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National Fuel Gas Co. (NYSE:NFG)

F4Q07 (Qtr End 9/30/07) Earnings Call

November 9, 2007 11 am ET

Executives

Jim Welch - Director, IR

Phil Ackerman - Chairman and CEO

Dave Smith - President and COO

Ron Tanski - Treasurer and Principal Financial Officer

Matt Cabell - President, Seneca Resources Corporation

Analysts

Jim Harmon - Lehman Brothers

Carl Kirst - Credit Suisse

Becca Followill - Tudor Pickering & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 National Fuel Gas Company Earnings Call. My name is Lacy and I will be your operator for today’s call.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to our host for today’s call, Mr. Jim Welch, Director of Investor Relations. Please proceed.

Jim Welch

Thank you, Lacy, and good morning, everyone. Thank you for joining us on today's conference call for a discussion of last evenings' earnings release. With us on the call from National Fuel Gas Company are Phil Ackerman, Chairman and Chief Executive Officer; Dave Smith, President and Chief Operating Officer; and Ron Tanski, Treasurer and Principal Financial Officer; and from Seneca Resources Corporation, Matt Cabell, President.

At the end of the prepared remarks, we will open the discussion to questions. Also, since this call is being publicly broadcast, we remind you that today's teleconference discussion will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

While National Fuel's expectations, beliefs, and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as or on the date which they are made, and you may refer to last evening's earnings release for a listing of certain specific risk factors.

With that, we'll begin with Phil Ackerman.

Phil Ackerman

Thank you, Jim and good morning. Our quarter and full years' numbers are great at a $1.84 and $3.96 per share. We are raising our guidance for 2008 and National Fuel has great money-in-the-bank type assets, such as California Heavy Oil, the undeveloped Devonian sands and pipeline and storage.

Standing on the base of the utility, these should enable us to grow earnings and increase dividends for years to come. On top of that the wild card, that is the Marcellus Shale, may provide us with a huge growth opportunity if it can be successfully developed.

In short, we had another great year and we are capable of having many more. However, these are interesting times we live in. The company has nearly doubled the performance of the S&P 500 over the last one, three and five years; periods of time when the S&P achieved returns that most investors would gladly take over the next five years. And yet certain shareholders claim our Board of Directors, somehow has not adequately represented shareholders interest nor acted quickly enough.

Although time maybe money, haste for its own sake is seldom a virtue. Certain shareholders address the Board at our February 15, 2007 annual meeting, strongly suggesting that we sell our Gulf of Mexico assets and form and MLP of our California property.

Our history since February reinforces our belief, that experienced operation and management of assets is generally preferable to a quick sale or financial engineering. In February, our Gulf of Mexico production was $40 million cubic feet equivalent per day, today it is $47 million.

In February the price for California Heavy Oil was $50.61, today it is over $80. Had we acted in haste, both these significant profit enhancements would have been lost to shareholders. Most of you are aware that New Mountain Ventures has filed proxy solicitation materials; and I know that you must have many questions about the content.

A complete discussion of the weaknesses of their claims is beyond the scope of this call, since a fair critic will require a lengthy filing of our own. Sufficed to say that every member of senior management has an overwhelming interest in the performance of our stock, through both options and direct share ownership.

In short, if New Mountain's claims were consistent with our own knowledge and experience, we would be implementing them. Yesterday our utility, National Fuel Gas Distribution Corporation filed a petition with the Pennsylvania Public Utility Commission, seeking to ensure that New Mountain complies with that state's laws regarding acquiring control of the utility.

Pennsylvania utility law requires that if an entity is pursuing a controlling interest either directly or indirectly in a regulated public utility, then it must first secure a certificate of public convenience. The requirement is designed to give the public and the Public Utility Commission an opportunity to determine if an entity is qualified to manage a utility.

Our Pennsylvania utility serves more than 200,000 customers in western Pennsylvania, and has provided the safe and reliable natural gas service to its customers for more than 100 years. The company is requesting that the PUC commence an investigation to assure that no violations of the public utility code have occurred.

As I indicated on our last earnings call, we've been working with Morgan Stanley for months, on evaluating whether the MLP structure is appropriate for our pipeline and storage asset. We recognize that at least in theory there are inherent tax advantages to the MLP structure. However in our case the tax leakage caused by the relatively low tax basis of our midstream asset erode much of the benefit to National Fuel.

