Extension Of Joint Development Agreement Between National Fuel, IOG Capital To Develop Additional Marcellus Shale Natural Gas Assets

Extension of Joint Development Agreement between National Fuel, IOG Capital to develop additional Marcellus Shale natural gas assets

21-Jun-16

National Fuel Gas Company announced that Seneca Resources Corporation, its wholly owned exploration and production subsidiary, and IOG CRV - Marcellus, LLC, an affiliate of IOG Capital, LP and funds managed by affiliates of Fortress Investment Group LLC, have agreed to a modified extension of their joint development agreement, which includes a commitment to develop additional Marcellus Shale natural gas assets located in Elk, McKean and Cameron counties in north-central Pennsylvania.

Under the terms of the revised joint development agreement, Seneca and IOG commit to jointly participate in a program that will develop a total of 75 Marcellus wells located in the Clermont/Rich Valley area in Pennsylvania. In December 2015, IOG initially committed to developing 42 wells with an option to participate in 38 additional wells if elected prior to July 1, 2016. The total number of wells and pad locations included in the revised joint development agreement were modified to reflect mutually beneficial changes in Seneca's drilling and completions schedule resulting from adjustments to gathering infrastructure plans and other operational factors. To date, 39 of the 75 joint development wells have been either completed and turned to sales or drilled and in the process of being completed, leaving an additional 36 wells to be developed under the revised joint development agreement. IOG was also granted an option to participate in a 7-well Marcellus pad that will be completed prior to December 31, 2017. Should IOG choose to participate in the 7-well Marcellus pad, the total commitment under the joint development agreement would reach 82 wells.

IOG continues to hold an 80% working interest in all of the joint development wells, with the remaining 20% working interest held by Seneca. As part of the amended agreement, Seneca and IOG agreed to make certain modifications to the royalty structure. Seneca's royalty in the additional 36 wells was reduced from 10% to 7.5%, resulting in a net revenue interest of 26% for Seneca and 74% for IOG. Consistent with the initial agreement, Seneca's working interest will increase to 85% after IOG achieves a 15% internal rate of return.
At Seneca's current Marcellus well costs, which have averaged an industry-leading US$650,000 per 1,000 feet of completed lateral fiscal year-to-date, IOG's obligation on the remaining 36 wells is expected to further reduce Seneca's net capital expenditures by approximately US$35 mln in fiscal 2016 and another US$120 mln spread across fiscal 2017 and fiscal 2018. In total, IOG is expected to fund approximately US$325 mln for its 80% working interest in the 75 joint development wells, which is approximately US$55 million less than what was projected under the initial joint development agreement. The decrease from the initial agreement is due to the reduction in the total well count and a US$600,000 per well average improvement in Seneca's actual well costs versus initial projections.

Seneca will continue to 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's Gathering segment's Clermont Gathering System. IOG will also continue to share in Seneca's contracted firm sales and firm transportation capacity, including the 490,000 dekatherms per day of capacity on National Fuel's Pipeline & Storage segment's Northern Access project that is expected to be placed in-service by November 2017.