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Southwestern Says It Can Keep Up with New Fayetteville Players

Two big-ticket acquisitions in the Fayetteville Shale by BHP Billiton Petroleum and XTO Energy Inc. suggest that the pace of development in the play will be accelerating, acknowledged Steve Mueller, CEO of Fayetteville veteran Southwestern Energy Co. But his company can hold its own, having locked in some of its costs and beaten down drilling times, Mueller said.

XTO bought Petrohawk Energy Corp.'s Fayetteville natural gas assets in December (see Shale Daily, Dec. 27, 2010). More recently BHP stepped in, acquiring Chesapeake Energy Corp.'s Fayetteville portfolio for $4.75 billion (see Shale Daily, Feb. 23).

"It's hard to say right now what BHP is going to do," Mueller told financial analysts during an earnings conference call Friday. However, he said XTO is accelerating development. "I would assume that BHP will want to go faster; I don't know that.

"As far as our company and our costs are concerned, one of the things that we've done for the last couple of years...we ran 15 rigs a year ago. Today we're running 12 rigs. The reason we can do that is we've cut those [drilling] days down and we can drill roughly the same number of wells."

Southwestern owns 11 rigs, Mueller noted, saying the company will be moving another rig into the Fayetteville from East Texas later this year. As for pumping services, the company has year-to-year contracts that generally run until next February.

As development in the Fayetteville continues, more pipeline takeaway capacity might be needed, Mueller said, but that is a few years away.

During the conference call, Mueller said Southwestern is just beginning to do the financial work for a monetization of its Fayetteville midstream assets. "We're working on that process, but I wouldn't expect much from us until summertime as far as what we might do," he said.

Southwestern is planning to experiment with new hydraulic fracturing (fracking) technology called HiWay, which was developed by Houston-based Schlumberger Ltd. and is being tried by Petrohawk in the Eagle Ford Shale (see Shale Daily, Feb. 25). Mueller said Southwestern is considering using the pulsed fracking technology in both the Fayetteville and the Marcellus Shale, where it is lower on the learning curve. The Marcellus will probably see Southwestern's HiWay application first, he said.

For this year Southwestern will be focusing on the Fayetteville and Marcellus as well as some new oil opportunities that Mueller declined to discuss in much detail.

Last year Southwestern's production of 404.7 Bcfe marked an increase of 35% over 2009. Proved reserves were also up 35% over a year ago at 4,937 Bcfe.

"Despite lower realized gas prices, we set new records in 2010 for production, reserves, earnings and cash flow," Mueller said. "Our low-cost structure is the key in the current gas price environment, as our finding and development cost of $1.02/Mcfe and production costs of 93 cents/Mcfe for 2010 are among the lowest in our industry."

Net income was $604.1 million, or $1.73/share, compared to a net loss for 2009 of $35.7 million, or minus 10 cents/share, which resulted from a $907.8 million noncash ceiling test impairment. Excluding the impairment, adjusted net income for 2009 was $522.7 million, or $1.52/share.

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