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National Fuel Gas Co. (NYSE:NFG)

F4Q12 Earnings Call

November 2, 2012 11:00 am ET

Executives

Timothy J. Silverstein – Investor Relations

David F. Smith – Chairman of the Board, Chief Executive Officer

Ronald J. Tanski – President, Chief Operating Officer

David P. Bauer – Principal Financial Officer, Treasurer

Matthew D. Cabell – Senior Vice President; President of Seneca Resources Corporation

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2012 National Fuel Gas Company Earnings Call. My name is Coressa, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host Mr. Tim Silverstein, Director of Investor Relations. Please proceed.

Timothy J. Silverstein

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

At the end of the prepared remarks, we will open the discussion to questions. We would like to remind you that today's teleconference will contain forward-looking statements. 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 of the date on 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 will begin with, Dave Smith.

David F. Smith

Thank you, Tim, and good morning to everyone. The fourth quarter was a very good quarter for National Fuel and provided a strong finish to our fiscal year. Even with the exclusion of the non-recurring adjustment related to the approval of Supply Corporation's rate settlement, our $0.43 per share of operating results was at the high end of our range of expectations.

Seneca's production was up 46% over the prior year's quarter. Combined the operating results of our regulated segments were up over the prior year's quarter an impressive $0.12 per share, driven largely by the projects placed in service last fall, the Line N and Tioga expansion projects.

On a fiscal year basis, our performance was equally impressive. Overall, Seneca's production was up 15.7 Bcfe or 23% with a dramatic increase in Marcellus production and importantly a meaningful increase in California crude oil production.

Operating results for the Pipeline and Storage segment were up 50%, largely on the strength of the expansion projects I noted. These accomplishments help to offset the significant headwinds that resulted from a 21% drop in realized natural gas prices at Seneca and a 22% warmer than normal winter in our Pennsylvania utility service territory. Bottom line, I think it's fair to say that all things considered, it was a very good year for National Fuel from a financial performance perspective. It was also a good year operationally, with things proceeding according to our plans.

In the E&P segment, Seneca remains focused on increasing production in the Eastern Development Area, where we completed some great wells during the quarter from the second pad on Tract 100. As a result of our continued success, we expect to maintain a two rig development program in the EDA next year. Seneca also continues to make good progress in our delineation efforts in the Western Development Area.

We are very pleased with the results of our first Marcellus well in Rich Valley. It's one of the best we've drilled and we expect initial results on our first horizontal Utica well within the next few weeks, given the enormous size and the vast potential of our WDA legacy acreage. Delineation efforts will continue in 2013.

Seneca will also look to increase its exposure to crude oil production, particularly in California where our Bakersfield team has a proven track record of successfully optimizing mature oil assets.

In furtherance of that objective, last quarter we negotiated a farm-in opportunity with Chevron that we expect to close by January. That acreage is relatively near our existing base of operations. Also in furtherance of that objective with Seneca's acquisition of 9,300 net acres in Mississippian Lime play in Kansas, like our Ivanhoe acquisition in 2009, which has been very successful. These transactions are relatively modest and fairly priced. Increased our exposure to oil and provide some future running room.

Needless to say we'll continue to look for similar opportunities and particularly bolt-on acquisitions in California and in other areas where we're already operating.

Overall, considering the drop in natural gas prices Seneca had a very good year. As I mentioned, production was up materially reserves were up even more significantly. As you can see in last night's release, we had nearly 475% reserve replacement ratio in 2012. Our reserves now total about 1.25 trillion cubic feet, which is one-third higher than a year ago.

Most importantly, the assets, the management team and the company with our strong balance sheet are well-positioned for continued growth. Matt will have a full update on Seneca's operations including the California farm-in and Mississippian Lime transactions later on the call.

Turning to the Pipeline and Storage segment, construction of our $75 million Northern Access project is nearing completion. As of today, the project is partially in service. We are providing service for 240 million of the 320 million a day of contracted volumes. And we expect that will be fully in service by the end of December. At that point, it will add approximately $15 million in annual revenues.

