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

Southwestern Touts Marcellus, Fayetteville Results; Ups Guidance

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   |    Friday,August 01,2014

Southwestern Energy Company has reported its financial and operating results for the quarter and six months ended June 30, 2014.

Second quarter highlights include:

• Record gas and oil production of 189 Bcfe, up 18% compared to year-ago levels;
• Adjusted net income of $207 million, or $0.59 per diluted share, up 9% compared to year-ago levels when excluding gains and losses on derivative contracts that have not been settled;
• Net cash provided by operating activities before changes in operating assets and liabilities of approximately $579 million, up 18% compared to year-ago levels;
• Strong production growth results in full-year 2014 production guidance increase to 758 to 764 Bcfe, up from previous guidance of 740 to 752 Bcfe; and
• Record well initial production rate of over 14 MMcf per day in the Fayetteville Shale

Steve Mueller, President and Chief Executive Officer of Southwestern Energy, commented: "Our results this quarter are helping to pave the way for another record year in 2014. Our production grew 18% and our wells in both the Fayetteville and Marcellus projects continue to perform better than expected. As a result, we have increased our production guidance for 2014 and only slightly revised our 2014 capital estimates, even though we have added a new project in the Niobrara with projected 2014 capital of approximately $280 million. The results from this quarter are continued evidence of the high quality of our current assets and growing portfolio of opportunities that will build even a brighter future."

Investments

During the first six months of 2014, Southwestern invested a total of $1.3 billion, up from $1.2 billion in the first six months of 2013, and included approximately $1.2 billion invested in its E&P business, $75 million invested in its Midstream Services segment and $13 million invested for corporate and other purposes. The company has increased its planned total capital investments program for 2014 to approximately $2.4 billion, up 3% from its original capital investment program of approximately $2.3 billion. The following table provides updated annual forecast information for the company's capital program in 2014, compared to its original capital budget.

E&P Operations Review

During the first six months of 2014, Southwestern invested a total of approximately $1.2 billion in its E&P business, including $450 million in the Fayetteville Shale, $373 million in the Marcellus Shale, $69 million in the Brown Dense, $191 million in the Niobrara, $2 million in its Ark-La-Tex division, $36 million in New Ventures, $51 million for Drilling Rigs and $4 million in E&P Services.

The company has updated each of its E&P segments, which can be accessed below:

Southwestern's Marcellus Production Jumps 80%; Type Curves Detailed

Southwestern Sees Best Fayetteville Results in 2Q

New Ventures

On May 1, 2014, the company closed on its previously announced acquisition of approximately 306,000 net acres in northwest Colorado targeting the Niobrara formation for approximately $183 million. Subsequently, in July the company agreed to acquire an additional 74,000 net acres in two separate transactions in the area for approximately $31 million. These agreements are expected to close in the third quarter of 2014. The company is currently completing its first vertical Niobrara well and drilling its second vertical well out of a five well program in 2014. In the Denver–Julesburg Basin in northeast Colorado, the company is currently completing its third vertical well in the Atoka and Marmaton formations.

Second Quarter of 2014 Financial Results

For the second quarter of 2014, Southwestern reported net income and adjusted net income of $207 million, or $0.59 per diluted share. For the second quarter of 2013, Southwestern reported adjusted net income of $190 million, or $0.54 per diluted share, when excluding a $93 million ($56 million net of taxes) gain on derivative contracts that have not been settled. Including this gain, Southwestern reported net income of $246 million, or $0.70 per diluted share, in the second quarter of 2013.

Net cash provided by operating activities before changes in operating assets and liabilities was $579 million for the second quarter of 2014, up 18% compared to $492 million for the same period in 2013.

E&P Segment

Operating income from the company's E&P segment was $275 million for the second quarter of 2014, compared to $253 million for the same period in 2013. The increase was due to higher production volumes, partially offset by lower realized natural gas prices and higher operating costs and expenses due to increased compression and gathering costs.

