Southwestern Energy Co.’s Marcellus Shale output, now at about 400 MMcf/d, shouldn’t be constrained in moving its natural gas north or south for the next couple of years, according to the management team.

A firm transportation contract will carry about 600 MMcf/d through 2015, and then another transport agreement kicks in to carry 750 MMcf/d, COO Bill Way told analysts during a quarterly conference call. Although output is “slightly ahead of schedule…we are utilizing other transportation released in the area and balancing that with incremental transportation if we need it.”

The company had some “challenges early on” this year because of bottlenecks, but “those are now behind us…We got off to a slower start than we planned to get wells connected to sales. There were some troubles in January with the weather, and only two wells were brought on. We soon made up for it and brought on 19 more by the end of the quarter.

“Now we’re hitting our full stride and are back on pace. Gross production already has reached 400 MMcf/d and we should surpass 500 by the end of the year.”

Southwestern has an agreement with DTE Energy Co. for the Bluestone Gathering system in Pennsylvania to carry gas to Millennium Pipeline Co. in Broome County, and to Tennessee Gas Pipeline Co. in Susquehanna County. Tennessee now is moving some volumes south, and the Millennium line was set to ramp up “within days,” Way said. “We’ve been able to move all of our gas south with that activity, and now we will be able to split some north to Millennium…”

Southwestern now operates about 175,300 net acres in the Marcellus, and last month it nearly doubled its holdings in a deal with Chesapeake Energy Corp. that adds another 162,000 net acres (see NGI, May 6). The transaction includes about 40,000 net acres whose leases are set to expire over the next two years that Southwestern may let lapse, said CEO Steve Mueller.

“This is acreage that has some four- and five-year terms on it, with extensions that are expensive, probably in the $3 million to $4 million range to extend,” Mueller said. “Some of it will come up in 2013 and ’14. But when we did the analysis, we assumed that acreage would not renew…In general value, we think that…about half the acreage will have wells better than 5 Bcf on them. The real key for us, when we did the analysis, was if gas was $4.00 flat forever, we could have 70 wells with returns. That’s very profitable, and we know we will have more than 70 wells.”

Activity won’t increase substantially before next year, Way said.

Including the Marcellus, Southwestern produced a total of 147.8 Bcfe in 1Q2013, which was 11% higher year/year and mostly all natural gas. Southwestern produced 147.5 Bcf in the quarter, versus 133.3 Bcf a year ago. Southwestern also marketed 179.8 Bcf of gas volumes in the latest period, compared with 159.5 Bcf a year earlier. Gas volumes gathered rose to 214 Bcf, versus 202 Bcf.

Marcellus production has grown from less than 1% of total output in 4Q2010 to 16% in 1Q2013, Mueller noted. Meanwhile, today it’s less reliant on its signature Fayetteville Shale acreage, where production in 1Q2013 actually fell sequentially.

Net income was higher year/year at $127.5 million (36 cents/share) from $107.7 (31 cents). The company lost about $30.8 million net in the latest quarter on hedging. Excluding the one-time item, adjusted net income was $146.0 million (42 cents/share), versus $106.4 million (30 cents). Net operating cash was a record $426.3 million, compared with $370.8 million. Revenues totaled $733,649, up from $654,835.

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