Net income for the three months ended March 31, 2009 included a $907.8 million non-cash ceiling test impairment ($558.3 million net of taxes) of the company’s natural gas and oil properties resulting from lower natural gas prices. Excluding the non-cash impairment, Southwestern Energy reported net income for the first quarter of 2009 of $125.5 million, or $0.36 per diluted share, compared to net income of $109 million, or $0.31 per diluted share, for the same period in 2008.
Southwestern Energy accounts for its natural gas and oil properties using the full-cost method of accounting, which requires the company to perform a ceiling test that limits the amount of its capitalized gas and oil properties less accumulated amortization and related deferred income taxes to the aggregate of the present value of future net revenues attributable to proved natural gas and oil reserves discounted at 10% (standardized measure) plus the lower of cost or market value of unproved properties.
Net cash provided by operating activities before changes in operating assets and liabilities, was $372.6 million for the first quarter of 2009, up from $283.7 million for the same period in 2008. Excluding the non-cash impairment, the increase in the company’s first quarter comparative financial results was driven primarily by the significant growth in production volumes from the Fayetteville shale play, partially offset by lower realized natural gas prices.
“We had a very productive first quarter, despite the effects of the recent decline in natural gas prices,” remarked Harold M. Korell, chairman and chief executive officer of Southwestern Energy. “Our production from the Fayetteville shale continues to climb as we move up the learning curve in the play. Our gross operated production from the play reached about 850 MMcf per day at the end of the first quarter, compared to about 400 MMcf per day around this time last year. While we feel confident that natural gas prices will be higher for the longer-term, the price of gas has fallen about 35% from year-end 2008, thus causing non-cash impairment of our oil and gas properties.
As a result of the continuing low commodity price environment, we are reducing our planned capital program for 2009 by an additional $100 million down to $1.8 billion, which is about flat with our 2008 capital investments. The important thing to know is that commodity prices move in cycles and with the decreased drilling activity in our industry we are now positioned for an upturn in commodity prices. With our growing production volumes and financial flexibility, Southwestern Energy is well-positioned to benefit.”
First Quarter 2009 Financial Results
E&P Segment – Excluding the non-cash ceiling test impairment, operating income from the company’s E&P segment was $179.9 million for the three months ended March 31, 2009, compared to $165.7 million for the same period in 2008. The increase was primarily due to higher production which was partially offset by lower realized natural gas prices and increased operating costs and expenses.
Gas and oil production totaled 63.9 Bcfe in the first quarter of 2009, up from 39.1 Bcfe in the first quarter of 2008, and included 50.2 Bcf from the company’s Fayetteville shale play, up from 23.6 Bcf in the first quarter of 2008.
The revised total gas and oil production guidance for 2009 of 289 to 292 Bcfe is an increase of about 49% over the company’s 2008 gas and oil production. Of the 289 to 292 Bcfe of expected production in 2009, about 238 to 240 Bcf is expected to come from the Fayetteville shale.
During 2008, the majority of the company’s gas from the Arkoma basin was moved to markets in the Midwest. Phase 1 of the Fayetteville Lateral portion of the Texas Gas Transmission Pipeline (Boardwalk Pipeline) was placed in-service on December 24, 2008 providing additional capacity to the Midwest markets. On April 1, 2009, both Fayetteville and Greenville Laterals were placed in-service and the company began transporting a portion of its gas to Eastern markets.
In April 2009, Texas Gas announced that there would be temporary reductions on the Fayetteville Lateral due to various activities, including maintenance and pipeline inspection. The exact completion date for these activities is unknown, but is expected to occur by the end of the third quarter. As a result, transportation on the Fayetteville Lateral as of April 24, 2009 was about 700,000 MMBtu per day, and the company’s capacity was about 500,000 MMBtu per day to Bald Knob, Arkansas including 365,000 MMBtu per day to Lula, Mississippi. The company expects that the remainders of its Fayetteville shale production will continue to be transported on other pipelines to Midwest markets until these issues are resolved.
Including the effect of hedges, Southwestern Energy’s average realized gas price in the first quarter of 2009 was $5.94 per Mcf, down from $7.70 per Mcf in the first quarter of 2008. The company’s commodity hedging activities increased its average gas price by $2.13 per Mcf during the first quarter of 2009 and by $0.24 per Mcf during the same period in 2008. Disregarding the impact of commodity price hedges, the company’s average price received for its gas production during the first quarter of 2009 was about $1.08 per Mcf lower than average NYMEX spot prices, compared to about $0.57 per Mcf lower during the first quarter of 2008 due to widening basis differentials.
Beginning in the second quarter of 2009, the company believes that average basis differentials going forward will be lower than the differentials experienced during the second half of 2008 and first quarter of 2009. As of April 24, 2009, the company had protected about 45.1 Bcf of its second quarter 2009 expected gas production from the potential of widening basis differentials through hedging activities and sales arrangements at an average basis differential to NYMEX gas prices of about $0.25 per Mcf, excluding transportation charges and fuel charges. As of that same date for the third and fourth quarters of 2009, the company had protected about 49.1 and 36.4 Bcf, respectively, at average basis differentials to NYMEX gas prices of $0.25 per Mcf and $0.20 per Mcf, excluding transportation and fuel charges. The company typically sells its natural gas at a discount to NYMEX spot prices due to locational basis differentials, transportation charges and fuel charges.
Lease operating expenses per unit of production for the company’s E&P segment were $0.78 per Mcfe in the first quarter of 2009, compared to $0.77 per Mcfe in the first quarter of 2008. The modest increase was the result of higher per unit operating costs associated with the company’s Fayetteville shale operations, partially offset by the impact that lower natural gas prices had on the cost of compressor fuel in the first quarter of 2009.
General and administrative expenses per unit of production were $0.31 per Mcfe in the first quarter of 2009, compared to $0.42 per Mcfe in the first quarter of 2008. The decrease was primarily due to the effects of the company’s increased production volumes which more than offset increased compensation and related costs primarily associated with the expansion of the company’s E&P operations due to the Fayetteville shale play.
Taxes other than income taxes per unit of production were $0.13 per Mcfe in the first quarter of 2009, compared to $0.16 per Mcfe in the first quarter of 2008, primarily due to the change in the mix of the company’s production volumes and fluctuations in commodity prices.
