SWN Reports White Hot 3Q08


The 3Q Numbers:

  • Production Above Upwardly Revised Guidance:
    • Reported 52.8 Bcfe (574,000 Mcfepd), up 76% from year ago quarter, guidance was 47 to 49 Bcfe.
    • Why? Simply better than expected performance from the extended long lateral program in the Fayetteville Shale.
    • Fayetteville Shale Gross production was 600,000 Mcfepd at the end of the quarter, that's a whopping 20% increase from the end of 2Q's 500,000 Mcfepd.
    • Note that they could have produced more were it not for takeaway capacity limitations caused by a delay in the completion of the Fayetteville Lateral of the Boardwalk Pipeline.
      • It'll be interesting to see how many wells are awaiting completion due to this delay (think even bigger production spike in 1Q/2Q time frame as they are fracced and tied in.
  • Revenues of $683mm vs $572 expected
  • CFPS of $0.90 vs $0.99 expected
  • EPS of $0.53 (net of a gain) vs $0.41 expected
    • the miss on CFPS and exceedance on EPS are partially a function of a lower than expected DD&A rate due to asset sales. Make no mistake, they rocked the quarter.
  • LOE of $0.93 per Mcfe in line with the low end of guidance and slightly better than 2Q08 levels.
  • Balance Sheet Gets Strong which should play well with the Street:
    • Net debt to Cap falls to a very manageable 25%
    • $425 mm in cash
    • $1 billion revolver is un-drawn

Production Guidance: Going Up.

  • 4Q08 goes from a range of  50 to 52 Bcfe to a new range of 53 to 55 Bcfe. Normally I'd think they are sandbagging for another beat at year end given 3Q's average level but pipeline constraints which "limited" 3Q production are not expected to be alleviated until late in the 4Q.

Operations Highlights:

  • Fayetteville Shale: Good Gets Better
    • Busy quarter sees yet longer laterals and higher initial production
      • IPs approaching 2.9 MMcfepd, up 1 MMcfepd from year ago levels
      • The result of longer laterals (now 3,736' long)
      • Most importantly, the declines are coming shallow to the older wells with shorter laterals and completed under a less certain, mixed type methodology (all are slickwater fracs last two quarters as the science has solidified)
        • 3Q07 saw a 42% drop between day 1 (post clean up I assume) and day 60.
        • 3Q08 running a 24% drop over the 60 day period. This is the fourth quarter in a row at this mid 20% or better 60 day production decline and that alone will go along way towards boosting numbers
        • Wells seem to be solidifying around a 2 to 2.5 Bcfe recoverable reserves type curve.
      • $3.0 mm average well cost means easily sub $2 all in F&D cost here. Nice
      • 12 days to drill. That's down from 14 last quarter despite adding nearly 200 feet to the lateral


E. Texas - Angelina River Trend

  • Average IP's in the Jame Lime of 9 mmcfepd, up from 8 last quarter but gross production eased lower. Not sure if they have one rig or two for now but they 102,000 gross acres so plenty of room to run should prices warrant.

Haynesville Update:

  • First vertical well drilling, nothing to report

Conference Call: Friday, 10 EST

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