Although its profits fell while production grew, Southwestern Energy Co. said its drilling programs in both the Fayetteville and Marcellus shales remain profitable. But the Houston-based company also plans to divert $50 million in midstream capital toward ventures in the Brown Dense formation and the Denver-Julesburg (DJ) Basin.
"We had a good quarter," CEO Steve Mueller told financial analysts during a conference call Friday, but, he warned, "the gas price clouds cast dark shadows over our entire gas industry investments. We continue to respond to the current prices. Only the best economic wells are being drilled at our Fayetteville Shale project, and we continue to add firm capacity to the Marcellus to ensure we're getting gas to the most liquid point of sales."
Southwestern earned $107.7 million (31 cents/share) during the first quarter, down 27% from $136.6 million (39 cents/share) during the first quarter of 2011, while net quarterly production increased 16% year over year to 133.4 Bcfe.
Southwestern believes it can make the numbers work at its dry gas plays because it claims to have some of the lowest operating costs in the industry at about $1.31/Mcfe.
On Thursday, Marcellus gas in northeastern Pennsylvania traded for a combined average price of $2.25/MMBtu, down 4 cents, while gas in the Fayetteville traded for an average price of $2.21/MMBtu, down 8 cents, according to NGI's Shale Price Index. Gas from the Marcellus in southwestern Pennsylvania and West Virginia scored highest among the shale basins at $2.32/MMBtu.
The company produced 115.8 Bcf from the Fayetteville (up 13% year over year) and 9.3 Bcf from the Marcellus (up 332% year over year) during the first quarter and expects annual production to range 560-570 Bcfe, up 13% over 2011 volumes.
Although it is scaling back drilling in the Fayetteville in favor of the economics offered by the dry gas Marcellus, Southwestern recently achieved two milestones in the dry gas play in Arkansas it helped launch in 2004, hitting 2 Bcf/d of gross production in April and 2 Tcf of cumulative production in May (see Shale Daily, Feb. 29).
Southwestern is currently running 13 rigs in the Fayetteville and brought 146 operated wells online during the first quarter at an average cost of $2.8 million per well.
The 30- and 60-day production rates on those wells declined year over year. The company blamed that on a change in strategy over the past year to drill more wells on pads, which requires tighter spacing and can cause "interference" between wells. That trend should turn around again this year, Mueller said, because the company is only drilling its best wells on each pad to maximize costs in the current price environment.
In the Marcellus, Southwestern has participated in 94 operated horizontal wells in northeastern Pennsylvania, of which 24 were producing as of March 31. The company is currently producing 122 MMcf/d, a rate constrained by pipeline bottlenecks.
The company recently increased its firm transportation capacity in the Marcellus through an agreement on a 121-mile pipeline proposed by Constitution Pipeline Co. LLC to connect to the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in Schoharie County, NY. The 15-year agreement would give Southwestern 150 MMcf/d of capacity. The project is expected to be online by the second quarter of 2012.
Southwestern completed three wells in the Brown Dense formation, an emerging unconventional play in southern Arkansas and northern Louisiana during the quarter.
The Roberson 18-19 No. 1-15H completed in February in Columbia County, AR, tested at 103 b/d of oil and 200 Mcf/d of natural gas before Southwestern shut in the well to build up pressure. The Garrett 7-23-5H No. 1 completed in March in Claiborne Parish, LA, flowed at a 24-hour peak production rate of 301 b/d of oil and 1.7 Bcf/d of natural gas, but the company expects production to increase as flowback water rates decline.
Southwestern spud its third well in late March, but a pressure kick stalled the program. The company is now drilling a sidetrack and expects to complete the well this month.
The wells currently cost between $10 million and $12 million, but Southwestern expects to get the cost down to below $10 million and possibly as low as $8 million.
Southwestern began drilling the liquids-rich play last August (see Shale Daily, Sept. 1, 2011; Aug. 2, 2011). Cabot Oil & Gas Corp., Devon Energy Corp. and EOG Resources Inc. are the other major players in the region (see Shale Daily, April 30; March 13).
If early results are favorable, Southwestern could drill seven wells in the Brown Dense this year and potentially sanction development by the end of the year. "That's the goal," Mueller said. "Whether we can get there or not depends on if the rock is like we think it is and it depends on whether it flows like we think it's going to flow."
Southwestern also holds acreage in the Ark-La-Tex region of East Texas and in New Brunswick, Canada, and recently leased acreage in the DJ Basin of eastern Colorado.