Southwestern Energy Co. (SWN) reported second-quarter 2011 earnings of 48 cents per share, comfortably beating the Zacks Consensus Estimate of 43 cents and showing a 37% improvement from the year-earlier profit of 35 cents. The improved performance was led by production growth, primarily at its Fayetteville shale operations.
Second-quarter revenues climbed nearly 30% to $765.2 million from the year-ago level of $589.9 million.
Production and Realized Prices
During the reported quarter, the company’s oil and gas production shot up 25% year over year to 122.8 billion cubic feet equivalent (Bcfe) encouraged by impressive Fayetteville Shale operations. Production from the company’s Fayetteville Shale play increased 28% to 107.4 Bcfe from the year-earlier period.
The company’s average realized gas price, including hedges, has inched up slightly to $4.30 per thousand cubic feet (Mcf) from $4.27 per Mcf in the year-ago period.
Segmental Highlights
Operating income from the Exploration and Production (E&P) segment surged 37% to $222.5 million, buoyed by higher production volumes, which were partially toned down by higher operating costs.
On a per-Mcfe basis, lease operating expenses were down almost 6% year over year at 80 cents per share. On the other hand, general and administrative expense per unit of production dropped 13% year over year to 27 cents.
The Midstream Services segment’s operating income leaped 437% to $59.6 million from $43.8 million in the year-earlier quarter. The increase was driven by an improvement in gathering revenues related to the Fayetteville and Marcellus Shale plays.
Capex and Debt
The company spent $556 million in total capital expenditure in the quarter, of which $476.0 million was invested toward E&P activities and $59.9 million for the Midstream segment. For 2011, Southwestern plans to invest a total of $2.0 billion, mainly for faster drilling activities at its Fayetteville Shale play.
As of June 30, 2011, long-term debt stood at $1.2 billion, representing a debt-to-capitalization ratio of 27% (versus 28.1% in the preceding quarter).
Hedging
At July 28, 2011, Southwestern had approximately 160 Bcf of its remaining 2011 projected natural gas production hedged at a weighted average floor price of $5.21 per Mcf.
The company also had approximately 266 Bcf and 185 Bcf of its 2012 and 2013 expected gas productions hedged at an average floor price of $5.16 and 5.06 per Mcf, respectively.
Guidance
Earlier, Southwestern forecast its total oil and gas production in the range of 483 Bcfe to 491 Bcfe for 2011, up about 20% from the 2010 production level.
Outlook
Southwestern’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. For 2011, the company expects approximately 425–435 Bcf of the total hydrocarbon volume to come from the Fayetteville Shale.
We believe Southwestern’s industry leading presence in the Fayetteville Shale and its emerging position in the Marcellus Shale provide ample opportunities for newer natural gas discoveries.
During the quarter, several strong wells became operational in the Marcellus Shale play, the current gross operated production of which exceeded 100 MMcf per day from 17 horizontal wells. Again, the company remains upbeat on a potential new unconventional horizontal oil play and expects to get two test wells drilled and completed by year-end.
However, we remain apprehensive regarding the weak natural gas scenario in the U.S. arising out of continued oversupply and low demand for natural gas. This will likely impede the company’s performance in the near term.
Other risk factors include weaker-than-expected commodity prices, technological failures and the lack of a diversified asset base. Competition from its peers, such as Chesapeake Energy Corporation (CHK), also remains a threat to the company.
The company holds a Zacks #3 Rank (short-term Hold rating). We also maintain our long-term Neutral recommendation on the stock.
