One year after spending $1.9 billion on capital expenditures (capex) in the Fayetteville Shale play (see Shale Daily, Dec. 21, 2010), Southwestern Energy Co. (SWN) indicated that it would probably spend less there in 2012 as overall gas production and net income and earnings continued to rise.

"I think you'll see a drop [in Fayetteville capex spending] in 2012 and the reason for that is we do have the backbone in," CEO Steve Mueller said during a conference call with industry analysts and shareholders on Friday to discuss the company's 3Q2011 results. "And we've always said that that was the biggest part of what we needed to do. There are some things in the Fayetteville, especially with some third-party gas that we'd like to get taken care of what might give some more upside to the midstream."

According to figures released Thursday by SWN, the company -- which has 19 drilling rigs (12 horizontal, seven vertical) in the Fayetteville -- placed 132 horizontal operated wells in the Fayetteville into production during 3Q2011, reaching a gross production rate of approximately 1.9 Bcf/d on Oct. 23, up from the 1.5 Bcf/d produced last year. Well completion costs totaled $2.8 million per well during 3Q2011.

"We need to look at where the capital's going and how the overall capital looks to figure out rig counts and things like that," Mueller said. "If I had my preference, we would probably just keep the rigs the same and let the well count creep up a little bit. But that decision still has to be made. We've set the Fayetteville Shale up knowing that it would be there for a long time. We have the ability to send about 2 Bcf/d either to the East Coast or to the Southeast, or 1 Bcf/d to the Midcontinent and on to the Chicago market or the Gulf Coast. Our idea all along was that over the years, at certain points in time, [we] would put gas one way or the other in the system.

"That's our strategy really for any areas: try to get as much as you can to as many markets as you can so that as it evolves over time you can take advantage of that. The Northeast is much harder because, frankly, you're in the Northeast."

But Mueller said the company had not yet decided its 2012 capex spending.

"We're working on the 2012 budget to figure out how much capital we may need in 2012," Mueller said. "That's not done yet. And as we look at the market, there's nothing that says you have to do it today versus maybe waiting a quarter or something. So we keep watching it. There's value in our midstream. There's value in keeping our midstream where it's at and there's possibly value down the road of doing something with it also."

Mueller was then asked for a prediction on how the evolution of the Marcellus Shale -- where gross operated production for the company is approximately 110 MMcf/d -- would affect the company's portfolio.

"We're trying to figure out how fast [the Marcellus] is going to grow and how big that impact really is for the Northeast and for the rest of the country," Mueller said. "You're starting to see some contracts backhauling natural gas to Chicago or down to the Gulf Coast. Until we get more [infrastructure] built into the system, the system will limit how much you've got [available for market], and that will moderate [prices] for at least the next few years. But as the industry starts building out beyond 2013 the gas will have to go other places than the Northeast."

Gas production totaled 128.7 Bcf during 3Q2011, compared to 104.7 Bcf for the same quarter last year, about a 23% increase.

Net income and earnings totaled $175.2 million (50 cents per diluted share) during 3Q2011, compared to $160.7 million (46 cents/share) in 3Q2010, about a 9% increase.

"Internally, we think $4.50 [per MMBtu] is the new $7.00," Mueller said. "There is a lot of gas out there. We're just assuming that for the next few years at least that we're going to be in that $4 to $5 range. We're planning on it being in this environment."