Construction of the Line N 2012 expansion, which will add annual revenue of approximately $8 million was completed last month and went in service just yesterday. The final cost of their project will be about $43 million.

As you now, this was the second expansion of our Line N system. Given its strategic location, which is 10 to 15 miles from the Pennsylvania, Ohio border, we believe there will be further opportunities to expand the Line N system in the years to come.

Switching to Empire, we are seeing renewed interest in the Central Tioga extension project, which would extend the Empire Connector another 25 miles south to the Tennessee 300 Line. Given the constraints on that pipeline, shippers are looking for alternatives to move their gas to market.

The connector, which interconnects with Millennium, the Tennessee 200 Line and TransCanada at Chippawa provide shippers with a number of attractive options. As a result, we are optimistic about the viability of this project.

As our actions and our investments indicate, we continue to be bullish on the future of our Midstream businesses, both regulated and unregulated and we'll keep you up-to-date as each of these and other midstream projects develop. Ron will have more to say on this segment in his remarks.

In conclusion, considering the twin headwinds of low natural gas prices and the warmest winter on record in our utility service territory, where by the way our employees did a great job of controlling costs and providing excellent service. Fiscal 2012 was a very good year for National Fuel and frankly a testament to our diverse business model and our flexibility in allocating capital to our best opportunities.

Looking forward, I expect 2013 will be an even better year at the midpoint of our guidance, production should be up by more than 20% and the operating results in National Fuel should increase by more than 10%.

With that, I'll turn the call over to Ron.

Ronald J. Tanski

Thanks, Dave, and good morning, everyone. In addition to our solid financial performance for the fiscal year, fiscal 2012 was a good year from an operations point of view and we've started 2013 in great shape.

In the Utility, we kept pace with all our major capital maintenance projects. We again spent $58 million on upgrades or replacements in our utility system to assure that it's operating reliably and safely.

Going into the winter heating season, the Utility has 99% of its gas storage capacity filled to help assure that reliability. Assuming a normal winter, we are projecting that our average customers heating bills for the entire winter will be about $660 in our New York jurisdiction and $619 in our Pennsylvania jurisdiction. While the cost per cubic foot of gas is about 5% less than it was last year, remember that last year was about 21% warmer than normal and our projections are based on normal weather.

In the Pipeline and Storage segment, all our pipeline integrity and maintenance work that we had planned for the year was also substantially completed and pretty well on budget.

On Page 20 of last night's release where we show $144.2 million of spending in the Pipeline and Storage segment, $35.9 million of that total was for maintenance and pipeline integrity work. The rest was for expansion projects; including our most recent Line N pipeline and compressor station expansion, our Northern Access project pipeline and compression station work, and completion work earlier in the year in our Tioga County Extension for the Empire Pipeline.

In addition to our Utility having 99% of its gas in storage for the upcoming winter, all of supply corporations other East Coast customers have their contracted storage space filled up to the 98.5% level. They are in good shape to meet all our customers' winter supply requirements.

In our Midstream business, the Trout Run Gathering System in Lycoming County built for Seneca's production from the DCNR Tract 100 production has been operating steadily and is ready to accept more production from each of Seneca's new well pads as they are completed. That production is flowing into the Transco system.

Now looking forward for our pipeline business, I expect that it will continue to upgrade, re-engineer and expand our legacy systems to move more and more of the production from newly drilled Marcellus and Utica wells to market. For 2013, we'll likely be looking at smaller lateral pipeline projects ranging from $3 million to $20 million each that could be built under our FERC Blanket Authorizations. Larger more significant expansions of our legacy system are possible in the 2014 to 2015 timeframe.

To date, Marcellus producers near our pipeline system have been focusing much of their attention in the southwestern part of the state, but the production includes more liquids. Over the next few years, we expect producers in the Utica and the Marcellus will be increasingly active further north in Mercer County and the surrounding counties in Pennsylvania and Ohio, also chasing production with higher liquids content. As Dave said, our Line N system is well-positioned to benefit from this increased activity.

