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Fayetteville, Marcellus Drive Southwestern to Record Production

With strong performance in both the Fayetteville and Marcellus shales, Houston-based Southwestern Energy Co. set a number of records during the first quarter.

Gross operated production from the Marcellus hit 800 MMcf/d, up 147% from a year ago as Marcellus rocks are turning out to be better than Southwestern thought. In the Fayetteville, the learning/efficiency curve continues still.

Overall, Southwestern had record production of 182 Bcfe, up 23% from a year ago. Adjusted net income also set a record at $231.4 million (66 cents/share), up 58% from a year ago.

"Our first quarter demonstrated the earnings and cash flow power of our combined Fayetteville and Marcellus assets," said CEO Steve Mueller. "Although we attained record production and earnings this quarter, our focus remains the same: to add more value every day through our current drilling and midstream operations while keeping our costs low, all the while building for the future with new exploration ideas."

First-quarter Fayetteville production was 119.4 Bcf, compared to 118.9 Bcf in the first quarter of 2013. Gross operated gas production in the Fayetteville was 2,022 MMcf/d at March 31. During the quarter Southwestern placed 30 operated Fayetteville wells on production with initial rates that exceeded 5 MMcf/d, and 18 wells that exceeded 6 MMcf/d. Wells placed on production during the quarter had average initial production rates of 4.27 MMcf/d.

Recent tornadoes in Arkansas did not materially affect Southwestern operations in the Fayetteville, COO Bil Way said.

"Our first-quarter results included two wells with initial production rates over 10 MMcf/d, and April is already off to a great start with two wells, which had peak rates of 11.3 million and 10.7 MMcf/d, respectively," he said. “In April, we also surpassed for the first time the 2.1 Bcf/d mark for the field. During the quarter, we also continued to test the upper Fayetteville." One of these wells completed during the quarter had an initial production rate of 3.8 MMcf/d.

Southwestern is drilling another 19 upper Fayetteville test wells with completions expected during the summer, Way said. "We continue to work to drive our costs lower. One of the components of our vertical integration that we are currently upgrading and which will benefit future costs is the introduction of our new Southwestern drilling rigs which began this week."

The company recently contracted for seven new rigs, the first of which began drilling its first well last week. New rigs are scheduled to be delivered every 45 days, with the last one expected in December, Way said. The new AC-powered rigs are expected to cut drilling times by a full day, he said.

Southwestern's Fayetteville midstream business was gathering about 2.3 Bcf/d via more than 1,900 miles of gathering lines at the end of March.

Gas production from the Marcellus Shale was 58 Bcf in the first quarter, more than double its production of 23.5 Bcf in the first quarter of 2013. Gross operated production in the Marcellus was 823 MMcf/d at March 31. At the end of the quarter, Southwestern had 193 operated Marcellus wells on production and 91 wells in progress. Of the operated wells on production, 192 were horizontals, of which 93 are in Bradford County, PA, 16 are in Lycoming County, PA, and 83 are in Susquehanna County, PA. Of the 91 wells in progress, 36 were either waiting on completion or waiting to be placed to sales, including 10 in Bradford and 26 in Susquehanna, the company said.

During the quarter, Southwestern spud its first three wells in the Upper Marcellus in Bradford County, with the first production from these expected later in the year, Way said.

In the Marcellus, Southwestern's midstream operations were gathering 436 MMcf/d of gas via 96 miles of gathering lines at the end of March. Plans are to add 18 compressors in northeastern Pennsylvania during the remainder of the year, Way said, adding that by year-end, all of the company's operated volumes in Bradford, Susquehanna and Lycoming counties will have compression.

"Our gas marketing team is constantly working towards finding additional sales and firm transportation opportunities for our gas and their efforts in the first quarter strengthened our position in the Marcellus by adding a 118 MMcf/d of firm transportation," Way said. "We now have firm contracts in place that allow us to reach 1 Bcf/d of firm transportation out of the basin by year-end 2014. Through this firm transportation, we are able to assure flow everyday and reach our 10 different liquid market points."

Southwestern just closed on a deal to acquire about 312,000 net acres in northwestern Colorado prospective for the Niobrara formation (see Shale DailyMarch 5). A five-rig program is expected to begin in June; it will include four vertical test wells and one horizontal well targeting a 400-foot section in the condensate/oil window of the play.

In the Denver-Julesburg Basin, the company plans to spud its third well later this month testing the Marmaton and Atoka sections. Two more undisclosed "exploration ideas" are to be tested this year as well.

During the conference call last Friday, Mueller was asked why the company wasn't raising guidance for this year in light of such strong results.

"...[W]e are not ready to tease you today with any guesses about the rest of the year," he said. "Certainly, production is ahead of guidance, so is upside to that number for the year, but we want to better determine what activity we can really do in the [recently closed] Niobrara acquisition, fine-tune the capital needs and other parts of the company..." One more quarter's worth of insight into gas prices is also wanted, he said.

Additionally, Mueller said one of the main reasons the company is holding pat on guidance for now is that the Marcellus could turn out to be better still. "...[W]e may be able to significantly back down on some capital and still hit the numbers we want [in the Marcellus], and we want to watch that for a quarter or more before we make that decision," he said

Mueller said the Southwestern view on prices is that natural gas will trade between $4 and $5 per MMBtu "for the foreseeable future," with weather events pushing the needle up and down over the next 12 months. "Within that price range, both our Fayetteville our Marcellus economics match with almost any basin in North America. So I have confidence that Southwestern will continue to set more records next quarter and throughout the year," Mueller said.

Operating income from the exploration and production segment was $352.1 million, compared to $175.8 million for the same period in 2013. The increase was primarily due to higher production volumes and higher realized gas prices, offset slightly by increased operating costs and expenses due to increased compression and gathering costs.

Southwestern reported adjusted net income of $231.4 million (66 cents/share) when excluding a $61.9 million ($37.2 million net of taxes) loss on derivative contracts, net of settlements. Including this loss, net income for the first quarter was $194.2 million (55 cents/share). For the first quarter of 2013, Southwestern reported adjusted net income of $146.0 million (42 cents/share) when excluding a $30.8 million ($18.5 million net of taxes) loss on derivative contracts, net of settlements. Including this loss, Southwestern reported net income of $127.5 million (36 cents/share) in the first quarter of 2013.

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