Gas and oil production totaled 189 Bcfe in the second quarter of 2014, up 18% from 160 Bcfe in the second quarter of 2013, and included 124 Bcf from the Fayetteville Shale, up from 121 Bcf in the second quarter of 2013. Gas production from the Marcellus Shale was 61 Bcf in the second quarter of 2014, nearly double its production of 34 Bcf in the second quarter of 2013. The company has updated its production guidance for the remainder of 2014 due to the continued strong performance in its Fayetteville and Marcellus Shale operating areas. The revised total gas and oil production guidance for 2014 of 758 to 764 Bcfe is an increase of approximately 16% over the company's 2013 gas and oil production (using midpoints).

Including the effect of hedges, Southwestern's average realized gas price in the second quarter of 2014 was $3.77 per Mcf, down from $3.87 per Mcf in the second quarter of 2013. The company's commodity hedging activities decreased its average realized gas price by $0.17 per Mcf during the second quarter of 2014, compared to an increase of $0.29 per Mcf during the same period in 2013. Excluding the effect of hedges, the company's average realized price for the second quarter of 2014 was $4.11 per Mcf for its Fayetteville gas volumes and $3.58 per Mcf for its Marcellus gas volumes, compared to $3.54 per Mcf and $3.66 per Mcf, respectively, in the second quarter of 2013. As of June 30, 2014, the company had approximately 233 Bcf of its remaining 2014 forecasted gas production hedged at an average price of $4.35 per Mcf and approximately 240 Bcf of its 2015 forecasted gas production hedged at an average price of $4.40 per Mcf.  

Like most producers, the company typically sells its natural gas at a discount to NYMEX settlement prices. This discount includes a basis differential, third-party transportation charges and fuel charges. Disregarding the impact of hedges, the company's average price received for its gas production during the second quarter of 2014 was approximately $0.73 per Mcf lower than average NYMEX settlement prices, compared to approximately $0.51 per Mcf lower during the second quarter of 2013. As of June 30, 2014, the company had protected approximately 163 Bcf of its remaining 2014 forecasted gas production from the potential of widening basis differentials through hedging activities and sales arrangements at an average basis differential to NYMEX gas prices of approximately ($0.08) per Mcf. While Southwestern expects its discount to NYMEX settlement prices for the full-year of 2014 to range between $0.54 to $0.59 per Mcf.

Lease operating expenses per unit of production for the company's E&P segment were $0.90 per Mcfe in the second quarter of 2014, compared to $0.85 per Mcfe in the second quarter of 2013. The increase was primarily due to an increase in gathering costs in the Marcellus Shale and an increase in compression costs. 

General and administrative expenses per unit of production were $0.23 per Mcfe in the second quarter of 2014, compared to $0.24 per Mcfe in the second quarter of 2013, down due to a larger increase in production volumes compared to the increase in personnel costs.   

Taxes other than income taxes were $0.11 per Mcfe in both the second quarters of 2014 and 2013. Taxes other than income taxes per Mcfe vary from period to period due to changes in severance and ad valorem taxes that result from the mix of the company's production volumes and fluctuations in commodity prices.

The company's full cost pool amortization rate increased to $1.09 per Mcfe in the second quarter of 2014, compared to $1.05 per Mcfe in the second quarter of 2013. The amortization rate is impacted by the timing and amount of reserve additions and the costs associated with those additions, revisions of previous reserve estimates due to both price and well performance, write-downs that result from full cost ceiling tests, proceeds from the sale of properties that reduce the full cost pool and the levels of costs subject to amortization. The company cannot predict its future full cost pool amortization rate with accuracy due to the variability of each of the factors discussed above, as well as other factors.

Midstream Services

Operating income for the company's Midstream Services segment, which is comprised of natural gas gathering and marketing activities, was $93 million for the second quarter of 2014, up 27% from $73 million for the same period in 2013. Adjusted EBITDA for the segment was $107 million in the second quarter of 2014, up from $85 million in the same period in 2013 (a non-GAAP measure reconciled below). The growth in operating income and adjusted EBITDA was primarily due to increases in gas volumes gathered and marketing margins.

At June 30, 2014, the company's midstream segment was gathering approximately 2.3 Bcf per day through 1,980 miles of gathering lines in the Fayetteville Shale and approximately 417 MMcf per day from 61 miles of owned gathering lines in the Marcellus Shale. Gathering volumes, revenues and expenses for this segment are expected to grow over the next few years largely as a result of continued development of the company's acreage in the Fayetteville Shale and Marcellus Shale and development activity being undertaken by other operators in those areas.