Now, our involvement could take multiple forms, at a minimum. I expect we’ll continue to expand our Line N corridor in increments as production in the area increases similar to the way we have with our Line N 2011 and 2012 projects. On a bigger scale, it's conceivable that National Fuel could be part of a larger integrated wet gas solution in the region.

For example, I can envision a scenario in which National Fuel will concentrate its efforts and building high pressure gathering lines that deliver wet gas production to a new processing plant and expanding our dry gas system to move the dry gas volumes from the processing plant to the interstate markets.

At this stage we’re still early in the process as producers have only begun to evaluate their acreage and the liquids content of production in this area. However Supply Corp and National Fuel Gas Midstream have held initial marketing meetings with perspective customers and the interest to-date has been very encouraging.

I'll now turn the call over to Matt.

Matthew D. Cabell

Thanks Ron and good morning everyone. Seneca produced 24.6 Bcfe in the fiscal fourth quarter a 46% increase over last year's fourth quarter and an 11% increase over third quarter 2012. For the fiscal year we produced 83.4 Bcfe a 23% increase over fiscal 2011.

The recent production increase comes primarily from new wells at Tract 100 in Lycoming County. These wells have been outstanding with eight wells tested to-date having peak 24-hour IP rates of 10.5 million to 16.1 million cubic feet per day. The best well, from the first pad averaged 14 million cubic feet per day over its first 30 days of production and produced its first billion cubic feet in just 94 days. We estimate the average EUR of our producing wells in Tract 100 at 11.5 BCF.

Also in the Marcellus we tested our well in Rich Valley area at a peak 24-hour rate of 6.3 million cubic feet per day with very little decline over the five-day test period. Our preliminary estimated ultimate recovery for this well is 6.4 BCF. This was a relatively long lateral at 6,300 feet and we used the reduced cluster spacing for the completion, both of which led to a relatively high well cost of approximately $10 million.

However, in a full development mode with economies of scale from multi-well pads and shared water handling facilities, we believe we can drill and complete 6 BCF wells for about $7 million, resulting in pre-tax IRR's of 25% at $4 per Mcf or perhaps shorter lateral, less costly wells with slightly lower EURs, but similar economics. Remember, we own most of this acreage in fee, and therefore pay no royalties.

In the Utica, we will be drilling our plugs at Tionesta soon, and should have some initial flow data by the end of the month. Our other Utica horizontal, the Mt. Jewett well required some well repair work. At this point, we are not sure if we will be able to frac all stages or just produce from the three stages already fracked.

For fiscal 2013, we plan to keep two rigs at Tract 100 in Lycoming County and one rig focused on Utica and Marcellus delineation of our Western Pennsylvania acreage. The three rig program allows us to keep our East division spending at around $400 million, assuming no spending within the EOG joint venture.

Looking further out to 2014, we plan to continue with two rigs in Lycoming County and we'll likely have at least one rig drilling development wells at Rich Valley, Boone Mountain or Owl's Nest in the Marcellus and/or possibly developing a portion of the Utica. Of course, where we are active in 2014 and how many rigs are utilized is dependent on both natural gas prices and this year's delineation results.

We recently converted two of our three Marcellus drilling rigs from diesel to natural gas. Initially, these rigs will use liquefied natural gas, LNG, but ultimately when we're developing large areas with good infrastructure in place they will run on fuel gas, our produced gas in the area being developed. This changeover has several benefits including reduced emissions, cost savings, and increased demand for our primary product, clean burning domestic natural gas. But as you know natural gas is not our only product, we're also growing our production of crude oil.

