Southwestern Energy Co. isn’t going to let something like tight capital markets keep it down in 2009. Unlike a growing number of its peers, the Houston-based natural gas producer stepped up its planned capital expenditures (capex) in 2009 by half a billion dollars, with most of the money directed toward the Fayetteville Shale in Arkansas. The producer also expects to drill 10 more wells than it had scheduled for 2008.

Southwestern late Thursday unveiled a $2 billion capex program, which is $500 million more than 2008’s budget. The bulk of the spending, $1.5 billion, is directed at its core leasehold in the Fayetteville Shale, where Southwestern is the leading leaseholder.

“2008 has been an incredible year for Southwestern Energy,” said CEO Harold M. Korell. “We have seen significant improvements in our well performance in the Fayetteville Shale over the past several quarters, resulting in remarkable growth in our production levels and, correspondingly, our earnings and cash flow.”

Times are tough all over, he said, but Southwestern is ready for the challenges ahead.

“The turbulent times in the financial and commodity markets are having a considerable impact on both the national economy and our industry,” said the CEO. “As a result, we will enter 2009 with both caution and optimism. We believe the future for Southwestern is very bright and that 2009 will be another record year for our company. The company is well positioned with an extremely strong balance sheet and financial position and an opportunity set that rivals any in our industry with our Fayetteville Shale play.”

Southwestern is sticking with its plans to operate 20-21 rigs in the Fayetteville play next year, and it wants to drill around 620 horizontal wells (470 operated), compared with an estimated 520 wells in 2008.

Combining all of its onshore gas-prone plays, Southwestern is forecasting 2009 production of 280-284 Bcfe, which is 48% more than this year. In total, the company plans to drill around 720 wells in 2009, which is 10 more wells that it estimated for this year.

The current financial position and balance sheet “are in excellent shape as we enter 2009,” Korell noted. Next year’s capex is to be funded through a combination of increased cash flow, more than $200 million of cash on hand and “modest” borrowings under a $1 billion revolving credit facility. And the long-term debt-to-total capitalization ratio “will be little changed from year-end 2008,” ranging between 24% and 26% by the end of 2009.

“While we understand that these are uncertain times, our low cost operations, our track record of improving performance in the Fayetteville and our financial flexibility will allow us to add significant value for our shareholders,” said Korell.

In the Fayetteville Shale, the $1.5 billion budget includes $200 million to expand gathering systems. Southwestern had set aside $1.4 billion for the Fayetteville Shale this year, and it spent around $175 million for gathering systems. This year the Fayetteville operations extended the horizontal lateral lengths of the wells drilled and used closer perforation cluster spacing in its completions. Using the longer horizontals, 12 of the company’s top 15 wells based on initial production rates were completed within the last six months, the company noted. For 2009 average completed well costs are estimated to be $3-3.25 million/well.

Most of the capex is targeted for Arkansas, but Southwestern also plans to maintain an “active” program in its other onshore plays, which include the Arkoma Basin, East Texas and Marcellus Shale, “yet at reduced levels compared to 2008.”

Around $87 million, down from this year’s $130 million, is to be invested in the Arkoma Basin, and 50 wells are planned next year. The company also plans to invest $121 million in East Texas, where it expects to participate in 40 wells, including 34 horizontals in the James Lime formation. The 2008 budget in East Texas was an estimated $150 million.

In Pennsylvania’s Marcellus Shale, the company plans to invest $42 million, compared with $61 million this year, to acquire additional land and seismic data and drill two wells. Southwestern also wants to invest $47 million in various other unconventional, exploration and “new ventures” projects in 2009.

Energy analysts were enthusiastic about Southwestern’s plans.

“Production growth in 2009 should average 48%, higher than our estimate of 41%,” and “we believe, it is very manageable, with the current balance sheet strength,” wrote FBR Capital Markets’ Amir Arif and Mitesh Thakkar. The balance sheet, they said, “remains in good position. Based on our $5/Mcf Henry Hub gas price and the company’s 48% hedged position, we estimate that operating cash flow will be $1.36 billion…The long-term upside “could be very significant.”

Analysts with SunTrust Robinson Humphrey/the Gerdes Group (STRH) said the news from Southwestern implies an “almost 20% increase in fair value.” STRH increased its production forecast for Southwestern by 6% to 284 Bcfe, and said that the company’s ability to maintain its 20-plus rig count in the Fayetteville Shale “exemplifies the company’s drilling efficiency increases.”

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