Southwestern Energy Earnings Call INSIGHTS: Well Interpretation, New Ventures

On Friday, Southwestern Energy Company (NYSE:SWN) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Well Interpretation

Scott Hanold – RBC Capital Markets: Obviously I think Smackover (shouldn’t) be an area of focus, so I guess my question is, can you give us your view on what you think is kind of going on at the well? It’s got a lot more gas relative to some of the other ones and that bottom hole pressure seems incredibly high. I mean, what is your interpretation, what’s going on and what does that portend potentially to like EUR and in longer term productivity?

Steven L. Mueller – President and CEO: Scott we don’t know exactly what the overall result is going to be here that’s why we are drilling the two vertical wells and doing some testing on those. But as we discussed last quarter that BML well did give some pressure that is significantly higher than we seen in the other wells and you are seeing that in the bottom hole pressure, you are seeing that in the rates and its given us a lot of encouragement. As far as the gas and the oil when you go back and look at the second well, the second well had similar ratios of gas to oil and didn’t have quite high rates. So this one looks a lot more like the second well than it does to the first well but with the high pressures we are still trying to sort out exactly what the meaning that is. We won’t know probably for another 45 to 60 days actually seeing the details and all the numbers from the core data but in looking at it through just visual inspection, it looks like the zone that where we have in the BML well and in the two vertical well and one vertical well in TG today and hopefully the other wells are getting down has more (indiscernible) in it and actually has a little bit of silt in it as compared to the second and first wells that had more carbonate in them. But what that means to processing formability, what that means where it goes and how it works, we’re still trying to figure that out.

Scott Hanold – RBC Capital Markets: So, would this be I mean obviously just broadly speaking kind of analogy to what you have in the Bakken or you have to got like a (indiscernible) sandstone near a shale that tend to be more productive, am I reading in a little bit too much into it?

Steven L. Mueller – President and CEO: There could be a little bit of that, but basically it looks like more than half a zone somewhere in that range 40% to 60% of the zone has this different characteristic to it in that third and fourth well that we didn’t see in the first two wells. To remind everyone that the total zones that we’re looking at in these third and fourth wells is about 450 foot thick, so it’s a fairly thick interval as close to Bakken which is a fairly thin zone with shales on either side of it.

Scott Hanold – RBC Capital Markets: Then maybe moving to the Marcellus, so it sounds like the infrastructure has come online, so we’re going to see a pretty good step function now that you’ve got some of the firm end and how many wells do you have I guess in backlog and so I think you said 41 producing, how many are in backlog and are expected to be brought on production in the second half of the year?

Steven L. Mueller – President and CEO: I think in the second part of the year, we’re looking at between probably around 60 or so wells, 60 plus wells that we’ll have to put on production. Let me also clarify while our production is increasing, the key step jump that you’re talking about is the Bluestone line. That Bluestone line is not operational yet and it looks like it will not be operational until sometime in the fourth quarter. We will continue to have an increase in production, but the Bluestone by itself should be almost 100 million a day production late in the year. So, that’s still to come and we’ll continue to put lines on as we talked about and as Bill talked about almost all the wells getting online to-date, while along the Stagecoach pipeline in the Greenzweig area, we only have those two wells down in price and the Southern Susquehanna online and all the wells we’re drilling in Northern Susquehanna block that Bill mentioned, we had three wells we tested, those wells will come on line at the end of the year.

New Ventures

David Kistler – Simmons & Company: Kind of, a bit of big picture question here. As we start thinking about 2013 and looking at your New Ventures program, you’ve got a number of more visible efforts than you have in the past, looks like we’re focusing on a period of continued weak gas prices, most of the Fayetteville’s held by production. How do we think about how spending looks for next year. Do you may be shift down activity in the Fayetteville, take up New Ventures more than you have in the past, do you even consider for New Ventures, doing some acquisition type activity. So very big picture, but we’d love to get any color you can give us in that direction?

Steven L. Mueller – President and CEO: Our first hope is we got three discoveries and we really have an issue that we have to figure out how to fund all of them. Now from a practical standpoint, I don’t know that we’ll have that in 2013. We just have to look at and we talked about in the past, we’re drilling on present value index and if we find something in New Venture and its better than anything we have, then anything is potentially on the table to fund that better project. If for instance, it’s better than the Fayetteville and not quite as good as the Marcellus, then you have a different way to fund and you start moving dollars around, and certainly we have capacity. As Greg mentioned, we have got our balance sheet is clean, we’ve got our borrowing line or we can borrow on to at least start any kind of New Venture program and we have got other ways where we can access capital. So I think the big key is find something that’s good, figure how good it is, and once we find that we’ll figure out a way to fund it and everyone I think will be happy with it.

David Kistler – Simmons & Company: Does that include though maybe looking at acquisitions a little different than in the past where things have been organically driven?

Steven L. Mueller – President and CEO: We certainly have been aggressive and (Jess Eric) was in the room as part of – he heads up that group. That is looking for ways both to supplement our New Ventures Group, where they come up with ideas and then maybe acreage that has some kind of held by production characteristic to it, or if we want to get into an area and the best way to get into the area is acquisitions and I don’t think that flows down or speeds up based on what we find our New Ventures. I think if anything it is just part of the overall plan. We really don’t care how we do it. It’s just a matter of finding those good projects and going on down the road from there.

David Kistler – Simmons & Company: I appreciate that color and then maybe one micro question. Looking at the Fayetteville specifically and the 60-day IP rates, it looks like over the last year certainly (a sense) 3Q ’11 the 60-day rates have tended to trend down. Can you talk a little bit about maybe what’s happening there, obviously we are seeing the initially IP start to go up as you are high grading your portfolio, but looking at the 60’s they seem to be slipping a little?

Steven L. Mueller – President and CEO: If you remember 2010 and the first half of 2011 we drilled a significant number of wells and it will be almost 600 wells that was basically that was two-years we have a 1,000 wells drilled and they were just down spacing and certainly as you get the wells closer together and start seeing the interference on them at some point in the out past the initial rate you will start seeing the affects of that. Then in the second half of 2011 we started actually doing the drilling, acre space and we thought would be probably (indiscernible) and then start drilling pads and drilling. So we always talked about expecting 2012 and beyond that you are going to start seeing interference and you could see it in the 60 day numbers and then you will certainly see it in the overall numbers. We have talked about 10% to 15% type interference. What’s actually happened and what you are seeing in the IPs is that at the end of this year when the drop in the gas prices there we went to drilling the best wells not worrying about drilling pad wells. We widened out the spacing on those wells and we talked about last quarter expect that the IPs would be better in the second half of the year. You are just starting to see that with our second quarter productions and if you think about the 60 day rates, the 60 day rates are reflecting the very beginning of this quarter with the numbers you don’t have the June date in there. You are not going to see a June date for another 45 days and so you should see that whole curve move up as it goes into the future. But again it’s going to move up because we are drilling the very best wells. Once we get back to pad drilling whenever that is then you are going to have the same (indiscernible) you start seeing those numbers work back in again.