In our September 27 press release we described two new opportunities for oil production growth. Specifically, I nearly finalized farm-in deal from Chevron in California at the East Coalinga Field and an acreage acquisition in the Mississippian Lime in Kansas. In the Mississippian Lime, we hold 9,300 net acres in Pratt County, Kansas. We will be operator on 4,600 net acres with a 100% working interest. The remainder is a 25% working interest in approximately 18,500 gross acres. We expect to participate in four to 10 gross horizontal wells in fiscal 2013.

The East Coalinga farm-in will give us the opportunity to grow production in a field that is simply low on the priority list for the current operator. Under the agreement, we will keep Chevron on hold for the existing PDP reserves and give them an override on any production increases due to our future activity. We see potential to drill new infill wells, work over existing wells and bring wells back online that had been temporarily abandoned. Additionally, there may be some opportunity for secondary recovery.

Including the Chevron deal, we are planning to spend about $80 million in California in fiscal '13, the most we've ever spent in California in a single fiscal year. California oil production grew 8% in fiscal 2012 and we expect additional growth in fiscal 2013 with the most significant growth potential coming from Sespe.

Two new Sespe wells came online in the fourth quarter at a combined rate of over 200 barrels of oil per day. Four more wells are being fracked and completed in the current quarter and six more Sespe wells will be drilled in fiscal 2013.

Our year-end reserves are 1.246 trillion cubic feet equivalent. We replaced 473% of production at a finding and development cost of approximately $1.77 per Mcfe. Absent price related negative revisions, F&D would have been even lower at about $1.40. 67% of our reserves are in the proved developed category, a healthy percentage considering our huge resource footprint. Many of our peers rely on puds for as much as half of their total proved reserves.

Looking forward to fiscal '13 we are expecting continued growth in production and reserves. In fact we are revising our production guidance upward by 2.5 Bcfe to a new range of 95 to 107 Bcfe. This increase is primarily due to the outstanding well results we're having in Lycoming County.

However, I should point out that no significant new production comes on until mid-second quarter. Therefore production in the first and to some degree the second quarters of fiscal '13 may be relatively flat as compared to the quarter just ended. We've also finalized our fiscal 2013 CapEx forecast, increasing guidance by $25 million to a range of $425 million to $525 million. This new range captures our current expectations for spending in the two new oil projects I mentioned, as well as a bit more spending in the Utica Shale.

Looking beyond fiscal '13, we expect to continue to operate two rigs in Lycoming County through fiscal 2014. We have a great inventory of other Marcellus development opportunities; including another 20 wells at Tract 595, approximately 120 wells at our other two DCNR Tracts, many hundreds of locations at Boone Mountain and Rich Valley, which may ultimately prove to be superior to Tioga County, in part due to lack of royalty burden, and hundreds if not thousands of locations across multiple potential wet gas development areas on our more Western acreage.

In addition, we have huge, but less delineated potential in the Utica. It is clear that our natural gas opportunities are immense. Our natural gas activity level will be dependent on gas prices, development cost and cash flow. Meanwhile, as we continue our disciplined spending program in the Marcellus and Utica, we plan to continue to grow oil production, with California as our primary focus, but also with an eye toward additional opportunities in the Mississippian Lime and possibly elsewhere.

With that, I'll turn it over to Dave Bauer.

David P. Bauer

Thank you, Matt. Good morning, everyone. Considering the drop in natural gas prices, the fourth quarter was a great quarter for National Fuel. GAAP earnings were $0.58 per share, included in that amount was one-time non-cash $0.15 per share benefit to earnings related to the settlement of Supply Corporation's rate case. Previously, Supply Corp. had a deferral mechanism under which any difference between actual retiree medical expense and our rate allowance for that expense was deferred as a regulatory asset or liability. Over the years, $21 million regulatory liability had accumulated on the balance sheet. Under the rate settlement approved by FERC this quarter, effective as of May 1, 2012, Supply Corp and the other parties agreed to end this deferral mechanism.

