Southwestern Energy’s first quarter 2015 financial results

HOUSTON – Southwestern Energy Company announced its financial and operating results for the quarter ended March 31, 2015. First quarter highlights include:

• Record production of 233 Bcfe, including 4 Bcfe associated with the East Texas and Arkoma assets scheduled to be divested in the second quarter;
• Total Appalachia net production of 113 Bcfe, comprised of 83 Bcf from Northeast Appalachia (a 43% increase compared to year-ago levels) and 30 Bcfe from Southwest Appalachia;
• Adjusted net income attributable to common stock (a non-GAAP measure reconciled below) of US$84 million, or US$0.22 per diluted share when excluding losses on derivative contracts, net of settlements and certain transaction costs associated with the West Virginia and southwest Pennsylvania acquisition closed in the fourth quarter of 2014;
• Net cash provided by operating activities before changes in operating assets and liabilities (a non-GAAP measure reconciled below) of approximately US$493 million; and
• Completed long-term acquisition financing with issuance of equity and debt and agreements to divest of our northeast Pennsylvania gathering system and conventional E&P assets in East Texas and Arkoma.

“As we do every year, we have begun 2015 with the same focused approach on generating strong returns with a platform for significant growth for our shareholders in any price environment,” remarked Steve Mueller, Chairman and Chief Executive Officer of Southwestern Energy. “Our first quarter results once again demonstrated the strength of our portfolio, which continues to deliver economic projects at current prices due to the quality of our assets, our focus on maintaining our low cost structure and our differentiating firm transportation capacity.”

For the first quarter of 2015, Southwestern reported adjusted net income attributable to common stock of US$84 million, or US$0.22 per diluted share, when excluding US$44 million (US$27 million net of taxes) of certain transaction costs associated with the West Virginia and southwest Pennsylvania acquisition closed in the fourth quarter of 2014 and a US$18 million (US$11 million net of taxes) loss on derivative contracts, net of settlements. Including these items, net income attributable to common stock for the first quarter of 2015 was US$46 million, or US$0.12 per diluted share (reconciled below). For the first quarter of 2014, Southwestern reported adjusted net income attributable to common stock of US$231 million, or US$0.66 per diluted share, when excluding a US$62 million (US$37 million net of taxes) loss on derivative contracts, net of settlements. Including this loss, Southwestern reported net income attributable to common stock of US$194 million, or US$0.55 per diluted share, in the first quarter of 2014 (reconciled below).

Net cash provided by operating activities before changes in operating assets and liabilities (reconciled below) was US$493 million for the first quarter of 2015, compared to US$617 million for the same period in 2014.

The first quarter of 2015 and 2014 include the operating results from our gathering system in northeast Pennsylvania (divested in April 2015) and our conventional E&P assets in East Texas and the Arkoma basin (expected to be divested during the second quarter of 2015).  See “Divestitures” below for additional information.

E&P Segment – Operating income from the company’s E&P segment was US$78 million for the first quarter of 2015, compared to US$352 million for the same period in 2014. The decrease was primarily due to lower realized natural gas prices and increased operating costs and expenses from higher activity levels, partially offset by the revenue impacts of higher production volumes.

Gas, oil and NGL production totaled 233 Bcfe in the first quarter of 2015, up 28% from 182 Bcfe in the first quarter of 2014.  The quarter included 115 Bcf from the Fayetteville Shale, 83 Bcf from Northeast Appalachia and 30 Bcfe from our newly acquired Southwest Appalachia.  This compares to 119 Bcf from the Fayetteville Shale and 58 Bcf from Northeast Appalachia in the first quarter of 2014.

Including the effect of hedges, Southwestern’s average realized gas price in the first quarter of 2015 was US$2.99 per Mcf, down from US$4.19 per Mcf in the first quarter of 2014. The company’s commodity hedging activities increased its average realized gas price by US$0.36 per Mcf during the first quarter of 2015, compared to a decrease of US$0.44 per Mcf during the same period in 2014. As of April 21, 2015, the company had approximately 181 Bcf of its remaining 2015 forecasted gas production hedged at an average price of US$4.40 per Mcf.

Like most producers, the company typically sells its natural gas at a discount to NYMEX settlement prices. This discount includes a basis differential, third-party transportation charges and fuel charges. Disregarding the impact of hedges, the company’s average price received for its gas production during the first quarter of 2015 was approximately US$0.35 per Mcf lower than average NYMEX settlement prices (US$0.12 per Mcf lower in our combined Appalachia areas), compared to approximately US$0.31 per Mcf lower during the first quarter of 2014 (US$0.15 per Mcf higher in Northeast Appalachia). As of April 21, 2015, the company had protected approximately 245 Bcf of its remaining 2015 expected gas production from the potential of widening basis differentials through hedging activities and sales arrangements at an average basis differential to NYMEX gas prices of approximately (US$0.23) per Mcf.

