Southwestern Energy : Transcript- Southwestern Energy Announces Acquisition of Southwest Marcellus and Utica Assets

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Steve Mueller; Southwestern Energy; Chairman of the Board, President, and Chief Executive Officer

Craig Owen; Southwestern Energy; CFO Bill Way; Southwestern Energy; EVP, COO

Jeff Sherrick; Southwestern Energy; EVP Corporate Development

Michael Hancock; Southwestern Energy; Director of Investor Relations

Drew Venker - Morgan Stanley

Gil Yang - DISCERN

Matt Portillo - Tudor, Pickering & Holt

Charles Meade - Johnson Rice

David Kistler - Simmons & Company

Bob Christensen - Imperial Capital

James Campbell - CalPERS Arun Jayaram - Credit Suisse

David Heikkinen - Heikkinen Energy Advisors

Scott Hanold - RBC Capital Markets

Andrew Coleman - Raymond James

Greetings and welcome to the Southwestern Energy Company conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. In the interest of time, please limit yourself to two questions. Afterward you may feel free to re-queue for additional questions. (Operator instructions.) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Steve Mueller, Chairman and Chief Executive Officer for
Southwestern Energy.

Thank you. Good morning and thank all of you for joining us today. With me today are Bill Way, our Chief Operating Officer, Craig Owen; our Chief Financial Officer; Jeff Sherrick, Executive VP of Exploration and Business Development; and Michael Hancock, our Director of Investor Relations.
If you did not receive a copy of this morning's press release regarding the asset acquisition, you can find a copy of this on our website at swn.com. Also I'd like to point out that many of the comments during this teleconference are forward-looking statements and involve risks and uncertainties affecting outcomes many of which are beyond our control and are discussed in more detail in our risk factors and forward- looking statement sections of our annual and quarterly filings with the Securities and Exchange Commission. Although we believe these expectations expressed are based on reasonable assumptions, they're not guarantees of future performance and actual results or developments may be different materially.

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Now let's begin. Let me start by saying that I'm very excited and the whole company is very excited about this acquisition. It fits who we are and what we do best and we have been very consistent in the past about some very - there are few, but very significant fundamental imperatives for our company; and I'd like to review those and review those in light of the acquisition.
First off, we have a very disciplined approach to investing. Many of you have heard us talk about our present value index where we want to deliver $1.30 discount at 10% for every dollar we invest. That discipline has created a proven record for our earnings, earnings that were driven by natural gas over the several years; and when you look at year-over-year returns we've been able to beat many of those liquid centric companies. We believe this acquisition significantly exceeds those economic hurdles and will continue to provide a very transparent long term up tier returns for our company.
The second basic fundamental we have is that we believe in a robust future for natural gas and we're developing an industry best portfolio of properties to take advantage of that upside. I think many out there and many in our industry in particular have been missing some of the signals. We've already evidenced the beginning of a new demand growth in 2014 and our company started to discuss that last
conference call when we talked about over 1 Bcf a day contracts in our various operating areas that were
long term. All the fundamentals for us show that it looks like we're in $4.00 NYMEX price environment and we believe that a strong company can make great returns in that environment and can win.
Our company's performance certainly has shown that. We look back in 2012 with much lower gas price environments, we still had great returns, and this acquisition just strengthens that position. As a matter of fact when you stress test the acquisition at $3.50 flat forever, we still deliver good returns.
Our third major tenet that we have is we look for projects we can apply our unique talents to and create our value plus, and I'll talk more about value plus through the rest of this presentation, but that uniqueness includes vertical integration, continuous improvement and focus. When we focus on a few large projects, it drives unusual value for our shareholders and we show evidence of that every time we talk about the company. We talked recently about the Fayetteville shale where a combination of vertical integration continues changing and tinkering and has resulted in the best wells ever drilled in that project. We continue to be a class leader in cost and we show that every quarter and every presentation when we're one of the few, as a matter of fact, the only one that I know in the industry that has costs go down for our grown fleet of our wells every year since 2008.
In the case of this acquisition Southwestern Energy is beginning the acquisition with an experience of over 4,000 wells in Fayetteville shale and 300 wells in the Marcellus. I must emphasize we're beginning at that point. When you start that as a beginning point, there's very few companies in the industry that can even think about that and it'll drive the future valuation of this acquisition even better than what we think it is today.
The fourth major point we have is that we have our own unique brand of innovation. It starts with curiosity and that curiosity leads to learning. That learning leads to discovery and that discovery leads to innovation. The curiosity comes in a lot of different forms. Sometimes it's that continuous improvement where some little anomaly leads us to something else; it leads us to something else that grows to something bigger; and other times one curiosity, one well like in the case of the Fayetteville shale, discovered a major new province for the US and for our company. In this case we see several things in this acquisition that we can use our curiosity and innovation for, but we're looking at great rock and great opportunities.
That curiosity and innovation also allows us to grow several ways. The first way it allows us to grow is through exploration. That's how we got into the Fayetteville shale. That's how we got in early on into the northeast corner of Pennsylvania and we plan to continue doing that in the future. The second way that innovation helps us grow and get better is through building the base that you already have, and we've talked about in the past the upper Fayetteville, now a whole new project for us that adds 900 wells in our

