Seneca Resources eyes 'modest' gas production growth through efficiency gains

National Fuel Gas Company's exploration and production arm, Seneca Resources, has shifted its production targets up to average high single-digit annual growth for 2022-2024, which it aims to achieve through operational efficiency gains, executives said during the company's most recent earnings call Feb. 4.

The company increased the midpoint of its total gas and liquids production guidance by 2.5 Bcfe, with a range of 340-365 Bcfe, for the remaining three quarters of fiscal 2022. National Fuel Gas Company adheres to the fiscal calendar, making the quarter ended Dec. 31 its first quarter of 2022.

Operational efficiency gains are expected to drive gas production growth in the Appalachia Basin, with the producer continuing its two-rig program while increasing top hole rig work and tightening stage spacing for pads, Justin Loweth, president of Seneca Resources, said in prepared remarks.

"Our top hole rig program will reduce drill times by three to five days per well, allowing us to drill and complete more wells per year while also lowering our drilling costs on a per foot basis," Loweth said.

Seneca will also seek to reduce stage spacing to 150 feet from 200 feet.

The production growth resulting from these operational improvements is expected to extend past 2022, with possible growth of 10% in 2023 over the forecasted 2022 production volumes.

Reducing exposure to in-basin pricing

Efforts to minimize exposure to in-basin pricing will support the production gains, with the company wary of possible basis blowouts in the case of regional production exceeding existing takeaway capacity.

"We're not going to grow just to grow," Loweth said. "We want to grow knowing we have a good home for our gas, and that is not in-basin."

Platts Analytics estimates that current takeaway capacity out of Appalachia is in the neighborhood of 34.5-35 Bcf/d. Towards the end of 2021, regional gas production had edged toward that limit, averaging 34.3 Bcf/d in December. Appalachia production volumes have since declined, averaging 32.9 Bcf/d in January and 32.8 Bcf/d so far in February, Platts Analytics data shows.

Seneca executives expect Appalachia production to increase over the next year, with little in the way of capacity additions expected. With that in mind, the company has doubled down on securing both firm transportation and firm sales out of the basin. Around 92% of the E&P's projected Appalachia gas production for fiscal year 2022 has firm sales contracts in place, with hedges in place for much of the remaining expected volumes.

Recent capacity additions have expanded the company's ability to move its gas to demand markets.

Parent company National Fuel Gas Company completed and brought online its 330 MMcf/d FM100 expansion in December, which is a key part of Transcontinental Gas Pipe Line's Leidy South expansion project. The expansions will move gas out of Pennsylvania toward the Mid-Atlantic states of New York and New Jersey.

The expansion helped enable a 7% increase in the company's Appalachia gas production during the last quarter from the prior one, Loweth said.

Financial results

The company's first priority continues to be shoring up its balance sheet through free cash flow generation and reducing debt, CEO David Bauer said.

For the quarter ended Dec. 31, National Fuel Gas Company had net income of $132.4 million, or $1.44 per share, up from $77.8 million, or $0.85 per share, in the corresponding quarter in 2020. "Higher commodity prices and an increase in Appalachia natural gas production drove the strong results," Bauer said.