SWN looking to repeat Fayetteville find

 After discovering the Fayetteville shale, Southwestern Energy, is looking to repeat. 
 

  Currently the thirteenth largest natural gas producer in the U.S. with 1.2 bcf per day of production, the company is looking beyond Arkansas.

“The Fayetteville is the driver of everything we do, it’s 70 to 75 percent of all our work and we have about a $1.5 billion to $2.1 billion budget for the play,” says Steven Mueller, President and CEO of Southwestern Energy. “But we have to replace the Fayetteville, and we think we’ve captured it in New Brunswick, Canada.”

 Southwestern is one of the most focused E&P companies out there, says Mueller. The company’s production is 99 percent gas and their E&P segment operates in Arkansas, Texas, Oklahoma and Pennsylvania.

 “Our strategy is built on organic growth through the drill bit,” he says. “From 2004 to 2009, we’ve averaged over 40 percent annual production and reserve growth and annually replaced over 500 percent of our production at a F&D cost of $1.46 per mcf.”

 The company’s producing properties include 900,000 acres in the Fayetteville, 150,000 acres in the Marcellus, and 100,000 acres in east Texas. Management has increased market capitalization from $187 million at year-end 1998 to approximately $14 billion today.

 In Southwestern’s Fayetteville property, which is the equivalent of 1,400 square miles, the company first tried to make the play work with vertical drilling, then
re-started as horizontal.

 “We’ve been learning over the past five years,” says Mueller. “We’ve drilled 1,000 wells, and know enough that we need 10 wells per section, so 10,000 wells need to be drilled at about 600 a year.”

 They have reduced days to drill from under 17 days to 11—one was drilled in 4.5 days. In that time, lateral length has doubled and will increase another 1,500 feet in the near future.
 

“We grew production by 50 percent last year, doubled reserves to 1.5 tcf, all while maintaining a flat drilling cost,” he says. “We anticipate participating in 650 to 680 wells in 2010, 475 to 500 of which we plan to operate.”

 In New Brunswick, Canada, the company holds exploration licenses for more than 2.5 million acres within the Maritimes Basin. Work in the area began about a year ago.

 “We look to be ahead of the game, to be the first movers, to repeat the Fayetteville,” says Mueller. “We want to replace the Fayetteville, and we don’t want to replace it with lots of small projects.”

 The principal targets are the conventional and unconventional sandstone and shale reservoirs of the Horton Group. The company has a three-year initial exploration license to complete the work program with yearly rentals of $1.55 per acre. There are options for multiple five-year extension leases and a maximum 12.5 percent royalty.

 “The shale is 200 to 600 feet thick and may have oil potential,” says Mueller. “The next three years and $47 million will all be for science—more magnetics, more seismic, and we’ll drill test wells toward the end.”

 Southwestern has only to drill one well per block to hold the lease—the blocks are huge at around 60,000 acres, which equates to 30 to 40 wells.

 Finally, Mueller gave his take on the rig environment, rhetorically asking why the industry is adding rigs in a depressed price market.

 “The answer is there is a lot of drilling to hold acreage,” he says. “The average length left is 3 to 4 years, and by our count you’d have to run 550 horizontal gas rigs to hold that on a risked basis. We’re at 600 today.”