SWN 12/19/08 Operations Update

SWN Outlines Budget, Growth

• Capex of $2 billion, $1.78 B on E&P and of that $1.5 B on the Fayetteville Shale vs $1.4 B this year.
  • This will be one of the few E&Ps you see with up capex 2009 vs 2008 (total capex of $1.7B)
  • 20 to 21 rigs in the Fayettevile, not down from prior number.
  • Higher well count at 620 horizontals in 2009  vs 520 this year as per well drill times contract.
  • Not quite staying within cash flow next year but almost (gas price deck for that is $6).
  • Debt to total cap seen at 24 to 26% at YE09 vs 25% as of the 3Q08. This is a very manageable amount of debt with pre-capitalized interest at about $68 million and EBITDA generation close to $1.5 B next year.
  • Outside of the Fayetteville they will be slowing down with about 100 wells in other plays (Arkoma, E. Texas (they are in a JV to drill a couple of Haynesville tests I think soon),  and 2 wells wells in Marcellus)
  • Funding to come from cash flow, cash on balance sheet of "over $200 million" (which looks light by the way so they must have been spending pretty heavily in the fourth quarter) and from their undrawn $1 billion credit facility.
• Production Growth Guidance: 48% at 280 to 284 Bcfe for 2009.  That’s slower than the 69% growth this year and the 57% growth seen in 2007 but normal as we see the law of large numbers start to affect the play.
• Well costs rising slightly with longer laterals and bigger fracs but that should not be a problem. They should be able to get another 2 years of declining F&D costs in the Fayetteville.
  • as they have nearly doubled the lateral length over the past two years, they have more than doubled the average IP and probably proportionately increased per well reserves.
  • 2006 F&D: $2.72 / Mcfe
  • 2007 F&D:  $2.55 / Mcfe
  • 2008: ? but wells costs close to $3 million and production profiles in the extended laterals approaching 2.5 BCFE type curves augers for a significnat reduction in finding costs.
• Hedges
  • 2009 is 48% hedged with average floor price of $8.48 which helps to explain the up capex.
• Gas Price Sensitivity:
  • A $1 change in natural gas yields roughly a $0.40 CFPS change or about 10%.
    
  • At present, SWN’s $5 gas case matches Street consensus for CFPS in 2009 of $4.08 …
    
  • …and their $6 case comes in just ahead of EPS Consensus while the $5 gas comes up 20 cents light at $1.40 vs $1.60. As usual, I would argue, at length if necessary, that CFPS is by far the better measure of an E&P company.
• Cost Guidance: good (low) LOE, consistent with historic leve at the low end of their peer group.
• In a nutshell, good guidance, could be cause for the Street to inch up some numbers but since most of their acreage is now HBP I have to wonder a bit about where the fire is relative to capital discipline here. I think in the present financial markets and gas macro setting it might have been better to ease growth a touch more, getting to say "only 35%" growth while leaving cash balances alone and whittling debt down slightly. Still, I’m not complaining with this outlook.