Independent natural gas operator
Southwestern Energy Co.
(
SWN
) reported first-quarter 2012 earnings of 31 cents per share, which
missed the Zacks Consensus Estimate by a penny.
The quarterly result also declined 20.5% from the year-earlier
profit of 39 cents. The underperformances were primarily due to the
drop in natural gas prices.
First-quarter revenue declined approximately 3% to $656.5
million from the year-ago level of $676.3 million. The revenue
lagged the Zacks Consensus Estimate of $669 million.
Production and Realized Prices
During the reported quarter, the company's oil and gas
production shot up 16% year over year to 133.4 billion cubic feet
equivalent (Bcfe) - almost entirely gas - driven by the
Fayetteville Shale operations. Production from Southwestern's
Fayetteville Shale play increased nearly 15% to 115.8 Bcfe from the
year-earlier period.
The company's average realized gas price, including hedges,
dropped more than 15% to $3.49 per thousand cubic feet (Mcf) from
$4.12 per Mcf in the year-ago period. Oil was sold at $104.39 per
barrel, up 13.3% from the year-earlier level of $92.11 per
barrel.
Segmental Highlights
Operating income for the
Exploration and Production
(E&P) segment dropped 34.8% to $116.2 million in the
first quarter. The decrease was due to lower gas price realization
as well as increased operating costs and expenses related to higher
production, which was partially toned down by the
increased production level.
On a per-Mcfe basis, lease operating expenses were marginally
down at 83 cents from 86 cents in the prior year. On the other
hand, general and administrative expense per unit of production
climbed 15% year over year to 30 cents.
The
Midstream Services
segment's operating income jumped more than 28% to $69.3
million in the first quarter from $53.9 million in the year-earlier
quarter. The increase was driven by an improvement in gathering
revenues related to the Fayetteville and Marcellus Shale plays.
Capex and Debt
The company's total capital expenditure in the quarter was
$573.1 million, of which $533.1 million was invested in E&P
activities and $26.2 million in the Midstream segment.
As of March 31, 2012, long-term debt stood at $1,669.4 million,
representing a debt-to-capitalization ratio of 28.7% (versus 25.3%
in the preceding quarter).
Hedging
At March 31, 2012, Southwestern had approximately 200 Bcf and
185 Bcf of its 2012 and 2013 expected gas productions hedged at an
average floor price of $5.16 and 5.06 per Mcf, respectively.
Guidance
Earlier, Southwestern had updated its production guidance for
2012, due to a reduction in its previously planned capital
investments. The revised total gas and oil production guidance for
2012 is 560 Bcfe to 570 Bcfe. The updated outlook represents a 13%
increase over the 2011 level.
Of the company's total expected production for 2012,
approximately 465 Bcf to 470 Bcf is expected to come from the
Fayetteville Shale and approximately 60 Bcf to 65 Bcf is
expected to come from the Marcellus Shale.
Our Take
Southwestern's industry-leading holdings in Northern Arkansas'
Fayetteville Shale play make it one of the highest quality natural
gas discoveries in North America in recent years. Marcellus and
Fayetteville shales also hold ample opportunities for newer natural
gas discoveries. The company's all-in cash operating costs of $1.31
per Mcfe during the first quarter of 2012 is considered to be among
the lowest in the industry.
We see the company as well positioned for production growth
given its streamlined cost structure, upcoming drilling programs in
the Fayetteville and Marcellus shales, and a wide acreage in its
New Ventures, especially in the Brown Dense play. During the first
quarter of 2012, Southwestern's Marcellus shale operations in the
northeastern U.S. produced 9.3 Bcf, compared with 2.8 Bcf in the
prior-year quarter.
However, we remain apprehensive regarding the weak natural gas
scenario in the U.S. arising out of continued oversupply and low
demand. This will likely impede the company's performance in the
near term.
Other risk factors include weaker-than-expected commodity
prices, technological failures and the lack of a diversified asset
base. Competition from its peers, such as
Chesapeake Energy Corporation
(
CHK
), also remains a cause of concern.
The company holds a Zacks #3 Rank (short-term Hold rating). We
also maintain our long-term Neutral recommendation on the
stock.
CHESAPEAKE ENGY (CHK): Free Stock Analysis
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SOUTHWESTRN ENE (SWN): Free Stock Analysis
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