Southwestern Energy, one of the largest drillers in the Marcellus with 480,000 acres under lease, turned in their first quarter 2019 update last week. It was the company’s first update since becoming a pure play operator, totally focused on the Marcellus/Utica region. What did it show? Net income nearly tripled to $594 million (vs. 1Q18’s $205 million). Production averaged 2.0 billion cubic feet equivalent per day (Bcfe/d), close to what the prolific Cabot produced in 1Q19.
Most of Southwestern’s production was in northeastern Pennsylvania, where they produced 1.24 Bcfe/d. In “Southwest Appalachia” (mainly West Virginia) the company’s wells produced 345 million cubic feet equivalent per day (MMcfe/d).
Honorable mention goes to Southwestern for drilling a Marcellus well in WV that is approximately 18,000 feet, “a division record in West Virginia.” Southwestern also claims to have drilled the longest Marcellus lateral in Pennsylvania, at 18,683 feet.
Southwestern spent $325 million on drilling in the first quarter, drilling 30 wells, completing 31 wells, and placing 19 wells online to sales.
Southwestern averaged $2.98/Mcf (thousand cubic feet) for the gas it sold. By comparison, Cabot averaged $3.35/Mcf in 1Q19 (see today’s story on Cabot).
A copy of the full Southwestern Energy 1Q19 update:
During a conference call with analysts, Southwestern’s Chief Operating Officer, Clay Carrell, had the following to say about Southwestern’s drilling program in his prepared remarks:
We started the year with another strong quarter and continued our operational momentum. We achieved greater operational efficiencies and the resulting cost reductions as we began our planned progression to longer laterals in 2019. We continue to improve well performance on both new and existing wells. Total production for the quarter was a 182 Bcfe with liquids accounting for 21% of total production. Liquids production increased 33% to 71,740 barrels per day consisting of 62,260 barrels per day of NGLs and 9,490 barrels per day of condensate.
As planned, we invested $325 million in the first quarter; the shape of the capital spend will be similar to the 2018 and weighted to the front half of the year. In the current commodity price environment, we expect to average approximately six rigs and four frac crews in the second quarter. We set several new SWN records in the first quarter including completion stages, drilled footage and lateral links. We set a new pad record of 8.3 completion stages per day; we drilled a record 8,300 feet in a 24-hour period while drilling a 100% of the time in the target zone and we set new drilled lateral length records in both West Virginia and Pennsylvania.
As Bill mentioned, we are on track to deliver an average completed well cost of $875 per lateral foot for wells to sales, at 25% well cost reduction versus last year. Average well cost in the quarter were reduced by 10% to $1,022 per lateral foot on the 19 wells we turned to sales during the quarter with an average lateral length of just over 8,000 feet. As planned the Q1 wells to sales included some wells that were drilled in 2018 without the benefit of our 2019 cost improvements.
We have extended the average lateral length of wells drilled during the first quarter to almost a 11,000 feet and as they are brought to sales, will decrease our average cost per lateral foot even further. So costs are moving in the right direction and we have a clear path to our 875 goal. We drilled five ultra-long laterals this quarter, each in excess of over 15,000 feet applying learnings from our methodical approach to extending lateral links, improving the capabilities of our teams and our company owned super spec drilling rigs.
Well performance continues to improve in both our liquids, rich and dry gas acreage. In southwest Appalachia we brought nine wells to sales with a combined initial production rate of 99 million cubic feet equivalent per day including 67% liquids of which 4,800 barrels per day were oil. In Northeast Appalachia, we brought 10 wells online with a combined initial production rate of 199 million cubic feet per day including the Tioga County well that came online at an initial rate of 39 million cubic feet per day which was a new company record.
As part of our focus on converting resource to reserves, we continued to progress our evaluation of the Upper Devonian Utica and Upper Marcellus intervals. We drilled our fourth Upper Devonian well in the first quarter and plan to complete the well in the second quarter. We also continue to progress our operational and technical knowledge of the Utica through ongoing data trades. In Pennsylvania, we plan to drill three Upper Marcellus wells in the second quarter testing current generation drilling and completion designs.*
Carrell’s comment about the well in Tioga County, PA that achieved a company record initial production rate of 39 MMcf per day generated a question during the Q&A portion of the conference call:
Got it. That was I was after. And then Clay, you’ve mentioned that Tioga well in your prepared comments and you got mention in your press release as well, I was wondering if you could add a little bit on or what you could add on where you landed that well, if there was anything different about it and how it compared with your previous expectations?
Sure. We landed it for Marcellus normal landing zone some of the big differences on this well are we were able to drill a longer lateral there, it’s over 11,000 feet versus what some of the offsets have been. This area benefited from that joint venture we talked about last year, where we were able to bring some acreage together and get the longer laterals. Secondly, we continue to be optimizing our completion designs and we feel like in that area we adjusted some ideas there and it resulted in even better well performance, so that the combination of longer laterals and the ongoing completion design improvement is resulting in better performance.*
A question to CEO Bill Way about whether the company will do more drilling in southwest PA:
Yes, good morning. Bill I was wondering how your thought process is about in southwest PA? Obviously you guys have been focused on the wet gas part of your acreage. Given the softness and liquids pricing how are you thinking about the relative attractiveness of dry gas versus your wet gas acreage?
