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Southwestern Living Within Its Means, Riding Out Downturn

Southwestern Energy Co., one of the nation's largest natural gas producers, spent the first quarter living within its means as it focused sharply on positioning itself for a commodities rebound and delivering on a plan it highlighted earlier this year to reduce debt and maximize efficiency.

The company saw better than expected results with its 2016 spending cut significantly from last year's levels and all of its rigs in the Appalachian Basin and the Fayetteville Shale idled. In February, the company highlighted a series of initiatives to stay flexible for a rebound, build its liquidity, operate more efficiently and optimize its portfolio (see Shale DailyFeb. 26).

But management had little to add about those initiatives on Friday during a conference call to discuss its first quarter results other than to say the work will take time.

"Another reason to be confident about Southwestern Energy is the progress we've made on the strategic initiatives we previously discussed for differentiating value-added growth for when commodity prices do recover," said CEO Bill Way. "Just a few months into the year, we are well on our way to delivering on that plan as we promised.

"At the appropriate time, we will talk in detail about the actions we have taken to strengthen the balance sheet and be assured we've made good progress."

The company beat the high end of its quarterly guidance by 2 Bcfe. It produced 237 Bcfe during the quarter, driven by 134 Bcfe from the Appalachian Basin and 103 Bcf from the Fayetteville. That's up from 233 Bcfe in 1Q2015 but down from the 249 Bcfe it produced in 4Q2015. Southwestern has forecast a 14-17% decline in overall output this year on the lower activity it has planned.

However, Paul Geiger, senior vice president of the Appalachian division, said the first quarter production beat was mainly the result of "strong well performance" across the company that "resulted in shallower decline of our base production than previously estimated."

At the end of the first quarter, the company had $4.8 billion in long-term debt, including $1.55 billion of cash drawn on its revolving credit facility. The company has since repaid those borrowings and Way said Southwestern continues to explore all options to reinforce its liquidity and reduce its debt, including equity offerings, joint ventures (JV) and asset sales, among other things. The company has started the asset sale process, management said Thursday.

"Another component of strengthening the balance sheet includes potential asset sales," Way said. "Our asset sales process is continuing. As bids are received, we will make a decision on which asset sales make the most sense to move forward with as an option to address our debt levels. We will update on these decisions as [they] are finalized."

Discussions are also ongoing about joint ventures across the company's operations, Way added.

"We've had some interest in a couple of areas," he said. "We don't have a specific offer on the table at the moment, but there continues to be some interest in a couple of different places. We've actually looked at pieces of this and thought about moving it into an asset disposition mode because when you talk to these people they say, 'you know, I'd like to JV with you, but I'd rather buy it.' So, we'll watch that over the next little while."

The company placed 12 wells into sales, including three in Northeast Pennsylvania and nine in the Fayetteville, in the first quarter. Geiger said Southwestern would place another 11 wells into sales this quarter. The company also has more than 100 drilled but uncompleted wells in its inventory that continue to be analyzed as the company prepares for a future rebound in commodity prices.

Last year, Southwestern drilled its first Utica Shale well in West Virginia, and it expects to drill more ahead of schedule when its program ramps back up.

"As we've ranked capital projects this year and prioritize them, we're keeping that one in mind on when we actually complete," Way said of the drilled Utica well. "We have some additional Utica wells planned for other portions of our acreage. I think a lot of it really depends on where gas prices go, where liquids prices go and the balance between wet and dry Marcellus and Utica. So, too early to tell in the specific drilling schedule, but we have advanced the process from 2018 to sooner just on a general basis because we've already made that one well test."

Including hedges, Southwestern's average realized gas price in the first quarter was $1.48/Mcf, down from $2.99/Mcf in 1Q2015. It has added hedges on 107 Bcf, or 23% of its expected gas production from April to October with fixed price swaps and put options that have an average floor price of $2.42/Mcf. The company also utilized its extensive firm transportation portfolio in the Appalachian Basin by releasing excess capacity to help drive $30 million in gains.

While the company spent just $122 million on its operations -- well within its $147 million net cash flow -- and identified another $40 million in operational savings, it absorbed steep losses during the first quarter on low commodity prices.

Revenue declined to $579 million from $933 million in the year-ago period. Southwestern also recorded a $1 billion impairment on its oil and gas properties.

It saw an adjusted operating loss in its exploration and production segment of $65 million, compared to operating income of $78 million at the same time last year. Adjusted operating income for its midstream segment dropped to $63 million during the first quarter from $88 million in the year-ago period on a decline in gathering volumes.

Overall, the company reported a net loss of $1.1 billion (minus $3.03/share) during the quarter, compared to net income of $46 million (12 cents/share) in 1Q2015.

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