Southwestern Energy Co. (SWN) reported third-quarter 2010 earnings of 46 cents per share, in line with the Zacks Consensus Estimate. The increased results were driven by higher-than-expected production in the quarter. However, the third-quarter results were higher than the year-earlier profit of 34 cents.
Revenues jumped 35.6% year over year to $682.2 million, but were below the Zacks Consensus Estimate of $697 million.
Operational Performance
The company’s oil and gas production shot up 43.4% year over year to 105.0 billion cubic feet equivalent (Bcfe), which was at the high-end of management’s guidance. The improvement was on the back of solid Fayetteville Shale operations. Production from the company’s Fayetteville Shale play increased nearly 57% to 92.3 Bcfe from the year-earlier period. The company maintained its full-year production guidance range of 393−401 Bcfe.
Operating income for the Exploration and Production (E&P) segment was $216.7 million, up 26% from the third quarter of 2009. The increase was primarily attributable to higher production volumes, which were partially offset by lower realized gas prices and increased operating costs and expenses. The company’s average realized gas price, including hedges, in the quarter was $4.67 per thousand cubic feet (Mcf), down approximately 7.7% year over year.
Operating income for the Midstream Services segment increased significantly to $53.4 million from $25.1 million in the year-earlier quarter. The increase was driven by the improvement in gathering revenues and margins form gas marketing activities from the Fayetteville Shale play. The positives were partially offset by high operating costs and expenses.
On a per-Mcfe basis, lease operating expenses in the quarter were up nearly 12% year over year at 85 cents per share. General and administrative expense per unit of production in the reported quarter was 28 cents, down from 38 cents in the year-ago quarter.
Liquidity
Capital expenditure was $516.6 million in the quarter, of which $420.3 million was invested in the E&P segment. The company’s capital investment program remains unchanged for 2010 at approximately $2.1 billion.
Net cash provided by operating activities before changes in operating assets and liabilities was $421.1 million in the reported quarter, up 27% from the year-ago quarter. At the end of the quarter, long-term debt was $1.3 billion, representing a debt-to-capitalization ratio of 30.9%.
Outlook
The company’s industry-leading holdings in Northern Arkansas’ Fayetteville Shale play make it one of the highest quality natural gas discoveries in North America in the recent years. We believe Fayetteville is in the initial phase of unlocking its true value given its impressive production results and the company’s positive outlook.
Southwestern reduced its Fayetteville horizontal rig count to 13 from 16 due to continued weak natural gas prices. Since natural gas accounts for almost all of the company’s reserves and production, its results are vulnerable to the negative near-term outlook for natural gas. Hence, the company holds a Zacks #3 Rank (short-term Hold rating) for Southwestern. We also maintain our long-term Neutral recommendation on the stock.
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