oil and natural gas production during the fiscal year that ends in September 2016 is expected to be between the equivalent of 139 to 202 billion cubic feet of natural gas, down by about 13 percent from its previous forecast of between 161 billion and 232 billion cubic feet.
Under the deal, IOG will develop 42 Marcellus wells and has the option to participate in the drilling of an additional 38 wells. If IOG exercises its option to drill in those 38 wells, it would reduce National Fuel’s expected capital spending in the 2017 fiscal year by an additional $180 million. National Fuel would get 28 percent of the revenue generated by those wells.