Southwestern Energy Co
Background
Southwestern Energy Company (SWN) (including its subsidiaries, collectively, is an independent energy company engaged in natural gas, oil and NGL exploration, development and production, which the company refer to as “E&P.” Southwestern Energy Co is also focused on creating and capturing additional value through its natural gas gathering and marketing businesses, which the company refer to as “Midstream.” The company conduct most of its businesses through subsidiaries, and the company currently operate exclusively in the United States.1
E&P. The company's primary business is the exploration for and production of natural gas, oil and NGLs, with its current operations focused on the development of unconventional natural gas reservoirs located in Pennsylvania, West Virginia and Arkansas. The company's operations in northeast Pennsylvania, which the company refer to as “Northeast Appalachia,” are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. The company's operations in West Virginia and southwest Pennsylvania, which the company refer to as “Southwest Appalachia,” are focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs. The company's operations in Arkansas are primarily focused on an unconventional natural gas reservoir known as the Fayetteville Shale. Southwestern Energy Co has smaller holdings in Colorado and Louisiana, along with additional small acreage leased for potential testing for new resources. The company also have drilling rigs located in Pennsylvania, West Virginia and Arkansas, and the company provide certain oilfield products and services, principally serving its E&P operations.
Midstream. Through its affiliated midstream subsidiaries, the company engage in natural gas gathering activities in Arkansas and Louisiana. These activities primarily support its E&P operations and generate revenue from fees associated with the gathering of natural gas. The company's marketing activities capture opportunities that arise through the marketing and transportation of natural gas, oil, and NGLs produced in its E&P operations.
Recent Financial and Operating Results
Significant second quarter 2018 operating and financial results include:
Total Company
- Net income attributable to common stock of $51 million, or $0.09 per diluted share, declined 77% compared to net income attributable to common stock of $224 million, or $0.45 per diluted share, for the same period in 2017, primarily due to a $170 million relative decrease in its derivatives comprised of a $229 million decrease in the unrealized portion of its derivative activity partially offset by a $59 million increase in settled derivative impact during the respective periods.
- Operating income of $124 million declined 34% compared to operating income of $188 million for the same period in 2017 on a consolidated basis primarily due to increased operating expenses associated with increased production in the Appalachian basin and increased depreciation, depletion and amortization along with one-time restructuring charges.
- Net cash provided by operating activities of $300 million increased 13% from $266 million for the same period in 2017, primarily due to a $22 million increase in working capital timing differences. Additionally, positive effects from its settled derivatives and increased oil and NGL revenues more than offset decreased natural gas revenues and increased operating expenses combined.
- Total capital investing of $403 million increased 24% from $325 million for the same period in 2017 primarily due to increased developmental drilling in Southwest Appalachia.
- The Company used cash on hand to reduce total outstanding debt by approximately 19% to $3,570 million.
- E&P segment operating income of $97 million was lower than $146 million for the same period in 2017 primarily due to increased operating expenses associated with increased production in the Appalachian basin and increased depreciation, depletion and amortization along with one-time restructuring charges.
- Total net production of 234 Bcfe, including 167 Bcfe from the Appalachian Basin and 67 Bcf from the Fayetteville Shale, increased 5% compared to the same period in 2017 and was comprised of 86% natural gas and 14% NGLs and oil.
- Excluding the effect of derivatives, realized NGL price of $15.37 and realized oil price of $60.15 increased 37% and 48%, respectively, from the same period in 2017, while realized natural gas prices of $1.99 decreased 15%.
- E&P segment invested $396 million in capital: drilling 37 wells, completing 56 wells and placing 45 wells to sales.
Outlook
During the first half of 2018, the company took steps to identify and implement structural, process and organizational changes to reduce costs. In June 2018, the company announced a reduction in workforce that is expected to improve process efficiencies. The company also identified additional non-personnel related savings opportunities that should further decrease costs as they are implemented through early 2019. These changes, coupled with the interest savings related to the repayment of the term loan associated with the 2016 credit facility, its new revolving credit facility and recent credit upgrades, are expected to result in a lower cost structure.
In addition to cost savings, the company focused its efforts in the first half of 2018 on operational efficiencies and execution initiatives, which positively impacted the pace of its activity and allowed it to accelerate well completions, which resulted in higher than budgeted second quarter production of 234 Bcfe and the increase of its full year production guidance.
In the second half of 2018, the company expect to continue to exercise capital discipline by aligning its 2018 capital investing program with its expected cash flow from operations, net of changes in working capital. The company remain committed to its strategy of investing no more than the cash the company generate and repositioning its portfolio by sharpening its focus on its highest return assets. This includes its continued pursuit of strategic alternatives for its Fayetteville Shale E&P and related Midstream gathering assets. The company plan on utilizing the funds realized from the foregoing to reduce debt, supplement Appalachian Basin development, potentially return capital to shareholders, and for general corporate purposes.
Liquidity and Capital Resources
The company depend on funds generated from its operations, its revolving credit facility and capital markets as its primary sources of liquidity. Although the company currently have approximately $1.5 billion of capacity on its revolving credit facility, the company continue to be committed to its capital discipline strategy of investing within its cash flow from operations net of changes in working capital for the fiscal year 2018, supplemented by $40 million in 2017 cash flow carried forward into 2018.
The company's cash flow from operating activities is highly dependent upon the sales prices that the company receive for its natural gas and liquids production. Natural gas, oil and NGL prices are subject to wide fluctuations and are driven by market supply and demand, which is impacted by many factors. The sales price the company receive for its production is also influenced by its commodity hedging activities. The company's derivative contracts allow it to ensure a certain level of cash flow to fund its operations. See “Quantitative and Qualitative Disclosures about Market Risks” in Item 3 and Note 7, in the unaudited condensed consolidated financial statements included in this Quarterly Report for further details.
The company's commodity hedging activities are subject to the credit risk of its counterparties being financially unable to settle the transaction. The company actively monitor the credit status of its counterparties, performing both quantitative and qualitative assessments based on their credit ratings and credit default swap rates where applicable, and to date have not had any credit defaults associated with its transactions. However, any future failures by one or more counterparties could negatively impact its cash flow from operating activities.
The company's short-term cash flows are also dependent on the timely collection of receivables from its customers and joint interest owners. The company actively manage this risk through credit management activities and, through the date of this filing, have not experienced any significant write-offs for non-collectable amounts. However, any sustained inaccessibility of credit by its customers and joint interest partners could adversely impact its cash flows.
Due to these above factors, Southwestern Energy Co is unable to forecast with certainty its future level of cash flow from operations. Accordingly, the company expect to adjust its discretionary uses of cash depending upon available cash flow. Further, the company may from time to time seek to retire, rearrange or amend some or all of its outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, will depend on prevailing market conditions, its liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
