Quarterly / Earnings Reports | Second Quarter (2Q) Update

Southwestern Energy Talks Q2 Results

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Southwestern Energy Co. announced financial and operating results for the quarter ended June 30, 2019.

Bill Way, President & CEO, said: "SWN's position as a leading Appalachia producer is underpinned by its operational outperformance, continued cost reduction, disciplined capital allocation and prudent commodity management. This, combined with a strong balance sheet and no material near term debt maturities, provides resilience in this volatile commodity price environment."

Highlights:

• Planned second half activity reduction underway with average rig count reduced from 6 rigs in the first half to 2 rigs by the end of the third quarter;
• Invested total capital of $368 million, consistent with front-half loaded capital program;
• On track to deliver 25% annual average well cost reduction on wells to sales; $866 per lateral foot in the quarter with average lateral length of over 10,100 feet;
• Lowered top end of capital guidance, not to exceed $1.15 billion due to ongoing capital efficiency improvements;
• Reported Appalachia production of 186 Bcfe, up 11% compared to prior year quarter; liquids production of 70.7 MBbls per day, 21% of production;
• Captured $2.61 per Mcfe weighted average realized price, including derivatives and excluding $0.44 per Mcfe of transportation costs, essentially flat compared to prior year quarter;
• Net debt to EBITDA of 2.0 times excluding the benefit of 2018 Fayetteville EBITDA; undrawn revolver of $2 billion; no material debt maturities before 2025;
• 72% of projected gas production hedged for the remainder of the year with a fair value of gas derivitives of $110 million at June 30, 2019; and
• Improved gas differentials and LOE costs expected to more than offset lower NGL realizations by approximately $40 million for the year; updated guidance follows.

Way added: "We reiterate our priority of returning to free cash flow by the end of 2020, which remains achievable at recent strip prices. This strategic objective will be enabled by our continuing operational and cost improvements, without compromising our demonstrated operating and financial discipline, including our practice of investing within a fully funded capital program."

Operational Results

Total production was 186 Bcfe, an 11% increase compared to the prior-year second quarter excluding Fayetteville, including 148 Bcf of gas production, 937 MBbls of oil production and 5,497 MBbls of natural gas liquids production. E&P capital invested was $349 million, 8% lower than the second quarter of 2018. During the quarter, SWN drilled 41 wells, completed 40 wells and placed 36 wells to sales.

Well Cost Update

The Company is on track to achieve its commitment of averaging $875 per lateral foot for all wells to sales in 2019. This quarter, the Company achieved an average well cost of $866 per lateral foot with an average completed lateral length of 10,128 feet. Average well costs per lateral foot includes title, regulatory, permitting, pad site, facilities, drilling, completion and initial flowback costs. Longer lateral lengths, piped water, self-sourced sand and operational outperformance are the primary contributors to improving well costs.

• Lateral length on wells to sales increased 30% year over year
• Realizing an average savings of approximately $800,000 per well for all wells utilizing Southwest Appalachia water infrastructure; 100% of wells completed this year will utilize piped water
• Sand savings of $230,000 per well have exceeded original estimates
• Stages per day expected to improve 35% in 2019 to 7.2 stages per day, compared to full year 2018

Southwest Appalachia's total production averaged 802 MMcfe per day, including 10.2 MBbls per day of oil and 60.4 MBbls per day of natural gas liquids. During the quarter, natural gas liquids production was reduced to capture greater value through ethane rejection. The Company drilled 23 wells, completed 26 wells and placed 23 wells to sales in the quarter. In alignment with the Company's plan to focus on liquids-rich Marcellus wells, all 23 wells brought online this quarter were located in the super rich acreage and had an average lateral length of 10,211 feet.

Twelve of the 23 wells were online for at least 30 days and had an average 30-day rate of 11 MMcfe per day, an over 60% increase compared to second quarter last year. The improvement is attributed to longer lateral lengths and well performance improvements.

Northeast Appalachia's total production averaged 1.2 Bcf per day, essentially flat to the prior year quarter. In the quarter, the Company drilled 18 wells, completed 14 wells and placed 13 wells to sales with an average lateral length of 9,981 feet.

Wells to sales in the quarter had an average initial production rate of 25 MMcf per day, 25% higher than the same quarter last year, driven predominantly by longer lateral lengths. Four of the 13 wells to sales in the quarter were online for at least 30 days and had an average 30-day rate of 17 MMcf per day.

Financial Results

The table below summarizes financial statistics. Year over year results are not comparable as prior year's results include the contribution of Fayetteville assets, which were sold in December 2018.

(1) Capital investments on the cash flow statement include increases of $39 million and $19 million for the three months ended June 30, 2019 and 2018, respectively, and increases of $105 million and $52 million for the six months ended June 30, 2019 and 2018, respectively, relating to the change in accrued expenditures between periods.

Southwestern Energy reported net income attributable to common stock of $138 million, or $0.26 per share, and adjusted net income of $40 million, or $0.08 per share. Compared to the prior year quarter these results include interest expense savings of $17 million and general and administrative expense savings of $19 million. Adjusted EBITDA was $186 million, net cash provided by operating activities was $101 million and net cash flow (non-GAAP) was $173 million.

Weighted average realized price was $2.17 per Mcfe, which includes transportation costs and the benefit of $0.18 per Mcfe from settled derivatives. By commodity, including the benefit of derivatives, realized gas price was $1.94 per Mcf, oil realizations were $51.60 per Bbl and NGL realizations were $12.62 per Bbl.

Excluding derivatives, which is consistent with guidance, natural gas differential was $0.84 per Mcf, NGL realizations were 18% of WTI and oil differential was $10.26 per Bbl.

For the second half of 2019, 72% of the Company's natural gas production, 34% of NGLs and 77% of oil are hedged, based on the midpoint of guidance.

At June 30, 2019, the Company had cash of $155 million, an undrawn revolver of $2 billion, total debt of $2.3 billion and a trailing 12 month net debt/EBITDA ratio of 2.0 times, excluding the benefit of EBITDA associated with the Fayetteville Shale.

During the quarter, Southwestern Energy invested capital totaling $368 million, including capitalized interest and expense of $46 million, bringing year to date capital investment to $693 million, consistent with the Company's previously disclosed front-half weighted capital program. Further, as planned, the Company has already begun to manage down capital investment with average rig count reduced from 6 rigs in the first half to 2 rigs by the end of the third quarter. Total capital investment for the year is not expected to exceed $1.15 billion, below the high end of original capital guidance, and the Company reaffirms original annual production guidance.

(1) Based on last day monthly futures settlement prices. 
(2) This discount includes a basis differential, a heating content adjustment, physical basis sales, third-party transportation charges and fuel charges, and excludes financial basis derivatives.

Resource to Reserves 
The Company continued its testing program in the quarter by successfully drilling and completing three Upper Marcellus wells and completing its first Upper Devonian well in the super rich acreage. All four wells are expected to be online in the third quarter.