An additional and significant concern to us and to our state regulators is the needs of our state utility customers, because of the integration of our pipeline and our Utility. As most of you know, the Pipeline and Storage operations of Supply Corporation and the Utility operations of Distribution Corporation are highly integrated and mutually depended upon each other. They share common personnel and from a practical perspective are operated as one system.

Considering the severally tax impacted benefit to the Pipeline and what we perceive is a potentially significant risk on the Utility side, we are unconvinced that the Pipeline MLP makes sense from the total shareholder perspective.

To the best of our knowledge, none of the MLPs created to-date contains midstream assets that are as highly integrated within LDC as ours are. We are discussing these concerns with our MLP Council, as well as our state regulatory attorneys. We will be reviewing the subject again with our Board in near future and anticipate a final decision at that time.

We are also evaluating whether an MLP might work for certain E&P asset, particularly our California oil properties. Our greatest concern in this area is sustainability. Given the natural decline curve to the oil and gas properties, new long life reserves must be constantly added to an upstream MLP, in order to merely sustain its gas distributions, much less [plough] them.

Given the significant premiums being paid for long life MLP friendly reserves, we are skeptical that upstream MLPs can be fueled solely through acquisitions over the long-term. Should our Appalachian acreage prove to be as prolific as we all hope, the development of that resource might eventually sustain an MLP. But it is premature to count on that.

During my time as a Chairman of National Fuel, I have focused on board recruiting, and bringing a geographically diverse array of obvious gas industry experts to the Board, including two former chairs of the American Gas Association, the former chair of Questar, and a former CFO of KeySpan, and resident of Southwestern New York, who actually made his living as an Appalachian producer before National Fuel bought his company.

These people have made the NFG Board, the best and strongest in the industry. Composed of people whose depth of experience permits them to quickly get to the heart of the issues, without a need for expensive explanation. These people have served their own shareholders well for a long period of time, and they have served our shareholders in an exemplary fashion as evidenced by our stock performance and record earnings.

I am optimistic about our assets, our people and our future. The paraphrase (inaudible), I can't wait until tomorrow because we get better looking everyday. With that I will turn it over to Dave Smith,

Dave Smith

Thank you, Philip. And good morning to everyone. As Phil said the three months ended September 2007, was yet another outstanding quarter and it capped an exceptional fiscal year for the Company. For both the quarter and the fiscal year, each of our major segments posted results that met or exceeded our expectations.

Excluding non-recurring items, our 2007 earnings were 10% higher than they were in 2006. More importantly, even at the low end of our guidance, we expect 2008 earnings will be at least 10% higher than they were in 2007.

The market has recognized and rewarded that strong performance. As Phil said over the past year, National Fuel shares have produced a total return of 32%, twice that of the S&P 500. While we are proud of our accomplishments, we are certainly not content to rest on (inaudible). We continue to work diligently, to improve upon areas of concern, and to take advantage of opportunities to grow the company, with a view towards increasing long term shareholder value. We expect much of that growth to come in the Pipeline and Storage segment and also in the E&P segment.

As I've said in the past, expansion of Pipeline and Storage segment is a major priority for National Fuel. And the Empire Connector is the first of what we hope and expect would be a number of Pipeline and Storage projects.

We broke ground on the Empire Connector in early September and expect to complete at least 20 miles by December 2007. The project is on budget and on schedule. To-date we spent a little more than $20 million, and expect to spent a another $30 million by the end of this calendar year. We remain on track for a November 1, 2008 in service date.

Looking beyond the Empire project, earlier this year Supply Corporation held an open season to assess market interest in additional west to east capacity. The results of the open season were very encouraging and led us to propose a new pipeline project; we're calling the West to East project, which would be a 324 miles pipeline from the terminus of Rockies Express at Clarington, Ohio to the Millennium pipeline in Corning, New York.

The proposed pipeline, approximately 75% of which will be built on existing [reservoir] would be designed to move approximately 550 million to 750 million decatherms of Rockies gas per day. It would also be able to accommodate volumes from local production areas. In deed it would be laid through Seneca's Appalachian acreage and (inaudible) volumes arriving at lighting.

