During the third quarter, Southwestern Energy Co. grew natural gas and oil production by 12% from a year ago. Costs associated with its Fayetteville Shale activities declined while well results there improved. Marcellus Shale production more than doubled from a year ago, and the company continues to find its way in the emerging Brown Dense play.

“The main drivers of our business continue to move in the right directions,” said CEO Steve Mueller.

Gas and oil production totaled 144.3 Bcfe from 128.9 Bcfe in the year-ago quarter, and included 123.6 Bcf from the Fayetteville Shale play, up from 111.9 Bcf in the third quarter of 2011. Production from the Marcellus was 15.1 Bcf, compared to 7.4 Bcf in the third quarter of 2011.

In the Fayetteville, Southwestern placed 105 operated wells on production. At the end of September Southwestern was producing about 2 Bcf/d from the play, gross, up from 1.9 Bcf/d a year ago. Southwestern is running 11 rigs in the Fayetteville, including seven capable of drilling horizontal wells. Horizontal wells had an average completed well cost of $2.6 million each, down from $2.8 million during the second quarter. The company’s Fayetteville wells placed on production during the third quarter averaged initial production rates of 3,857 Mcf/d.

In the Marcellus Shale in northeast Pennsylvania, Southwestern had 50 horizontal producing wells, 44 wells waiting on either completion or pipeline and 34 wells in progress at the end of September. It is running four rigs in the play. Net production from the area was 15.1 Bcf in the third quarter of 2012, compared to 7.4 Bcf in the third quarter of 2011. The company’s gross operated production from the area was 218 MMcf/d at the end of September.

In Susquehanna County, PA, Southwestern has about 25 wells waiting on either completion or the Bluestone Pipeline, which is estimated to be placed into service into the Tennessee Gas Pipe Line 300 Line in late November. Once the Bluestone Pipeline is in service, Southwestern said its year-end gross production exit rate will be about 300 MMcf/d. During a conference call, Mueller told analysts that Southwestern has been building a transportation portfolio out of the Marcellus for some time. Executives stressed that the company’s production growth in the region would be in step with available takeaway capacity.

Southwestern has about 506,000 net acres targeting the Lower Smackover Brown Dense formation in southern Arkansas and northern Louisiana. It has drilled six wells in the play area to date. The first three wells, which were completed earlier this year, are currently shut-in. The fourth and fifth wells, the Johnson #21-22-1 #1 and the Dean 31-22-1E #1 both located in Union Parish, LA, were drilled to vertical depths of 10,507 feet and 10,503 feet, respectively. Both encountered higher pressures within the target formation. Southwestern said it is using these wells to obtain additional log data and core samples and to optimize fracture stimulation designs in the vertical sections of the wells.

Mueller told analysts that the company would know “a lot” more about the Brown Dense in the next three months once it understands the shape of the production curve of the play. He also said Southwestern needs to work on the the vertical reach of its hydraulic fracturing program so as to reach across more of the pay zone.

Southwestern plans to re-enter these wells as horizontal wells next. It also is completing the Doles 30-22-1H #1, in Union Parish, which was drilled to 10,673 feet with a 4,731-foot completed horizontal lateral. This well also encountered high pressure within the formation and flowback was planned to take place over the next few days. In late November Southwestern plans to place both the Doles well and the its third well, the BML #31-22 #1-1H, to sales with the expectation of learning more about the decline characteristics of both wells before year-end. More drilling is planned for the area next year.

The company has 302,000 net acres in the Denver-Julesburg Basin in eastern Colorado and has begun testing a new unconventional oil play targeting middle and late Pennsylvanian to Permian age carbonates and shales. Southwestern said it has completed a horizontal well and a vertical well, both testing multiple intervals. Evaluation will continue on these two wells over the next 90 days. More permitting and drilling is planned for next year. And in Sheridan County, MT, Southwestern has drilled and completed a well targeting the Bakken/Three Forks. The well has been flowing back for about 60 days. Here, more permitting and drilling is planned for next year.

Southwestern reported a net loss of $144.8 million (minus 42 cents/share), which included a $441.5 million noncash ceiling test impairment ($276.6 million net of taxes) of gas and oil properties resulting from lower natural gas prices. Excluding the impairment net income was $131.8 million (38 cents/share) compared to net income of $175.2 million (50 cents) during the year-ago quarter.

Excluding impairments, operating income from exploration and production was $145.4 million, compared with $228.5 million for the same period in 2011. The decrease was primarily due to lower realized natural gas prices and increased operating costs and expenses from higher activity levels, partially offset by higher production. Including the effect of hedges, the company’s average realized gas price was $3.40/Mcf, down 21% from $4.30/Mcf a year ago. Hedging raised the realized price by $1.05/Mcf during the third quarter; the price improvement from hedging a year ago was 59 cents/Mcf.

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