Hedging losses cut into Southwestern Energy 2Q profits, no word on Fayetteville Shale auction

Southwestern Energy Company’s second quarter results beat Wall Street expectations but fell well short of year ago earnings as oil and gas hedging losses took a big bite out of Houston-based driller’s profits, the company announced after the close of business Thursday (Aug. 2).

For the period ended June 30, the Houston-based oil and gas company reported quarterly earnings of $51 million, or nine cents per share, down 77% from $224 million, or $45 cents per share, in the second quarter of 2017. Company officials said the lower earnings were primarily due to an unrealized losses in hedging positions of $56 million in 2018 compared to a $173 million gain in 2017.

After adjustments, Southwestern reported net income of $105 million, or 18 cents per share. Fourth quarter revenues came in at $816 million, up slightly from $811 million a year ago. Wall Street analysts had expected the independent oil and gas company to report second quarter earnings of 16 cents per share on revenue of nearly $831.9 million, according to Thomson Reuters.

“This quarter’s strong performance reflects increased margins, improved capital efficiency, and higher production growth,” said Bill Way, president and CEO of Southwestern Energy. “Our strategy of delivering growing value from our high-return Appalachia assets, and shift towards greater liquids while achieving greater operational efficiencies, are creating enhanced returns for our shareholders. This is underscored by our assets’ projected ability to generate modest free cash flow in 2018 without raising capital guidance.”

In the first quarter, Southwestern announced a 2018 capital budget of up to $1.25 billion and first revealed plans to “reshape and reposition” the company for future growth by looking at cost reduction opportunities across the company operations. Way reiterated Southwestern’s full-year capital spending plant, noting that the company invested $403 million in the second quarter on drilling and completion operations.

The Fayetteville Shale leader invested $396 million in E&P capital and drilled 37 wells, completed 56 wells and placed 45 wells to sales. More than $311 million of that second quarter investment was aimed at the company’s Appalachia Basin operations on the East Coast, where the company added 13 wells to its production schedule. Southwestern now expects to be toward the high end of its total 2018 well count guidance of 105 to 125 completed wells.

The Texas driller is also raising its full-year net production guidance to 955 – 970 billion cubic feet equivalent (bcfe), driven primarily by oil and gas liquids growth in Southwest Appalachia and production improvements in Northeast Appalachia.

In the Fayetteville Shale, the former Arkansas-based oil and gas company saw natural gas production of 67 billion cubic feet (Bcf) in the second quarter, compared to 82 Bcf a year ago. Despite the company’s cutback on capital spending in the Fayetteville Shale, the company’s Arkansas operations generated positive cash flow of $78 million from completed wells already in production.

Company officials did not offer any details on the Texas driller’s plans to exit its legacy Fayetteville Shale business, which goes back to the 1980s when the Arkansas Western Production Company changes its named to Southwestern Energy. In the first quarter, Southwestern announced plans to hire Wall Street banking and investment conglomerate JPMorgan to evaluate “strategic alternatives” and begin a process to get the most value out of the Arkansas natural gas development.

“In the best interest of our shareholders and the integrity of the process, we will not discuss additional details nor speculate on the future outcomes of that process. We do however look forward to working and updating with you once the process is complete,” Way said during the company’s first quarter conference call with Wall Street analysts.

Although Way would not divulge if Southwestern plans a future auction for its 919,000-acre leasehold position in Arkansas, the company has scheduled a conference call with investor and Wall Street analysts for 9 a.m. Friday that may offer more details. Some analysts have said the company could receive bids as high as $2 billion if the company’s Arkansas shale is sold to one suitor.

However, BHP sold its 268,000 net acre position in the Fayetteville Shale assets last week to privately-held Merit Energy of Dallas for a tidy sum of $300 million, well short of the $1 billion asking price forecasted by top Wall Street analysts. In 2011, BHP paid $4.75 billion in cash to purchase nearly 487,000 net acres of producing natural gas properties in the Arkansas play from Chesapeake Energy.

Southwestern officials have said there are only about 500 Southwestern employees in Arkansas, as most workers who supported drilling operations during the Fayetteville Shale boon have left the company or moved eastward to the support the company’s shale operations in the Appalachian region.

Southwestern shares (NYSE: SWN) closed at $4.90, down 10 cents or 2%. Over the past 52 weeks, the Houston oil and gas driller’s shares have traded in the tight range of $3.42 for a low and $6.72 as a yearly high.