Lease operating expenses per unit of production for the company’s E&P segment were US$0.92 per Mcfe in the first quarter of 2015, compared to US$0.93 per Mcfe in the first quarter of 2014. The decrease was primarily due to lower gathering costs per unit in Northeast Appalachia, partially offset by higher operating costs in Southwest Appalachia associated with liquids production.

General and administrative expenses per unit of production were US$0.24 per Mcfe in the first quarter of 2015, compared to US$0.25 per Mcfe in the first quarter of 2014, down primarily due to a larger increase in production volumes compared to the increase in personnel costs.

Taxes other than income taxes were US$0.12 per Mcfe in the first quarter of 2015, compared to US$0.13 per Mcfe in the first quarter of 2014. Taxes other than income taxes per Mcfe vary from period to period due to changes in severance and ad valorem taxes that result from the mix of the company’s production volumes and fluctuations in commodity prices.

The company’s full cost pool amortization rate increased to US$1.15 per Mcfe in the first quarter of 2015, compared to US$1.10 per Mcfe in the first quarter of 2014. The amortization rate is impacted by the timing and amount of reserve additions and the costs associated with those additions, revisions of previous reserve estimates due to both price and well performance, write-downs that result from full cost ceiling tests, proceeds from the sale of properties that reduce the full cost pool and the levels of costs subject to amortization. The company cannot predict its future full cost pool amortization rate with accuracy due to the variability of each of the factors discussed above, as well as other factors.

Midstream Services – Operating income for the company’s Midstream Services segment, which is comprised of gathering and marketing activities, was US$88 million for the first quarter of 2015, up 6% from US$83 million for the same period in 2014. The growth in operating income was primarily due to an increase in volumes marketed.  At March 31, 2015, the company’s midstream segment was gathering approximately 2.3 Bcf per day through 2,029 miles of gathering lines in the Fayetteville Shale.

Divestitures– During the first quarter of 2015, the company announced the signing of an agreement to sell its gathering system in northeast Pennsylvania. This transaction closed on April 10 for an adjusted sales price of approximately US$488 million, subject to customary post-closing adjustments, with the proceeds used to substantially repay borrowings under our US$500 million term loan facility that was scheduled to mature in December 2016. This gathering system generated operating income and net cash provided by operating activities of approximately US$12 million and US$14 million, respectively, for the first quarter of 2015.  For the same period of 2014, this gathering system generated operating income and net cash provided by operating activities of approximately US$9 million and US$10 million, respectively.

Additionally in the first quarter of 2015, the company announced the signing of an agreement to sell conventional E&P assets in East Texas and the Arkoma basin for US$218 million.  This transaction is expected to close during the second quarter with the proceeds used to reduce the balance on the company’s revolving credit facility.  These E&P assets had production of 3.6 Bcfe and operating income of approximately US$2 million in the first quarter of 2015.  This compares to production of 4.3 Bcfe and operating income of approximately US$11 million in the first quarter of 2014.

With the closing of these two transactions, the acquisition financing plan that was announced in the fourth quarter of 2014 will be complete.

Capital Structure and Investments – At March 31, 2015, the company had approximately US$5.2 billion in long-term debt, including approximately US$800 million borrowed on its revolving credit facility, and its debt-to-total capitalization ratio was 42%. Adjusting for the proceeds received in the April closing of the divestiture of our northeast Pennsylvania gathering system, our pro forma total debt was US$4.7 billion at March 31, 2015.

During the first quarter of 2015, excluding US$365 million and US$288 million associated with the closing of the transactions with Statoil and WPX Energy, respectively, Southwestern invested a total of US$518 million.  This is down from US$542 million in the first quarter of 2014 and included approximately US$496 million invested in its E&P business, US$19 million invested in its Midstream Services segment and US$3 million invested for corporate and other purposes.

E&P Operations Review

During the first quarter of 2015, Southwestern invested a total of approximately US$496 million in its E&P business, excluding the transactions with Statoil and WPX Energy noted previously.  This includes US$135 million in Northeast Appalachia, US$91 million in Southwest Appalachia, US$229 million in the Fayetteville Shale, US$1 million in its Ark-La-Tex division, US$34 million in New Ventures, and US$6 million in E&P Services.

Northeast Appalachia – In the first quarter of 2015, Southwestern placed 22 new wells on production in Northeast Appalachia resulting in net gas production of 83 Bcf, up 43% from 58 Bcf in the first quarter of 2014. Gross operated production in Northeast Appalachia was approximately 1,148 MMcf per day at March 31, 2015.

