National Fuel inks Marcellus Shale drilling JV agreement

Seneca, IOG will jointly develop up to 80 Marcellus Shale wells located on 10,500 acres in Clermont/Rich Valley area, Pennsylvania.

WILLIAMSVILLE, N.Y. – National Fuel Gas Company says it will develop up to 80 Marcellus Shale natural gas wells located on 10,500 acres in Clermont/Rich Valley area, Pennsylvania.

Seneca Resources Corporation, National Fuel’s wholly owned exploration and production subsidiary, has entered into an asset-level joint development agreement with IOG CRV – Marcellus, LLC , an affiliate of IOG Capital, LP, and funds managed by affiliates of Fortress Investment Group, LLC, to jointly develop the assets located in Elk, McKean and Cameron counties in north-central Pennsylvania.

Under the terms of the Seneca-operated joint development agreement, IOG will hold an 80 per cent working interest and is obligated to participate in the first 42 wells, and has a one-time option to participate in the remaining 38 wells that can be exercised on or before July 1, 2016.

At current well costs, IOG’s obligation on the first 42 wells is expected to reduce Seneca’s net capital expenditures by approximately $200 million in fiscal 2016, with a further $180 million reduction spread across fiscal 2016 and fiscal 2017 if IOG elects to participate in the remaining 38 wells.

As the fee-owner of the property’s mineral rights, Seneca retains a 7.5 per cent royalty interest and the remaining 20 per cent working interest (26% net revenue interest) in the first 42 wells.

If IOG exercises its option to participate in the 38 wells, Seneca will retain a 10 percent royalty and the remaining 20 percent working interest (28% net revenue interest) in those wells. Seneca’s working interest will increase to 85 per cent after IOG achieves a 15 percent internal rate of return.

Seneca will be the program operator, allowing it to maintain planned activity levels and further optimize Marcellus drilling and completion efficiencies. Production from all joint development wells will be gathered by National Fuel Gas Midstream Corporation’s Clermont Gathering System.

IOG will share in Seneca’s contracted firm sales and firm transportation capacity, including 660 thousand dekatherms per day on the Niagara Expansion/Northern Access 2015 and Northern Access 2016 pipeline expansion projects built by National Fuel’s Pipeline & Storage segment and designed to move Clermont/Rich Valley area production to premium Northeast U.S. and Canadian markets.

A portion of the initial 42 joint development wells were either drilled, or drilled and completed, prior to the execution of the joint development agreement, with the remainder to be developed over the course of fiscal 2016 and fiscal 2017.

In fiscal 2016, Seneca expects to transfer approximately 150 billion cubic feet equivalent (“Bcfe”) of existing proved undeveloped natural gas reserves as its interests in the joint development wells are conveyed to IOG.

“Our integrated growth strategy includes the continued development of our mineral acreage in Appalachia and the construction of new gathering and transmission pipelines to move Appalachian production to market,” said Ronald J. Tanski, president and CEO of National Fuel.

“During this period of lower commodity prices, where we are experiencing decreased cash flow in the upstream portion of our business, the drilling joint development agreement we announced today helps us move forward with our strategy.

“IOG is delighted to be partnering with a high quality operator such as Seneca Resources by providing flexible and targeted capital solution to meet Seneca and National Fuel’s corporate goals,” said Marc Rowland, Founder and Senior Managing Director of IOG Capital.

“We look forward to a long-lasting and productive partnership with Seneca for years to come.”

Tanski says the joint development agreement significantly reduces National Fuel’s upstream capital requirements, yet still allows the company to increase production from its acreage to support the continued growth in pipeline, storage and gathering segments.

“The continued growth of our company in a responsible manner requires us to maintain adequate liquidity and a strong balance sheet,” said Tanski.

“We believe this transaction helps meet those objectives and is yet another example of how National Fuel’s unique integrated model and quality asset base gives us the flexibility to allocate capital in a manner that maximizes value creation for our shareholders in most all market environments.”