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In Search of An Exit, Southwestern Pushing Fayetteville Performance for More Value

Southwestern Energy Co. has started the process of exiting the Arkansas play it helped build, but how long it may take is unclear, as management looks to once again push the Fayetteville Shale’s performance to maximize its sale value.

CEO Bill Way said the “time is right” to seek alternatives for the Fayetteville assets to focus on the higher returns and growing contributions that Appalachian natural gas liquids (NGL) are generating.

“While Fayetteville has numerous development opportunities, the high bar set by our Appalachia assets and our rigorous capital allocation discipline of investing in the highest return projects, make it challenging for Fayetteville to compete for capital in our portfolio,” Way said Friday during a year-end earnings call.

The company said last month it was pursuing strategic alternatives for the Arkansas assets it began acquiring in 2003, when it bought 343,000 acres, marking the Fayetteville’s beginnings. Southwestern now has nearly one million acres that could be monetized in an ongoing cost-cutting push to stabilize finances and optimize its operations in Appalachia.

“We are early in this process. We announced the process to bring context to our 2017 and 2018 performance,” Way said. “We have spoken about the fact that a major driver for this is repositioning the company to capture liquids in the Northeast and that the funds from any kind of monetization of that asset would go -- in the first instance -- to pay down debt.”

Southwestern produced 897 Bcfe in 2017, versus 875 Bcfe in 2016. While year/year Appalachian production increased to 578 Bcfe from 498 Bcfe, Fayetteville production declined from 375 Bcf to 316 Bcf. Northeast exit rates also skyrocketed, with its Southwest Appalachia division reporting a 56% year/year increase to 901 MMcfe/d and the Northeast Appalachia division reporting a 32% year/year increase of about 1.4 Bcfe/d.

Driven by those results, year/year NGL volumes also increased about 15% to 14.2 million bbl in 2017. Like other operators across Appalachia, the company intends to focus more on liquids this year. 

In all, Southwestern has allocated up to $870 million in discretionary capital for both its northeast and southwest Appalachian operations. The Fayetteville, meanwhile, is to see only up to $25 million of spending.

But that is to be spent more methodically, as management expects the legacy play has plenty of life left in it that can attract top dollar from potential suitors. The company has been testing the Moorefield Shale, which sits below the Fayetteville. It has so far derisked 36,000 net acres of the nearly 100,000 net acres that are prospective in the play.

Southwestern also has started to redevelop its legacy areas with the latest generation of drilling and completion techniques. Using what COO Clay Carrell said is a “data analytics model,” the company is identifying the Fayetteville’s highest performing properties, weeding out its lowest performing wells within them, and returning to drill and complete wells for better results.

“The strategy behind all the work that’s going on in Fayetteville right now is for the company to capture all of the value and upside that is present in this world-class asset and position it to get maximum value out going forward,” Way said, adding that many of the new techniques have previously been applied in Appalachia.

“The terrific potential that we think could be unlocked if these tests actually come through could be a game-changer for just the whole view on Fayetteville from the breadth of the 900,000 acres we have,” the CEO added. “So, it’s early days, we’re doing this one test at a time, being very structured about it, very disciplined about it, all the while honoring our capital allocation practices of targeting high value investments.”

In Appalachia, the company also began first production from the 28,000 acre Tioga area in north-central Pennsylvania. Tioga production was at 73 MMcf/d at the end of last year. Carrell said Southwestern has commissioned the first phase of a gas gathering and water distribution system, where it plans to increase activity this year.

In southwest Appalachia, the company expanded its rich-gas footprint by placing its northernmost pad to sales in Brooke County, WV,  which produced 7.9 Bcfe, including 68% liquids from four wells, after 240 days online.

Southwestern produced 239 Bcfe in the fourth quarter, up from 202 Bcfe in the year-ago period and from 232 Bcfe in 3Q2017.

Net income was $267 million (53 cents/share) for the period, compared with a net loss of $237 million (minus 48 cents) in 4Q2016. For the full-year, net income was $815 million ($1.63/share) from a net loss of $2.8 billion (minus $6.32) in 2016, when results included a steep impairment of oil and natural gas properties.

Average realized natural gas prices, including hedges, were $2.19/Mcf in 2017, compared with $1.64/Mcf in 2016. NGL and oil prices improved as well, helping to lift full-year revenue to $3.2 billion from $2.4 billion in 2016.

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