Houston-based Fayetteville Shale pioneer Southwestern Energy Co. took a hit last quarter from low natural gas prices in the form of a large ceiling test impairment and lower operating income.

For the second quarter Southwestern reported a net loss of $488.1 million (minus $1.40/share). This included a $935.9 million non-cash ceiling test impairment ($578.9 million net of taxes) of the company’s natural gas and oil properties resulting from lower natural gas prices. Excluding the non-cash impairment, Southwestern reported net income of $90.8 million (26 cents/share), compared to net income of $167.5 million (48 cents/share) for the year-ago quarter.

Net cash provided by operations before changes in operating assets and liabilities was $354.5 million, down compared to $448.2 million for the same period in 2011, primarily due to lower realized natural gas prices.

“Who would have imagined just one year, six-eight months ago, that today we’d be excited about having a $3 gas environment,” said CEO Steve Mueller during a conference call with financial analysts. “We were above $4, and we were hoping it would go higher at that time. That just confirms to us what we already knew: the unconventional gas discoveries that we have in North America have created short-term natural gas volatility. The price dropped because of the convergence of rapidly increasing supply and a winter that was the warmest we had in many, many years…certainly over 40 years.

“The recent increases in the natural gas price are a response to flattening production…and a very hot summer. That’s helped. The supply-demand imbalance has decreased more than 350 Bcf, but we still need to decrease almost another 500 Bcf to be in balance. And there’s a lot of us trying to guess what’s going to happen with that as we look into the future, but there’s two things we know as a company.

“First, the near-term gas price is going to remain volatile, and second, the current natural gas price does not create economic returns for most of the plays in North America.”

Mueller pledged that the company would continue to drill only the most economic opportunities in its portfolio. “Our costs continue to be low, with all-in cash operating costs of $1.20/Mcfe for the second quarter of 2012, and our Fayetteville and Marcellus drilling programs continue to provide a meaningful drilling inventory at the prices we see going forward,” Mueller said. “Finally, our new ventures activities in the Brown Dense play are providing encouraging results, and we are excited about the other ideas we are pursuing.”

The CEO was asked by an analyst whether the company would consider acquiring more natural gas acreage, given the low-commodity price environment and the potential for good deals. He said there isn’t much acreage available currently in the Fayetteville. In the Marcellus, Southwestern keeps chipping away, building its portfolio, he said. “We’d certainly like to continue to build our position in the Marcellus,” he said.

Mueller added that Southwestern is not predisposed to consider oil properties over gas, what matters are the economics and total return.

Excluding the non-cash impairment, operating income from the company’s exploration and production segment was $76 million, compared to $222.5 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.

Gas and oil production totaled 137.4 Bcfe, up 12% from 122.8 Bcfe in the second quarter of 2011, and included 121 Bcf from the company’s Fayetteville Shale play, up from 107.4 Bcf in the second quarter of 2011. Production from the Marcellus Shale was 9.9 Bcf, compared to 5.1 Bcf in the second quarter of 2011.

Including hedges, Southwestern’s average realized gas price was $3.12/Mcf, down 27% from $4.30/Mcf in the second quarter of 2011. Hedging increased average gas price by $1.36/Mcf during the second quarter, compared to an increase of 46 cents/Mcf during the same period in 2011.

As of June 30, Southwestern had hedges in place on notional volumes of 134 Bcf of its remaining 2012 forecasted gas production hedged at an average floor price of $5.16/Mcf and 185 Bcf of its 2013 forecasted gas production hedged at an average floor price of $5.06/Mcf. As of June 30, the company had protected 131 Bcf of its remaining 2012 expected gas production from the potential of widening basis differentials through hedging activities and sales arrangements at an average basis differential to Nymex gas prices of ($0.03)/Mcf.

Operating income for the company’s midstream services segment was $71.8 million, up 20% from $59.6 million in the same period in 2011, primarily due to increased gathering revenues related to the company’s Fayetteville and Marcellus Shale properties, partially offset by increased operating costs and expenses.

Southwestern placed 131 operated wells on production in the Fayetteville Shale. At June 30 the gross production rate from the Fayetteville Shale was 1,877 MMcf/d, up from 1,775 MMcf/d a year ago. Fayetteville production has been affected by recent extremely high temperatures in central Arkansas and, year-to-date, Southwestern estimated that its production from the field has been reduced by approximately 0.5-1 Bcf due to the extreme heat. Since June 30 gross production has returned to 2 Bcf/d.

In the Marcellus Shale Southwestern has participated in 120 operated horizontal wells in northeast Pennsylvania, of which 41 were producing. Net production from the area was 9.9 Bcf in the second quarter of 2012, compared to 5.1 Bcf in the second quarter of 2011. At June 30, the company’s gross operated production from the area was 166 MMcf/d and was limited by high line pressures and gathering constraints. Recent gross production from the area has exceeded 200 MMcf/d, Southwestern said.