Southwestern Energy Company (NYSE: SWN) has reported that its first quarter operating and financial results have exceeded initial expectations. Highlights include:

  • Gas and oil production of 115.0 Bcfe, up 28% compared to year-ago levels; 2011 production guidance raised to 483 to 491 Bcfe, up from previous guidance of 465 to 475 Bcfe
  • Net income and net cash provided by operating activities before changes in operating assets and liabilities (a non-GAAP measure reconciled below) both declined compared to year-ago levels due to 24% lower realized gas prices
  • Strong well results in Marcellus Shale

For the first quarter of 2011, Southwestern reported net income of $136.6 million, or $0.39 per diluted share, compared to net income of $171.8 million, or $0.49 per diluted share, for the prior year period. Net cash provided by operating activities before changes in operating assets and liabilities was $391.5 million for the first quarter of 2011, compared to $417.8 million for the same period in 2010. The company's first quarter comparative financial results were lower primarily due to a 24% decrease in average realized natural gas prices, partially offset by significant growth in the company's production volumes.

"Our first quarter financial and operating results have exceeded our expectations despite lower natural gas prices," said Steve Mueller, president and chief executive officer. "Our production continues to grow, and we increased our guidance for the rest of the year to take into account our first quarter results and the strong results we are continuing to see from both our Fayetteville and Marcellus drilling programs."

E&P Operations

Southwestern invested approximately $468 million in its E&P business during the first quarter of 2011, including $330 million invested in its Fayetteville Shale play, $52 million in Appalachia, $41 million in East Texas and $41 million in new ventures.

Fayetteville Shale Play

For the first three months of 2011, Southwestern placed a total of 137 operated wells on production in the Fayetteville Shale play, all of which were horizontal wells fracture stimulated using slickwater. At March 31, 2011, the company's gross production rate from the Fayetteville Shale play was approximately 1,725 MMcf/d, up from approximately 1,330 MMcf/d a year ago. The company is currently utilizing 18 drilling rigs in its Fayetteville Shale play, including 11 that are capable of drilling horizontal wells and 7 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 March 31, 2011.

During the first quarter of 2011, the company's horizontal wells had an average completed well cost of $2.8 million per well, average horizontal lateral length of 4,985 feet and average time to drill to total depth of 8.4 days from re-entry to re-entry. This compares to an average completed well cost of $2.7 million per well, average horizontal lateral length of 4,667 feet and average time to drill to total depth of 8.2 days from re-entry to re-entry in the fourth quarter of 2010. In the first quarter of 2011, the company had 11 operated wells placed on production which had average times to drill to total depth of 5 days or less from re-entry to re-entry.

The company's wells placed on production during the first quarter of 2011 averaged initial production rates of 3,231 Mcf per day, down 7% from average initial production rates of 3,472 Mcf per day in the fourth quarter of 2010, primarily due to locational differences in the mix of wells and higher line pressures in certain parts of its gathering system where wells were brought on-line during the first quarter.

The company continues to test tighter well spacing and, at March 31, 2011, had placed 764 wells on production that have well spacing of 700 feet or less, representing approximately 65-acre spacing or less. Based on the wells drilled to date, the company now believes that approximately 30% of the approximately 600,000 net acres drilled to date can be developed at 30- to 50-acre spacing and approximately 70% can be developed at 65-acre spacing. The company believes that there could be slight changes in certain areas in the play where tighter spacing may occur in the future.

Appalachia

Southwestern has participated in a total of 21 wells in northeast Pennsylvania, of which 14 were successful and 7 were in progress at March 31, 2011. The producing wells are all operated Marcellus Shale wells located in its Greenzweig area in Bradford County. Net production from the area was 2.8 Bcf in the first quarter of 2011, compared to 0.8 Bcf in the fourth quarter of 2010.

In the Greenzweig area, the company's current practice is to place several wells on production from a single pad at the same time. Three wells that were placed on production in October 2010 are currently producing at an average gross rate of 6,276 Mcf per day per well, while three wells placed on production in November 2010 are currently producing at an average gross rate of 4,315 Mcf per day per well and three wells placed on production in February 2011 are currently producing at an average gross rate of 5,816 Mcf per day per well. On April 18th, the company placed three additional horizontal wells on production at a gross rate of over 4,000 Mcf per day per well while awaiting the installation of production tubing, which will allow higher producing rates. All of the production rates above are without the benefit of compression into lines pressures of approximately 1,000 psi. Gross operated production from the area is currently approximately 60 MMcf per day.

Other Areas

Total net production from the company's East Texas and conventional Arkoma Basin properties was 11.2 Bcfe in the first quarter of 2011, compared to 14.5 Bcfe in the first quarter of 2010. The company participated in drilling 2 wells in these areas during the quarter, both of which were operated.

In March 2011, Southwestern entered into a definitive purchase and sales agreement for the sale of certain oil and natural gas leases, wells and gathering equipment in Shelby, San Augustine and Sabine Counties in East Texas for approximately $85 million. The effective date of the sale is January 1, 2011 and the standard closing adjustments will include natural gas sales proceeds and capital invested in 2011 prior to the closing. The sale includes only the producing rights to the Haynesville and Middle Bossier Shale intervals in approximately 9,700 net acres. The net production from the Haynesville and Middle Bossier Shale intervals in this acreage was approximately 7.3 MMcf per day as of April 15, 2011 and proved net reserves were approximately 25.1 Bcf as of year-end 2010. The transaction is expected to close in the second quarter of 2011.