In the first quarter of 2015, the average 30th-day rate was 8,217 Mcf per day on 12 wells that had an average lateral length of 5,090 feet and an average cost of US$5.8 million per well.  This compares to an average 30th-day rate of 6,922 Mcf per day on 26 wells that had an average lateral length of 5,333 feet and an average cost of US$5.9 million per well in the fourth quarter of 2014.

As of March 31, 2015, Southwestern had 349 operated wells on production and 95 wells in progress. Of the operated wells on production, 348 were horizontal wells of which 198 were located in Susquehanna County, 129 were located in Bradford County and 21 were located in Lycoming County. Of the 95 wells in progress, 35 were either waiting on completion or waiting to be placed to sales, including 15 in Susquehanna County, 13 in Bradford County, 4 in Lycoming County and 3 wells in Sullivan, Tioga and Wyoming Counties, combined.

The graph below provides normalized average daily production data through March 31, 2015, for the horizontal wells drilled by the company in Northeast Appalachia. The “pink curve” indicates results for 124 wells in Bradford County, the “blue curve” indicates results for 136 wells in Susquehanna County, the “orange curve” indicates results for 21 wells in Lycoming County and the “green curve” indicates results for the 130 wells that have been put on production within the last 18 months. As a reminder, the production rates from all of our wells in Northeast Appalachia are managed to maximize the ultimate recovery from the wells. The normalized production curves are intended to provide a qualitative indication of the company’s Northeast Appalachia wells’ performance and should not be used to estimate an individual well’s estimated ultimate recovery. The 8, 12 and 16 Bcf type curves are shown solely for reference purposes and are not intended to be projections of the performance of the company’s wells.

Southwest Appalachia – During the first quarter of 2015, Southwestern placed 13 wells on production in Southwest Appalachia resulting in net production of 30 Bcfe, 55% of which was natural gas.  The company made significant progress in integrating the newly acquired West Virginia and southwest Pennsylvania assets into the portfolio.  In addition to successfully working with the state of West Virginia to transfer the permits already in progress, the company drilled its first five wells.  The average time to drill to total depth was 19 days from re-entry to re-entry.  With pad drilling, this would have been 4 days shorter. The company also completed its first four wells, which will be placed on production in the second quarter.

As of March 31, 2015, Southwestern had 300 operated horizontal wells on production and 35 operated horizontal wells in progress. Of the operated horizontal wells on production, approximately 85% were in the wet gas portion of the acreage.  Of the 35 wells in progress, 14 were waiting on completion.  The company currently has two drilling rigs running, one company-owned, with plans to exit the year with 4 rigs.

Fayetteville Shale – In the first quarter of 2015, Southwestern’s net gas production from the Fayetteville Shale was 115 Bcf, compared to 119 Bcf in the first quarter of 2014. Gross operated gas production in the Fayetteville Shale was approximately 2,038 MMcf per day at March 31, 2015.

The 99 horizontal wells that were placed on production during the first quarter of 2015 had an average initial production rate of 4,357 Mcf per day, average completed well cost of US$2.8 million per well, average horizontal lateral length of 5,875 feet and average time to drill to total depth of 7.2 days from re-entry to re-entry. This compares to the 97 horizontal wells that the company placed on production in the fourth quarter of 2014 that had an average initial production rate of 4,840 Mcf per day, an average horizontal lateral length of 5,547 feet, average time to drill to total depth of 7.2 days from re-entry to re-entry and an average completed well cost of US$2.7 million per well.

Explanation and Reconciliation of Non-GAAP Financial Measures

The company reports its financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, management believes certain non-GAAP performance measures may provide financial statement users with additional meaningful comparisons between current results and the results of its peers and of prior periods.

One such non-GAAP financial measure is net cash provided by operating activities before changes in operating assets and liabilities. Management presents this measure because (i) it is accepted as an indicator of an oil and gas exploration and production company’s ability to internally fund exploration and development activities and to service or incur additional debt, (ii) changes in operating assets and liabilities relate to the timing of cash receipts and disbursements which the company may not control and (iii) changes in operating assets and liabilities may not relate to the period in which the operating activities occurred.

Additional non-GAAP financial measures the company may present from time to time are adjusted net income, adjusted diluted earnings per share, adjusted EBITDA and its E&P segment operating income, all which exclude certain charges or amounts. Management presents these measures because (i) they are consistent with the manner in which the company’s performance is measured relative to the performance of its peers, (ii) these measures are more comparable to earnings estimates provided by securities analysts, and (iii) charges or amounts excluded cannot be reasonably estimated and guidance provided by the company excludes information regarding these types of items. These adjusted amounts are not a measure of financial performance under GAAP. – PR Newswire