In addition, because of the regulatory liability had been funded to an external trust, the parties also agreed to remove it from our balance sheet. The credit side of the entry was recorded in the revenue from external customer's line item on the income statement, which is why the variance in pipeline and storage revenue for the quarter is so large. Excluding this $0.15 per share adjustment, operating results were $0.43 per share, which as Dave said earlier is at high-end of our range of expectations.

Several factors contributed to this outperformance. First, thanks to our strong well results at Tract's 100 and 595, Seneca's reserve bookings at quarter-end were higher than we had anticipated, which had a big impact on our depletion rate. This caused Seneca's DD&A expense for the quarter to be about $5 million, or $0.04 per share lower than we had expected.

Looking into fiscal '13, we now expect our DD&A rate will be in the range of $2.10 to $2.25 per Mcfe. Going in the other direction was an adjustment related to Seneca's deferred tax liabilities. Under the accounting rules, each year will require to reevaluate the effective rate used to calculate the deferred tax balances on our balance sheet. As our level of activity in Pennsylvania has grown, a greater percentage of our consolidated income has become subject to income tax in Pennsylvania, which has the highest corporate income tax rate of all the states in which we operate. As a result, we will require to make an upward adjustment to the rate we use to value our deferred tax balances at year-end. Applying the higher rate resulted in a $3.3 million or $0.04 per share adjustment to our deferred tax liability. This non-cash adjustment was recorded in the fourth quarter and was the principal reason our effective tax rate for the quarter was unusually high at 44%.

Looking forward, I expect our overall effective income tax rate for fiscal '13 will be in the range of 39% to 40%. G&A expense at Seneca was a little better than we expected partially due to the timing of our personnel hiring over the summer. During the quarter we had several open positions at Seneca, which had a favorable impact on G&A expense.

A downward revision in an incentive compensation accrual was also a factor. We are in the process of filling the open positions, and I expect our incentive compensation accruals will return to their historic levels. Therefore you should plan on an increase in G&A expense in fiscal '13 over the $12.5 million level in the fourth quarter.

We're updating Seneca's G&A guidance for 2013 to a range of $58 million to $62 million. At the midpoint that equates to $0.59 per Mcfe rate which is a $0.06 improvement in our fiscal 2012 rate.

Seneca's LOE and other taxes for the quarter came in just about where we thought they would, and we're still comfortable with our 2013 guidance for those expense items namely $0.90 to $1.10 per Mcfe for LOE and $0.15 to $0.25 per Mcfe for taxes.

At the ability fourth quarter O&M expense was lower than we had expected mostly because of the $5 million or $0.04 per share favorable adjustment through our reserve for bad debt. We take a pretty conservative approach to our bad debt accruals for the first nine months of the fiscal year, and then taka a hard look at the reserve at year end. September 30 our accounts receivable was better than we had expected. So we are able to reverse $5 million of the bad debt expense we recorded earlier in the year. Note that there was a similar size adjustment to bad debts in last year’s fourth quarter which is why this item doesn’t appear in earnings variance yesterday’s release.

The fourth quarter was the first full quarter undersupply’s new rate agreement. Aside from the non-recurring adjustment I referred to earlier, the impact on the quarter was relatively modest and we don’t expect it will have a major impact on fiscal ’13. Remember we filed the case because we were required to under our 2006 settlement agreement, not because we needed to.

Our monitory rates generally increase, for example, transportation rates went from $0.115 to $0.135 but we implemented a fuel tracker so our efficiency gas revenues go away. Depreciation rates were reduced under the settlement which explains the drop in pipeline and storage DD&A expense for the quarter. Longer term we expect increased O&M spending and pipeline integrity and greenhouse gas emissions will offset that benefit. At the end of the day, the expansion projects will be the real drivers of our pipeline and storage performance in fiscal ’13.

Switching to consolidated guidance, we are increasing our fiscal ’13 earnings expectations to a range of $2.65 to $2.95 per share at the midpoint, a $0.20 per share increase. The increase reflects the new NYMEX price assumption for natural gas of 350 per Mmbtu. Our previous guidance assumed three and a quarter.

