Southwestern Energy Company (SWN)

SWN 
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Industry: Energy
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Southwestern Energy (SWN)

Q3 2012 Earnings Call

November 02, 2012 10:00 am ET

Executives

Steven L. Mueller - Chief Executive Officer, President and Director

William J. Way - Chief Operating Officer and Executive Vice President

Robert Craig Owen - Chief Financial Officer, Senior Vice President and Chief Accounting Officer

Analysts

David W. Kistler - Simmons & Company International, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

Hsulin Peng - Robert W. Baird & Co. Incorporated, Research Division

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Arun Jayaram - Crédit Suisse AG, Research Division

Dan McSpirit - BMO Capital Markets U.S.

Presentation

Operator

Greetings, and welcome to the Southwestern Energy Third Quarter 2012 Earnings Teleconference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Mueller, President and CEO, Southwestern Energy. Thank you. Mr. Mueller, you may now begin.

Steven L. Mueller

Thank you. Good morning and thank you for joining us. With me today are Bill Way, our Chief Operating Officer; Craig Owen, our Chief Financial Officer; Jeff Sherrick, Senior VP of Corporate Development; and Brad Sylvester, our VP of Investor Relations. If you’ve not received a copy of yesterday's press release regarding the third quarter 2012 results, you can find a copy at our website at www.swn.com.

Also, I would like to point out that many of the comments during the 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 the Forward-looking Statement section 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.

To begin, I'd like to say that our thoughts and prayers are with our friends, families and employees on the East Coast. A storm like this puts everything in perspective, and we are hoping that you are able to find higher ground and can be as comfortable as possible during this very uncomfortable time.

With that being said, I want to take a moment to express how proud I am of the third quarter results. We continue to make meaningful progress in lowering our costs. This, along with our growing production, growing cash flow from our midstream and our hedge position continue to help our earnings and cash flow move higher. Our wells in Fayetteville Shale have improved and our Marcellus production is growing and is expected to ramp up dramatically later in the fourth quarter.

We've also -- we also have several debenture prospects underway that I personally am excited about and especially knowing more with the Brown Dense later this year and added results from our Colorado and Montana plays in the first quarter of 2013. Plus, we have some other ideas we're working on we hope to unveil soon.

Let me take a few moments to talk about the macro picture regarding gas price. U.S. demand and production data for August are scheduled to be released today, and everyone who follows those numbers knows how difficult it is to predict individual monthly data points. The trends though are obvious. Rig gas -- gas rig count is less than 1/2 of what it was a year ago, and the U.S. Lower 48 gas production has been nearly flat since the beginning of the year, and that only reflects part of that decrease in rig count. The lower gas price this year has increased demand, the past 3 months, almost 11% over 2011, and a combination of flat supply and increasing demand has averted that potential overfull storage problem, so as the foregoing conclusion for many just a few months ago.

What does this mean about the future? As this week has shown, weather still remains variable with the continuing narrowing of the supply, demand and balance, gives cause to be more constructive about 2013 gas prices and a strong case to be made for 2014 yearly average gas price above $4, as the many new gas power plant projects start coming online to help maintain healthy demand.

As shown this past year, demand does change with change in price. And as price rises, both the possibility of some rig count returning and less coal to gas fuel switching is very real. This will have the tendency to keep average yearly prices below $5 for the foreseeable future.

At SWN, we use these tendencies to help plan, but what if is always in the back of our mind. What if the general economy drops? What if it begins to expand? What if oil rig count increases along with higher associated gas, or what if weather is different than expected? Our job is to deliver in whatever the case of what if. And as you will hear today, SWN continues on the path of delivering and improving on the projects in our portfolio.

I will now turn the call over to Bill Way for more details on the operations and then to Craig for a recap of our financials.

William J. Way

Thank you, Steve, and good morning, everyone. In the Fayetteville Shale, we placed 105 operated wells on production in the third quarter, resulting in net production of 123.6 Bcf, which is up 10% from a year ago. Our operated horizontal wells achieved a record quarterly average initial production rate of 3.8 million cubic feet a day, up from 3.5 million cubic feet per day in the second quarter.

Read the rest of this transcript for free on seekingalpha.com