Midstream Services – Operating income for the company’s Midstream Services segment, which is comprised of natural gas gathering and marketing activities, was $82.6 million for the first quarter of 2014, up 8% from $76.3 million for the same period in 2013.  The growth in operating income was primarily due to increases in gas volumes gathered and marketing margins.  At March 31, 2014, the company’s midstream segment was gathering approximately 2.3 Bcf per day through 1,961 miles of gathering lines in the Fayetteville Shale and approximately 436 MMcf per day from 96 miles of gathering lines in the Marcellus Shale. Gathering volumes, revenues and expenses for this segment are expected to grow over the next few years largely as a result of continued development of the company’s acreage in the Fayetteville Shale and Marcellus Shale and development activity being undertaken by other operators in those areas.

During the first quarter of 2014, Southwestern invested a total of $542 million, up from $518 million in the first quarter of 2013, and included approximately $499 million invested in its E&P business, $39 million invested in its Midstream Services segment and $4 million invested for corporate and other purposes.

E&P Operations Review

During the first quarter of 2014,  Southwestern invested a total of approximately $499 million in its E&P business, including $227 million in the Fayetteville Shale, $184 million in the Marcellus Shale, $1 million in its Ark-La-Tex division,  $60 million in New Ventures, and $27 million in E&P Services.  

Marcellus Shale –  In the first quarter of 2014, Southwestern placed 21 new wells on production in the Marcellus Shale resulting in net gas production from the Marcellus Shale of 58.0 Bcf, up 147% from 23.5 Bcf in the first quarter of 2013. Gross operated production in the Marcellus Shale was approximately 823 MMcf per day at March 31, 2014.

As of March 31, 2014, Southwestern had 193 operated wells on production and 91 wells in progress.  Of the operated wells on production, 192 were horizontal wells of which 93 were located in Bradford County, 16 were located in Lycoming County and 83 were located in Susquehanna County. Of the 91 wells in progress, 36 were either waiting on completion or waiting to be placed to sales, including 10 in Bradford County and 26 in Susquehanna County.

Results from the company’s drilling activities since the third quarter of 2010 are shown below.

The graph below provides normalized average daily production data through March 31, 2014, for the company’s horizontal wells in the Marcellus Shale. The “pink curve” indicates results for 46 wells with more than 18 fracture stimulation stages, the “purple curve” indicates results for 84 wells with 13 to 18 fracture stimulation stages, the “orange curve” indicates results for 58 wells with 9 to 12 fracture stimulation stages and the “green curve” indicates results for 4 wells with less than 9 fracture stimulation stages. The normalized production curves are intended to provide a qualitative indication of the company’s Marcellus Shale wells’ performance and should not be used to estimate an individual well’s estimated ultimate recovery. The 4, 8, 12 and 16 Bcf typecurves are shown solely for reference purposes and are not intended to be projections of the performance of the company’s wells.

Fayetteville Shale – In the first quarter of 2014,  Southwestern placed 105 new wells on production in the Fayetteville Shale resulting in net gas production from the Fayetteville Shale of 119.4 Bcf in the first quarter of 2014,  compared to 118.9 Bcf in the first quarter of 2013. Gross operated gas production in the Fayetteville Shale was approximately 2,022 MMcf per day at March 31, 2014.

During the first quarter of 2014, the company’s horizontal wells in the Fayetteville Shale had an average completed well cost of $2.5 million per well, average horizontal lateral length of 5,680 feet and average time to drill to total depth of 6.9 days from re-entry to re-entry. This compares to an average horizontal lateral length of 5,976 feet and average time to drill to total depth of 6.9 days from re-entry to re-entry for an average completed well cost of $2.6 million per well in the fourth quarter of 2013. In the first quarter of 2014, the company had 21 operated wells placed on production which had average times to drill to total depth of 5 days or less from re-entry to re-entry. Since inception, the company has drilled 456 wells to total depth in 5 days or less from re-entry to re-entry in the Fayetteville Shale.

In the first quarter of 2014, the company placed 30 operated wells on production with initial production rates that exceeded 5,000 Mcf per day, and 18 wells that exceeded 6,000 Mcf per day. The company’s wells placed on production during the first quarter of 2014 averaged initial production rates of 4,272 Mcf per day. Results from the company’s drilling activities since the first quarter of 2007 are shown below

Note: Results as of March 31, 2014. 

Ark-La-Tex – Total net production from the company’s East Texas and conventional Arkoma Basin assets was 4.3 Bcfe in the first quarter of 2014, compared to 4.8 Bcfe in the first quarter of 2013.

New Ventures – In the company’s Lower Smackover Brown Dense project, the Sharp 22-22-1 #1 vertical well in Union Parish, Louisiana, was placed back on production in late March and is currently producing at approximately 431 barrels of oil per day and 852 Mcf of gas per day. The company’s Milstead 15-22-1 #1 vertical well in Union Parish, located one mile north of the company’s Sharp well, reached a peak 24-hour production rate of 28 barrels of oil per day and 161 Mcf of gas per day in April. The company’s Plum Creek 23-22-1 #1 vertical well in Union Parish was completed with 9 stages in April and has just begun to flow back.  In April, the company started drilling the Benson 27-22-1 #1 vertical well. 

On May 1, 2014, the company closed on its previously announced acquisition of approximately 312,000 net acres in northwest Colorado targeting the Niobrara formation for approximately $180 million. 

Explanation and Reconciliation of Non-GAAP Financial Measures

The company reports its financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, management believes certain non-GAAP performance measures may provide financial statement users with additional meaningful comparisons between current results and the results of its peers and of prior periods. 

One such non-GAAP financial measure is net cash provided by operating activities before changes in operating assets and liabilities. Management presents this measure because (i) it is accepted as an indicator of an oil and gas exploration and production company’s ability to internally fund exploration and development activities and to service or incur additional debt, (ii) changes in operating assets and liabilities relate to the timing of cash receipts and disbursements which the company may not control and (iii) changes in operating assets and liabilities may not relate to the period in which the operating activities occurred.

Additional non-GAAP financial measures the company may present from time to time are adjusted net income, adjusted diluted earnings per share and its E&P segment operating income, all which exclude certain charges or amounts. Management presents these measures because (i) they are consistent with the manner in which the company’s performance is measured relative to the performance of its peers, (ii) these measures are more comparable to earnings estimates provided by securities analysts, and (iii) charges or amounts excluded cannot be reasonably estimated and guidance provided by the company excludes information regarding these types of items. These adjusted amounts are not a measure of financial performance under GAAP.

See the reconciliations below of GAAP financial measures to non-GAAP financial measures for the three months ended March 31, 2014 and March 31, 2013. Non-GAAP financial measures should not be considered in isolation or as a substitute for the company's reported results prepared in accordance with GAAP.

Southwestern management will host a teleconference call on Friday, May 2, 2014 at 10:00 a.m. EST to discuss its first quarter 2014 results. The toll-free number to call is 877-407-8035 and the international dial-in number is 201-689-8035. The teleconference can also be heard “live” on the Internet at http://www.swn.com.

Southwestern Energy Company is an independent energy company whose wholly-owned subsidiaries are engaged in natural gas and oil exploration and production and natural gas gathering and marketing. Additional information about the company can be found on the internet at http://www.swn.com.