Southwestern Energy Co. (SWN) reported its second-quarter 2010 earnings of 35 cents per share, beating the Zacks Consensus Estimate by a penny. The increased results were driven by higher-than-expected production in the quarter. However, the second-quarter results remained flat on a year-earlier comparison.
Revenues rose nearly 24% year over year to $589.9 million, but were below the Zacks Consensus Estimate of $625 million.
Operational Performance
The company’s gas and oil production boosted 32% year over year to 98.3 billion cubic feet equivalent (Bcfe) in the reported quarter on the back of solid Fayetteville Shale operations after its fall-off in the first quarter of 2010. Production from the company’s Fayetteville Shale play increased nearly 38% to 83.6 Bcfe from the year-earlier period. The company maintained its third quarter as well as full year production guidance. Full-year guidance, incorporating the actual second-quarter results, implies approximately 33% year-over-year growth.
Operating income for the Exploration and Production (E&P) segment was $162.5 million, down nearly 7% from the second quarter of 2009. The decrease was primarily due to the lower realized gas prices associated with higher operating costs and expenses, partially offset by higher production volumes. The company’s average realized gas price, including hedges, in the quarter was $4.27 per thousand cubic feet (Mcf), down approximately 15% year over year.
Operating income for the Midstream Services segment increased approximately 58% from the year-earlier quarter to $43.8 million. 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 was up about 16% year over year at 85 cents. General and administrative expenses per unit of production in the reported quarter (31 cents) were down from the year-ago quarter (34 cents).
Liquidity
Revenues rose nearly 24% year over year to $589.9 million, but were below the Zacks Consensus Estimate of $625 million.
Operational Performance
The company’s gas and oil production boosted 32% year over year to 98.3 billion cubic feet equivalent (Bcfe) in the reported quarter on the back of solid Fayetteville Shale operations after its fall-off in the first quarter of 2010. Production from the company’s Fayetteville Shale play increased nearly 38% to 83.6 Bcfe from the year-earlier period. The company maintained its third quarter as well as full year production guidance. Full-year guidance, incorporating the actual second-quarter results, implies approximately 33% year-over-year growth.
Operating income for the Exploration and Production (E&P) segment was $162.5 million, down nearly 7% from the second quarter of 2009. The decrease was primarily due to the lower realized gas prices associated with higher operating costs and expenses, partially offset by higher production volumes. The company’s average realized gas price, including hedges, in the quarter was $4.27 per thousand cubic feet (Mcf), down approximately 15% year over year.
Operating income for the Midstream Services segment increased approximately 58% from the year-earlier quarter to $43.8 million. 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 was up about 16% year over year at 85 cents. General and administrative expenses per unit of production in the reported quarter (31 cents) were down from the year-ago quarter (34 cents).
Liquidity
Capital expenditure was $543.5 million in the quarter, of which $441.2 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 $345.7 million in the reported quarter, up 6% from the year-ago quarter. At the end of the quarter, long-term debt was $1.2 billion, representing a debt-to-capitalization ratio of 30.6%.
Outlook
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. With the impressive production results from this play along the company’s positive view, we believe that it is in the initial phase of unlocking the true value of this play.
We maintain our Zacks #3 Rank (Hold) for Southwestern since natural gas accounts for almost all of the company’s reserves and production and its results are vulnerable to the negative near-term outlook for natural gas.
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