As you know, there are many competing projects in this area, but we anticipate that the development of associated additional supply storage capacity both by way have enhancement of existing storage and the addition of new storage, will set our projects apart from the rest.

If all goes well, we hope to sign precedent agreements with potential anchor shippers early in 2008. After that we'll complete our design and engineering analysis, and conduct a binding Open Season. We will keep you up to-date as the project progresses.

Turning to the exploration and production segment, we've taken a number of steps that have strengthened Seneca and bode well for the future. First and foremost, we've added significant talent including our new President, Matt Cabell who you'll hear from this morning, and John McGinnis, our Senior Vice President of Exploration and Development, who we hired from Dominion and who has significant Appalachian experience.

In Appalachia, we've added 70 employees in the last year alone, including four recently hired geologists. We'll be adding three more this year. In short we are confident, that we are assembling the best team to move Seneca forward.

As you know, we are pleased with the sales of our Canadian properties not only because they did not perform to our expectations, but because we realized a sizeable gain. Perhaps more importantly, the sale allowed Seneca to focus more attention and where appropriate, more resources on areas of greater potential.

Obliviously as is evidenced by the additional hires I noted previously, Appalachia is at the forefront of that potential. As a result, we have significantly accelerated our drilling program in the upper Devonian and will continue to accelerate drilling. But to do so on a considered, comprehensive and sequential manner that recognizes the complex geology of the region. In approach that was clearly validated by the recently completed 3P reserve study by Netherland Sewell.

In addition, we have initiated activity on our extensive Marcellus Shale opportunity. With a partner EOG, who from a number of perspectives, including technical, financial and contributed acreage brought the most to the table. We are very comfortable with that decision, and Matt will update you on the progress that has been made to date and our plans for the next year.

We also continue to refine our efforts in the Gulf of Mexico, and we've had some recent success. In the past, we employed more of a shotgun approach to our exploration program. We drilled a large number of wells in different areas of the Gulf. While we've had overall success, overtime in recent years our finding cost have admittedly been high, and we only occasionally developed an in-depth knowledge of a particular area.

Matt who has a great deal of experience in the Gulf, and who was successful there heading up expiration programs at Texaco and Marubeni prefers more of a rifle shot approach, one that focuses on the areas where we have expertise and where we've had past success.

We are confident that with our new management team in place, with this different approach that we will lower our finding cost and improve our returns in the region. If we do not, as we did in Canada, we will revaluate our entire position in the Gulf.

Before turning the call over to Matt, I'd like to address a shareholder recommendation, that we sell our gas marketing company, National Fuel Resources, because they suggest it is non-core. Simply put, we disagree and can also assume the recommendation is based on a lack of understanding of that business and of NFRs activities.

While NFR has indeed been expanding its business on contiguous LDC markets to our ease, most of NFR’s business is highly integrated into our utility and pipeline system. It is presently one of the largest, if not the largest retail marketer on our utility system, serving our own utility customers and is the third largest customer on our pipeline and storage subsidiary supply.

In addition it is a large customer's [Empire]. Clearly it is core, and the financial results of NFR have been strong, consistent and incremental to earnings. Those earnings have been achieved with modest capital investment, and because NFR doesn’t speculate, with very, very little risk. Needless to ,say we have no intention of selling NFR.

With that I’ll turn the call over to Matt for a comprehensive update of Seneca activities. Thank you.

Matt Cabell

Thanks Dave. Good morning. Let me start by saying that fiscal 2007 was a good year for Seneca Resources. First of all, we increased our U.S. production to over 39 Bcfe. Secondly, we sold our Canadian operations for $232 million or $4.75 per Mcfe. And most notably, we continue to accelerate our drilling program in Appalachia, growing our east division [proved] reserves by 32%.

As we announced in our October 11th press release; in Appalachia we drilled 233 wells and added 33 Bcf of crude reserves. That’s five times our annual East Division production.

We’re extremely pleased with these results, and plan continued acceleration of our drilling program with 280 wells planned for fiscal ’08. While we do have aggressive growth plans, I must stress the importance of balancing the increased drilling pace with detailed geologic mapping and continuous integration of new drilling results. We will continue to accelerate our drilling pace at a rate, which will allow us to achieve that balance and therefore maximize the value of our asset.

