SWN Reports A Beat, Guides 1Q Higher, And Gives Positive Fayetteville Shale Update: Pre Call Notes

SWN - $67.65 as of 2/28/08

  • 4Q EPS of $0.41 vs Street Consensus of $0.36
  • 4Q CFPS of $1.17 vs Street of $1.06 (range of $0.97 to $1.16 so they beat all 18 analysts putting out quarterly #'s)
  • 4Q production was 34.9 Bcfe; 8% higher than guidance from 12/19.
  • 1Q08 guidance by 1 Bcfe to a range of 35 to 36 Bcfe (385 to 395 MMcfgpd - (million cubic feet of gas per day - new subscribers please see the definitions tab for this and other oil and gas terms)).
  • 2008 production guidance remains the same at 148 to 152 Bcfe, equating to 32% YoY growth.
  • Per unit LOE was well contained at $0.79 / Mcfe

Reserves Rocket:

  • Reserve replace of 474% (almost entirely organic)
  • Finding costs of $2.55 / Mcfe  - below industry average again.
  • Reserves up 41% to 1.45 Tcfe (about half in the Fayetteville shale; 96% natural gas).
  • Implies a reserve life of 13 years

Fayetteville Shale Update: Efficiency Improvements Continue As Does The Skyrocketing Growth

  • Net production increased from 32 Mmcfgpd in 2006 to 147 Mmcfgpd in 2007 (or nearly half of total company production)
    • 15 Mmcfgpd comes from convention Arkoma production within the confines of the Fayetteville play, the rest is shale gas.
  • Gross production tripled from 100 Mmcfgpd at the beginning of the year to 325 Mmcfgpd at 12/31/07. As of mid February gross production was at 350 Mmcfgpd.
  • They left their 2008 exit rate projection unchanged from prior guidance of 450 MMcfgpd with 2008 net production of 246 to 260 MMcfgpd - on the mid point that's 72% YoY growth.
  • Focus over the last half of 2007 shifted to what has been identified as the better acreage in the play covered by newly acquired 3D seismic.
  • SWN estimates completed horizontal well costs at $3.0 mm in 2008, pretty flat with $2.9 mm in 2007 and perhaps a bargain when you consider the lateral lengths (the horizontal part of the well) are getting longer (more frac stages, higher production).
  • Reserves per well: 2.0 to 2.5 Bcfe. Not bad finding costs there.
  • Drilling efficiency continues to improve: 15 days per well in 4Q down from 16 in 3Q and again that's with the longer laterals,
  • Completions are almost all slickwater fracs now which are showing better results than the cross linked gel fluid fracs.


Other Notable Items: New Ventures division:

  • They hold 98,000 net acres in the Marcellus shale - plans to spud a vertical well this quarter.
  • 49,500 acres in the Barnett Shale Permian play out in W. Texas
  • Drilling in a CBM play in Louisiana - Riverton in Caldwell Parish

In A Nutshell: These are very good results both for the quarter and the year and guidance is good. Costs remain in check and the potential for upsizing reserves and production from the Fayetteville Shale certain exist as the play transitions from science project to major resource play development.

Lastly, they announced a 2 for 1 split which may inspire a lemming rally. 

Conference Call: 10 am EST.

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