Southwestern invested approximately $411 million in its E&P business during the first quarter of 2010, including $319 million invested in its Fayetteville Shale play, $46 million in East Texas, $2 million in its conventional Arkoma Basin program, $17 million in Appalachia and $23 million in New Ventures.

Fayetteville Shale Play - For the first three months of 2010, Southwestern placed a total of 106 operated wells on production in the Fayetteville Shale play, all of which were horizontal wells fracture stimulated using slickwater. At April 25, 2010, the company's gross production rate from the Fayetteville Shale play was approximately 1,330 MMcf per day, up from approximately 850 MMcf per day a year ago. Operational delays and weather conditions impacted the company's operations during the first quarter resulting in 26 fewer wells placed on production than originally projected. As a result, the company has added two additional horizontal drilling rigs and additional pipeline construction crews and expects to catch up to its original well count schedule by late in the third quarter of 2010. The company is currently utilizing 24 drilling rigs in its Fayetteville Shale play, including 16 that are capable of drilling horizontal wells and 8 smaller rigs that are used to drill the vertical portion of the wells. The graph below provides gross production data from the company's operated wells in the Fayetteville Shale play area through April 25, 2010.

During the first quarter of 2010, the company's horizontal wells had an average completed well cost of $2.8 million per well, average horizontal lateral length of 4,348 feet and average time to drill to total depth of 12 days from re-entry to re-entry. This compares to an average completed well cost of $3.0 million per well, average horizontal lateral length of 4,303 feet and average time to drill to total depth of 12 days from re-entry to re-entry in the fourth quarter of 2009. The company's wells placed on production during the first quarter of 2010 averaged initial production rates of 3,197 Mcf per day, down 14% from average initial production rates of 3,727 Mcf per day in the fourth quarter of 2009. Factors contributing to the decrease in average initial production rates were the shift of all operated wells to "green completions" and the location and mix of wells placed on production.

Approximately 65% of the company's wells placed on production were in shallower northern and far eastern borders of the company's acreage, where well performance has been lower than in the central areas. While the wells drilled achieved results better than the average in those areas, this mix is at least 20% higher than any previous quarter.

In late 2009, the company began what sometimes is called "green completions," whereby wells are placed directly into production facilities very early in the flowback period so that incremental gas volumes are captured. As a result of the wells being placed on production earlier, the wells have added back pressure and take longer to recover fluids. The result is more gas sold and longer time to reach the reported initial production rate to the state. The company believes that the impact on initial production rates could be a reduction of 5% to 10%.

In April of 2010, the company has already placed about 50 wells on production at an average initial production rate of approximately 3,600 Mcf per day.

Beginning in late 2008 and continuing through the first quarter of 2010, the company has drilled wells to test tighter well spacing. At March 31, 2010, Southwestern had placed over 375 wells on production that have well spacing of 700 feet or less, representing approximately 65-acre spacing or less. In areas tested to date, Southwestern expects to drill between 10 and 12 wells per section in the Fayetteville Shale, pending additional well data and analyses. Current information indicates that wells at approximately 600-foot spacing have shown interference of less than 10%, compared to previous estimates of 10% to 15%. The company will continue to focus on optimizing the well spacing for the play and plans to test over 44 different pilots with well spacings that will range from 200 to 450 feet apart as part of its 2010 drilling program.

Appalachia - The company began drilling operations in Bradford County, Pennsylvania in February and is currently drilling its second well for 2010. The company expects to begin completion operations on these wells during the second quarter and could be placed on production as early as June. At March 31, 2010, Southwestern held approximately 150,800 net undeveloped acres in Pennsylvania under which it believes the Marcellus Shale is prospective.