In addition to our outstanding growth in the upper Devonian, we’ve now drilled three vertical wells for the Marcellus Shale and have recently drilled our first Marcellus horizontal well, with our joint venture partner EOG. The horizontal has been completed in fact with testing planned for next week. So far, all indications are positive.

For fiscal '08, we may drill up to 18 additional Marcellus wells, 10 of them horizontal. And with significant success we could do more. We are also seeing industry activity in the Marcellus heating up, on trend to our acreage, another operator has reported the results of their first three Marcellus horizontal wells, with initial production rates ranging form 1 million to over 3 million cubic feet per day, per well.

Also in the October 11th press release, we disclosed the results of Netherland Sewell's analysis of undeveloped, proved, probable and possible reserves on our Appalachia acreage. As we pointed out in the release Netherland Sewell would only classified acreage as proved, probable or possible if that acreage was within close proximity to wells with reliable production data. Therefore the majority of our acreage was outside of the 3P area.

Let me now address some important differences between the report by Netherlands Sewell and the projections made by New Mountain. At the suggestion of New Mountain, I met with Schlumberger in Pittsburgh. I was told that Schlumberger had not been released by New Mountain to discuss their study. However, the Schlumberger manager was able to discuss what the report was and what it was not.

Although we would still welcome a copy of Schlumberger's study and the opportunity to discuss it with them. It is apparent that New Mountain's analysis consisted of some simple calculations, based on Schlumberger's brief overview, using very limited data. In the words of Schlumberger's manager, their study was a 50,000 foot view and was no way near a reserves report.

While the Schlumberger overview could have driven New Mountain to invest in NFG, under no circumstances should we consider using this limited analysis as a guide for our Appalachian strategy.

That said, we believe that there is great potential on Seneca's Appalachian acreage. And although it is hypothetically possible to drill 600 wells per year, it is not the way to create the most value. I know I have said this before, but it bears repeating, only through detail geologic work and continued integration of drilling results, do we maximize the value of these assets, and thereby maximize value for our shareholders.

Our strategy and development plan are based on our proprietary data, our ongoing geologic work and the extensive knowledge and expertise of our geologist and engineers. So long as we continue to follow our strategic plan, we will have great success in developing our Appalachian properties.

Let me continue by pointing out that Netherland Sewell's estimated EUR per well is completely consistent with our drilling results. In fact their EUR estimates are simply an average of the EURs for Seneca's economic wells in each area. By definition, sub economic wells are left out, because only economic wells can be classified as spud probable and possible. Any operator will always have a tail of sub economic that are produced and these bring down the average of the program. In most areas Seneca's EURs per well are equivalent to or somewhat better than our competitors.

I would also like to point out that, although in some previous years we may have been less active than other operators, in fiscal 2007 our Appalachian reserve growth was 32%, are higher than the average growth rate of most competitors over the last several years. In fact, our PDP reserve growth alone at 20% was far ahead of the pack.

Contrary to what some might lead you to believe, Seneca is one of the leading drillers in Pennsylvania and quite possibly the leading company in terms of 2007 Appalachian reserve growth through drilling. Rest assured, we are constantly evaluating and modifying our long-term strategy for Appalachia. As you can see, our growth plans are aggressive and our expectations are high.

Moving on to the Gulf of Mexico. The highlight of our fiscal 2007 program was the drilling of the Highland 24L North well, and the subsequent development of the 2L field. Production commenced on October 18th, and we are currently producing approximately 70 million cubic feet equivalent per day, which is 90 million cubic feet equivalent per day net to our revenue interest, or 18% of our company wide production.

Over the past several months we've had many questions concerning our Gulf of Mexico business and I would like to take this opportunity to briefly discuss how our Gulf of Mexico strategy has changed. And why we intend to continue our operations in this division.

First of all, Seneca has a long history of profitability in the Gulf of Mexico. Over a period of 17 years, we invested $960 million and had net positive cash flow of $1.3 billion. This 17 year cash flow stream has an internal rate of return of 19%.

Secondly, we have a very large 3D seismic database that has allowed us to build a core acreage position on trend to our recent success. Finally, because of the results of the past several years have been inconsistent; our Gulf of Mexico strategy has changed, which Dave mentioned earlier, changed significantly from what it was a year ago.

Our strategy is far more focused and will leverage off of our recent success. Our expectation is a rate of return that is competitive with other divisions and continued production growth from 2007 to 2008.

