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Southwestern Energy Sees Path to Growth as 2016 Nears an End

Southwestern Energy Co. spent the third quarter making up for lost time, getting its rigs running again and finding more efficiencies to get back on the growth path heading into 2017 as production has declined since late last year.

CEO Bill Way said 2016 has been a year of "unwavering focus" for the company to strengthen its balance sheet, improve margins, optimize the portfolio and stay agile for a rebound. The company idled its rigs in February and put forth a plan to get leaner as it grappled with the commodities downturn (see Shale Daily, Feb. 26). The standstill ended in the third quarter when Southwestern put five rigs back to work across its core operating areas in Northeast Pennsylvania, West Virginia and Arkansas.

"I can tell you that the learning, planning and preparation that each of the teams focused on during the pause in drilling and completion activities resulted in an extremely successful re-initiation of our drilling and completion operations," Way said Friday during a conference call to discuss third quarter results. "With this quarter's impressive restart to activity, we fully expect to arrest our production decline by the end of the year after which we will be back on the growth trajectory."

The company controlled what it could during the quarter, with better than expected production and unit expenses, but the third quarter has historically been rough for Southwestern's price realizations, which dragged down its financial performance. For the third straight quarter, production fell, going from 249 Bcfe in 3Q2015 to 211 Bcfe. That's also down from 2Q2016 when the company produced 225 Bcfe (see Shale Daily, July 22).

The third quarter included 90 Bcf of production from the Fayetteville Shale, 84 Bcf from Northeast Pennsylvania and 37 Bcfe from West Virginia. Southwestern drilled 23 wells, completed 25 and turned in-line just 9 wells as it ramped back up and focused on testing new completion methods.

Drilling days are down for the company and it continues to experiment with higher proppant loads and tighter stage spacing. Those efforts have paid off in better producing wells that should lead to growth next year as the company gains more momentum coming out of the lull in activity, management said. At the end of the third quarter, Southwestern had 101 wells that were either waiting on completion or waiting to be placed to sales. Seventy-three of those were located in the Appalachian Basin and the company expects to exit 2016 with 85 drilled but uncompleted wells.

Including hedges, the company's average realized gas price was $1.73/Mcf during the third quarter, down from $2.21/Mcf in the year-ago period and up from the 2Q2016 average of $1.32/Mcf. Overall, Appalachian gas prices fared worse than expected during the third quarter, driven largely by seasonality that has some financial analysts forecasting steeper losses than anticipated for Northeast operators. Southwestern said that without hedges, the company's  gas price averaged a $1.03 less than the New York Mercantile Exchange average for the quarter.

Despite the wide differentials, Southwestern management remains bullish about the region's long-term prospects. Liquids should continue to lift wellhead prices and well performance continues to improve, management said. They also brushed aside concerns surrounding delays for infrastructure projects such as the Atlantic Sunrise and Constitution pipelines (see Shale Daily, Oct. 20; April 25).

"We do believe that the current challenges facing the Appalachian Basin are short term issues," Way said. "The quality and quantity of our transportation portfolio in our Appalachian businesses is robust and allows us both strong access to market and growth opportunities this year and beyond. Over the long-term, our view on improving regional basis differentials has not changed and we expect the projected capacity additions out of the greater Appalachian region to come online over the next few years. These pipeline projects have robust economics and are of high quality."

The company reached a milestone by surpassing 5 Tcf of cumulative production in the Fayetteville during the quarter. It has one rig running there that's targeting the Moorefield Shale below the Fayetteville in an effort to improve breakeven prices in Arkansas.

Third quarter revenue slid to $651 million from $749 million in the year-ago period on lower prices. The company also recorded an $817 million impairment on its oil and gas properties. As a result, Southwestern reported a net loss of $735 million (minus $1.52/share), compared to a net loss of $1.8 billion (minus $4.62) in 3Q2015.

An equity offering and the sale of 55,000 net acres in West Virginia to Antero Resources Corp. for $450 million, however, helped the company lower its debt to $4.7 billion from the $5.8 billion that was on its books earlier in the year (see Shale Daily, June 10).

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