Our oil price assumption is unchanged to $85 per barrel. The new range also reflects our updated production guidance of 95 to 107 Bcfe and Seneca's updated DDNA and G&A guidance ranges that I referred to earlier. Our assumptions with respect to the regulator segments have not changed.

With regard to capital spending our final consolidated capital budget for 2013 is a range of $610 million to $760 million, breaking it down by segment as Matt described earlier Seneca’s budget is now in the range of $425 million to $525 million.

Pipeline and Storage budget is now $70 million to $90 million, which is a $25 million increase from our initial estimates. More than anything this change is the timing issue about $25 million is spending on the line in 2012 in Northern Access project that we thought would fall in 2012 will now be spend in fiscal ’13. The projects and sales are on budget.

Utility’s final budget is $65 million to $70 million and NFG Midstream is $50 million to $75 million. At the midpoint of our earnings and capital spending guidance we expect capital spending only slightly exceed our cash from operations, our forecast cash as outstanding cash from operations by about $25 million.

Our next long term debt maturity is for $250 million in March of 2013 and you can expect new $350 million issuance through refinanced debt maturity in any short term debt that’s outstanding at the time.

Lastly, with regard to our hedging program, as gas prices rallied we added positions to our hedge book for fiscal '13 and '14. Going into fiscal '13 we're about 60% hedged for both gas and oil at prices of $4.76 for gas and $94.21 for oil.

With that I'll close and ask the operator to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from line of Carl Kirst. Please proceed.

Unidentified Analyst

Thanks and good morning everybody. And I apologize, I jumped on two minutes after the start, was anything said about the storm, I just want to make sure there was no storm related issues, if I could start there.

David F. Smith

No, there are no storm related issues.

Unidentified Analyst

Okay, appreciate that.

David F. Smith

Nothing was said about it.

Unidentified Analyst

Okay. Thank you. And then, Matt, may be just to clarify couple of things on the proved reserve report. Were all the revisions price related, or was there any meaningful non-price related revision?

Matthew D. Cabell

We had performance related revision that went in both directions. But overall they were positive, net positive on the performance revision.

Unidentified Analyst

Okay. And was anything meaningful from Tract 100 in that or was that too soon?

Matthew D. Cabell

You mean in the total or in the…

Unidentified Analyst

Yeah, yeah.

Matthew D. Cabell

Tract 100 is a fairly substantial part of it. I don't have a specific number for you Carl, but Tract 100 was important.

Unidentified Analyst

But the puds are what drove that. Okay, al right. Just wanted to

Matthew D. Cabell

There were keep in mind we've got eight wells producing there. So and they are big wells. So the PDPs are substantial at Tract 100 as well as the puds.

Unidentified Analyst

Okay, I appreciate that clarification. And then lastly if I could just Ron, I just wanted to make sure I understood you had suggested maybe there may be part of a larger wet gas solution that might be being negotiated right now. Did I understand you just said that you guys were perhaps looking at the piece that would be high pressure wet gathering and then perhaps a takeaway from a processing facility on the dry gas side, but not the processing facility itself or I just want to make sure I had this moving parts.

Ronald J. Tanski

Yes. You have those moving parts, but let's back up a little bit. We're not actually negotiating a deal right now, it's very early stages. Out on Supply Corporation's website, we have a map that kind of indicates the activity area that we're interested in and that pretty much centers right on our Line N pipeline, our legacy pipeline. And so, we're looking at – we're talking with a bunch of people and as you know that drilling over in that area is just in its preliminary stages, so that's exploratory. We have nothing built into our formal CapEx guidance for any of those projects this year, because we expect those are going to be a little bit longer-term and larger projects that would require a FERC filing.

Unidentified Analyst

Great, thank you very much for the color.

David F. Smith

Hey Carl.

Unidentified Analyst

Yeah.

David F. Smith

Just further on reserves, our overall PUD percentage is unchanged from '11 to '12.