For fiscal 2007, Gulf of Mexico had total net production of 14.7 Bcfe, an 11% increase over fiscal 2006. In the fourth quarter, we produced 3.5 Bcfe. At today's rate of 47 million cubic feet equivalent per day, a full quarter of production would be equivalent to 4.2 Bcfe or 20% more than the fourth quarter of 2007. Also, in the fourth quarter, we were the high bidder on five of our eight bids at the central Gulf of Mexico lease sale, all within our core acreage position.

Moving on to the West division, California continues to provide stable and predictable production with excellent cash flow. Fiscal 2007 production was 18.3 Bcfe, and we expect a similar production level for fiscal '08.

For fiscal 2007, we drilled 57 new producers in California, including proved undeveloped locations and Midway-Sunset acceleration wells. The increased at Midway-Sunset has begun to show its effects with September oil up 360 barrels per day, versus May when increased steaming began. That's an 8% increase.

To conclude my review of Seneca's fiscal 2007 results, I would like to discuss our year end approved reserves. Our total proved reserves as of September 30, 2007 are 491 Bcfe, as compared to 581 Bcfe on September 30, 2006. The changes in reserves can be attributed to 47 Bcfe of production, 31 Bcfe of a net negative revision, and 49 Bcfe from the sale of our Canadian operations offset by 37 Bcfe of discoveries and extension.

In the US, we replaced 90% of our production through drilling. But as I mentioned last quarter, the reserve audit by Netherland Sewell resulted in a net 42 Bcf negative revision or 7% of US of our reserves. As expect the Netherland Sewell revisions were primarily in the west. Even with these changes including the sale of our Canadian operations, the net present value of Seneca's reserves at year end has increased by more than $100 million since last year.

With Netherland Sewell's initial audit behind us, we expect future company wide downward revisions to be rare and upward revisions to become much more common.

Looking forward to the new fiscal year, I’m very excited about our program for 2008. We expect to continue to grow our US production, with 15% to 20% growth in Appalachia, 5% to 10% in the Gulf of Mexico, and flat to only a very slight decline in California.

Overall, the midpoint of our production guidance is a 4% increase to US production. Our refocused Gulf of Mexico program includes several high-potential exploration wells on trend to our recent success. And as I mentioned earlier, we expect to increase our shallow drilling in Appalachia to 280 wells, as well as drilling up to 10 horizontal wells in the Marcellus Shale.

Our proprietary database combined with the extensive knowledge and expertise of our E&P team should continue to deliver outstanding returns to our shareholders in 2008 and beyond.

Now I will turn it over to Ron.

Ron Tanski

Thanks, Matt. I only have a few items regarding our earnings numbers, before we take questions. Our reported GAAP earnings of $3.96 per diluted share were $1.50 above the high end of the range of the guidance that I gave during our earnings call in August. Most of the $1.50 or $1.41 of that amount came from Seneca's sale of the Canadian exploration and production operations.

Approximately $0.03 came from lower than forecast operation and maintenance expense, and our utility and pipeline and storage segment. Higher than forecast prices on our efficiency gas sales made up $0.02 per share, and higher oil prices in the exploration and production segment made up after remaining $0.04 difference between guidance and reported GAAP earnings.

Our earnings release provides all the details for the quarter-to-quarter and year-to-year comparisons, so I won't spend time on the call to repeat that information. Looking forward to 2008 earnings, we've increased our guidance to a range between $2.50 and $2.70 per diluted share.

As I mentioned last quarter, the biggest driver of the increase in earnings from 2007 to 2008 is increased commodity pricing after hedging in our Exploration and Production segment.

We increased the guidance range since our August call, because Seneca has layered in more hedges at prices higher than those embedded in our base forecast. Our hedged volumes for fiscal 2008 are listed on page 26th of the release.

Using the midpoint of our production guidance, we now have 50% of 2008 production hedged. Having more production hedged also required us to reduce the range of earnings sensitivity related to un-hedged production listed on page 29 of the release.

We've also finalized our capital expenditure budget for 2008. Our spending budgets are $59 million in the Utility segment, $146 million in the Pipeline and Storage segment, between $151 million and $159 million in the Exploration and Production segment, and $1 million in all other, for an overall CapEx range of $357 million to $365 million.

