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Southwestern eyes lower costs over high output

27 Oct 2017, 4.57 pm GMT

Southwestern eyes lower costs over high output

Houston, 27 October (Argus) — Independent natural gas producer Southwestern Energy is focusing less on growing output, instead looking to a water infrastructure project in Appalachia and a renegotiated transportation agreement to bring high returns during the fourth quarter.

Southwestern, the third-largest US gas producer by volume, discussed its efforts to streamline the business and lower costs at the wellhead during comments in an earnings call today.

Southwestern's project to transport water to remote hydraulic fracturing sites in southwest Appalachia by pipeline instead of truck should reduce well costs by about $500,000 per well beginning late next year. The project should increase the producer's operational flexibility and lower breakeven costs.

Adjustments to its firm transportation agreement out of the Fayetteville shale in Arkansas should save the producer $45mn in 2018 alone, the company said today. The agreement with Boardwalk Pipeline Partners remains flexible with options to amend and extend, chief executive Bill Way said.

The company has pared back the development of the Fayetteville shale to focus on more lucrative drilling opportunities in the Marcellus shale in Pennsylvania and West Virginia. But economics there have been unpredictable amid changing in-service dates for new infrastructure, leading Southwestern to rely on hedging to mitigate the risk.

"Looking forward to the fourth quarter, differentials continue to be a challenge for many, but we have basis hedges in place for October and the fourth quarter with a positive impact of 40¢/1,000 cf and 11¢/1,000 cf, respectively," Way said.

Southwestern's realized gas price during the third quarter was $3/mmBtu, at a $1.11/mmBtu discount to the Henry Hub, compared with the year-earlier average of $2.81/mmBtu and a discount of $1.03/mmBtu.

The producer's output in the third quarter rose by 10pc on the year to 2.5 Bcf/d of natural gas equivalent (Bcfe/d) (71mn m³e/d), but "this is not about production growth at all costs and it will not be that for us going forward," Way said. "Our allocation of capital on highest return projects is in line with the dialogue of the day focusing on quality returns and products over production growth."

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