Unidentified Analyst

Understood, thank you.

Operator

And your next question comes from the line of Mark Barnett. Please proceed.

Unidentified Analyst

Hey good morning everyone.

David F. Smith

Hi, Mark.

Ronald J. Tanski

Hi. Mark.

Unidentified Analyst

Just a couple of quick questions. The six BCF wells were about $7 million that you mentioned as kind of a future target, obviously a really attractive economics. Do you have any kind of idea of when that might start to play out, when you might be able to drive that scale?

David F. Smith

You mean when can we get to that kind of a well cost?

Unidentified Analyst

Yeah.

David F. Smith

It's more a function of when we get to a full development program, when we identify the area we want to really get after and then we can drive that kind of a cost. So, if for instance say in mid-2014, we decide we're really go forward with a big development program in the Western area. We could be at that cost in a fairly short order.

Unidentified Analyst

So not really something to look for through 2013?

Matthew D. Cabell

2013 we're primarily focused on delineation on the Western acreage and development on the Eastern acreage.

Unidentified Analyst

Just one quick more if I can. You've got about half a year of production now on those kind of earlier Lycoming wells with some really high IP rates. I'm wondering if you've got enough to really kind of extrapolate some of your decline rates in that region or is it still too early?

Matthew D. Cabell

Let me answer that like this. We've got enough data to estimate the EUR of the existing wells, the wells we've already drilled to be about 11.5 BCF.

Unidentified Analyst

Okay, thanks for that.

Operator

And your next question comes from the line of Ray Deacon. Please proceed.

Unidentified Analyst

Yes, hi. My question was for Matt. I was wondering on the Boone Mountain and Rich Valley areas, will you have results on those next quarter to talk about?

Matthew D. Cabell

I guess I'm not really sure what you're asking me. I just gave results on Rich Valley; Boone Mountain has been producing for a year or so.

Unidentified Analyst

Okay, got it. I guess I just meant in terms of – you mentioned in the comments that you thought that returns might actually turn out to be better than what you got on Tract 100 and I guess do you feel like you have off of a sample?

Matthew D. Cabell

Let me clarify one thing. I didn't say better than Tract 100, I said potentially it could turn out that in the long run some of those areas could be as good or better than Tioga County; Tract 100 and Lycoming County. Part of that reason is that we pay no royalty in those areas, but these are – if we can consistently get wells that are coming on at 6 million a day and have 6 BCF of EURs. There isn’t any reason to believe that those would be at least as good as our Tioga County developments.

Unidentified Analyst

Okay, got it. And I guess just any preliminary thoughts on the Utica based on couple of dozen wells that have been announced, are you thinking you should have some areas that has liquids on your acreage or is that likely to be dry gas?

David F. Smith

Our acreage is likely to be mostly dry gas, you can see our acreage on a map and there's one area there that obviously has the potential that has some liquids content. But what we've seen to-date from our drilling is good-quality rock relatively thick section. And as we interpreted a higher gas in place the Marcellus we have in those same areas.

Unidentified Analyst

Got it. Okay, great. Just on Sespe how many locations do you think you have remaining there and what are well costs looking like?

David F. Smith

We haven’t speculated on the total number of locations there yet, because we need a little more history on this down spacing, but it could be fairly substantial. Well costs are in excess of $3 million drilling complete.

Unidentified Analyst

Thank you.

Operator

And there are no further questions. At this time I would like to turn the call over to Mr. Tim Silverstein for closing remarks.

Timothy J. Silverstein

Thank you, Coressa. We like to thank everyone for taking the time to be with us today. A replay of this call will be available at approximately 2 pm Eastern Time on both our website and by telephone and will run through the close of business on Friday, November 9, 2012. To access the replay online, visit our Investor Relations website at investor.nationalfuelgas.com and to access of by telephone call 1-888-286-8010, and enter passcode 80430237.

This concludes our conference call for today. Thank you and goodbye.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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