Arkansas, a oil and gas producing state? Yes! Southwestern Energy Company (SWN), an $11billion dollar (market cap) exploration and production company, is here. Focusing on natural gas extraction from the Fayetteville Shale in the north central part of the state, the company has been a major player since 2004 when production started.
In addition to the Fayetteville play, the company has conventional wells and acreage in other parts of Arkansas, Texas and Oklahoma. Southwestern also has midstream gathering and marketing subsidiaries.
Southwestern has an attractive, well organized and informative website at www.swn.com At the site investors can find, among other things, news, annual reports, SEC filings plus they can request information. There is a two page summary fact sheet which provides the highlights of Southwestern’s revenues and reserves.
Chesapeake Oil (CHK) and BP plc (BP) also are active in the Fayetteville. BP plc acquired an interest in Chesapeake’s Fayetteville assets for $1.9 billion in late 2008 . Chesapeake sold the stake to bolster its cash position.
Fayetteville Shale is black, organic rich, rock of Mississippian age (approximately 325 million years ago) and lies at a depth of 1,500 to 6,500 feet in north central Arkansas. Typically a well is drilled vertically to just above the shale layer, then drilled horizontally for some 3,000 or more feet. The horizontal boreholes intercept pre-existing vertical fractures. Then, with the help up hydraulic fracturing, gas flows up the vertical fractures into the horizontal borehole from which it can be collected. If you are interested you can view here, a short (10-15 minute) video of the process put out by Northern Oil & Gas.
Southwestern’s stock price, currently around 31, is below the July, 2008 high of 52, but well above the low of 19 in October of 2008. The stock is up since October despite declining gas prices over the same period.
Since some 91% of the stock is held by institutional and mutual funds, thus redemption requests may negatively impact price.
Southwestern’s total proved reserves have increased from 1,026 bcfe (bcf equivalent) year end 2006 to 2,185 bcfe December 31, 2008. Most of the increase has come from the Fayetteville shale, which now accounts for 1,545 bcfe or 71% of proven reserves. Southwestern’s natural gas production from the Fayetteville has increased from 53.5 bcef a day in 2007 to an anticipated 229-232 bcef a day in 2009. Reserve replacement was 386% in 2006, 474% in 2007 and 523% in 2008. Southwestern seems to be finding lots of gas.
As of 12/31/2008 total cash was $196.28 million ($.571/share) and total debt was $734.5 million. With the help of hedging, the company, unlike some of its peers, was profitable in the fourth quarter of 2008. Levered Free Cash Flow (amount of cash available to stock holders after interest payments on debt), however, was -$831.98 million.
Despite low gas prices Southwestern is still planning a capital program of $1.9 billion for 2009 with the major focus on the Fayetteville shale. They plan to drill up to 650 wells. Since, unconventional shale gas in recent years has been found to have lower F&D costs than conventional gas, hence the proliferation of horizontal drilling.
Howard M. Korell, Chairman and CEO sold some $3.2 million in stock the week of March 19-25, 2009. Mr. Korell sold this stock some 3 weeks after the upbeat teleconference of February 27, 2009. Mr. Korell intends to retire in the first quarter of 2010. There are no reported insider buys so far this year.
Natural gas prices continue near record lows, currently the price is below $3.70/Mcf (Mcf is 1000 cubic feet). Since late February, the price of oil has rebounded some 50% while the price of gas continues to decline.
Industrial use, residential heating and electricity generation are the major markets for natural gas. Recession has reduced industrial demand, the onset of warm weather is dropping heating demand and recession has also somewhat lowered utilities demand. At the same time, thanks to companies like Southwestern, supplies are increasing, a “perfect storm” driving down gas prices.
We will probably continue to see low gas prices for the next several months. On the other hand, with the increasing scarcity of oil, I expect natural gas demand to eventually grow as it replaces oil as an energy source. T. Boone Pickens envisions natural gas replacing or augmenting oil for powering vehicles, a great idea, but this is still in its early developmental stage.
Another wild card is soon to come online LNG production worldwide. LNG imports, their cost basis and potential impact on US prices probably can only be estimated at this point.
Although Southwestern is rapidly growing reserves and is a low cost producer at around $3/Mcf (scroll down here to see chart), low gas prices will drag on income. Already some of the higher cost producing companies are shutting down rigs as natural gas prices drop below production cost. This will eventually tighten supply. Long term this is bullish for Southwestern. Dollar devaluation of course (if it occurs) will only make natural gas reserves more valuable.
Demand trends and Southwestern’s levered free cash flow, for now, are bearish. I would keep on eye on natural gas prices and Southwestern’s debt costs. A gas price upturn , say above $4.40 mcf, may indicate an entry point into this stock. Long term investors who don’t want to time the market could consider any significant price dip as an entry point.
