Midstream Services – Operating income for the company’s Midstream Services segment, which is comprised of natural gas gathering and marketing activities, was $93 million for the second quarter of 2014, up 27% from $73 million for the same period in 2013. Adjusted EBITDA for the segment was $107 million in the second quarter of 2014, up from $85 million in the same period in 2013 (a non-GAAP measure reconciled below). The growth in operating income and adjusted EBITDA was primarily due to increases in gas volumes gathered and marketing margins.

At June 30, 2014, the company’s midstream segment was gathering approximately 2.3 Bcf per day through 1,980 miles of gathering lines in the Fayetteville Shale and approximately 417 MMcf per day from 61 miles of owned 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.

First Six Months of 2014 Financial Results

For the first six months of 2014, Southwestern reported adjusted net income of $438 million, or $1.24 per diluted share, when excluding a $62 million ($37 million net of taxes) loss on derivative contracts that have not been settled. Including this loss, net income for the first six months of 2014 was $401 million, or $1.14 per diluted share (reconciled below). For the first six months of 2013, the company reported adjusted net income of $336 million, or $0.96 per diluted share, when excluding a $63 million ($37 million net of taxes) gain on derivative contracts that have not been settled. Including this gain, Southwestern reported net income of $373 million, or $1.06 per diluted share (reconciled below).

Net cash provided by operating activities before changes in operating assets and liabilities (reconciled below) was $1.2 billion for the first six months of 2014, up 30% from $918 million for the same period in 2013.

E&P Segment – Operating income from the company’s E&P segment was $627 million for the six months ended June 30, 2014, compared to $428 million for the same period in 2013. The increase was primarily due to higher production volumes and higher realized natural gas prices, offset by increased operating costs and expenses due to increased compression and gathering costs.

Gas and oil production was 371 Bcfe in the first six months of 2014, up 20% compared to 308 Bcfe in the first six months of 2013, and included 243 Bcf from the Fayetteville Shale, up from 240 Bcf in the first six months of 2013. Production from the Marcellus Shale was 119 Bcf in the first six months of 2014, more than double its production of 57 Bcf in the first six months of 2013.

Southwestern’s average realized gas price was $3.98 per Mcf, including the effect of hedges, in the first six months of 2014 compared to $3.65 per Mcf in the first six months of 2013. The company’s hedging activities decreased the average gas price realized during the first six months of 2014 by $0.30 per Mcf, compared to an increase of $0.41 per Mcf during the first six months of 2013. Excluding the effect of hedges, the company’s average realized price for the first six months of 2014 was $4.25 per Mcf for its Fayetteville gas volumes and $4.32 per Mcf for its Marcellus gas volumes, compared to $3.19 per Mcf and $3.44 per Mcf, respectively, in the first six months of 2013. Disregarding the impact of hedges, the average price received for the company’s gas production during the first six months of 2014 was approximately $0.52 per Mcf lower than average monthly NYMEX settlement prices, compared to approximately $0.47 per Mcf during the first six months of 2013.

Lease operating expenses for the company’s E&P segment were $0.91 per Mcfe in the first six months of 2014, compared to $0.83 per Mcfe in the first six months of 2013. The increase was primarily due to an increase in gathering costs in the Marcellus Shale and an increase in compression costs. 

General and administrative expenses were $0.24 per Mcfe in the first six months of 2014, compared to $0.23 per Mcfe in the first six months of 2013. The increase was primarily due to higher personnel costs.

Taxes other than income taxes were $0.12 per Mcfe during the first six months of 2014, compared to $0.11 per Mcfe in the first six months of 2013. Taxes other than income taxes per Mcfe vary from period to period due to changes in severance and ad valorem taxes that result from the mix of production volumes and fluctuations in commodity prices.

The company’s full cost pool amortization rate increased to $1.10 per Mcfe in the first six months of 2014, compared to $1.07 per Mcfe in the first six months of 2013.

Midstream Services - Operating income for the company’s midstream activities was $175 million in the first six months of 2014, up 17% compared to $149 million in the first six months of 2013. Adjusted EBITDA for the segment was $202 million for the first six months of 2014, up from $173 million in the same period in 2013 (a non-GAAP measure reconciled below). The increase in operating income and adjusted EBITDA was primarily due to increases in gas volumes gathered and marketing margins.

During the first six months of 2014, Southwestern invested a total of $1.3 billion, up from $1.2 billion in the first six months of 2013, and included approximately $1.2 billion invested in its E&P business, $75 million invested in its Midstream Services segment and $13 million invested for corporate and other purposes. The company has increased its planned total capital investments program for 2014 to approximately $2.4 billion, up 3% from its original capital investment program of approximately $2.3 billion. The following table provides updated annual forecast information for the company’s capital program in 2014, compared to its original capital budget.