We’re fortunate to have both super rich and rich liquid fill gas in West Virginia and dry gas in West Virginia and Pennsylvania. And so as we allocate capital we look at and the super rich has condensate with it as well but as we allocate capital, we run returns on every project that’s in the queue and we force rank them against each other and strip pricing. And so where we see a shift to higher gas pricing or higher liquid pricing or the for the reverse of that we can adjust and schedule accordingly because we drill our own rigs and we complete at least partially with our own frac leads.
And so it gives us a lot of flexibility to go back and forth at the current time, as we look at the core period which is the period where we get returns investing if we’re –if we remove — using six rigs today having around four of them in the super-rich area that includes condensate and having two of them in these high volume and high rate wells in Pennsylvania is where we sit. And we think that that will continue through the year.*
Just as Cabot got a question about whether or not the company is a candidate to get bought out by a bigger company, Southwestern got a similar question:
Good morning, everyone, and thank you for taking my questions. So, Bill you’ve been very clear on your ultimate strategy of returning to our organic cash flow neutrality and you’ve been committed a capital discipline for many years now. I was just wondering if you could share some color on just how you think about just the state of your current portfolio and how you think about Southwestern’s role in M&A or either as a buyer seller just to the extent that you can share your general strategy on that side of the equation.
Sure. We’re very confident in the portfolio that we have, and we especially like the diverse nature of it, whether it’s super rich condensate laden wells in West Virginia or high flow rate volume gas wells in Pennsylvania, and a variety of emerging intervals whether it’s upper Devonian or Utica as we continue to solve that. So a lot of confidence, a lot of a real drive to figure out organically what we’ve got in that case. As we look forward, you kind of look at this in two parts.
We’ve got 50 trillion cubic feet of resource across our acreage and just about 12 trillion cubic feet equivalent of reserves. So a big focus of ours is what the shareholder already owns, we want to make the best of it. So organically grow that, organically figure it out, testing research, we have a science budget and very methodically work through and bring more reserves to bear in that large resource base. Any opportunity beyond that whether it is that organic growth I mentioned or something that comes our way, you will have our commitment to rigorously analyze that and make sure that it drives long-term returns and long-term shareholder value.
And as we evaluate those that discipline and focus and really mirroring the efforts that we’ve done so far, if we’re ready to commit to benefits from another kind of an opportunity and we’ll figure out when those benefits are to be seen by the shareholder we’ll make commitments to end, we will deliver on those. And if we’re unable to do that then it’s not a deal that makes sense to us.*
As Dan Dinges from Cabot more or less said “no comment” on the possibility of selling the company (or buying another company), so too did Bill Way with respect to Southwestern.
A question about drilling long laterals:
Good morning. Couple of quick questions. The 15,000 foot lateral can we kind of get some color on what portion of your acreage would lend itself to this kind of lateral length and kind of how much incremental data do you need to help us think through how broadly you will apply this in the out-years? And then I’ve got one more question.
Okay. Our acreage with the work of our teams over the last few years has positioned us for progressing the lateral links significantly like we did this year, and then when we look a little further out, we think we’ll be able to maintain those lateral links. Of the five that we’re talking about four of them were in West Virginia. We saw a nice 20% reduction in the cost per lateral feet that were partly contributed to the longer laterals that were seeing in West Virginia. And then the fifth one was in Pennsylvania, so both parts of our portfolio have the ability for us to extend these laterals and that’s what we will be doing throughout the year.
And I would add real briefly before your second part of your question is, our commercial group is constantly looking at opportunities and the proof point was the JV we did in Pennsylvania, where commercially we were able to come together and trade acreage or do JV as we did. That creates an increased opportunity to drill longer laterals even in a more developed area. So I think there’s a sign across all of our acreage to do that.*
Tailing on to the end of a different question, CEO Bill Way had this to say about drilling in the Upper Marcellus, and in the Utica:
And let me kind of add a little bit to this inventory conversation. Clay mentioned in his remarks and we’ve talked a bit about the fact that we’re going to do some additional upper Marcellus testing. And what’s really exciting about this is we’re going into places where we’ve been before. And what I’m going to tell you about we’ve done before in other parts of our business, but taking today’s technology and capability of our teams these ultra long laterals and all the technical and operating capability that we have and going in back in there and looking and drilling some additional tests wells, opens opportunities for further inventory growth and further focus into there.
In Pennsylvania, we also have Utica, we’ve not done any drilling in that space just yet but if people around us are and so as we study and learn and prioritize that kind of development. And again it’s into this resource to reserve project we’ve got drillable inventory for some time to come. But it’s opportunities like that data utilization to drive just further growth organically.*
*Seeking Alpha (Apr 26, 2019) – Southwestern Energy Co. (SWN) CEO Bill Way on Q1 2019 Results – Earnings Call Transcript
Copy of the latest Southwestern slide deck, issued last week:
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