Southwestern Energy Company (SWN)

SWN 
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Southwestern Energy Company (SWN)

Q4 2009 Earnings Call Transcript

February 26, 2010 10:00 am ET

Executives

Harold Korell – Executive Chairman

Steve Mueller – President and CEO

Greg Kerley – EVP and CFO

Analysts

Scott Wilmoth [ph] – Simmons & Company

Jeff Hayden – Rodman & Renshaw

Scott Hanold – RBC Capital Markets

Mike Scialla – Thomas Weisel Partners

Brian Singer – Goldman Sachs

Bob Christensen – The Buckingham Research Group

Rehan Rashid – FBR Capital Markets

Judd Sturdivant [ph] – OCAP Management [ph]

David Heikkinen – Tudor, Pickering, Holt

Joe Allman – JPMorgan

Nicholas Pope – Dahlman Rose

Brian Kuzma – Weiss Multi-Strategy

Dan McSpirit – BMO Capital Markets

Presentation

Operator

Greetings and welcome to the Southwestern Energy Company fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. In the interest of time, please limit yourself to two questions. Afterward you may feel free to re-queue for additional questions. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Harold Korell, Executive Chairman of the Board for Southwestern Energy Company.

Harold Korell

Good morning and thank you for joining us. With me today are Steve Mueller, our Chief Executive Officer, and Greg Kerley, our Chief Financial Officer. If you have not received a copy of yesterday's press release regarding our fourth quarter and full year results, you can call 281-618-4847 to have a copy faxed to you.

Also I would like to point out that many of the comments during this teleconference are forward-looking statements that involve risks and uncertainties affecting outcomes, many of which are beyond our control, and are discussed in more detail in the risk factors and forward-looking statements section of our annual and quarterly filings with the SEC. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or developments may differ materially.

2009 was an exceptional year for Southwestern Energy. We saw several milestones this year, including setting new records for production, reserves, reserve replacement and cash flow, all in a year where we saw natural gas prices that were at a seven-year low. We celebrated our fifth anniversary of the Fayetteville Shale play while also reaching a production milestone of 1 Bcf per day in the play. We drilled and completed our 1,000th well in the play on our way to completing many more in the years to come.

Finally, we continue to have an industry-leading low cost structure as our finding and development cost of $0.86 per Mcf and lease operating expense of $0.77 per Mcf in 2009 are among the lowest in our industry. This is all pretty amazing when considered just five years ago, when we set all this in motion with the discovery of the Fayetteville Shale. Meantime, in our other areas, things are continuing to go well in our East Texas James Lime and Haynesville activities, and in Pennsylvania where we have just started an active drilling program.

I will now turn the teleconference over to Steve for more details on our E&P and Midstream activities and then to Greg for an update on our financial results. And then we will be available for questions.

Steve Mueller

Good morning. As Harold stated, we had an outstanding year in 2009, and our operational metrics are some of the best in the industry. Our production grew by 54% to a record 300 Bcfe equivalent, primarily as a result of the growth from our Fayetteville Shale where our production grew 81% to 243 Bcf. We also produced 35 Bcfe from East Texas and 22 Bcf from the Arkoma Basin.

Our year-end proved reserves increased by 67% to a record 3.7 Tcf equivalent. Approximately 100% of our reserves were natural gas and 54% were classified in proved developed, down to 8% from 62% in 2008. We are also one of the few companies that have recorded net positive reserve revisions as the improving performance from our Fayetteville Shale wells more than offset negative price revisions due to low gas prices and some performance revisions in our East Texas and Arkoma Basin programs.

For the last three years, our reserve replacement has averaged over 500% of our annual production. We replaced 592% of all of our 2009 production at a finding and development cost of $0.86 per Mcf equivalent, including revisions. Excluding revisions, we replaced 561% of our production, had an F&D of $0.91 per Mcf.

Now I’ll talk a bit about our operating areas. The Fayetteville Shale continues to deliver exceptional results. We invested approximately $1.3 billion in our Fayetteville Shale drilling program during 2009, adding 1.8 Tcf of new reserves at an F&D cost of $0.69 per Mcf. This includes net upward reserve revisions of approximately 238 Bcf, as our improved well performance more than offset negative revisions due to lower gas prices. The finding and development cost, excluding these revisions, was $0.80 per Mcf.

Total proved net gas reserves booked at the Fayetteville Shale play at year-end 2009 were 3.1 Tcf, more than double the reserves booked at the end of 2008. The average gross proved reserves for the undeveloped wells, including our year-end 2009 reserves, was approximately 2.2 Bcf per well, up from the 1.9 Bcf per well at the end of the year 2008. And based upon current drilling phase, we have approximately two years of drilling inventory booked as PUDs.

During 2009, we continued to improve our drilling and completion practices in the Fayetteville Shale. Our horizontal wells had an average completed well cost of $2.9 million per well compared to an average of $3 million per well in 2008, as the decrease in our drilling times and other savings more than offset a 13% increase in lateral length.

Our average initial producing rates improved 25% over last year as wells placed on production during 2009 averaged initial production rates of approximately 3.5 million cubic feet per day compared to the average initial production rate of 2.8 million cubic feet per day in 2008. Mid-year 2009, we celebrated reaching 1 Bcf per day from the Fayetteville, as gross production from our operated wells climbed from approximately 720 million cubic feet per day at the beginning of 2009 to approximately 1.2 Bcf a day at year-end.

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