Zman's  Instablog

Nutshell: Much better than expected 2Q results, minor disappointment due to the pipeline constrained guidance reduction but this is one of those "out of their control things" that institutional shareholders will often give managements (and stocks) a "get out of jail free pass for", maybe today, maybe it'll take a little longer. The key points are:

1. the reserves are still in the ground (not a problem to sell them later when prices are presumably higher), 
2. drilling results continue to get better quarter after quarter after quarter,
3. the 2nd well in the Haynesville is encouraging and this could certainly emerge as a second core area for them.
   
4. at the end of the day, even with reduced guidance, they will have one of the highest growth profiles in the domestic E&P universe, this year and next.
5. CFPS estimates likely to come down slightly, not substantially.
   
6. In my book, reducing the growth rate from 49% to 45% is not worthy of analyst downgrades, especially since the cause has no impact on net asset value.

The 2Q09 Numbers:

• Production of 74.3 Bcfe (816 MMcfepd) ; well above the top end of the guidance range of 70 to 71 Bcfe
  • up 16% from 1Q09
  • up 65% from 2Q08
    
  • Last quarter I wrote in reference to production guidance:  "My sense is that these are all ranges they feel they can handily beat."  I was more than right and the record volumes of the quarter were attained despite transportations during the quarter.
    
• Revenues of $477 mm vs $387 mm expected
  
  • Differentials continue to show vast improvement at $0.60 off Nymex in 2Q vs
    
    • $1.08 in 1Q09 and
      
    • a whopping $1.80 in 4Q08
    • this $0.60 deficit to NYMEX is below 4Q07 differentials when their was less cause for concern about takeaway capacity from the Fayetteville shale.  

• Costs continue to decline on a per unit basis
  
  • LOE of $0.73 per Mcfe vs $0.95 per Mcfe in 2Q08 and down from $0.79 last quarter.
    
  • G&A per Mcfe of $0.34, up slightly from $0.31 at 1Q09 - could be a bit of a personel ramp included here to handle the large number of new wells in the Fayetteville and in scaling up in the Haynesville.
    
• EPS of $0.35 vs $0.35 expected
• CFPS of $0.93 vs $0.88 expected

Production Guidance: Down for 3Q and 4Q Do To Pipeline Snafu: This is what upset the stock after the close last night.

• The Fayetteville Lateral of the Boardwalk Pipeline is in need of repairs. These are set to begin in September and could last anywhere from 1 to 5 months reducing SWN and others' takeaway capacity from the Fayetteville shale.

Production Guidance Reduced Accordingly:

• 3Q09 goes from a range of 75 to 76 Bcfe to a range of 66 to 68 Bcfe (note that this is still above production from 1Q09 or 63.9 Bcfe).

• 4Q09 goes from a range of 80 to 81 Bcfe to a range of 74 to 82 Bcfe (so the worst case is that the 4Q will be see volumes as big as this quarter which were a record.)

• Net effect is that the year goes  from a range of 289 to 292 Bcfe to a range of 278 to 288 Bcfe or a reduction from 49% YoY growth to 45% YoY growth.

• They are notoriously conservative "guiders" . I've never seen them set the bar too high for themselves, especially on production.

Operational Update Highlights:

• Fayetteville Shale:  Gross production at 1.0 Bcfepd, vs 850 MMcfepd in 1Q09.
  •  Drilling Results:  Well Costs Down, IP's Up.
    
    • Lateral lengths:  Averaged over 4,000 feet for the first time vs an average 3,874′ last quarter.
    • Time to drill 11 days, vs 12 days last quarter
      
    • IP rates resumed their upward trajectory reaching a new average high of 3.6 MMcfepd.
      
    • Completed Well Cost: $2.9 mm vs $3.1 last quarter
      
    • Looking at the decline rates of the recently drilled long lateral wells they match up well (just above actually) a 3.0 Bcfe type curve well meaning finding costs are now at or below $1 / Mcfe.

• East Texas: 
  
  • As announced on the last conference call, SWN's first  E. Texas Haynesville well had initial produciton of 7.2 MMcfepd - good rate, nothing out of the ordinary for this eastern part of the play.
  • Second well IP at 13.4 MMcfpgd. This well should have been put on production in late April or early May and is now (end of July) producing 7.8 MMcfepd. That's a good well by any of the E. Texas players' standards.
  • A third well has been completed (no production data available yet) and a 4th well has been spud.
  • SWN has 32,800 net acres in the play.
    
    
• New Ventures:
  • Nothing new on their Marcellus and other nascent projects.

Balance Sheet:  Debt to cap of 28% vs 24% as of March 2009. They remain one fo the very few E&P companies outspending cash flow in 2009.

Conference Call: 10 AM EST.

I currently own three sets of August dated Calls here.