Southwestern Energy Company (SWN)

SWN 
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Southwestern Energy (SWN)

Q2 2011 Earnings Call

July 29, 2011 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.

Scott Hanold - RBC Capital Markets, LLC

Robert Christensen - Buckingham Research Group, Inc.

Brian Kuzma - JP Morgan

Scott Wilmoth - Simmons & Company International

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

Peter Kissel - Howard Weil Incorporated

Gil Yang - BofA Merrill Lynch

Marshall Carver - Capital One Southcoast, Inc.

Joseph Allman - JP Morgan Chase & Co

Michael Bodino - Global Hunter Securities, LLC

Presentation

Operator

Greetings, and welcome to the Southwestern Energy Second Quarter 2011 Earnings Teleconference. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Mueller, Chief Executive Officer of Southwestern Energy. Thank you. Mr. Mueller, you may begin.

Steven Mueller

Thank you, Christine. Good morning and thank you for 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 second quarter results, you can find a copy on our website, www.swn.com.

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 in the risk factors in 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.

Now let's begin. We're excited to report one of the best quarters ever for our company. We posted outstanding growth in earnings, cash flow and production in the second quarter. Despite the current gas price environment -- that's in spite of the current in the gas environment, our production continues to grow, primarily driven by the favorable shale operations. However, we're also beginning to see the impact of our Marcellus Shale activities on our production, where operator production from Marcellus shale is over 100 million cubic feet per day from 17 horizontal wells.

Total production growth was 25% during the quarter, fueled by our Fayetteville Shale play, which grew by 28%, with production of 107 Bcf. We also produced 5.1 Bcf from the Marcellus Shale, 6.3 Bcfe from East Texas and 4 Bcf from our Arkoma operations.

Finally, we announced the new potential unconventional horizontal oil play, and hope to get 2 oils tested and drilled by the end of the year.

Now we'll talk about each of our operating areas. We placed 149 operated wells on production in Fayetteville shale during the first quarter, which resulted in gross operating production reaching 1.8 Bcf per day at July 25.

Our operated horizontal wells at an average completed well cost of $2.8 million per well, with an average drilling time of 8.2 days during the second quarter.

We also placed 10 wells on production during the quarter that were drilled in 5 days or less. In total, we have drilled 55 wells to date in 5 days or less. By the way, just last week, we had our fastest ever at 3.75 days.

Our average initial producing rates were approximately 3 million cubic foot per day, which is down from the first quarter, primarily due to the shorter lateral lengths, location differences in the mix of wells and more pad drilling, which creates additional well interference and uneven loading of compressors.

The last month average monthly production this quarter was in April, where we placed 55 wells on production, an average rate of 2.7 million cubic foot per day. These numbers improved as mix changed during the quarter, and by June, our average initial production rate was 3.4 million cubic foot per day.

In Northeast Pennsylvania, we're very encouraged by what we've seen to date. At June 30, we have completed 17 operated Marcellus Shale horizontal wells in our Greenzweig area in Bradford County. Net production from the area was 5.1 Bcf in the second quarter of 2011 compared to 2.8 Bcf in the first quarter and 0.8 Bcf in the fourth quarter of 2010.

In May, we initiated compression on 7 wells, and this reduced the average line pressure on those wells by 600 to 650 pounds. The other 10 wells, however, are currently producing without the benefit of compression into line pressures of over 1,000 pounds. Gross operating production from this area is currently approximately 104 million cubic foot per day.

We continue to place several wells in production from single path of [ph] time and the results continue to be strong. There is one specific well we'd like to talk about, that's the Ball Myer 1H. It was placed on line in June. This well had completed lateral of 4,500 feet and was fracture stimulated in 19 stages and is currently producing at a tubing-constrained rate of approximately 7.8 million cubic foot per day, at flowing tubing pressure of 1,400 psi after 33 days of production.

Prior to this well, our horizontal wells had average lateral lengths of approximately 3,900 feet and have averaged 10 stages of fracs in our completion. Going forward, our future horizontal wells are expected to average 12 to 13 stages per well, with estimated completed well cost for those wells of $5 million to $5.5 million per well.

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