Seneca Resources Corp., a wholly owned exploration and production subsidiary of National Fuel Gas Co. (NYSE: NFG), 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 Marcellus natural gas assets located in Elk, McKean, and Cameron counties in north-central Pennsylvania.
Under the terms of the Seneca operated joint development agreement, Seneca and IOG will jointly participate in a program that will develop up to 80 Marcellus wells located on 10,500 acres in the Clermont/Rich Valley area in Pennsylvania. IOG will hold an 80% 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 $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% royalty interest and the remaining 20% 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% royalty and the remaining 20% working interest (28% net revenue interest) in those wells. Seneca's working interest will increase to 85% after IOG achieves a 15% 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 Corp.’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 US 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 of existing proved undeveloped natural gas reserves as its interests in the joint development wells are conveyed to IOG.
Jefferies LLC acted as the exclusive financial advisor to Seneca for this transaction and Kirkland & Ellis acted as legal counsel. Jackson Walker, LLP acted as legal counsel for IOG.