Cash flow from Appalachia will be ‘double-digit growth and robust’ – Way
Goal is to take 135 wells to production with 6 rigs and 5 completion crews
Southwestern Energy (ticker: SWN) announced fourth quarter results and reserves today, showing net quarterly earnings of $267 million, or $0.53 per share. The company earned a total of $815 million in 2017, significantly improved from the $2.8 billion loss Southwestern reported in 2016.
Southwestern produced an average of 2.6 Bcfe/d in Q4 2017, up 18% from Q4 2016. Most of this growth came from the company’s Appalachia properties, as its 2017 exit rate production of 2.35 Bcfe/d represents a 40% increase compared to December 2016.
Southwestern, like many other major E&P companies, plans to fund its 2018 capital investments by net cash flow. The company intends to spend about $1.2 billion, to bring about 135 wells on production. The company will operate six rigs and five completion crews in the year.
Water takeaway system will reduce breakevens by $0.25/Mcf
Southwestern reports it will target the liquids-rich portion of its SW Appalachia acreage, as improving liquids realizations and prices make such a location more economic. The company plans to increase total production from the play by 30% this year, with liquids representing 54% of total production in 2018. The increase in liquids realizations is expected to generate a price uplift of approximately $0.80 per Mcfe.
The problem of water takeaway is not restricted to the Permian, as Southwestern is pursuing a major water infrastructure buildout in its southwestern Appalachia acreage. The company reports this will generate saving of $500,000 per well beginning in late 2018, and will reduce breakevens by $0.25/Mcf.
Source: Southwestern Energy Investor Presentation
Fayetteville sale possible
Southwestern is considering becoming a pure-play Appalachian producer, selling its Fayetteville assets. This would be a significant shift for the company, as the Fayetteville accounted for 35% of the company’s production in the past year. Southwestern’s operations in the play currently focus on unlocking additional future value, as it has identified opportunities for redevelopment and delineated the Moorefield acreage in 2017.
Southwestern saw a massive increase in reserves this year, rising to 14.8 Tcfe. This represents growth of 181% from 2016, primarily driven by the company’s Appalachian properties. These saw reserves expand nearly fourfold, from 2.25 Tcfe to 11.1 Tcfe. This was achieved at a proved developed F&D cost of $0.72 per Mcfe, which is 4% lower than in 2016.
President and CEO Bill Way commented “Our focus in 2018 will be on exploring strategic alternatives for Fayetteville Shale assets, accelerating development in Appalachia and reducing structural costs as we reposition the Company to compete and win in any commodity price environment for years to come.”
Q&A from SWN conference call
Q: In your prepared remarks, you mentioned, the abilities of the Appalachian assets to generate decent amount of cash as you scale up and I got, just longer-term, I think you talked a little bit about it some of the previous questions, but just — is the thought process there to use the free cash flow and returns to shareholders through dividend or share buybacks? And I guess it’s so, where do you think the balance sheet needs to be or where is leverage need to be in order to do that?
William Way: Well again we’re targeting, debt to EBITDA less than 2 or at 2. We are able to, as we move forward in time, once the transaction would occur to be able to fund from cash flow from those assets as they continue to improve and grow in scale. And then the third, and probably large point that Jennifer mentioned is if we — to be able to be free to return capital to shareholders, we’ve got covenants that we need to change and we think the best time to think about changing those is after we’ve taken some of the risk and some of the debt off. And then go through and get those cleared to give us that optionality.
Q: I was hoping you talk about pro forma in the Fayetteville Shale. What kind of growth you think you could deliver, I guess thinking beyond 2018, is the metrics you talked about for this year is still going to be in the process, so I think of the Shale, and then potentially debt paydown? And you also talking about an Appalachia growth rate, that’s — I think really pretty high. But if you’re spending to cash flow in 2019 and beyond, have you run through with those numbers might look like?
William Way: Yeah, I mean we model obviously, we’re going to continue to invest within cash flow. That’s the objective. And so with pricing and the volatility of that and the — yet to be determined total amount, we would get for Fayetteville, it’s kind of premature. The numbers that I said in my opening comments around the ability to grow at these cash flow numbers that the Appalachian Basin alone generates will be double-digit growth and robust.