E&P Operations Review

During the first six months of 2014, Southwestern invested a total of approximately $1.2 billion in its E&P business, including $450 million in the Fayetteville Shale, $373 million in the Marcellus Shale, $69 million in the Brown Dense, $191 million in the Niobrara, $2 million in its Ark-La-Tex division, $36 million in New Ventures, $51 million for Drilling Rigs and $4 million in E&P Services.  

Marcellus Shale – In the second quarter of 2014, Southwestern placed 23 new wells on production in the Marcellus Shale resulting in net gas production from the Marcellus Shale of 61 Bcf, up approximately 80% from 34 Bcf in the second quarter of 2013. Gross operated production in the Marcellus Shale was approximately 744 MMcf per day at June 30, 2014. With activity to date and the company’s planned level of drilling for the remainder of the year, Southwestern estimates that it will drill approximately 73 to 77 operated wells in the Marcellus Shale in 2014, compared to 80 to 85 wells previously forecast.

As of June 30, 2014, Southwestern had 216 operated wells on production and 93 wells in progress. Of the operated wells on production, 215 were horizontal wells of which 102 were located in Bradford County, 16 were located in Lycoming County and 97 were located in Susquehanna County. Of the 93 wells in progress, 34 were either waiting on completion or waiting to be placed to sales, including 8 in Bradford County, 1 in Lycoming County and 25 in Susquehanna County.

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

*Average CLAT of wells that have produced for 30 days.

Southwestern continues to test its acreage in Wyoming and Sullivan Counties that was acquired in 2013 and is currently drilling its first horizontal well in Wyoming County, the Dimmig 2H, which is planned to be tested in the fourth quarter. Three vertical wells have also been drilled in Wyoming and Sullivan Counties to help delineate the company’s acreage.

Southwestern has also begun testing the Upper Marcellus formation and its first well, the Preston Perkins 7H located in Bradford County, is drilled. The company plans to have four Upper Marcellus wells drilled and completed by year-end.

The graph below provides normalized average daily production data through June 30, 2014, for the company’s horizontal wells in the Marcellus Shale. The “pink curve” indicates results for 52 wells with more than 18 fracture stimulation stages, the “purple curve” indicates results for 98 wells with 13 to 18 fracture stimulation stages, the “orange curve” indicates results for 60 wells with 9 to 12 fracture stimulation stages and the “green curve” indicates results for 5 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 second quarter of 2014, Southwestern placed 147 new wells on production in the Fayetteville Shale resulting in net gas production from the Fayetteville Shale of 124 Bcf in the second quarter of 2014, compared to 121 Bcf in the second quarter of 2013. Gross operated gas production in the Fayetteville Shale was approximately 2,073 MMcf per day at June 30, 2014.

During the second 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 5,390 feet and average time to drill to total depth of 6.7 days from re-entry to re-entry. This compares to an 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 for an average completed well cost of $2.5 million per well in the first quarter of 2014. In the second quarter of 2014, the company had 26 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 311 wells to total depth in 5 days or less from re-entry to re-entry in the Fayetteville Shale.

During the second quarter, Southwestern placed on production 7 out of the top 10 highest rate wells since it began drilling in the area in 2004, including the Allison Trust 7-16 4-15H11 well located in Conway County which achieved a peak 24-hour production rate of 14,097 Mcf per day. In the second quarter of 2014, the company placed 41 operated wells on production with initial production rates that exceeded 5,000 Mcf per day, and 25 wells that exceeded 6,000 Mcf per day. The company’s wells placed on production during the second quarter of 2014 averaged initial production rates of 4,391 Mcf per day. Results from the company’s drilling activities since the first quarter of 2007 are shown below.

Note: Results as of June 30, 2014. 

Southwestern also continues to test the Upper Fayetteville formation and a total of 45 wells have been drilled to date. The company has drilled 15 Upper Fayetteville wells through the first six months of 2014. While several of the wells drilled in 2014 are choked back and are continuing to clean-up, six of these wells had an average initial production rate over 4.0 million cubic feet of gas per day, with the highest initial production rate being 6.3 million cubic feet of gas per day. The company plans to drill and complete five additional Upper Fayetteville wells later in the year.

Ark-La-Tex – Total net production from the company’s East Texas and conventional Arkoma Basin assets was 8.2 Bcfe in the first six months of 2014, compared to 9.5 Bcfe in the first six months of 2013.

New Ventures –  On May 1, 2014, the company closed on its previously announced acquisition of approximately 306,000 net acres in northwest Colorado targeting the Niobrara formation for approximately $183 million. Subsequently, in July the company agreed to acquire an additional 74,000 net acres in two separate transactions in the area for approximately $31 million. These agreements are expected to close in the third quarter of 2014. The company is currently completing its first vertical Niobrara well and drilling its second vertical well out of a five well program in 2014. In the Denver–Julesburg Basin in northeast Colorado, the company is currently completing its third vertical well in the Atoka and Marmaton formations.

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 and six months ended June 30, 2014 and June 30, 2013, respectively. 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, August 1, 2014 at 10:00 a.m. EDT to discuss its second 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.