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Independent natural gas operator, Southwestern Energy Co. (SWN - Analyst Report) reported second-quarter 2013 earnings of 54 cents per share, surpassing the Zacks Consensus Estimate of 52 cents and improving from the year-earlier profit of 27 cents. The growth was backed by increased production, primarily at its Fayetteville and Marcellus shale operations, as well as higher gas price realization.

Second-quarter revenues increased 42.2% to $862.0 million from the year-ago level of $606.1 million and comfortably surpassed the Zacks Consensus Estimate of $790.0 million.

Production and Realized Prices

During the reported quarter, the company’s oil and gas production grew 16.5% year over year to 160.1 billion cubic feet equivalent (Bcfe) – almost entirely gas – driven by the Fayetteville Shale and Marcellus Shale operations. Production from Southwestern’s Fayetteville and Marcellus shale plays increased 0.2% and 242.4% from the year-earlier period to 121.2 Bcfe and 33.9 Bcfe, respectively.

The company’s average realized gas price, including hedges, jumped 23.4% to $3.85 per thousand cubic feet (Mcf) from $3.12 per Mcf in the year-ago period. Oil was sold at $99.31 per barrel, down 4.9% from the year-earlier level of $104.44 per barrel. Natural gas liquids (NGL) realized a price of $37.63 per barrel.

Segmental Highlights

Operating income for the Exploration and Production (E&P) segment increased substantially 206.4% year over year to $252.5 million in the second quarter. The improvement was attributable to an increased output level and higher gas price realization, partially offset by higher operating expenses as a result of increased activity.

On a per-Mcfe basis, lease operating expenses were 85 cents versus 79 cents in the prior-year quarter. On the other hand, general and administrative expense per unit of production decreased 11% year over year to 24 cents.

The Midstream Services segment’s operating income increased 1.5% to $72.9 million in the second quarter from $71.8 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’s total capital expenditure was approximately $1.2 billion, of which $1.1 billion was invested in E&P activities and $95 million in the Midstream segment.

As of Jun 30, 2013, long-term debt was $1,897.7 million, representing a debt-to-capitalization ratio of 36.0% (versus 35.6% in the preceding quarter).

Hedging

As of Jul 30, 2013, Southwestern had approximately 169 Bcf of its remaining 2013 expected gas production hedged at an average price of $4.68 per Mcf. It has hedged approximately 233 Bcf of its 2014 expected gas production at an average price of 4.41 per Mcf.

Guidance

Southwestern has increased its production guidance for 2013 to 643–651 Bcfe from its earlier estimate of 631–642 Bcfe. The revised outlook represents a 15% increase over the 2012 level.

Our Take

Southwestern’s industry-leading holdings in Northern Arkansas’ Fayetteville Shale play offer some of the highest quality natural gas discoveries in North America in recent years. Marcellus and Fayetteville shale plays also hold ample opportunities for newer natural gas discoveries. The company already in Jul 2013 contracted additional pipeline capacity from DTE Energy Company (DTE - Analyst Report) to support its higher quantum of Marcellus Shale production.

We see the company as well positioned for production growth given its streamlined cost structure, upcoming drilling programs in shale plays, and a wide acreage in its New Ventures, especially in the Brown Dense play.

However, weaker-than-expected commodity prices, technological failures and the lack of a diversified asset base are the near-term risk factors.

The company holds a Zacks Rank #3 (Hold). However, there are Zacks Ranked #1 (Strong Buy) stocks in the oil and gas industry such as Range Resources Corporation (RRC - Analyst Report) and Dril-Quip, Inc. (DRQ - Analyst Report) that appear attractive in the short term.
 

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