We made no major structural changes in the underlying business segments that should cause any analyst to change their underlying model. We do however expect to receive an order next month from the New York Commission in our New York rate proceeding.

As we've previously announced, the Commission allowed us to have an early implementation of our Conservation Incentive Program. Our customers that install energy efficient appliances after November 1st, maybe eligible for rebate and we've listed those on our website. Any other rate changes that are approved by the Commission will go into effect right around the 1st of January.

With that operator we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question will come from the line of Jim Harmon with Lehman Brothers. Please proceed.

Jim Harmon - Lehman Brothers

Good morning. I have got three questions probably for Matt, and the first is if we could look at the Gulf of Mexico we've had a lot of focus on Appalachia. We’re seeing production growth out of that region, but we haven’t really seen reserve growth, so what's in your mind over the next 12 months to 18 months, are you going to be doing with that region is it more of a production or will we see reserve growth?

Matt Cabell

That’s a good question, I guess the way I would look at how we’re going to measure success, its going to be based on finding and development cost, and on the rate of return that we estimate for the wells that we drill over the course of the year. So, at the rate of capital spending versus the production we’re going to have this year it might not be any significant reserve adding activity, but yet it’ll be a value adding activity.

Jim Harmon - Lehman Brothers

Okay. Fair enough, second question on the rising gas environment and oil environment, you always get asking of this, it makes sense to hedge mines. And I know it took a while for you to get your ability to hedge oil, and I was wondering if triple digit prices doesn’t make sense to lot more than it, because I didn’t see any new hedges in last night's release.

Matt Cabell

I'm going to let Ron take that one.

Ron Tanski

Yeah we did have some new hedges from the last quarters release Jim, but as I mentioned on the call we have got 50% hedged right now and I think as you say.

Jim Harmon - Lehman Brothers

Oil?

Ron Tanski

Yes.

Jim Harmon - Lehman Brothers

Okay. My mistake.

Ron Tanski

Yeah that's on page 26 of the release I believe.

Phil Ackerman

We'll double check that.

Matt Cabell

Yeah, we’ve ran through those numbers and right now we are about 50% hedged overall. And as you said given the rising prices right now we're comfortable with that.

Jim Harmon - Lehman Brothers

Okay, oh it's possible; I miss something on a 30 page release. Okay. The last question is, assuming everything hits all cylinders in Appalachia can Matt or anyone talk about what the infrastructure is, like you handle the volumes and what would need to be done in order to make that operation as smooth as possible?

Matt Cabell

Well one of the continuous challenge for us is building the gathering system at a pace that will keep up with our drilling program, but it's not a challenge that can't be met, its just one that is very much part of our emphasis.

Dave Smith

Yeah I think Jim; this is Dave, on the upper Devonian its just kind of an incremental keeping on building it out. Certainly if the Shale takes off like it might, we've already put in place the structure which would revolve around a number of limited partnerships. And I mentioned previously that the main loss in this has been heading that up. Not only talking to Seneca, but to a number of other producers, and winding up what we need to do in order to, essentially run that as a separate business.

Right now it's not needed with respect to the present Appalachian production, but certainly if the Shale takes off, that's a business we'll be getting into. And we have all the regulatory work, all the corporate work, all the legal work lined up and ready to go.

Jim Harmon - Lehman Brothers

Okay.

Phil Ackerman

Jim let me just add this is Phil.

Jim Harmon - Lehman Brothers

Sure.

Phil Ackerman

Jim let me just add this as well. That if the shale takes off as Dave says, it goes beyond near gathering. It's a different order of magnitude then and you wind up meeting takeaway capacity to get all that gas completely out of the region, and then you are looking at some significant transmission facilities as well.

Jim Harmon - Lehman Brothers

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Carl Kirst with Credit Suisse. Please proceed.

Carl Kirst - Credit Suisse

Hey good morning everybody.

Jim Welch

Hey Carl.

Carl Kirst - Credit Suisse

Three questions, the first ones pretty easy today. I just didn't get a chance to scroll down the numbers. Matt I think you had run through what the production growth expectations were by region could you?

Matt Cabell

Certainly, certainly. 15% to 20% on Appalachia; 5% to 10% on the Gulf of Mexico; and flat to a slight decline in California.

