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Southwestern Earnings Outshine

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Independent natural gas operator, Southwestern Energy Co. (SWN - Free Report) reported first-quarter 2013 earnings of 42 cents per share, surpassing the Zacks Consensus Estimate of 39 cents and improving from the year-earlier profit of 30 cents. The growth was backed by higher production, primarily at its Fayetteville shale operations, as well as lower operating expense.

First-quarter revenue increased 12% to $733.6 million from the year-ago level of $654.8 million and comfortably surpassed the Zacks Consensus Estimate of $714.0 million.

Production and Realized Prices

During the reported quarter, the company’s oil and gas production grew 10.8% year over year to 147.8 billion cubic feet equivalent (Bcfe) – almost entirely gas – driven by the Fayetteville Shale operations. Production from Southwestern’s Fayetteville Shale play increased 2.7% from the year-earlier period to 118.9 Bcfe.

The company’s average realized gas price, including hedges, dropped 1.4% to $3.43 per thousand cubic feet (Mcf) from $3.48 per Mcf in the year-ago period. Oil was sold at $106.93 per barrel, up 2.4% from the year-earlier level of $104.39 per barrel. Natural gas liquids (NGL) realized a price of $47.97 per barrel.

Segmental Highlights

Operating income for the Exploration and Production (E&P) segment improved 53.4% year over year to $175.8 million in the first quarter. The increase was attributable to an increased output level and lower operating expenses, partially offset by lower gas price realization.

On a per-Mcfe basis, lease operating expenses were 81 cents versus 83 cents in the prior-year quarter. On the other hand, general and administrative expense per unit of production decreased 30% year over year to 21 cents.

The Midstream Services segment’s operating income jumped 10.1% to $76.3 million in the first quarter from $69.3 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 $518 million, of which $475 million was invested in E&P activities and $39 million in the Midstream segment.

As of Mar 31, 2013, long-term debt was $1,703.4 million, representing a debt-to-capitalization ratio of 35.6% (versus 35.5% in the preceding quarter).


As of Apr 30, 2013, Southwestern had approximately 240 Bcf of its remaining 2013 expected gas production hedged at an average price of $4.71 per Mcf. It has hedged approximately 233 Bcf of its 2014 expected gas production at an average price of 4.41 per Mcf.


Southwestern has increased its production guidance for 2013 to 631–642 Bcfe from its earlier estimate of 628–640 Bcfe. The revised outlook represents a 13% 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 shales also hold ample opportunity for newer natural gas discoveries.

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

However, we remain apprehensive about the weak natural gas scenario in the U.S. given the continued oversupply and low demand. This will likely hurt the performance of the company as well as of other natural gas companies like Chesapeake Energy Corporation (CHK - Free Report) in the near term.

Other risk factors include weaker-than-expected commodity prices, technological failures and the lack of a diversified asset base.

The company holds a Zacks Rank #2 (Buy). However, there are other stocks in the oil and gas sector – EPL Oil & Gas, Inc. and Harvest Natural Resources Inc. – which hold a Zacks Rank #1 (Strong Buy) and are expected to perform better.

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