Southwestern Energy Co., which has led the way in the Fayetteville Shale, saw its production jump by almost a third in 2Q2010 from the same period a year ago.

Net income was $122.1 million (35 cents/share) in the latest quarter, almost flat from $121.1 million (35 cents) in 2Q2009. Net cash from operating activities was $345.7 million, 6% more than a year earlier.

Most impressive in the latest quarter were the drilling results and relatively low costs in the Fayetteville play. In the last week of July the producer's gross operating production from the Arkansas play exceeded 1.4 Bcf/d, up from 990 MMcf/d a year ago, CEO Steve Mueller told financial analysts Friday during a conference call.

"During the second quarter of 2010, our horizontal wells had an average completed well cost of $3.1 million per well, average horizontal length of 4532 feet, and average time to drill to total depth of 13 days from re-entry to re-entry," he said. "In the second quarter, we had 22 wells with drill times of over 20 days, most of which were first sections that were in the deeper southern areas of the play.

"On the flip side, we placed three wells in production in the second quarter with average times to drill the total depth of five days or less from re-entry to re-entry." Southwestern's average time to drill to total depth in July improved to 10 days from re-entry to re-entry, with total footage of 6,600 feet in four days.

"Our Fayetteville Shale wells placed on production during the second quarter of 2010 averaged initial production rates of 3.45 MMcf/d, up 8% from the first quarter," said Mueller. Because of its gains in efficiency, Southwestern cut its horizontal rig this month to 15 rigs in the play.

Production gains also came from Southwestern's East Texas operations. Initial production rate from its James Lime Formation wells placed on production during the quarter averaged 7.2 MMcf/d, Mueller noted.

The company this year also launched a drilling program in the Pennsylvania portion of the Marcellus Shale. To date it has drilled four horizontal wells that are scheduled to be completed by the end of September.

"We plan to drill about 20 total wells during the year," Mueller said of the Marcellus play. One well placed on production currently is producing 3.3 MMcf/d.

"We believe that [the] Marcellus in northeast Pennsylvania is rapidly developing into one of the best plays in the country," he said. However, "there are still many challenges from regulatory, logistics and environmental perspectives."

Southwestern's production grew by 32% in 2Q2010 from a year earlier and was up 9% sequentially. It also completed the sale of a portion of its Haynesville and Middle Bossier properties in East Texas for about $355 million.

"We are keeping our production guidance unchanged for the third and fourth quarters of 2010 as our improving results in the Fayetteville are currently expected to fully offset the expected production associated with the sold properties," said the CEO. "Our capital investment program also remains unchanged at approximately $2.1 billion."

Operating income from the company's Exploration and Production (E&P) segment was $162.5 million in the latest quarter, down from $174.4 million for the same period in 2009. Southwestern attributed the decline primarily to lower realized gas prices combined with increased operating costs and expenses, which were only partially offset by higher production volumes.

Gas and oil production totaled 98.3 Bcfe in the quarter, versus 74.3 Bcfe in 2Q2009. Of the total, 83.6 Bcf came from the Fayetteville Shale play, which is up from 60.6 Bcf from the year-ago period. Including the effect of hedges, Southwestern's average realized gas price in the latest quarter was $4.27/Mcf, compared with $5.01 a year earlier.

Lease operating expenses per unit of production for the company's E&P segment were 85 cents/Mcf, compared with 73 cents in 2Q2009. The higher expenses were blamed on increased gathering costs and increased costs associated with higher water disposal volumes related to its Fayetteville Shale operations.

The company's Midstream Services segment earned $43.8 million in operating income in 2Q2010, up from $27.8 million a year earlier. Most of the gains came from an increase in gathering revenues and higher margins from gas marketing activities related to the company's Fayetteville Shale play, partially offset by increased operating costs and expenses.

At the beginning of August the midstream unit was gathering close to 1,620 MMcf/d through 1,367 miles of gathering lines in the Fayetteville Shale play area, up from around 1,060 MMcf/d through 960 miles of gathering lines a year ago. "Gathering volumes, revenues and expenses for this segment are expected to continue to grow as reserves related to the company's Fayetteville Shale play are developed and production increases," the company said.

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