Bloomberg News

Southwestern May Cut Spending If Gas Price Stays Low, CEO Says

January 09, 2012

Jan. 6 (Bloomberg) -- Southwestern Energy Co., the biggest natural-gas producer in Arkansas’s Fayetteville Shale, may reduce spending and cut drilling if prices stay low.

Southwestern expects to realize an average of $4 per million British thermal units during the next three years, Chief Executive Officer Steven Mueller told Bloomberg News.

“If we decide in the next three or four months that there’s just going to be a glut of gas for the next three years, you could see us significantly reduce the capital budget,” Mueller said in an interview yesterday at Southwestern’s Houston headquarters.

The slowdown would happen in the Fayetteville Shale; Southwestern’s acreage in the Marcellus Shale is profitable even at low prices, he said.

Gas drilling is similar to manufacturing, Mueller said.

“The guys who can do it cheaper, the guys who have the better quality, the guys who have the better location, are going to win,” he said.

Gas dropped below $3 per on Dec. 30, after averaging $4.026 during 2011, according to Bloomberg data. Mueller said he expects the price to recover as producers stop drilling wells.

“The rig count on the gas side been dropping like a rock,” he said.

Other gas producers like Chesapeake Energy Corp. and EOG Resources Inc. have announced billions of dollars in transactions to expand their production into more-profitable oil and petroleum liquids. Southwestern’s 1.4 billion cubic feet of net daily production is almost all gas, Mueller said.

Depressed Prices

“They’re making a product that is depressed in price,” Michael McAllister, a managing director at Sterne Agee & Leach Inc. in New York, said in an interview. That “doesn’t mean you should go out and make other products that you’re not really well versed in.” He has a “neutral” rating on Southwestern shares and owns none.

Southwestern has locked in prices through energy contracts on 40 percent of its production, assuring it will realize $4 per million Btu if the price of gas averages $3.50, Mueller said. The company also plans to improve efficiency in its 915,000-acre Fayetteville field, cutting the average time to drill a well to 7.4 days from more than 8 days in 2011.

Southwestern is exploring for oil in the Brown Dense field in Arkansas and Louisiana. It also has about 500,000 acres that may contain oil or petroleum liquids in new fields that it hasn’t publicly identified. It won’t outspend its cash flow to ramp up oil production, Mueller said.

Southwestern is unlikely to sell assets or form joint ventures to raise capital, Mueller said.

--Editors: Jasmina Kelemen, Jessica Resnick-Ault

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net -0- Jan/06/2012 16:09 GMT


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