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Southwestern Turning Bits Again as Prices Improve

During the downturn, Southwestern Energy Co. has been "drilling wells on paper," revisiting past efforts and analyzing results for opportunities to improve. Now that prices have improved, somewhat, Southwestern is sending rigs back to the patch.

"We have already resumed drilling activities much faster than anticipated," CEO Bill Way said Friday during a second quarter earnings conference call. "Our first well, which was spud last weekend, reached TD [total depth] in less than four days, which is comparable to what we were doing seven months ago when we halted drilling activity. "We plan to add one to two rigs per month across the company during the third quarter, demonstrating the speed and agility with which we can adjust our activity."

During the second quarter, Southwestern production beat the top end of company guidance by 10 Bcfe, and costs came in below guidance, Way said. "These achievements position the company to capture the benefits of a strengthening commodity price that appears to be in process," he said.

Southwestern will be emphasizing Appalachia (northeast and southwest) over the Fayetteville Shale, but one rig will be returning to the Arkansas dry gas play, too.

"We anticipate five rigs running by the end of the third quarter: Two in Northeast Appalachia, two in Southwest Appalachia and one in the Fayetteville," said Jack Bergeron, senior vice president of operations. We expect to drill approximately 60 wells and place approximately 100 wells to sale in the second half of this year, which includes our Utica [Shale] well, which we drilled in late 2015.

"...The real [production] benefit of this comes in 2017 as we build the momentum of the portfolio and return to value-added growth."

What was learned during the fallow months is expected to provide benefits, too. "During the time that we've been not drilling, we've gone through and we've...done a lot of collaboration within our company and shared a lot of ideas of things that have worked," Bergeron said.

For instance, last year the company used a rotary steerable rig in Northeast Pennsylvania after having done so in Southwest Appalachia last year, he said. "That's one of the reasons we were immediately able to get back on curve. Everything didn't go perfect on that well, but we were still right on pace with what we did in the past." Southwestern has also reviewed past completions, he said.

The Northeast Marcellus is favored over the Fayetteville because of more attractive finding and development costs, Bergeron said. Additionally, bigger wells in the Northeast make for bigger returns, and liquids lift the economics of wells in the Northeast, added CFO Craig Owen.

As part of the return to activity, Southwestern's inventory of drilled but uncompleted (DUC) wells will be declining, executives said. However, management emphasized that Southwestern uses DUCs as an efficiency tool and doesn't drill wells and then hold them merely to wait for better prices. The initial phase of activity restart we'll see the DUC inventory reduced merely as a matter of "putting the house into an efficient mode again."

Like other producers commenting during the start of second quarter earnings season, Southwestern is decidedly more bullish on the outlook for the remainder of this year and into 2017.

"The fundamentals continue to show improvement," said Randy Curry, senior vice president for midstream. "If you look at year-over-year changes on the demand side, we've seen...changes of plus 2.1 Bcf/d. If you look at exports, combined LNG [liquefied natural gas] and exports to Mexico, up roughly 1.2 Bcf/d. And we see lower dry gas production year over year, a decline of about 1.5 Bcf/d. The macro fundamental outlook is certainly improving. We've certainly got less gas available to go into the ground. I think we'll see some very low injection numbers over the course of the next two or three weeks...I think overall from a macro standpoint, the balance of the year into '17 it's a positive outlook."

Net second quarter Southwestern production totaled 225 Bcfe, down less than anticipated from the 245 Bcfe in the second quarter of 2015, the company said. The quarter included 96 Bcf from the Fayetteville, 90 Bcf from Northeast Appalachia and 38 Bcfe from Southwest Appalachia. This compares to 121 Bcf from the Fayetteville, 87 Bcf from Northeast Appalachia and 35 Bcfe from Southwest Appalachia in the second quarter of 2015.

The company reported a second quarter net loss of $620 million (minus $1.61/share) and an adjusted net loss of $34 million (minus 9 cents/share). This compares to a net loss of $815 million (minus $2.13/share) and an adjusted net loss of $9 million (minus 2 cents/share) in the second quarter of 2015.

Stay up to date on 2Q16 earnings and projections for the remainder of the year with NGI's Earnings Call and Coverage sheet.

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