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Southwestern to Cut Spending, Sharpen Focus on Fayetteville Shale

Southwestern Energy Co. will devote $1.9 billion to its capital investment program in 2011, down 10% compared with $2.1 billion in 2010, with most of it continuing to be spent on operations in the Fayetteville Shale where the Houston-based producer expects to see a significant increase in production.

"Our plan for the Fayetteville Shale during the year is to transition from earning our acreage position by drilling first wells in new sections and optimizing well spacing to more drilling on multi-well pads, which will result in faster drilling times," said CEO Steve Mueller. The company believes that the long-term fundamentals for natural gas "are very good," despite prices that are currently lower than they were at the beginning of 2010, Mueller said.

Southwestern's 2011 capital program includes approximately $1.6 billion for its exploration and production (E&P) segment and $225 million for its midstream segment. The E&P capital budget includes $1.2 billion for development and exploratory drilling and $50 million for seismic and other geological and geophysical expenditures. Southwestern also plans to invest about $170 million in various other unconventional, exploration and new venture projects in 2011.

Southwestern expects its Fayetteville gas production to be 410-420 Bcf in 2011, up from 346-349 Bcf in 2010, and it said its total gas and oil production next year will be 465-475 Bcfe, an 18% increase from its expected 2010 levels. Southwestern has Nymex hedges in place on notional volumes of 128.6 Bcf of its 2011 projected gas production hedged through fixed-price swaps and collars at a weighted average floor price of $5.43/Mcf. Assuming a Nymex commodity price of $4.50/Mcf for 2011, Southwestern is targeting net income for 2011 of $555-565 million and operating income of $960-970 million.

The company expects to participate in 580-600 total gross wells (480-500 operated) in 2011, compared with an estimated 700 total gross wells in 2010 (approximately 575 operated). Southwestern's 2011 net well count will be approximately 380-400 wells compared with approximately 440 net wells in 2010.

The producer plans to participate in 530-540 gross wells (440-450 operated) in the Fayetteville Shale next year. It expects the average time to drill to total depth to decrease to about 9.5 days from about 11 days in 2010. Average completed well costs are projected to be $2.8 million per well in 2011. About 60 operated wells in 2011 will be the first well drilled in a section, compared with about 220 operated wells in 2010, and about 2.3 wells per drilling pad are planned in 2011, compared with about 1.8 wells per drilling pad this year.

In the Marcellus Shale, Southwestern expects to increase its number of operated rigs from one to two in 2011 and plans to participate in a total of 40-45 gross wells, all of which will be operated. The company drilled 12 horizontal wells in Northeast Pennsylvania targeting the Marcellus in 2010 and expects a total of seven horizontal wells and one vertical well in the area to be producing by the end of the year.

In East Texas, Southwestern expects to participate in eight-10 gross wells in 2011, two of which will be operated and targeting the James Lime formation.

U.S. E&P companies that have taken a shine to oily shale plays are boosting their capital expenditures (capex) in 2011, while gas-focused shale operators are reining in spending, according to a survey by Barclays Capital (see Shale Daily, Dec. 16). In addition to Southwestern's 11% capex decrease, other gas-directed shale producers will slash or keep capex flat, including Encana Corp. (down 21%), Devon Energy Corp. (down 10%), Williams Cos. (down 8%), and Range Resources Corp. (down 6%), according to the Barclays Capital survey. Chesapeake Energy Corp., which spent about $4.9 billion this year for its upstream operations, plans to keep spending flat.

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