Completing wells faster than ever before
Southwestern Energy (ticker: SWN) announced first quarter results today, showing net income of $205 million, or $0.36 per share.
The company produced an average of 2.46 Bcfe/d in Q1, up 11% year-over-year. Southwestern’s liquids production has grown significantly more rapidly than overall output, rising by 37% year-over-year. The company drilled 32 wells and completed 29 this quarter, the result of $334 million in CapEx.
Southwestern reports it achieved record-high operational efficiencies, completing wells and installing facilities at record pace. The company is now pumping over six stages per day using zipper fracs, an improvement of over 55% compared to historical operations. In addition, Southwestern has reduced the time required to install well facilities by 45% compared to the 2017 average. The company is combining speed with precision, and drilled its longest lateral to date this quarter. The company drilled a 13,400 foot lateral with a geologic target of only 30 feet, and was on target 100% of the lateral.
Northeast Appalachia gas saw premium to NYMEX
The company also reported improving differentials, a welcome shift from the standard situation faced by Marcellus operators. The company realized prices from its Southwest Appalachia operations of $3.00/Mcfe in Q1, even with the NYMEX gas price. In the Northeast Appalachia properties, Southwestern actually realized a premium of $0.04 per Mcf. These realized prices are far better than the historical average for such producers, which faced punishing differentials in years past.
While Southwestern does not expect to always be at parity with NYMEX gas, the prospects for differentials are improving. The company has narrowed its expected 2018 discount to about $0.75 per Mcf, due to the improving outlook.
Southwestern also updated its balance sheet, entering into a new, five-year $3.5 billion credit facility with an initial commitment of $2 billion supported by a borrowing base of $3.2 billion. This new credit agreement is expected to reduce Southwestern’s interest expense, producing savings of about $20 million in 2018 and $30 million in later years.
Southwestern did not provide any updates on its Fayetteville divestiture process, but did discuss the company’s redevelopment activities in the area. Two wells were drilled in Q1, using advanced completions and optimized landing zones to maximize performance. The first well the company drilled continues to outperform historical production, and has produced 60% more in its first 180 days online than previous wells in the area.
“We delivered a strong start to the year, meeting or exceeding all commitments for the quarter,” said Bill Way, President and Chief Executive Officer of Southwestern Energy. “Momentum from growing liquids production and relentless delivery of operational and technical excellence, combined with our new credit facility, will improve margins in 2018 and into the future.”
Q&A from SWN conference call
Q: Behind capital efficiency that you rightly emphasize are cycle times, the ops update highlighted the increases in stages pumped per day. You spoke about it in your prepared remarks, as you did improve facilities installation times. What more can be done on this front or is the company nearing the physical limit if you will on these efficiency gains?
SWN: I don’t believe we’re anywhere near being done on this. The logistics are improving dramatically around sand and water in our Appalachia business and then that gives us the opportunity to move more into the completions, utilizing the zipper fracs, which allows us to be much more efficient in the completion side of the business. We’re continuing to focus on efficiencies around our cycle times in both the facilities and the drilling side of our business. So the opportunity is there for us to continue to expand on some of the results we talked about in the call.
Q: You’ve always stated that you’ll spend within cash flow. So apart from thinking about proceeds from the sale of the Fayetteville, as you go forward here and now with the restriction on share repurchases lifted under the new credit facility, with an incremental cash flow as you might realize here from all those factors, how do you think about spending more or buying back stock?
SWN: We run models on investment, on debt reduction, on share buybacks, all of those options. We will invest within cash flow and investment whether that’s invest and paying down debt, whether that’s investment in buying back shares. We do have the restrictions moved on once we got the RBL, but there’s limited availability and limited ability to do that and Julian can speak more to it. I think the real focus is to move with prudency through the Fayetteville process take a debt reduction which is the prime objective and then look at the material options that are presented in front of us at that point in time and make those decisions.
SWN: Look when we entered into this and you’ll see it because the credit agreement will be filed. So we have normal restricted payment limitations under the agreement as it is effective today. So you’ve got your 2.75 times asset, which gives us not a lot of room today to do something like a stock buyback. Now, you will see that we built in some additional flexibility such that if there is a consummation of the Fayetteville Shale process that will then trigger an ability to have greater flexibility. So I think that’s the right time to address appropriate uses of capital, we’ll know how much we have and we’ll know what’s right to do with it.
Q: I wanted to start on lateral length, wanted to see if you could refresh us on your thoughts of where average lateral length could go over the next couple of years. And then in Northeast and Southwest, Appalachia, you’ve highlighted some long lateral wells in your press release, although the averages I think are kind of between 6,800 and 7,400. So, perhaps you could address what acreage and technical limitations are and what opportunities or interest you may have for acreage swaps or acquisitions.
SWN: We’re definitely making progress on extending the laterals, you mentioned acreage swaps. That’s where we can get a benefit and bring acreage up against some hedges of our acreage and that allows us to drill longer laterals. Another development that was beneficial for us is the approval of the co-tenancy bill in West Virginia. That also is going to allow us to drill some longer laterals and as we incorporated into our forecasts, we have an estimate in Southwest Appalachia to be north of 9,000-foot average lateral length in 2019.