First Six Months of 2014 Financial Results

For the first six months of 2014, Southwestern reported adjusted net income of $438 million, or $1.24 per diluted share, when excluding a $62 million ($37 million net of taxes) loss on derivative contracts that have not been settled. Including this loss, net income for the first six months of 2014 was $401 million, or $1.14 per diluted share. For the first six months of 2013, the company reported adjusted net income of $336 million, or $0.96 per diluted share, when excluding a $63 million ($37 million net of taxes) gain on derivative contracts that have not been settled. Including this gain, Southwestern reported net income of $373 million, or $1.06 per diluted share.

Net cash provided by operating activities before changes in operating assets and liabilities was $1.2 billion for the first six months of 2014, up 30% from $918 million for the same period in 2013.

E&P Segment

Operating income from the company's E&P segment was $627 million for the six months ended June 30, 2014, compared to $428 million for the same period in 2013. The increase was primarily due to higher production volumes and higher realized natural gas prices, offset by increased operating costs and expenses due to increased compression and gathering costs.

Gas and oil production was 371 Bcfe in the first six months of 2014, up 20% compared to 308 Bcfe in the first six months of 2013, and included 243 Bcf from the Fayetteville Shale, up from 240 Bcf in the first six months of 2013. Production from the Marcellus Shale was 119 Bcf in the first six months of 2014, more than double its production of 57 Bcf in the first six months of 2013.

Southwestern's average realized gas price was $3.98 per Mcf, including the effect of hedges, in the first six months of 2014 compared to $3.65 per Mcf in the first six months of 2013. The company's hedging activities decreased the average gas price realized during the first six months of 2014 by $0.30 per Mcf, compared to an increase of $0.41 per Mcf during the first six months of 2013. Excluding the effect of hedges, the company's average realized price for the first six months of 2014 was $4.25 per Mcf for its Fayetteville gas volumes and $4.32 per Mcf for its Marcellus gas volumes, compared to $3.19 per Mcf and $3.44 per Mcf, respectively, in the first six months of 2013. Disregarding the impact of hedges, the average price received for the company's gas production during the first six months of 2014 was approximately $0.52 per Mcf lower than average monthly NYMEX settlement prices, compared to approximately $0.47 per Mcf during the first six months of 2013.

Lease operating expenses for the company's E&P segment were $0.91 per Mcfe in the first six months of 2014, compared to $0.83 per Mcfe in the first six months of 2013. The increase was primarily due to an increase in gathering costs in the Marcellus Shale and an increase in compression costs. 

General and administrative expenses were $0.24 per Mcfe in the first six months of 2014, compared to $0.23 per Mcfe in the first six months of 2013. The increase was primarily due to higher personnel costs.

Taxes other than income taxes were $0.12 per Mcfe during the first six months of 2014, compared to $0.11 per Mcfe in the first six months of 2013. Taxes other than income taxes per Mcfe vary from period to period due to changes in severance and ad valorem taxes that result from the mix of production volumes and fluctuations in commodity prices.

The company's full cost pool amortization rate increased to $1.10 per Mcfe in the first six months of 2014, compared to $1.07 per Mcfe in the first six months of 2013.

Midstream Services

Operating income for the company's midstream activities was $175 million in the first six months of 2014, up 17% compared to $149 million in the first six months of 2013. Adjusted EBITDA for the segment was $202 million for the first six months of 2014, up from $173 million in the same period in 2013. The increase in operating income and adjusted EBITDA was primarily due to increases in gas volumes gathered and marketing margins.

Capital Structure and Investments

At June 30, 2014, the company had approximately $1.8 billion in long-term debt, including approximately $172 million borrowed on its revolving credit facility, and its long-term debt-to-total capitalization ratio was 31%.

2024 Development Plan

Category	2023	2024 Est. Initial	Updated 2024 Guidance	%Difference (2023 vs 2024)
Total Capital Expenditure($mm)

 Click here for More Planned 2024 Activity