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Southwestern Targeting Arkansas-Louisiana Oil Play

Fayetteville Shale pioneer Southwestern Energy Co. has been branching out to Appalachia's Marcellus Shale; to New Brunswick, Canada; and to the Lower Smackover Brown Dense formation, an unconventional oil reservoir in southern Arkansas and northern Louisiana. Right now company executives are most enthusiastic about the latter, which Southwestern has been working on for more than two years.

"The formation is an Upper Jurassic age, kerogen-rich carbonate source rock found across the Gulf Coast region of the southern United States from Texas to Florida," said CEO Steve Mueller. "This region of Arkansas and Louisiana has produced oil and gas from the Upper Smackover since the 1920s.

"The Brown Dense formation is the source rock for these Upper Smackover fields. It has the critical properties necessary to be a successful play and compares favorably to other productive oil plays in the United States. However, it has never been exploited with horizontal drilling technology until now."

The Lower Smackover Brown Dense formation ranges in vertical depth from 8,000 to 11,000 feet. Southwestern said it appears to be laterally extensive over a large area ranging in thickness from 300 to 550 feet.

Analysts at FBR Capital Markets noted Southwestern's announcement but expressed skepticism. "Our conversations with investors suggest that the market is skeptical of [the play's] prospectiveness as a previous horizontal well in the region had encountered sour gas in the formation."

Southwestern has about 460,000 net acres in the play and said it plans to spud its first test well late in the third quarter. "The [test] well will be extensively logged and a full core will be obtained over the entire Brown Dense interval before the well is completed," Mueller said. "Our second well is planned to spud later this year with a total vertical depth of approximately 10,700 feet and a 6,000-foot horizontal lateral in Claiborne Parish, LA. We plan to drill up to 10 additional wells as we continue to test the concept in 2012. If our testing yields positive results, we expect that our activity in the play could increase significantly over the next several years."

The company said its investment in undeveloped acreage in the play area to date is about $150 million and its leases have an 82% average net revenue interest and an average primary lease term of four years with four-year extensions.

Elsewhere, in Appalachia Southwestern has participated in 28 wells in northeast Pennsylvania, of which 18 were successful and 10 were in progress as of June 30. The producing wells are all operated Marcellus Shale wells in the Greenzweig area in Bradford County. Net production from the area was 5.1 Bcf in the second quarter, compared to 2.8 Bcf in the first quarter of 2011 and 0.8 Bcf in the fourth quarter of 2010. The company is running one drilling rig and is moving in another rig, which will begin drilling in Susquehanna County in August.

In New Brunswick at the end of the quarter Southwestern held 2,518,518 net undeveloped acres. There the company is in the acquisition phase of approximately 410 miles of two-dimensional seismic data and plans to have that finished in September.

In the Fayetteville Shale during the second quarter Southwestern placed 149 operated wells on production. As of July 25 the company's gross production from the Fayetteville was about 1.8 Bcf/d, up from about 1.4 Bcf/d a year ago. The company is currently utilizing 18 drilling rigs in the play, including 12 that are capable of drilling horizontal wells and six smaller rigs that are used to drill the vertical portion of the wells.

"Our production continues to grow, primarily driven by our Fayetteville Shale operations. However, we are also beginning to see the impact of our Marcellus Shale activities on our production, as we placed several strong wells online during the quarter," said Mueller.

Southwestern reported second quarter net income of $167.5 million (48cents/share) compared to $122.1 million (35 cents/share) for the prior year period. Net cash provided by operating activities before changes in operating assets and liabilities was a record $448.2 million for the second quarter, up 30% from $345.7 million for the same period in 2010.

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