Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

After a Great 2013, What’s Next For Natural Gas in the Marcellus?

By Arjun Sreekumar - Mar 20, 2014 at 10:40AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Thanks to major improvements in well productivity and costs last year, Southwestern Energy looks well positioned for another great year.

Houston-based natural gas producer Southwestern Energy ( SWN 5.16% ) delivered outstanding performance last year. Not only did the company significantly improve well performance and productivity, but it also maintained its industry-leading cost structure. Let's take a closer look at some of Southwestern's major improvements over the past year and why they position it for a strong 2014.

Photo Credit: Flickr/Nicholas A. Tonelli.

A year of records
Southwestern had a truly exceptional year in 2013, marked by company records in production, reserves, net income, EBITDA, and cash flow. Full-year oil and gas production rose 16% year over year to 656.8 billion cubic feet equivalent, fueling a 60% jump in the company's exploration and production operating income to $879 million, while proved reserves surged 74% to roughly 7 trillion cubic feet.

Combined with higher natural gas prices and reduced costs, this surge in production fueled 45% year-over-year growth in the company's adjusted net income to $703.9 million, or $2 per diluted share, and a 24% year-over-year increase in cash flow from operating activities, which jumped to a company record of $2 billion.

Improving performance in Marcellus and Fayetteville
These record figures were largely the result of the company's stellar performance in the Marcellus shale, where production skyrocketed 181% from its 2012 level and total proved reserves more than doubled. Southwestern's best Marcellus wells were drilled in Bradford, Lycoming, and Susquehanna counties, with a newly operational Susquehanna County well achieving an impressive peak 24-hour production rate of more than 32,000 cubic feet per day. 

The company posted similarly impressive results in the Fayetteville shale, where cumulative gross operated production surpassed 3 trillion cubic feet last year. Crucially, Southwestern achieved its highest average initial production rate per Fayetteville well last year, while simultaneously driving down well costs to their lowest average level since it first began drilling in the play back in 2004. In addition to improving well productivity and lowering well costs, the company is also spending a whole lot less money to find and develop its resources.

Last year, Southwestern's finding and development, or F&D, costs fell to $0.56 per thousand cubic feet equivailent, or Mcfe, the lowest level in company history. That's more or less in line with other low-cost peers such as Range Resources ( RRC 0.86% ), Cabot Oil & Gas ( COG 3.13% ), and Ultra Petroleum ( UPL ), whose F&D costs averaged $0.61, $0.55, and $0.53 per Mcfe, respectively. The fact that Southwestern's F&D costs are comparable to these companies is especially impressive because the majority of its reserves and production are located in the less economical Fayetteville shale, while Range and Cabot are overwhelmingly concentrated in the Marcellus.

What's next for Southwestern?
These major improvements bode extremely well for Southwestern and, in my view, position the company for another year of double-digit growth in production, earnings, and cash flow. Even though Southwestern is only increasing its capital budget by about $50 million this year to roughly $2.3 billion, it expects to deliver 14% year-over-year growth in production.  

While both production and capital investment in the Fayetteville are expected to remain flat, the company anticipates growing Marcellus production by a whopping 60% this year while actually reducing its capital investment in the play from $870 million in 2013 to $760 million in 2014 -- a testament to improved capital efficiency thanks to higher well productivity and lower costs.

In addition to the Marcellus, Southwestern's liquids-rich prospects offer tremendous upside potential. Investors should keep a close eye on the company's progress at Brown Dense, where it will initiate a 10-well development program that should shed further light on the play's potential, and the newly acquired oil-rich assets in Colorado's Niobrara shale, where Southwestern expects to begin operations as early as June.

Success at either of these plays could be a true game changer for Southwestern. It would not only help diversify the company's production mix, but could also fuel even stronger cash flow growth thanks to the higher margins associated with liquids-rich drilling.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ultra Petroleum Corp. Stock Quote
Ultra Petroleum Corp.
Range Resources Corporation Stock Quote
Range Resources Corporation
$18.85 (0.86%) $0.16
Cabot Oil & Gas Corporation Stock Quote
Cabot Oil & Gas Corporation
$20.75 (3.13%) $0.63
Southwestern Energy Company Stock Quote
Southwestern Energy Company
$5.30 (5.16%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/09/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.