Jamison Cocklin
August 7, 2023
Natural Gas Intelligence
Southwestern Energy Co. said a combination of activity cuts, moderating inflation and operational efficiencies would cut its full-year capital spending by $200 million as it continues to navigate a volatile commodity landscape.
The company now expects capital investment to be $2.0-2.3 billion this year, with full-year production of 1.65-1.70 Tcfe, or about 1% below the high end of its previous range. Management said Friday that the company would drill 10 fewer wells and turn 15 fewer to sales than originally planned as a result of the spending cuts.
“Lower sector activity, combined with an improved global supply chain has provided the opportunity for our strategic sourcing team to mitigate, and in some cases, reverse the inflationary cost pressures we had expected at the beginning of the year,” said COO Clay Carrell.
The company “has captured savings across the board,” particularly in well casing and completions. “We continue to work with our service providers to further align costs with the current commodity price environment,” Carrell said.
Management previously baked in 10-15% inflation this year, but it now expects low single-digit rates, “with the potential for deflationary impacts next year,” Carrell said. He added that year/year well costs are expected to be 10-15% lower in 2024.
Accelerated well turn-in-lines, improved performance and less downtime helped the Houston-based company produce more oil and gas than Wall Street had expected. Southwestern reported second quarter volumes of 423 Bcfe, including 257 Bcfe from Appalachia and 166 Bcf from the Haynesville Shale. That’s down slightly from the 438 Bcfe produced in the year-ago period as it cut activity levels heading into the year as prices declined.
“The company continues to demonstrate the inherent flexibility in our business by adjusting our development program in response to overall and relative commodity price levels,” said CEO Bill Way.
Carrell said there are no plans to add back the completions it has cut from the program, but “that optionality still exists if we see a price surge that allows us to go forward with that.”
Southwestern isn’t alone in cutting back. North American producers have slowly responded to falling natural gas prices. Carrel noted that the industry has reduced gas-directed drilling by 20% year-to-date, setting the stage for what management believes will be a rebound over the next two years.
“We believe the capital discipline that we’ve seen through industry-wide activity reductions will result in moderating, if not declining, sector production heading into next year,” Way added.
The company expects strong power burn and increased LNG demand to provide additional price support in the coming years.
Way noted that about 12 Bcf/d of liquefied natural gas export projects are under construction along the Gulf Coast, with in-service dates beginning next year. Nearly 8 Bcf/d of liquefaction capacity, he said, is expected to be operational by 2025.
“We believe natural gas pricing would need to strengthen materially to incentivize the production growth necessary to meet this next wave of LNG demand,” Way said. “While Permian associated gas growth is expected to provide some of the needed supply, particularly to the facilities on the South Texas coast, we believe the Haynesville – given its advantaged proximity – will be critical to supply the majority of this increased LNG demand.”
That puts Southwestern in a solid position, he added. The company is the largest Haynesville producer and U.S. gas supplier to existing export facilities. It already sends about 1.5 Bcf/d of feed gas to LNG plants.
“Additionally, we have further optionality in our business to leverage our direct access from Appalachia to the Gulf Coast through our firm transportation portfolio.”
For now, U.S. natural gas production continues to trend above 100 Bcf/d. It has averaged 101.4 Bcf/d over the last 30 days, or above the 97.7 Bcf/d average during the same period last year, according to Wood Mackenzie data. The excess supplies, along with high storage and weak LNG feed gas demand, are holding prices back.
NGI’s August Bidweek prices fell 12 cents month/month to $2.48/MMBtu. The long-term outlook is stronger, however. NGI’s Forward Look shows Henry Hub prices climbing well above $3 next year and exceeding $4 in 2025 as more LNG comes online.
The curve should encourage producers like Southwestern to move more gas from Appalachia – where NGI indexes like Texas Eastern M-2, 30 Receipt are lower over the same time – south toward incremental demand on the Gulf Coast if they have the outlets.
Southwestern’s second quarter average realized prices, including derivatives, declined to $2.33/Mcfe from $3.04 in the year-ago period.
The company reported second quarter net income of $231 million (21 cents/share). That’s compared with net income of $1.2 billion ($1.05) in 2Q2022, which was attributed in part to a gain on unsettled derivatives.
Going forward, the company is also aiming to cut its total debt of $4.05 billion to a range of $3-3.5 billion. To reduce debt, management said it would utilize free cash flow and other proceeds, including $120 million earned from an asset sale in Northeast Pennsylvania to Seneca Resources Co. LLC.
