National Fuel Posts Net Income Of $73.5 Million In Q2 Fiscal 2009

Management Comments:

David F. Smith, chief executive officer and president stated: “During our second quarter, the steady and predictable performance of our regulated businesses kept our company on course despite the impact of the negative commodity price environment on our Exploration and Production segment. The consistent earnings from the Pipeline and Utility businesses support our commitment to a strong dividend to benefit our shareholders. In addition we are able to continue to invest in infrastructure projects and resource development that position the company for future growth.

In order to protect the company against the uncertainties in the financial markets making daily news, earlier this month the company issued $250 million of ten year longterm debt. While the debt rates were higher this year than last, the strong demand for the notes issued by the company is a vote of confidence in the company by the financial markets.”

Summary Of Results:

Consolidated earnings for the six months ended March 31, 2009, of $30.8 million, or $0.38 per share, decreased $134.8 million, or $1.55 per share, from the same period in the prior year, where earnings were $165.6 million, or $1.93 per share.

The comparability of the company’s financial results when comparing the quarter and six months ended March 31, 2009, to the comparable periods in fiscal 2008. Excluding these items, Operating results for the current second quarter of $73.5 million, or $0.92 per share, decreased $20.9 million, or $0.18 per share from the previous year’s second quarter.

Excluding these items, operating results for the six months ended March 31, 2009 of $137.8 million, or $1.71 per share, decreased $27.2 million, or $0.21 per share.

Discussion Of Results By Segment:

Exploration and Production Segment

The exploration and production segment operations are carried out by Seneca Resources Corporation (Seneca). Seneca explores for, develops and purchases natural gas and oil reserves in California, in the Appalachian region, and in the Gulf of Mexico.

The exploration and production segment’s earnings in the second quarter of fiscal 2009 of $18.1 million, or $0.23 per share, decreased $16.5 million, or $0.17 per share, when compared with the prior year’s second quarter. The decrease was primarily due to lower crude oil and natural gas prices realized after hedging and lower natural gas production in the Gulf of Mexico. For the quarter ended March 31, 2009, the weighted average oil price received by Seneca (after hedging) was $56.39 per barrel (Bbl), a decrease of $22.15 per Bbl from the prior year’s quarter. The weighted average natural gas price received by Seneca (after hedging) for the quarter ended March 31, 2009, was $7.53 per thousand cubic feet (Mcf), a decrease of $1.68 per Mcf.

In the first quarter of fiscal 2009 Seneca recorded a non-cash charge of $108.2 million to write down the value of its oil and natural gas producing properties. Seneca uses the full cost method of accounting for determining the book value of its oil and natural gas properties. This accounting method requires that Seneca perform a quarterly ceiling test to compare the present value of future revenues from its oil and natural gas reserves based on period end spot prices with the book value of those reserves at the balance sheet date. If the book value of the reserves exceeds the ceiling calculation, a noncash charge must be recorded in order to reduce the book value of the reserves to the calculated ceiling. The impairment was mainly driven by a significant decrease in commodity prices.

In the second quarter of fiscal 2009, despite a decrease in natural gas spot prices at March 31, 2009, compared to December 31, 2008, Seneca’s quarterly “ceiling test” indicated that the book value of the reserves did not exceed the ceiling and it was not necessary to record an impairment charge. An increase in crude oil prices combined with the decrease in the basis differential between prices at Cushing, Oklahoma, for West Texas Intermediate oil and prices for Seneca’s California oil at March 31, 2009, were the main drivers of the increase in the ceiling calculation.

Overall crude oil and natural gas production for the quarter was 10.1 Bcfe. Production increased in California and the Appalachian region by nearly 8% and 7%, respectively, compared to the prior year’s second quarter. Continuing curtailments from third party pipelines damaged by Hurricane Ike caused production in the Gulf of Mexico to decrease 0.7 Bcfe.

Other items impacting earnings for the quarter were lower depletion and lease operating expenses (LOE) and higher other operating expenses. The decrease in depletion expense was due to an increase in proved reserves and a lower depletable base resulting from the ceiling test impairment recorded in the first quarter of fiscal 2009 described above. The decrease in LOE is due to lower steaming costs in California, lower workover expenses and the continued shut-in of certain properties related to Hurricane Ike in the Gulf of Mexico. The increase in other operating expenses is due to a bad debt charge and recognition of actual plugging costs in excess of amounts previously accrued.

Earnings also benefited from the positive impact of period-to-period changes in the mark-to-market adjustments to recognize hedge ineffectiveness on certain derivative financial instruments used to hedge prices on Seneca’s oil and gas production.

The Exploration and Production segment’s loss of $65.5 million, or $0.82 per share, for the six months ended March 31, 2009, compares to earnings of $68.6 million, or $0.80 per share, for the six months ended March 31, 2008. The decrease was mainly due to the non-cash charge of $108.2 million to write down the value of Seneca’s oil and natural gas producing properties in the first quarter of the current fiscal year, as explained earlier in this release.

Excluding the impact of the ceiling test charge in the first quarter of fiscal 2009, Operating Results for the six months ended March 31, 2009, of $42.8 million or $0.53 per share decreased $25.8 million, or $0.27 per share, from the prior year. The decrease was primarily due to lower crude oil and natural gas prices realized after hedging and was also impacted by lower production, primarily in the Gulf of Mexico. For the six months ended March 31, 2009, the weighted average oil price received by Seneca (after hedging) was $60.36 per Bbl, a decrease of $15.08 per Bbl from the prior year’s six month period.

The weighted average natural gas price received by Seneca (after hedging) for the six months ended March 31, 2009, was $8.18 per Mcf, a decrease of $0.37 per Mcf.

Overall production for the six months ended March 31, 2009, was 19.7 Bcfe, a decrease of 1.4 Bcfe compared to the prior year’s six month period. The decrease was primarily in the Gulf division as a result of continuing curtailments due to Hurricane Ike.

Other items impacting operating results for the six months ended March 31, 2009, were lower depletion and LOE and higher other operating expenses. The decrease in depletion expense was mainly due to the increase in proved reserves and a lower depletable base resulting from the ceiling test impairment recorded in the first quarter of fiscal 2009 described above. The increase in other operating expenses is due to a bad debt charge and recognition of actual plugging costs in excess of amounts previously accrued. Operating results also benefited from the positive impact of period-to-period changes in the mark-to-market adjustments to recognize hedge ineffectiveness on certain derivative financial instruments used to hedge prices on Seneca’s oil and gas production.