Southwestern Energy (NYSE:SWN) announced a reduction in capital spending on the company's Fayetteville Shale development program in 2012 as it inches slowly away from the core play that the company was built on. To know more about oil and gas, read Oil And Gas Industry Primer.

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2012 Capital Spending
In December 2011, the company announced a $2.3 billion capital program for 2012, with approximately $2 billion dedicated to exploration and production spending. The Fayetteville Shale play was slated to receive $1.25 billion for the year, enough to cover the costs of 580 to 590 gross wells in 2012.

It has now reduced its overall 2012 capital budget to $2.1 billion, with approximately $1.8 billion allocated to the exploration and production segment.

The company plans to spend $1.1 billion of this capital on the Fayetteville Shale in 2012, down by $150 million from the December preliminary budget. This level of spending will cover from 460 to 470 gross wells during the year.

Although $1.1 billion in capital is a sizeable sum, it is down considerably from 2011, when it spent $1.35 billion and spud 650 wells.

The Fayetteville Shale
Despite the capital reduction for the Fayetteville Shale development in 2012, the play remains an important part of the company and will remain that way for quite some time. Southwestern Energy reported total production of 437 billions of cubic feet equivalent from this play in 2011, up 25% from 2010. The company exited 2011 producing at a rate of 1.95 billion cubic feet per day.

It also increased proved reserves in the Fayetteville Shale to 5.1 trillion cubic feet (Tcf) at the end of 2011, adding 1.2 Tcf of additional proved reserves during the year.

New Ventures
The company expects low natural gas prices to persist for 2012 and 2013, and has been slowly transitioning away from its dependence on the Fayetteville Shale and natural gas.

One area that Southwestern Energy has been working on is the Lower Smackover Brown Dense play in Louisiana and Arkansas, where the company has assembled a 520,000 net acre position. It has spud three wells into the play and expects the pace of development during the year to be based on well results.

Another company active in the play is Cabot Oil and Gas (NYSE:COG). The company recently reported that it has finished completion operations on its first well here. Devon Energy (NYSE:DVN) is also involved here and reported a 40,000 net acre position, with the company working on its first well here.

Southwestern Energy has also disclosed a 238,000 net acre position in the Denver Julesburg basin in Colorado. The company plans to target a number of Permian and Pennsylvanian formations that produce oil and liquids at depths ranging from 8,000 to 10,500 feet.

Many exploration and production companies have set up operations in the Denver Julesburg Basin as they seek out oil and liquid plays to develop.

Noble Energy (NYSE:NBL) was one of the earliest operators in this basin and has an active development program planned for 2012. The company has 840,000 net acres under lease and plans to operate six rigs here during the year.

The Bottom Line
Although Southwestern Energy built the company on the Fayetteville Shale, the company is making the correct decision to reduce development here in 2012, as prices for natural gas are likely to remain low for an extended period of time. For additional reading, check out A Guide To Investing In Oil Markets.

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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