National Fuel Gas Exec Insights: California’s Growth Rate and Its Limitations

On Friday, National Fuel Gas Company (NYSE:NFG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

California Growth Rate

Andrea Sharkey – Gabelli & Company: I was wondering if you could give us some more guidance towards 2013 on California. You guys have done a great job increasing that oil production. I think it’s up about 10% so far the first half of this year, seem to be ramping up more drilling. Can we expect a similar type of growth rate in 2013 and beyond or is there a level where you sort of tap out on the California area?

David P. Bauer – Treasurer and Principal Financial Officer: We haven’t given any guidance yet for specific by division for fiscal ’13. We will be spending a bit more in ’13 in California than we did this year in ’12. So, I think we would anticipate some growth in production between ’12 and ’13, but I don’t think we’re really prepared to quantify that yet, Andrea.

Andrea Sharkey – Gabelli & Company: Then I guess the next question would be, I think you guys had about $250 million in debt that’s maturing in 2013 and you might be a little bit – have a shortfall on your capital spending this year. So, I guess how do you plan to address that? Will that just be new debt equity what are you thinking there? Then also looking at 2013 do you plan to sort of stay within cash flow there?

David P. Bauer – Treasurer and Principal Financial Officer: In terms of the $250 million at this point I think we plan on refinancing that with another long-term debt issuance. I wouldn’t see us needing to issue equity. That’s not in the plans. Then in terms of fiscal ’13 spending versus cash flows, we haven’t initiated guidance yet, but I think it’s safe to say that we’ll be much, much closer to living within cash flows.

Andrea Sharkey – Gabelli & Company: Then just last question from me and I’ll give somebody else a chance. You guys have significant hidden value in all of your assets and there is a lot of options out there for you to service that value, for example we’ve talked about before monetizing the pipeline by maybe an MLP structure. Where are you guys on evaluating any of that potential financial engineering options?

David F. Smith – Chairman and CEO: Well, I think at this point, Andrea, we’re fairly comfortable with where we are. Certainly as we move forward and look to devote more capital to the Pipeline and Storage segment and the Midstream segment, and we have higher basis, tax basis assets there we would looking much more towards an MLP at that point. I think right now we have some room to lever up a little bit a couple $100 million. Certainly that’s very active in our thoughts and considerations as we move forward.

California Limitations

Holly Stewart – Howard Weil Inc.: I guess just a couple follow-ups. Remind us Matt on the limitations in California, because I think obviously as you look out to the macro environment right now people think great cash flows in California, so why wouldn’t you be going faster. So, can you just remind us of the limitations out there?

Matthew D. Cabell – SVP: Well, let’s think about out two biggest growth areas, which would South Midway Sunset and Sespe. At South Midway Sunset we are extending reservoirs as we drill those wells. So really if you try to get ahead of yourself you might outdrill the limit of the reservoir, so you need to – each well is dependent on the previous one. At Sespe the primary growth area at Sespe is the five acre infill program. We really want to get some production history before we determine how aggressive we want to get on that program. We have got a little bit of production history from the 2011 drilling will get some production, some further history from those wells plus some from our 2012 drilling, and then we maybe to accelerate it a little in fiscal, let’s call it fiscal ’14, but there’s some limit even if we felt like it was something we want to get more aggressive on, there are some limitations to how much we’d drill Sespe. We have a limited drilling window that’s a fairly environmentally sensitive area. So, there would still be someone that’s based on that.

Holly Stewart – Howard Weil Inc.: And two rigs running right now?

Matthew D. Cabell – SVP: In California? One rig in California right now.

Holly Stewart – Howard Weil Inc.: Then kind of switching to the Marcellus, talk about the decision to drop the rig, I guess more specifically was there a financial impact of that decision in terms of rig contracts and services?

Matthew D. Cabell – SVP: We fully expect that we’ll be able to have that rig placed in another basin and that our costs will be minimal. We do have an obligation on the rig that would be on the order of $6.5 million a year were it not placed.

Holly Stewart – Howard Weil Inc.: Another basin?

Matthew D. Cabell – SVP: Yeah, not for us.

Holly Stewart – Howard Weil Inc.: Then, just a reminder on, I think Dave said now looking for a 25% growth in 2013 in the Marcellus. What was the previous announced growth rate there?

David P. Bauer – Treasurer and Principal Financial Officer: It was 35% to 40% I think, Holly, previously.