Southwestern Energy Still Sees Gold In Fayetteville Shale

By Eric Fox | November 04, 2010 AAA

Southwestern Energy (NYSE:SWN) continued to ride the company's core properties in the Fayetteville Shale, turning in 44% year-over-year production growth in the third quarter.

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Q3 Summary
Southwestern Energy reported total production of 105 billion cubic feet equivalents in the third quarter of 2010, up 44% from the same quarter of 2009. Approximately 87% of this production was from the company's core properties located in the Fayetteville Shale in Arkansas.

Some exploration and production companies are growing production even faster than Southwestern Energy. Petrohawk Energy (NYSE:HK) estimates that the company's production will grow 58% in 2010 over 2009.

Southwestern Energy realized an average price for natural gas of $4.67 per Mcf in the third quarter of 2010. This realized price included 76 cents per Mcf from the hedging strategies that the company employed to reduce volatility and protect its cash flows from the continued weakness in natural gas prices. (For related reading on hedging, see Hedging In Layman's Terms.)

Southwestern Energy is preparing for this continued weakness in natural gas prices in 2011, and has 92 Bcf of the company's production hedged at an average price of $5.61 per Mcf.

Fayetteville Shale
The Fayetteville Shale is the most important part of Southwestern Energy, and the company continues to direct most of its capital into this play. During the third quarter of 2010, the company placed 145 wells onto production, and reported production of 1.54 million cubic feet per day of natural gas. Southwestern Energy is cutting back slightly here and has reduced its rig count to 13 rigs due to the low price for natural gas.

Southwestern Energy continues to become more efficient at development here, and reported a completed well cost of $2.8 million per well, and an average time to drill of 11 days. Both these figures are down significantly from the previous quarter.

Southwestern Energy also used the third quarter of 2010 to advance the company's understanding of the Fayetteville Shale. The company has been experimenting with increasing the density of development here, and previously concluded that some of its acreage could be developed on 65 acre spacing, or 10 to 12 wells per section.

Southwestern Energy has now concluded that at least 20% of its acreage can be developed at 30 to 40 acre spacing. There may be room to drill even tighter as some exploration and production companies in other basins drill even closer than this. Ultra Petroleum (NYSE:UPL) is developing the Pinedale Field in Wyoming and has been drilling some areas at five acre spacing.

Other Plays
Southwestern Energy also moved forward development of other plays in the United States. The company has 151,000 net acres in Pennsylvania that are prospective for the Marcellus Shale, and plans to drill 15 wells in 2010, and complete seven of them.

Other companies active in the Marcellus Shale include Talisman Energy (NYSE:TLM), which drilled 116 gross wells in this play during the first three quarters of 2010.

Southwestern Energy didn't give out much information on its new play in New Brunswick, where the company hopes to find a future core area for the company. During the earnings conference call, the company said that the company was still assessing the acreage with the intent of starting a drilling program in 2012.

Bottom Line
The Fayetteville Shale is still the workhorse for Southwestern Energy as the company continues to milk this play for everything its can despite the weak fundamental environment for natural gas. (To learn more, see Oil And Gas Industry Primer.)

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