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Southwestern Secures More Appalachian NatGas Takeaway, Takes $1.5B Price-Related Impairment

Houston-based Southwestern Energy Co. made headway securing more natural gas transportation out of the Appalachian Basin during the second quarter and has boosted its 2015 production guidance with strong gains in the onshore.

The natural gas-focused independent produced a record 245 Bcfe (122 Bcfe net) in 2Q2015, 30% higher from a year ago. However, the volumes couldn't overcome slumping commodity prices.

Southwestern posted a one-time impairment charge of $1.5 billion in the latest period after writing down $806 million ($2.11/share) on the value of its properties. Including the one-time charge, total net losses were $815 million (minus $2.13/share), versus year-ago profits of $207 million (59 cents). Revenue fell 26% to $764 million.

"The second quarter presented challenges to the energy industry, but just as we have done historically, Southwestern Energy delivered another strong quarter," said CEO Steven Mueller. "We have increased guidance on our already record production levels, reduced our 2015 capital investments, added new economic locations and after only seven months, are operationally performing alongside the best in our industry in our newest acquisition in southwest Appalachia.

"Our low-cost structure and our unique portfolio continues to demonstrate our ability to thrive in an environment where many in the industry are focusing on how to survive. The operational momentum that we have built in 2015 is setting up an enduring future of delivering significant returns for our shareholders."

The venerable Fayetteville Shale in Arkansas, which drove output for years, quickly is being overtaken by Appalachian assets. Fayetteville output was 121 Bcf in 2Q2015, down from 124 Bcf a year ago. In Appalachia, total production increased to 212 Bcf, including a jump in Pennsylvania to 87 Bcf from 61 Bcf year/year. In southwestern Pennsylvania and into West Virginia, leaseholds that Southwestern has acquired since a year ago, output was 35 Bcfe.

Between April and June, 21 new wells ramped up in Northeast Appalachia with gas production of 87 Bcf net, up 43% year/year. Gross operated production was 1.20 Bcf/d at the end of the quarter. The average 30-day rate on six wells with a lateral length of around 4,749 feet was 6.02 Bcf/d; the wells cost on average $5.8 million each.

The production rate fell from the first quarter average of 7.51 Bcf/d for 22 wells, which had lateral lengths averaging 4,713 feet; costs were the same. Southwestern said the decrease quarter/quarter was primarily because of the location of activity. However, operational performance improved, with with the average time to drill to total depth falling to nine from 11 days quarter/quarter. The company also drilled its fastest Marcellus well to date with re-entry to re-entry of slightly more than four days.

During quarter, Southwestern made progress in securing more firm transportation capacity in Southwest Appalachia with an agreement with Columbia Pipeline Group to carry 500 MMcf/d on the Mountaineer XPress pipeline, a portion of which would be transported to the Gulf Coast on the Gulf XPress pipeline (see Daily GPI,June 24).

The new pipeline, scheduled for service in 2018, is to be routed "through much of the core of Southwestern's West Virginia acreage," Mueller said. "This line will provide optionality as it will access the company's wet gas production from the Majorsville area and will allow the company to tie in future dry gas gathering systems."

Including the Columbia agreement, Southwestern has secured about 800 MMcf/d of long-term takeaway capacity from Appalachia, with 60% destined for Gulf Coast markets. To date, the blended weighted average reservation charge of the transportation portfolio in southwestern Appalachia for all signed commitments is about 60 cents/MMBtu, the producer said.

"Additionally, if growth is assumed to be 35% per year in 2016 and 2017 in Southwest Appalachia, the company has already achieved its objective of covering at least 80% of the expected production with firm capacity or firm sales for both 2016 and 2017," Mueller said. "The company continues to be engaged in discussion with a number of other counterparties for additional released capacity or firm sales opportunities."

Even with the capacity agreements and stronger output, capital discipline has led management to reduce capital spending through the rest of the year. The total for 2015 now is set at $1.875 billion, compared to a February projection of $2.015 billion.

In northeastern Pennsylvania, expenditures were reduced to $605 million from $700 million, while in Southwest Appalachia, capital was cut by $10 million to $510 million. Fayetteville spending remains at $560 million for this year, while exploration spending in the Sand Wash and Brown Dense plays was cut to $85 million from $110 million. Midstream services now has a budget for the year of $80 million, versus $85 million, while E&P services/corporate spending is cut by $5 million to $35 million.

Even with less spend, production this year is forecast to be 27% higher than in 2014, averaging 973-982 Bcfe, the company said. Of the total expected production in 2015, 462-465 Bcf is the guidance from the Fayetteville, with Northeast production coming on strong. This year, about 363-366 Bcf is expected from the dry gas acreage in Northeast Appalachia, with 139-142 Bcfe from the wet gas areas in Southwest Appalachia, which includes West Virginia leaseholds.

Including the effect of hedges, average realized gas prices in 2Q2015 were $2.23/Mcf, versus $3.77 in 2Q202014. Hedging activities increased the average price by 47 cents/Mcf year/year, versus a year-ago decrease of 17 cents/Mcf. As of last Thursday (July 23), the company had 121 Bcf of its remaining 2015 forecasted gas production hedged at an average price of $4.40/Mcf.

Like most producers, Southwestern typically sells its gas at a discount to New York Mercantile Exchange (Nymex) settlement prices. Disregarding the impact of hedges, the average price received for gas production in 2Q2015 was 88 cents/Mcf lower than average Nymex settlement prices, compared with 73 cents lower during the year-ago quarter. As of July 23, Southwestern had protected 163 Bcf of remaining 2015 expected gas production "from the potential of widening basis differentials" through hedging and sales at an average basis differential to Nymex gas prices of about minus 24 cents/Mcf.

Lease operating expenses/unit of production for the E&P segment were 93 cents/Mcfe in 2Q2015, 3 cents higher year/year. The increase was blamed on higher operating costs in southwestern Appalachia associated with liquids production.

Within the midstream services unit, operating income for 2Q2015 was $77 million, 17% lower year/year, which the company said resulted from the sale of a gathering system in northeastern Pennsylvania. At the end of June, the segment was gathering about 2.2 Bcf/d through 2,036 miles of gathering lines in the Fayetteville Shale.

Southwestern had about $4.5 billion in long-term debt at the end of the second quarter, with a debt-to-total capitalization ratio of 42%.

In a note Tuesday, Jefferies LLC analysts said the update overall was positive, crediting the miss on earnings to lower gas price realizations. In addition, Southwestern secured "significant new firm transport capacity out of Appalachia -- seen by the market as a key risk."

Tudor, Pickering, Holt & Co. analysts also viewed the results as positive and said the full-year production outlook is better than expected. The "thorn" in Southwestern's side remains weak liquids realizations, which were $5.77/bbl in 2Q2015. That kind of realization "pressures" wet gas economics in southwestern Appalachia, analysts said.

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