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Low natural gas prices take a toll on National Fuel

Low natural gas prices will be good for National Fuel Gas Co.'s customers this winter, but not the Amherst energy company's profits.

National Fuel on Friday cut its profit forecast for this fiscal year by 7% because falling natural gas prices will cut into the earnings of its oil and natural gas drilling business.

With the company facing what CEO David P. Bauer called "a challenging commodity price environment," National Fuel already had been planning to scale back its natural gas drilling operations in western and central Pennsylvania by about a third, dropping one of the three drilling rigs it currently operates in the region.

And Bauer hinted Friday that the company could scale back even more if prices stay depressed in Pennsylvania, where a lack of available pipeline capacity causes natural gas produced there to sell for less than the national spot market prices.

"Any further activity changes will obviously be dependent on pricing – as we move through the winter season, we’ll continue to watch prices and reassess our activity level for 2021 and beyond," Bauer said during a conference call with analysts.

Even with the plans to reduce drilling, National Fuel still expects its oil and gas production to rise by about 14% during the current fiscal year and single-digit growth in the next as the company brings wells now being drilled online.

To combat the drop in natural gas prices, National Fuel has shifted the focus of its drilling program to areas where it already has drilled wells into the Marcellus Shale. By using the drilling sites and gathering pipelines that already are in place to handle gas from the Marcellus wells, the company is able to lower the costs of drilling additional wells into the prolific Utica Shale that lies beneath the Marcellus.

At the same time, National Fuel is shifting more of its capital spending budget into its pipeline business to upgrade and expand its pipeline system and modernize its utility operations. New pipeline projects now underway are expected to add about $65 million to the company's annual revenues once they are completed by the end of 2021. And the more dependable stream of earnings generated by its stable utility business is a strong source of cash for the company.

National Fuel's utility business in Western New York has been adding customers at a modest pace – gains that Bauer attributed to low natural gas prices and an improving local economy. With gas prices dropping, National Fuel expects heating costs to fall by nearly 15% this winter across Western New York, assuming normal temperatures.

Bauer cited that customer growth as a reason behind its efforts to expand its pipeline network, including its controversial $500 million Northern Access Pipeline project that would stretch from McKean County in Pennsylvania to Niagara County.

State environmental officials have moved to block the project by denying it a key water quality certificate, but federal energy officials have ruled that the state's refusal to grant the permit was invalid because of a missed deadline. For now, the project remains in limbo, even as National Fuel's customer base grows slowly.

"We expect this trend will continue in the near-term – a clear sign our customers value natural gas as an efficient, cost-effective way to heat homes, notwithstanding the state’s view toward pipelines and fossil fuels," Bauer said.

"While it’s easy for policymakers to say we ought to switch to 100% renewable energy, actually doing it isn’t quite as simple, especially when you consider the costs to consumers of making such a switch," he said, referring to the state's goal of getting all of its electricity from renewable sources by 2040.

"We intend to be an active participant in state energy policy discussions to ensure that our 500,000-plus customers in the state continue to have access to low-cost, reliable energy."

National Fuel's fourth-quarter profits rose by 24% to $47.3 million, or 54 cents per share, from $38 million, or 44 cents per share, a year ago. But it cut its profit forecast for the current fiscal year to around $3.15 per share, down 10% from $3.51 per share during the fiscal year that ended in September. That's less than the $3.40 per share it forecast in August and less than the $3.29 per share that analysts were expecting.

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