Southwestern Energy Co., which has built fortunes and natural gas reserves from success 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.

"We saw meaningful progress on many fronts during the second quarter," said CEO Steve Mueller. "Our production grew by 32% compared to last year and grew 9% sequentially, as our operations in the Fayetteville Shale are back on track after a slowdown in the first quarter. We also closed the transaction we previously announced for the sale of a portion of our Haynesville and Middle Bossier properties in East Texas for approximately $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. 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.

In the recent quarter Southwestern placed a total of 143 operated wells on production in the Fayetteville play, all of which were horizontal wells fracture stimulated using slickwater. At the end of July the company's gross production rate from the play was 1,447 MMcf/d, up from 990 MMcf/d a year earlier. The company currently is operating 24 drilling rigs in play, including 16 that are capable of drilling horizontal wells and eight smaller rigs that are used to drill the vertical portion of the wells.

The horizontal wells in 2Q2010 had an average completed well cost of $3.1 million/well, average horizontal lateral length of 4,532 feet and average time to drill to total depth of 13 days from re-entry to re-entry. This compares with the first three months of this year when the average completed well cost was $2.8 million/well, average horizontal lateral length was 4,348 feet, and average time to drill to total depth of 12 days from re-entry to re-entry.

Wells placed on production during the latest quarter averaged initial production rates of 3.45 MMcf/d, up 8% from 1Q2010.

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