Southwestern Energy Co. (SWN) reported first-quarter 2011 earnings of 39 cents per share, in line with the Zacks Consensus Estimate. However, the quarterly results could not measure up to the year-earlier profit level of 49 cents per share, mainly due to lower price realization of natural gas, partly compensated by a 28% increase in production.
First-quarter revenues inched up slightly more than 1% year over year to $676.3 million, and handily surpassed the Zacks Consensus Estimate of $657 million.
Production and Realized Prices
During the reported quarter, the company’s oil and gas production shot up 28% year over year to 115 billion cubic feet equivalent (Bcfe) encouraged by solid Fayetteville Shale operations. Production from the company’s Fayetteville Shale play increased nearly 34% to 101.1 Bcfe from the year-earlier period.
The company’s average realized gas price, including hedges, was $4.12 per thousand cubic feet (Mcf), down approximately 24% year over year.
Segmental Highlights
Operating income from the Exploration and Production (E&P) segment plunged approximately 29% to $178.3 million. The decrease was primarily due to lower realized gas prices and higher operating costs.
On a per-Mcfe basis, lease operating expenses were up by more than 10% year over year at 86 cents per share. On the other hand, general and administrative expense per unit of production dropped 10% year over year to 26 cents.
The Midstream Services segment’s operating income leaped 43% to $53.9 million from $37.6 million in the year-earlier quarter. The increase was driven by an improvement in gathering revenues related to the Fayetteville and Marcellus Shale plays.
Liquidity
The company spent $530.5 million in total capital expenditure in the quarter, of which $468.2 million was invested toward E&P activities and $46 million in the Midstream segment. The company now expects to invest a total of $2.0 billion in 2011 (versus prior expectation of $1.9 billion), mainly for faster drilling activities at its Fayetteville Shale play.
At the end of March 31, 2011, long-term debt stood at $1.2 billion, representing a debt-to-capitalization ratio of 28.1% (versus 27% in the preceding quarter).
Guidance
Southwestern revised its total oil and gas production expectation to a range of 483 Bcfe to 491 Bcfe for 2011, up about 20% from 2010 production level. Second quarter production is expected to range between 119 Bcfe and 121 Bcfe versus the prior expectation of 115 Bcfe and 117 Bcfe.
Outlook
Southwestern’s industry-leading holdings in Northern Arkansas’ Fayetteville Shale play make it one of the highest quality natural gas discoveries in North America in recent years. For 2011, the company expects approximately 425–435 Bcf of the total hydrocarbon volume to come from the Fayetteville Shale. We believe Southwestern’s industry leading presence in the Fayetteville Shale and its emerging position in the Marcellus Shale provide ample opportunities for newer natural gas discoveries.
However, we remain apprehensive regarding the weak natural gas scenario in the U.S. arising out of continued oversupply and low demand for natural gas. This will likely impede the company’s performance in the near term.Other risk factors include weaker-than-expected commodity prices, technological failures and the lack of a diversified asset base. Competition from its peers, such as Chesapeake Energy Corporation (CHK), also remains a threat to the company.
The company holds a Zacks #3 Rank (short-term Hold rating). We also maintain our long-term Neutral recommendation on the stock.
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