Southwestern Energy Co., which has proved time and again that making money is possible in some of the onshore natural gas plays, last week cut a bargain deal that will nearly double its gassy acreage position in the Marcellus Shale of Pennsylvania.

The Houston operator, which now has about 175,300 net acres in the play, agreed to pay $93 million to Chesapeake Energy Corp. and its partners to buy a string of leaseholds that together equal 162,000 net acres (see related story). The transaction works out to about $547/acre, a sale price considering that some acreage in the region has sold for more than $10,000/acre in the past.

The “key” acreage being acquired, said CEO Steve Mueller, is in Susquehanna, Wyoming, Tioga and Sullivan counties. Current net production is about 2 MMcf/d from 17 wells; 1.2 net wells to Southwestern. Once the transaction is completed in mid-May, “our acreage position of approximately 337,000 net acres in the Marcellus strengthens our ability to provide future double-digit production and reserve growth.”

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 Mueller. The company’s management knew that going in and budgeted out production plans ahead of time.

“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,” he 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.”

Southwestern’s biggest holding today is in Susquehanna County (81,600 net), and the Chesapeake transaction will give it another 51,000 net acres. About 53,000 net acres will be added to the 7,000-net-acre leasehold in Wyoming County, and in Lackawanna County, the 24,700 net acres will increase by 14,000 net acres. Through the acquisition, Southwestern will add several new positions in four more counties: Sullivan (25,500); Tioga (15,000); Luzerne (3,000); and Columbia (500).

The Houston operator in April was producing about 400 MMcf/d in the Marcellus and management doesn’t foresee any constraints in moving natural gas to markets north or south for the next couple of years.

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 an earnings conference call on Friday. The company is going to be “able to move all of our gas through the end of the year and through the end of next year with no constraints…

“We’re slightly ahead of schedule, but we are utilizing other transportation released in the area and balancing that with incremental transportation if we need it.”

Two years ago, Southwestern secured a long-term agreement with DTE Energy Co. to build 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 is 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 also has all of its infrastructure in place in Lycoming County, PA, and “really, the next sort of question mark becomes the timing of longer term projects. We’re doing some work around those to make sure we have capacity in place in the longer term.”

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.”

Including the Marcellus, Southwestern produced a total of 147.8 Bcfe in 1Q2013, which was 11% higher than a year earlier. Nearly all of the output gains were in natural gas. In the first three months Southwestern produced 147.5 Bcf, versus 133.3 Bcf a year ago. Oil production totaled 41,000 b/d, compared with 24,000 b/d. The company also produced 20,000 b/d of natural gas liquids in the latest period; it reported none 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.”

Net income was higher year/year at $127.5 million (36 cents/share) from $107.7 million (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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