Disclosure: None
In addition to the Fayetteville play, the company has conventional wells and acreage in other parts of Arkansas, Texas and Oklahoma. Southwestern also has midstream gathering and marketing subsidiaries.
Southwestern has an attractive, well organized and informative website at www.swn.com At the site investors can find, among other things, news, annual reports, SEC filings plus they can request information. There is a two page summary fact sheet which provides the highlights of Southwestern’s revenues and reserves.
Chesapeake Oil (CHK) and BP plc (BP) also are active in the Fayetteville. BP plc acquired an interest in Chesapeake’s Fayetteville assets for $1.9 billion in late 2008 . Chesapeake sold the stake to bolster its cash position.
Fayetteville Shale is black, organic rich, rock of Mississippian age (approximately 325 million years ago) and lies at a depth of 1,500 to 6,500 feet in north central Arkansas. Typically a well is drilled vertically to just above the shale layer, then drilled horizontally for some 3,000 or more feet. The horizontal boreholes intercept pre-existing vertical fractures. Then, with the help up hydraulic fracturing, gas flows up the vertical fractures into the horizontal borehole from which it can be collected. If you are interested you can view here, a short (10-15 minute) video of the process put out by Northern Oil & Gas.
Southwestern’s stock price, currently around 31, is below the July, 2008 high of 52, but well above the low of 19 in October of 2008. The stock is up since October despite declining gas prices over the same period.
Since some 91% of the stock is held by institutional and mutual funds, thus redemption requests may negatively impact price.
Southwestern’s total proved reserves have increased from 1,026 bcfe (bcf equivalent) year end 2006 to 2,185 bcfe December 31, 2008. Most of the increase has come from the Fayetteville shale, which now accounts for 1,545 bcfe or 71% of proven reserves. Southwestern’s natural gas production from the Fayetteville has increased from 53.5 bcef a day in 2007 to an anticipated 229-232 bcef a day in 2009. Reserve replacement was 386% in 2006, 474% in 2007 and 523% in 2008. Southwestern seems to be finding lots of gas.
As of 12/31/2008 total cash was $196.28 million ($.571/share) and total debt was $734.5 million. With the help of hedging, the company, unlike some of its peers, was profitable in the fourth quarter of 2008. Levered Free Cash Flow (amount of cash available to stock holders after interest payments on debt), however, was -$831.98 million.
Despite low gas prices Southwestern is still planning a capital program of $1.9 billion for 2009 with the major focus on the Fayetteville shale. They plan to drill up to 650 wells. Since, unconventional shale gas in recent years has been found to have lower F&D costs than conventional gas, hence the proliferation of horizontal drilling.
Howard M. Korell, Chairman and CEO sold some $3.2 million in stock the week of March 19-25, 2009. Mr. Korell sold this stock some 3 weeks after the upbeat teleconference of February 27, 2009. Mr. Korell intends to retire in the first quarter of 2010. There are no reported insider buys so far this year.
Natural gas prices continue near record lows, currently the price is below $3.70/Mcf (Mcf is 1000 cubic feet). Since late February, the price of oil has rebounded some 50% while the price of gas continues to decline.
Industrial use, residential heating and electricity generation are the major markets for natural gas. Recession has reduced industrial demand, the onset of warm weather is dropping heating demand and recession has also somewhat lowered utilities demand. At the same time, thanks to companies like Southwestern, supplies are increasing, a “perfect storm” driving down gas prices.
We will probably continue to see low gas prices for the next several months. On the other hand, with the increasing scarcity of oil, I expect natural gas demand to eventually grow as it replaces oil as an energy source. T. Boone Pickens envisions natural gas replacing or augmenting oil for powering vehicles, a great idea, but this is still in its early developmental stage.
Another wild card is soon to come online LNG production worldwide. LNG imports, their cost basis and potential impact on US prices probably can only be estimated at this point.
Although Southwestern is rapidly growing reserves and is a low cost producer at around $3/Mcf (scroll down here to see chart), low gas prices will drag on income. Already some of the higher cost producing companies are shutting down rigs as natural gas prices drop below production cost. This will eventually tighten supply. Long term this is bullish for Southwestern. Dollar devaluation of course (if it occurs) will only make natural gas reserves more valuable.
Demand trends and Southwestern’s levered free cash flow, for now, are bearish. I would keep on eye on natural gas prices and Southwestern’s debt costs. A gas price upturn , say above $4.40 mcf, may indicate an entry point into this stock. Long term investors who don’t want to time the market could consider any significant price dip as an entry point.
Disclosure: None
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