Southwestern Energy (SWN)

Q1 2011 Earnings Call

April 29, 2011 10:00 am ET

Executives

Steven Mueller - Chief Executive Officer, President and Director

Greg Kerley - Chief Financial Officer, Executive Vice President and Director

Analysts

Brian Singer - Goldman Sachs Group Inc.

Scott Hanold - RBC Capital Markets, LLC

Dan McSpirit - BMO Capital Markets U.S.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Gil Yang - BofA Merrill Lynch

Hsulin Peng - Robert W. Baird & Co. Incorporated

Scott Wilmoth - Simmons

Rehan Rashid - FBR Capital Markets & Co.

Michael McAllister - Sterne Agee & Leach Inc.

Nicholas Pope - Dahlman Rose & Company, LLC

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Presentation

Question-and-Answer Session

Steven Mueller

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Well, there really -- you can either call it 3 areas or 4 areas. We've got the area drilling right now in Greenzweig, which is right on top of a pipeline that goes north, south and ties with Millennium and Tennessee Gas. And as we mentioned in our press release, we have purchased farm comparison both Millennium and Tennessee as well as we're doing some spot capacity. The farm -- the first that the farm that comes on is later this year, November this year. And then it builds over the next couple of years, well over 200 million a day. That DTE pipeline we talked about, it is a north-south line that will run across through our far eastern acreage and that pipeline will have a capacity above 300 million a day. We've committed to about 280 million at peak on that but it will be significantly more than we could handle. And part of the farm that we purchased on Millennium and Tennessee Gas matches was when that pipeline will be in early 2012. So we could have a couple of bumps in the road if we go -- if these wells continue to be as strong as they are right now. Towards the end of the year, we could have a little bit of issues where we may not be able to buy something off just a spot and we have a little bit of issues. But I think between now and the end of 2012, going into 2013, we go from basically having 90 million day-to-day to well over 200 million, going on 300 million available to us at the end of next year and into 2013. So that's kind of the game plan. We've been fortunate both Millennium and Tennessee Gas just went through a new RFP process to get in new customers and we've been able to buy that farm. So I think we're okay at least over the next couple of years. Obviously, if the wells keep being as strong as they are, we have the spot in the next 6 months about what we want to be beyond 2012, but I think we're okay from here.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

And then Steve, just thinking on PVI basis, can you give us some thoughts around have initial wells also looked like they're tracking 68 Bcf at these wells cost in the Marcellus? How does that compare to the Fayetteville just on the PVI?

Steven Mueller

The Fayetteville is -- remind everyone that this Present Value Index and we look for 1.3 Present Value Index, which is nothing more than giving our investors $1.30 discount or 10% for every $1 we invest. To get to that number on the Fayetteville Shale, it's right at $4 today. And as we drill the wells faster and the wells get a little cheaper, that works down a couple of pennies. What we thought was going to be the case in the Marcellus even 3 months ago, we were talking about Marcellus then being in the $3.80s. Now we're talking in the low $3 and maybe have team handle on it for economics for 1.3 PVI. Depending on whether it's at 5 to 6 Bcf well or if it's an 8-plus Bcf well.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

But thinking about kind of return on capital employed and kind of overall funding cost, as you ramp the Marcellus, it isn't the same scale as the Fayetteville but should actually see direction go well in '12 and then into '13?

Steven Mueller

Yes, we already get to it as fast as we can get to it -- and one thing I didn't mention before when we were talking about the pipeline takeaway, we do have that one block of acreage that's in Lycoming County. We will drill a couple of wells on that. This year was actually a third rig that was coming in to drill a few wells and we'll start working on a takeaway on that as well. But what you'll see is due as we look out into 2012 and beyond, you'll see us working in basically 3 general areas, the Greenzweig area; the eastern part Susquehanna County; and then the Lycoming County, and that will build up to 5-plus rigs in the not-too-distant future and go that direction with it. So that's kind of our general game plan. We're getting all of the infrastructure in place to do that and we're really excited about the fact that the wells are coming much better than we expected.

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Thanks. I don't say great quarter very often but that was a good turnaround, so thanks a lot.

Operator

Our next question comes from Dan McSpirit with BMO Capital Markets.

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