This Oil and Gas Company Is Expanding for the Better
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Global oil and gas volume grew 16.3% to 73.8 billion barrels of oil equivalent, or boe, in 2010 and is expected to grow at the rate of 24.4% to reach 91.8 billion boe by 2015. In addition, natural gas production reached an all-time high of 3.929 trillion cubic feet in 2012. This momentum is going to help Southwestern Energy (NYSE: SWN), which is seeking growth by enhancing its drilling activities and expanding in high quality natural gas fields.
Let's find out how these strategic moves will help the company.
Enhancing production from Fayetteville shale region
Southwestern Energy is currently generating 80% of its total production from the Fayetteville Shale region, located in Northern Arkansas, which offers superior quality natural gas. The geography of this region allows for easy gas extraction, which helps the company explore additional natural gas from Fayetteville. The company plans to increase Fayetteville Shale production by spending $900 million in this region this year.
It will use around $830 million to drill around 390 wells. By drilling these wells, the company is expecting to raise its operating production from Fayetteville by 4% to the overall production range of 631 billion cubic feet equivalent per day, or Bcfepd - 642 Bcfepd in 2013. This represents year-over-year production growth of 13%.
Further, the company has around 6,000 well locations in this region ready for drilling activities and it plans to drill nearly 400 wells to 450 wells per year. It currently holds more than 900,000 acres from which it is producing two bcfepd. The company placed 102 wells in the first quarter at the cost of $2.1 million per well, its lowest cost ever. It is expected to use same methodology to drill its future wells, reducing the drilling time from 5.4 days to 5 days. It anticipates the average initial production rate of these new wells to be around 3.3 million cfepd, and the reduced cost will enable the company to beat its hurdle rate.
Betting on Marcellus Shale region
In the first quarter ended in March 2013, Southwestern reported a production increase of approximately 11% from the Marcellus Shale region, where Range Resources (NYSE: RRC) has a strong presence and is continuing to perform well. To deepen it foothold and compete with the region’s competitors, Southwestern acquired 162,000 Marcellus Shale acres in Northeastern Pennsylvania from Chesapeake Energy (NYSE: CHK) for $93 million in the middle of the second quarter.
Therefore, Southwestern doubled its coverage in the Marcellus Shale, known for “dry gas,” providing a strong opportunity for extracting natural gas. It is expected that the midstream activities, which enable the company to grow in Fayetteville, will replicate the same in this region also. Currently, 17 wells in region are producing around 2 million cfed of natural gas per day, and it expects to raise the production to double digits.
Chesapeake Energy is the second-largest gas producing company in the U.S. It sold its Marcellus assets to Southwestern Energy to improve its cash position and offset the impact of falling natural gas prices. Since 2012, the company has been continuously selling its assets to fill the gap between its planned expenditures and its cash flow in 2013. Through these sell-offs, it expects to generate the funds of more than $4 billion this year, which it will use to pay outstanding debts and expand its footprint in oil rich fields.
It recently sold other assets in North Eagle Ford Shale and Haynesville Shale to Exco Resources for $1 billion. With these sales, it has collected funds of around $3.6 billion year-to-date. Chesapeake planned to devote 80% of its spending to drilling activity compared to 50% in the last three years, which will balance out its asset selling program. It is expected that the company may generate total revenue of $6.98 billion this year from $5.73 billion last year.
Meanwhile, Southwestern’s competitor Range Resources recently posted results for the second quarter ended in June 2013, reporting year-over-year production growth of 27% to 910 Million cfepd, driven by the continuous success of drilling activities in the Marcellus Shale. In April 2013, the company sold its New Mexico assets for $275 million in order to develop its Marcellus area further. With these efforts, Range Resources expects to have production of around 950 million cfepd in the third quarter of 2013 and year-over-year production growth of around 25%.
Overall, by exploring the Marcellus Shale region and increased drilling activities in Fayetteville region, Southwestern's total revenue may increase by nearly 18% to $872 million with the EBITDA margin of around 59.25% in second quarter of 2013.
With the aim of enhancing its footprint, Southwestern has expanded its drilling activities in the Fayetteville region and is improving its drilling methodology, which will enhance its drilling efficiency. Further, by acquiring more acreage in the Marcellus Shale, the company should be able grow its production and revenue.
Therefore, I recommend buying this stock for long-term growth.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Range Resources. The Motley Fool has the following options: long January 2014 $30 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!