Carl Kirst - Credit Suisse

Okay, great. The second question really was kind of one keying off of Jim's and your answer to him with respect to the Gulf is, F&D is certainly one of the metric that you are looking at to build value. Can you I guess two part for this question, with 2007 results here is it possible to breakout F&D by region for the three remaining region? And two when you are saying for the Gulf of Mexico as we look forward, can you help us out with where you think F&D should be if you are successful as we hope your.

Matt Cabell

Let me answer that last part first and say that $4 is our target and with the high rates that we get in the Gulf of Mexico, $4 finding and development cost provides very economic project. In terms of what are -- you are asking about what was our F&D.

Carl Kirst - Credit Suisse

The N&D by region right for '07.

Matt Cabell

I don't have that off the top of my head. In the Gulf it would have been relatively high, but I should carry out that by saying that we have significant probable reserves added in but not disclosed, but added in the High lsland 24-L area, which if you included those the finding and development cost wouldn't look too bad.

Carl Kirst - Credit Suisse

Okay. Actually, off of that, whether you want to, maybe the easier question is just for the company as a whole on the [E&P] side, as you look at your PV-10 calculation here for year end. In that calculation, you have an estimate for what future development cost would be?

Matt Cabell

Not at my finger tips.

Carl Kirst - Credit Suisse

I could follow-up offline or get it --

Phil Ackerman

[Scorning] around you are looking for it. May be you can go to the next question.

[Multiple Speaker]

Ron Tanski

This needs some refinement Carl, because it has also all the P&A cost.

Carl Kirst - Credit Suisse

Okay.

Ron Tanski

So we're going to have work on, refine this a little bit more.

Phil Ackerman

We'll get back to you on that.

Carl Kirst - Credit Suisse

Okay. Fair enough. Last question was simply on the -- though the west to east potential project coming up here. And I understand, from past engineering and what the final size may or may not be. But, is it possible 324 miles pipelines through that area, even though its non-existing right of way, I would think, it's not going to be a smaller project. Do you have any sort of bookings of what size we might be talking about, whether or not that would then require you to take on a partner or how should we think about that?

Dave Smith

Well we’ve been looking at 24 to 30 inch depending upon what the market calls for. It is very helpful to have the existing rates as you recognize. And, you know Carl there are about 15, depending if you count the over the top projects, there are about 15 projects our there and certainly not all or most of those projects are going to move forward.

So, we would not need to partner-up but, we are certainly not ruling that out and we have had discussions with other pipelines and others about potentially partnering up. So, that certainly is something that we would consider, although at this point we don't regard it as necessary.

Carl Kirst - Credit Suisse

Okay, that's helpful. And far as capital cost size should we be thinking of $1 million to $2 million a mile or could it be significantly less than that considering the….

Dave Smith

Estimates would range between $630 million and $725 million.

Carl Kirst - Credit Suisse

Okay.

Dave Smith

With the whole thing.

Carl Kirst - Credit Suisse

Alright, that’s what that we were thinking. Okay, I appreciate. Allright thanks guys

Dave Smith

Thanks Carl.

Operator

(Operator Instructions). Our next question comes from the line of Becca Followill with Tudor Pickering. Please proceed.

Becca Followill - Tudor Pickering & Co.

Hello, first question is on the Marcellus. What is your disclosure going to be on that? Are you going to disclose individual wells or you are going to give us periodic updates or are you going to wait until you have significant amount of information, what's is the plan there?

Matt Cabell

Well Becca, we recognized that all our shareholders are anxious to hear about our drilling results as soon as possible. While we recognize that, we've got to balance the value of that confidentiality with the benefit derived by disclosing those flow rates and reserves. So, the play is becoming very competitive, and I guess this is a long way, to say we don't know yet exactly what we'll disclose.

Becca Followill - Tudor Pickering

Are you leasing at this point?

Matt Cabell

That again goes into that same very question about competitive issues and I guess what I would say is the success of the play is certainly going to drive our leasing activity in our leasing plans.

Becca Followill - Tudor Pickering

Okay, thank you. Second question on you mentioned Phil that the rebuttal New Mountain, will take more lengthy document, I assume that you guys at this point are going to make another filing that rebuts New Mountain is that correct?

Phil Ackerman

That's right.

Becca Followill - Tudor Pickering

And the timing for annual meeting, would we expect that to be in the normal time?

