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National Fuel cuts back on drilling, delays pipeline as gas prices hurt profits

Low natural gas prices are prompting National Fuel Gas Co. to further reduce its drilling in the Marcellus Shale region in Pennsylvania and delay the completion of a major pipeline expansion project by a year.

The Amherst-based energy company said the cutbacks are part of a cash preservation effort that will roughly cut its capital spending to half of its original plan during the current fiscal year. The reduced spending on drilling new wells and building more pipelines also will allow National Fuel to pay for those projects with cash that it already has, instead of borrowing additional money.

Ronald J. Tanski, National Fuel’s president and chief executive officer, said the cutbacks were done to keep the company on solid financial footing in the face of low natural gas commodity prices that have made its drilling business less profitable and caused other producers to scale back their production, as well.

“It’s prudent for us to reduce our capital expenditures and maintain our balance sheet,” Tanski said during a conference call Friday.

While National Fuel believes natural gas prices will rebound in the next few years, making its drilling operations more viable, Tanski said scaling back now will allow the company to balance its spending with its cash flow during a challenging current environment.

“We have a positive outlook for longer-term gas prices,” he said.

National Fuel, which had been operating three drilling rigs in Pennsylvania late last year, dropped one of the rigs in January and now plans to operate only one rig through September 2017.

National Fuel currently has about 70 wells that it either has drilled but not taken the final steps needed for those wells to begin production or are idle because they have not been connected to the lower capacity gathering pipelines that must be completed in order for their gas to reach the market. The company expects to complete about 36 of those wells this year, while drilling another 50.

As those wells come on line, the company will be able to meet its production targets for this year even with the reduced drilling schedule, said Matthew D. Cabell, who runs National Fuel’s oil and natural gas drilling business. The drilling business also should generate more cash than it uses.

The company also said it is delaying the completion of one phase of its Northern Access pipeline expansion project by a year, pushing the date for the pipeline to begin carrying natural gas to November 2017, rather than its original target of late this year.

The $455 million pipeline expansion will be able to transport natural gas from wells that National Fuel owns in Pennsylvania to markets across the Northeastern United States and Western New York, as well as Canada.

Delaying the completion of the pipeline will allow National Fuel to time the launch of the extension with a scaled-back gas drilling schedule that still will be able to produce enough gas to fill most of the new pipeline’s increased capacity, Cabell said.

The cutbacks came as National Fuel reported a $189 million loss during the first quarter, caused by a $253 million write-down of the value of its natural gas reserves that stems from low commodity prices. The company, which has already taken several similar write-downs, expects another in the current quarter.

Excluding the write-down, National Fuel’s earnings from its operations fell by 22 percent to $66.5 million, or 78 cents per share, from $84.7 million, or $1 per share, a year ago.

Operating profits fell by 30 percent in its oil and natural gas drilling business, while earnings rose 2 percent in its pipeline and natural gas storage unit. Earnings fell 18 percent in its utility business, mostly because of lower revenues in its Pennsylvania service territory caused by the warm winter weather.