Southwestern Energy Company (ticker: SWN) will be going deeper into the Appalachian once again in 2018. The plan includes drilling 100-120 wells, completing 105-125 wells and placing 125-145 wells to sales.
2017 recap
In 2017, SWN had a total net production of 897 Bcfe, including 578 Bcfe from the Appalachian Basin and 316 Bcf from the Fayetteville Shale – this was comprised of 89% natural gas and 11% NGLs and condensate. The Appalachian Basin gross operated exit rate production hit 2.35 Bcfe/day, a 40% increase compared to December 2016.
The company also had an increase in estimated pre-tax PV10 reserve value, increasing to approximately $5.8 billion, which is up 247% compared to year-end 2016. This includes $3.8 billion from the Appalachian Basin.
E&P business to receive CapEx of $1.130-$1.215 billion
SWN has capital investment plans of $1.15-$1.25 billion, funded entirely by net cash flow. Additionally, the company projects an average net production of 930-965 Bcfe, a 6% increase (using midpoints) over the 2017 production of 897 Bcfe.
During 2018, the company plans to invest $1.130-$1.215 billion in its E&P business, which includes $775-$815 million for drilling and completion activities, $210-$230 million for capitalized interest and expenses, $65-$75 million in water infrastructure and $80-$95 million for land, seismic and other items.
The 2018 capital budget will focus on the Appalachian Basin, where the company plans to begin the year operating four rigs and utilizing three completion crews in Southwest Appalachia and two rigs and two completion crews in Northeast Appalachia.
Southwest Appalachia
In Southwest Appalachia, based on current liquids realizations and improving economics, the company plans to target the liquids rich portion of the play, which is expected to increase total production by 30% (using midpoints), with liquids representing 54% of total production in 2018.
The company plans to allocate approximately $490-$510 million in discretionary capital to Southwest Appalachia, with approximately $430-$450 million allocated to drilling and completions activities.
Approximately $60 million is planned to be used for land and seismic activity. The company expects the average 2018 completed well cost for the wells placed to sales to be $7.6 million per well with approximately 7,200-foot average horizontal lateral length.
As the company targets longer lateral lengths, the company’s drilled lateral lengths are expected to increase throughout the year, averaging approximately 8,500 feet for the second half of 2018.
Additionally, the company commenced a water infrastructure project in late 2017 and plans to invest approximately $65 million to $75 million in capital in 2018. While this project does not directly provide production growth, it is expected to reduce well costs by approximately $500,000 per well beginning in late 2018 and lower the breakeven gas price threshold by $0.25 per Mcf.
This water project will be utilized for future development of the rich and lean gas Marcellus wells, along with dry gas Utica development.
Northeast Appalachia
The 2018 program plans to focus primarily on its core area in Susquehanna County while further developing its Tioga County acreage. The company plans to allocate approximately $340-$360 million in discretionary capital to Northeast Appalachia, with approximately $320-$340 million allocated to drilling and completions and the remaining $20 million allocated to land and other capital.
The company expects the average 2018 completed well cost for the wells placed to sales to be $6.6 million per well with approximately 7,100-foot average horizontal lateral length.
As additional pipeline capacity is added in the region, Southwestern’s transportation portfolio is positioned to capture materially improving basis differentials without significant increases in transportation charges, resulting in a $0.25 per Mcf improvement in Northeast Appalachia margins. As a result, the company expects to generate approximately $150 million in positive cash flow from operations, net of capital, in 2018 while growing production 13% (using midpoints), capitalizing on the operational momentum created during 2017.
Fayetteville
The company continues to identify additional opportunities to realize incremental value from these assets. Along with advancing its learnings and monitoring the longer-term results from the Moorefield wells drilled in 2017, the company said in a press release it plans to further test additional redevelopment concepts in 2018. However, in a separate announcement on Feb. 8, Southwestern said it intended to find “strategic alternatives” for its Fayetteville Shale E&P business and the related midstream gathering assets.
The company also said in the Fayetteville announcement that it would make internal organizational changes to cut costs.
The company said it would use funds realized from selling Fayetteville along with cash from its internal cost reductions “to reduce debt, supplement Appalachia development capital, potentially return capital to shareholders, and for general corporate purposes.”
Fifty-seven percent of Southwestern’s 2016 reserves were associated with its Fayetteville assets—almost 3 Tcfe; and 43% of the company’s production was from Fayetteville. Southwestern controls almost 919,000 acres in the Fayetteville shale. Southwestern’s other assets are in the Marcellus and Utica.
Q1 2018 net production estimates
The company’s first quarter net production rates are estimated to average 2.48 Bcfe/day to 2.54 Bcfe/day. The decline in production compared to the fourth quarter of 2017 is largely due to a reduction in activity in late 2017, the timing of completions and the impacts from severe winter weather on operations in the month of January 2018. The winter weather increased realized prices in the northeast to more than offset the impact on production, thus generating growth in cash flow.
Analyst Commentary
From John Gerdes - KLR
SWN ($3.60, B, $9, Gerdes) – Production in ’17 In Line, Provides ’18 Guidance (Modestly Negative Value Impact), Pursuing Strategic Alternatives for Fayetteville Assets – Southwestern announced ’17 production of ~897 Bcfe (~89% gas, ~11% liquids), in line with our expectation and fractionally below the consensus estimate (~898 Bcfe). The company anticipates capital spending this year of $1,150-$1,250 million (almost entirely in Appalachia), which is ~$100 million lower than our prior expectation. Southwestern expects 1Q/18 production of 223-229 Bcfe (~88% gas, ~11% NGLs, ~1% oil) and ’18 production of 930-965 Bcfe (~86% gas, ~12% NGLs, ~2% oil). Preliminarily we anticipate 1Q/18 production at the high end of company guidance and ’18 production in the lower half of guidance. Southwestern plans to operate four rigs/three completion crews in Southwest Appalachia and two rigs/two completion crews in Northeast Appalachia. The company anticipates drilling 100-120 wells and placing 125-145 wells to sales this year. The drilled lateral lengths in Appalachia should average 7,100’-7,200’. Southwestern anticipates increasing drilled lateral lengths in Southwest Appalachia in the second half of this year to ~8,500’. Further, the company’s YE17 proven reserves increased ~181% (~9.6 Tcfe) to ~14.8 Tcfe (~54% PD, ~75% gas) equating to a ~1170% reserve replacement ratio.
Fayetteville/Midstream Rationalization: Southwestern announced plans to potentially rationalize its Fayetteville Shale E&P and midstream gathering assets. The company’s Fayetteville upstream production was ~800 Mmcfpd. Assuming a ~$2k per Mmcfpd production rate multiple, the sale of the Fayetteville upstream assets should generate approximately $1.5 billion in net proceeds. Assuming an 8x-10x EBITDA multiple, the sale of the Fayetteville midstream assets ($170-$200 million in EBITDA) should generate approximately $1.5 billion in net proceeds. The sale of the Fayetteville assets, per the contemplated terms, would lower ’18 net debt to EBITDA from ~2.7x to ~1.2x and is modestly value accretive.
