Southwestern Energy Company (SWN)

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Southwestern Energ (SWN)

Q3 2010 Earnings Call

October 29, 2010 10:00 am ET

Executives

Steven Mueller - Chief Executive Officer, President and Director

Greg Kerley - Chief Financial Officer, Executive Vice President and Director

Analysts

Brian Singer - Goldman Sachs Group Inc.

Dan McSpirit - BMO Capital Markets U.S.

Jack Aydin - KeyBanc Capital Markets Inc.

Gil Yang - BofA Merrill Lynch

Amir Arif - Stifel, Nicolaus & Co., Inc.

David Heikkinen - Tudor, Pickering & Co. Securities, Inc.

Scott Wilmoth - Simmons

Scott Hanold - RBC Capital Markets Corporation

Robert Christensen - Buckingham Research Group

Rehan Rashid - FBR Capital Markets & Co.

Nicholas Pope - Dahlman Rose & Company, LLC

Presentation

Operator

Greetings , and welcome to the Southwestern Energy Co. Third Quarter Earnings Teleconference Call. [Operator Instructions] It is now my pleasure to introduce your host, Steve Mueller, President and Chief Executive Officer. Thank you, Mr. Mueller, you may begin.

Steven Mueller

Thank you, and good morning. Thank you for all of you joining us. With me today are Greg Kerley, our CFO; and Brad Sylvester, our VP of Investor Relations. If you have not received a copy of yesterday's press release regarding our third quarter results, you can call (281) 618-4847 to have a copy faxed to you.

Also, I'd 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 on the risk factors and the forward-looking statement sections of our annual and quarterly filings with the Securities and Exchange Commission. 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.

Let me begin. We had an excellent third quarter. Despite lower gas prices, our earnings and cash flow were up significantly compared to last year. This increase was primarily driven by our production growth of 44% compared to last year and 7%, sequentially.

We are also driving down the well costs, while beginning to better understand the well spacing for the Fayetteville Shale play. I'll speak more about these points in a few moments. Now to talk about each of our operating areas. During the third quarter, our gross operating productions on the Fayetteville Shale reached over 1.5 BCF per day, up from approximately 1.2 BCF per day a year ago and also surpassing the net production mark of 1 BCF per day. During the third quarter of 2010, our horizontal wells had an average completed well cost of $2.8 million per well. That cost matches the lowest quarter we've ever had since beginning drilling horizontally. The average horizontal length, with 4,503 feet, almost 500 feet longer than the last time we had $2.8 million per well cost, and the average days to drill from re-entry to re-entry was 11 days.

We continue to see faster drilling times. And in the third quarter, we had eight wells placed on production, which had average times to drill to total depth of five days or less from re-entry to re-entry. Our horizontal rig counts stands at 13 rigs compared to the 15 rigs we averaged during the first nine months of 2010. The 145 Fayetteville wells placed on production during the third quarter of 2010 averaged initial production rates of nearly 3.3 million cubic foot per day, down 5% compared to the second quarter. Results for the quarter include 58 wells or 40% placed on production, which were the first wells in the new section and, 36 wells or 25% drilled to test tighter well spacing. We also set a new record during this quarter by placing the play's highest rate well, the Harlan 09-10 #1-12H located in Cleburne County, on production with initial production rate of approximately 8.7 million cubic foot per day. This well had a completed lateral length of 3,874 feet and a nine-stage fracture stimulation. After 34 days, it's still producing 5.7 million cubic foot per day.

We continue to test tighter spacing and at September 30, 2010, have placed over 520 wells on production that have well spacing of 700 feet or less, representing approximately 65-acre spacing or less. Previously, we have stated that based from the wells drilled to date, we'd expect in a minimum of 10 to 12 per section to effectively drain the reserves which will represent the 65-acre spacing. However, early production performance from recent well spacing tests indicates that there are areas of field that may be economically developed at tighter spacing. At this time, we've confirmed that approximately 20% of the roughly 600,000 net acres drilled to date can be drilled at 30- to 40-acre spacing, approximately 40% can be developed at 65-acre spacing and the remaining 40% requires additional results to determine if the development on tighter spacing than 65 acres is warranted.

We will continue with our well-spacing program to better define the areas of field that are suitable for tighter spacing and expect to know more about the well spacing on the remainder of our acreage in 2011.

Switching to East Texas. Production from our East Texas properties was 26.9 BCF during the first nine months of 2010 compared to 24.6 BCF during the same period last year. Approximately 2.1 BCF of our 2010 production was related to the Haynesville and Middle Bossier properties, which were sold in June. We still have approximately 10,500 net acres with Haynesville and Middle Bossier Shale potential and have drilled three wells on this acreage to date. The Timberstar Blackstone A-1H targeting the Haynesville Shale formation was placed on production on August and initial production rate of 13.2 million cubic foot per day. The other two wells, which are targeting the Middle Bossier, will be completed in the first quarter of 2011. In our Conventional Arkoma Program, production was 14.8 BCF for the first nine months of 2010 compared to 16.9 BCF for the first nine months of 2009.

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