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Southwestern Energy Roars in the Fayetteville Shale

Southwestern Energy Co. used its muscle in the Fayetteville Shale to boost its natural gas-weighted output by 65% in the last three months of 2008 from a year earlier, the company reported late Thursday.

The producer's total output, which is 99% weighted to gas, jumped to 57.6 Bcfe in 4Q2008 from 34.9 Bcfe, with most of the gains in the Arkansas shale, where production rose to 44.1 Bcf from 19.9 Bcf. This year the Houston-based producer is forecasting gas production in the Fayetteville Shale will be up about 70%, CEO Harold Korell told energy analysts Friday during a quarterly earnings conference call.

"A key accomplishment, clearly, is the progress we made in the Fayetteville Shale play in 2008," Korell said. "As we enter 2009, we will continue to focus on organic growth and the value added for each dollar we invest, which means we will reevaluate proposed investments as needed to take into account prevailing market conditions."

Some of its peers have decimated their 2009 capital spending plans, and Southwestern has reduced its 2009 budget too -- but only slightly. Capital expenditures now are set at $1.9 billion, below the $2 billion budget that it announced in December. It's not the economy that led to the spending reductions. Southwestern plans to make up the difference through expected lower service costs and from internal drilling efficiencies, Korell said.

Southwestern now is running 22 rigs in the Fayetteville Shale, where it holds 875,000 net acres. Completed well costs are expected to decline slightly per well this year to around $2.9 million from $3 million. By comparison, wells drilled in the Haynesville Shale have been costing around $10 million each.

"We will release four rigs in 2009, and we'll actively manage our capital program," Korell said. "We have the facility to make further reductions...There's a lot of uncertainty in the markets, but when the industry comes out the other side, Southwestern Energy will be extremely well positioned, financially healthy and growing significantly at low-cost levels."

Separately, Korell announced plans to turn over the reins to COO Steven Mueller in early 2010. Korell took over Southwestern in 1999 and reshaped it from its role as a utility company to one of the top domestic gas producers in the United States. "Being here has been a fabulous experience over the past 12 years," Korell told analysts.

For 4Q2008, Southwestern reported net income of $104.2 million (30 cents/share), compared with 4Q2007 net income of $71.6 million (21 cents). Net cash provided by operating activities was $283.4 million, up from $204.3 million in 4Q2007.

Gas and oil production totaled 194.6 Bcfe in 2008, up from 113.6 Bcfe in 2007. Total annual output included 134.5 Bcf from the Fayetteville Shale play, up from 53.5 Bcf in 2007. Last year 99% of Southwestern's output was gas, compared with 97% in 2007.

Estimated proved oil and gas reserves totaled 2,185 Bcfe at the end of 2008, up 51% from 1,450 Bcfe at the end of 2007. The company said 100% of its 2008 estimated proved reserves were natural gas, with 62% classified as proved developed. Last year the producer replaced 523% of its production volumes by adding 920 Bcfe of proved reserves and net upward revisions of 98 Bcfe. In 2007 the company's reserve replacement ratio was 474%, including revisions.

This year Southwestern expects to produce 280-284.0 Bcfe total, which would be 45% above 2008 production. The Fayetteville Shale is expected to account for 229-232 Bcf of total output.

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