National Fuel Gas Company (NYSE: NFG) is a diversified energy company engaged principally in the production, gathering, transportation, storage, and distribution of natural gas. The company operates an integrated business, with assets centered in western New York and Pennsylvania, benefiting from the production and transportation of natural gas from the Appalachian Basin.

National Fuel Gas reported solid second quarter results, with adjusted operating earnings of $1.79 per share, an increase of 16% from the prior year's second quarter. The company's performance was driven by significant growth in its regulated businesses, which delivered a 36% increase in earnings per share, along with double-digit growth in Seneca's production and the Gathering segment's throughput.

For the full fiscal year 2024, the company expects operating results, excluding items impacting comparability, to be between $4.75 and $5.05 per share. This guidance reflects a modest reduction of $0.15 at the midpoint, primarily due to lower natural gas price assumptions. National Fuel Gas reported annual net income of $476.9 million, annual revenue of $2.17 billion, annual operating cash flow of $1.24 billion, and annual free cash flow of $227.2 million in its most recent fiscal year.

Business Overview

National Fuel Gas operates through four business segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility.

Exploration and Production Segment

The Exploration and Production segment, operated by Seneca Resources Company, LLC, is focused on the development of natural gas and oil reserves, primarily in the Appalachian region. During the second quarter, Seneca's production increased 10% year-over-year to 103 Bcfe, despite voluntary pricing curtailments of over 5 Bcf due to low in-basin pricing. Seneca is reducing the top end of its fiscal 2024 capital expenditure guidance by $20 million to a range of $525 million to $555 million, driven by service cost reductions and operational efficiencies associated with the transition to the Eastern Development Area (EDA).

Pipeline and Storage Segment

The Pipeline and Storage segment, operated by National Fuel Gas Supply Corporation and Empire Pipeline, Inc., provides natural gas transportation and storage services. In the second quarter, the segment's earnings increased 29% year-over-year, driven by a $13 million increase in revenues primarily due to the settlement of Supply Corporation's rate case. The new rates, which went into effect on February 1, 2024, are estimated to increase Supply Corporation's annual revenues by approximately $56 million.

Gathering Segment

The Gathering segment, operated by National Fuel Gas Midstream Company, LLC, provides natural gas gathering services for Seneca and third-party producers in the Appalachian region. Gathering segment throughput increased 15% year-over-year to approximately 126 Bcf, driven by Seneca and third-party production growth.

Utility Segment

The Utility segment, operated by National Fuel Gas Distribution Corporation, provides natural gas distribution services in western New York and northwestern Pennsylvania. Utility segment earnings increased 41% in the second quarter, primarily due to the impact of a $23 million delivery rate increase in Pennsylvania that went into effect in August 2023, as well as the implementation of a weather normalization adjustment (WNA) in the Pennsylvania jurisdiction.

Regulatory Matters

National Fuel Gas has several ongoing regulatory proceedings that are expected to have a significant impact on the company's near-term financial performance.

In Pennsylvania, Distribution Corporation reached a settlement in its rate case, which was approved by the Pennsylvania Public Utility Commission (PaPUC) in June 2023. The settlement authorized a $23 million increase in annual base rate operating revenues, effective August 1, 2023.

In New York, Distribution Corporation filed a rate case in October 2023 seeking an $89 million increase in annual revenue. Confidential settlement discussions are currently underway, and new rates are expected to go into effect on October 1, 2024.

On the pipeline side, Supply Corporation filed an NGA Section 4 rate case in July 2023, proposing rate increases to be effective February 1, 2024. In March 2024, Supply Corporation and the parties in the case reached a settlement, which is pending final FERC approval. The settlement is estimated to increase Supply Corporation's annual revenues by approximately $56 million.

Liquidity

National Fuel Gas maintains a strong financial position, with a debt-to-capitalization ratio of 0.44 as of March 31, 2024. The company has a $1.0 billion unsecured committed revolving credit facility, which was recently extended to February 2028. In addition, the company entered into a $300 million unsecured committed term loan agreement in February 2024, with the full amount drawn in April 2024.

The company's capital expenditures are expected to be approximately $435 million for fiscal 2024, with the majority of the spending focused on the Exploration and Production, Pipeline and Storage, and Utility segments. National Fuel Gas generated $586.3 million in cash from operating activities during the first six months of fiscal 2024, a decrease of $124.9 million compared to the prior year period, primarily due to lower cash receipts from lower realized natural gas prices in the Exploration and Production segment.

Outlook

National Fuel Gas is well-positioned to deliver consistent returns to shareholders, driven by growth in its regulated businesses and improved capital efficiency in its Exploration and Production and Gathering segments. The company's recent rate case settlements and pending proceedings are expected to have a significant positive impact on earnings and cash flow in the near term.

However, the company is not immune to the challenges facing the natural gas industry, including volatility in commodity prices and potential regulatory changes related to climate change initiatives. The company's ability to manage these risks through its integrated business model and disciplined hedging program will be critical to its long-term success.

Conclusion

National Fuel Gas is a diversified energy company with a strong track record of delivering consistent returns to shareholders. The company's integrated business model, focus on regulated growth, and disciplined approach to capital allocation position it well to navigate the challenges facing the natural gas industry. With a robust pipeline of regulatory and operational initiatives, National Fuel Gas is poised to continue generating significant earnings and free cash flow for the foreseeable future.