Phil Ackerman

It will be in February.

Becca Followill - Tudor Pickering

Okay.

Dave Smith

Well, the annual meeting, but are you asking Becca, when the rebuttal would?

Becca Followill - Tudor Pickering

No, when the annual meeting is, I assume it's at the normal time. And then finally back to the pipeline question, I think this is maybe the fifth or the sixth proposed pipeline that's coming for the terminus of Rockies, why does this project have a competitive advantage over the others?

Dave Smith

There is at least five or six. And I mean number one, we were at it very quickly, I think we might have been the first out of the box. Number two, we do have the existing rights, number three, fortunately because of our geographic area there is an awful lot of potential storage right on where we are proposing to lay the line.

So, I think when you add all of that together, we're in a relatively good position, that's not to say, some of the other projects look interesting as well, but I think when you put it all together we're in a pretty good position and we'll know, we’ve been out talking with the customers at some length for some time and we are coming fairly close to a conclusion.

Becca Followill - Tudor Pickering

Great, thank you. And then one last question on the New Mountain filing that they made they talk about Schlumberger's PT10 value. Do you think that that is an accurate assessment?

Phil Ackerman

I think we've said right along and Matt said that we think it was a very cursory analysis, based on numbers I don't think they agree with ours. That the numbers that they appear to use in terms of reserves per well simply don't agree with the reserve numbers that we come up with and with our actual experience, it seems to have been based on a different portion of the basin, and I wished that number was there.

Dave Smith

I'll add one thing to Phil's comments back in, that is that beyond proved reserves as you will know and particularly when you get outside of three 3P reserves and you are talking about perspective resources a recognition of risk is appropriate and required when you value those additional resources. And I guess my question would be have they recognized that risk properly.

Becca Followill - Tudor Pickering

Exactly, Okay. Thank you. And I'm sorry I have one more question, on the California reserve write-down I know there was an auditor taking a look at it, but what were the big pieces behind that significant change in the reserves?

Dave Smith

The vast majority of it was a change in our recovery factor.

Becca Followill - Tudor Pickering

Okay. Can you give us metrics on from what to what?

Dave Smith

I'm going to say from 80% to 70% and that's a rough ballpark.

Becca Followill - Tudor Pickering

Okay, Great. Thank you gentlemen.

Phil Ackerman

And if Carl is still on the line, the future CapEx that's built into our PV10 numbers is approximately $220 million.

Operator

And our next question comes from the line of Shneur Gershuni with UBS. Please proceed.

Unidentified Analyst

Hi. Good morning guys. It's actually Chris. Most of my questions have been answered, but I just have one quick one. Given the recent strength in the stock, and healthy CapEx well for 2008, what's the status of your share buyback?

Phil Ackerman

The share buyback remains authorized by the Board, the number of shares that have actually been bought back they are disclosed in the 10-Q.

Ron Tanski

We didn't buy any shares during the last quarter, Chris.

Unidentified Analyst

No, for fishing around, I am just curious looking forward is that something to kind of carry on or are you -- I mean, looking into the future at these levels, at these CapEx , I guess, the quarters buyback kind of something that you're targeting?

Ron Tanski

Well, I guess, one way to look at it is, yes, share buybacks are competing use of capital and as Matt said if the Marcellus takes off, we would be looking at using more dollars there and investing it in the ground rather than buying shares. But as I've sated before, with respect to the share buyback, we've got Board authorized targets and volumes and amount and pricing that were not going to be disclosed beforehand.

Unidentified Analyst

Okay. Thank you guys very much.

Operator

At this time there are no questions in the queue. I would now like to turn the call back over to Jim Welch for closing remarks.

Jim Welch

Thank you, Lacy. At this point, we'll conclude our call for today. We'd like to once again thank everyone for taking the time to be with us today. A replay of this call will be available in about one hour on both our website and by telephone. And both will run through the close of business on Friday, November 16th. Our website address is www.nationalfuelgas.com. The telephone replay number is 1888-286-8010, using pass code 19287282. This concludes our conference call for today. Thank you and good bye.

Operator

Thank for your participation in today's conference. This concludes your presentation, you may now disconnect. Good day.

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Source: National Fuel Gas F4Q07 (Qtr End 9/30/07) Earnings Call Transcript
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