Improving performance from its core Fayetteville Shale play more than offset low natural gas prices in 2009, Houston-based Southwestern Energy Co. reported Friday. Production, which is 100% natural gas, jumped by 54% last year to a record 300 Bcfe -- and output from the Fayetteville play was up 81% to 243 Bcf.

In 4Q2009 higher gas production more than offset lower realized prices and increased costs, said the independent. Net income in the final period of 2009 totaled $157.8 million (45 cents/share), compared with $104.2 million (30 cents) in the year-ago period. Net cash provided by operating activities jumped to $411.4 million, up 45% from $283.4 million in 4Q2008.

Higher gas production may have offset low prices, but prices are still a concern, CEO Steve Mueller told financial analysts during a conference call Friday. Other Southwestern executives pointed to a tightening of basis across the board that is making local markets more attractive.

"As we look forward, there remains uncertainty for natural gas prices, so our capital plan will remain flexible," said Mueller. "If we see a repeat of the low gas prices we saw in 2009, we will actively manage our capital program and make reductions in our 2010 plan. If gas prices rebound in 2010, we could increase our planned investments and accelerate the development of our Fayetteville Shale play by utilizing additional drilling rigs.

"However, we know that our disciplined approach to capital investing, focus on organic growth and financial flexibility will keep us extremely well positioned during both the good and the challenging times. While we are very proud of our accomplishments in 2009 and over the past five years, we also know that we have much more work to do. We are looking forward to what lies ahead in 2010 and in the years to come."

Including the effect of hedges, Southwestern's average realized gas price in 4Q2009 was $5.29/Mcf, down 11% from $5.93 a year earlier. Commodity hedging activities increased the average gas price by $1.51/Mcf, versus an increase of 79 cents in 4Q2008.

Disregarding the impact of commodity price hedges, Southwestern's average price received for its gas production in the last three months of 2009 averaged 39 cents/Mcf lower than average New York Mercantile Exchange (Nymex) spot prices, compared with an average $1.80/Mcf lower in 4Q2008. As of Feb. 23, Southwestern had protected about 47 Bcf of its 1Q2010 expected gas production from the potential of widening basis differentials through hedging activities and sales arrangements at an average basis differential to Nymex gas prices of about 20 cents/Mcf.

The company typically sells its natural gas at a discount to Nymex spot prices due to locational basis differentials, while transportation charges and fuel charges also reduce the price received. This year Southwestern expects to pay average third-party transportation charges in the range of 25 cents to 32 cents per Mcf and average fuel charges in the range of .25% to 1.00% of the company's sales price for natural gas.

CFO Greg Kerley said Southwestern continues to see the gas basis differential tighten. "Our current guidance [for 2010] is, we expect somewhere between 10 cents to 20 cents of negative adjustment to our price, so that's down considerably from more than a year ago, for sure."

"When you look at the basis across the United States, it has collapsed significantly," added Chairman Harold Korell. "If you look back at 2008, there are wide swings in various basins. Today, almost seeing where you're at, you can almost get the best price you saw in your local market as opposed to trying to get to the East Coast."

Southwestern's production totaled 89.0 Bcfe in 4Q2009, up from 57.6 Bcfe in the prior year. Output included 73.9 Bcf from the Fayetteville Shale, up from 44.1 Bcf in 4Q2008. Estimated proved gas and oil reserves totaled 3,657 Bcfe at the end of 2009, which was 67% higher than the 2,185 Bcfe at year-end 2008. About 54% of its reserves were classified as proved developed, compared with 100% and 62%, respectively, in 2008.

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