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inventory. We're testing upper Marcellus this year and last year we picked up over 160,000 acres in the Marcellus to build that position, which we're also testing. We will do more of that in the projects we have and we'll be able to do more of that in this acquisition that we have.
And the final part for that innovation that allows us to grow our company is by finding the assets that fit our strategy. Earlier this year we announced the Sand Wash Basin acquisition. In that case some wells that were anomalous wells allowed us to go to some operators, pick up that acreage and now we're working on an exploration project, and obviously this acquisition is a perfect fit for that. We justified it on what we know today, but we see with innovation both there's upside in the formations that we'll tackle and in the geographic area that they will cover.
Our fifth major tenet is that we want to be the best citizen we can in the communities where we work. Our formula talks about the right people doing the right things by wisely investing the cash flow from the underlying assets, and I'll talk about the investments on the underlying assets on my next point. But the whole idea here is not just to deliver value, but to deliver something greater than value, to deliver value plus and also values plus. In our case we have a long history of working with regulators and communities to do things right and we think we can bring that unique history to this acquisition. Part of that uniqueness for our company is that we're the only company in the industry that has a goal to be net fresh water
neutral by 2016 and we set internal standards for finding and preventing methane emissions that are more stringent than any current regulations in any state or any legislative body. We do this because it's the right thing, but we also do it because there are economic reasons to do it. It's part of that uniqueness we bring, and it's part of the uniqueness we'll bring to this acquisition.
And finally our sixth tenet is that we have a commitment to keep a strong balance sheet and keep a clean balance sheet, and part of the reason for doing that is that there's always going to be those inevitable difficult times when commodity prices are challenging and a strong balance sheet helps you through
those times. But more important, it gives us the opportunity to take advantage of a large project when it comes by and it fits our strategy. It allows us to act when others can't. It allows us to buy low rather than wait to buy high. This acquisition fits that perfectly.
Now with that and with this acquisition our balance sheet will inevitably change at least for the short term, but we're committed to get that balance sheet back to a point where we can have a concrete opportunity set in the future and grow our company even better.
So what's the result of those six imperatives? Southwestern Energy is already the fourth largest gas producer in the lower 48 and our current projects in Fayetteville and Marcellus have a large inventory that drives top tier returns by themselves. When you add this acquisition as a third asset that we can immediately exploit and provide potential, what happens is we can build value faster and quicker for our shareholders.
So what are we buying? We're buying 256 operated wells mainly in the Marcellus and a few horizontal wells in the Utica. We've got another 179 non-operated wells that are small and working interests in the Marcellus and Utica and it's approximately 1,100 old legacy wells that produce total about 10 million a day. Our current production totals as of September 2014 is 336 million cubic foot a day and for the first time in a long time we can talk about liquids, about 45% of that has some kind of liquid component to it. That's the base that we're doing. Certainly as we build through the rest of the year and we get to the end of the year, we'll talk about what reserves go with that base, but I'll just tell you that just the PDP by itself without any kind of other locations on it, we believe is over 900 bcf.
One of the things that the acquisition is subject to is a consent of the co-owner on this acreage and in addition they also have a 30 day preferential right to purchase. What that means is they have 30 days to decide if they want to buy this acreage for the $5.4 billion. That 30 days starts today.

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In a minute we'll open the call to some questions, but I want to spend a few minutes and a few moments here mentioning that we do not plan to answer any questions related to third quarter or potential 2015 budget. We have a conference call already scheduled for next week to talk about our earnings release and it'll take some time for us to digest this, as well as get those pref rights in before we start talking about 2015.
In addition you may not hear from us much after this call for the next few weeks until we learn more about
that consent and pref rights. It's not that we don't have a lot to say and something we're not excited about what we have to say, but we don't want to be part of the speculation or even fuel any further speculation, so we'll just wait and talk when we get the opportunity then.
With that, operator, we'll now open the call to answer some questions.

Thank you. We'll now be conducting a question and answer session. In the interest of time please limit yourself to two questions. Afterwards you may feel free to requeue for additional questions. (Operator instructions.) One moment please while we poll for questions.
Our first question comes from the line of Drew Venker with Morgan Stanley. Please go ahead with your question.

Hello, good morning, everyone. Steve, I was hoping you could address whether this acquisition means you might underpin a longer term growth profile similar to some of what your peers have put out in the past like a 20% or 25% a year growth rate over the long term, or whether it's too early for that.

It's too early to address that. Certainly if you look at where our current growth rate is, it's a very respectable 15+% and I have no doubt that we can grow at that rate or higher for a long time, so we'll talk more details about what that is and how that works in the future.

Okay, and then you mentioned a commitment to a strong balance sheet. Obviously you've had a strong
balance sheet historically. Do you have any target leverage metrics?

I don't know that we can say that we have specific targets on the leverage. I will say that we're dedicated to stay investment grade, and so whatever we do, how we finance in whatever we do, we will be investment grade when it's all done.

Do you have any details on who has the preferential right to purchase the properties or that you've had
any conversations with them?

I do not have any details there. They are getting the notice today to start the 30 day clock and that notice, when I say notice, they actually have to see the document and have to accept that document the way it's written actually as a pref right. Other than that we will be talking with them and as I say, they've got 30 days and I don't have any guess whether that's going to take all 30 days or less than 30 days or anything.

Okay, thank you, Steve.

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Our next question comes from the line of Gil Yang of DISCERN. Please go ahead with your question.

Good morning, Steve. Can you talk about what percentage of the acreage you view as being derisked?

The best way that I can describe that and we'll talk a lot more detail on that in the future, but we've got
HBP right now over 50%, so certainly there's at least 50% that's derisked.

Okay, great. Regarding the pref rights, do you know if they are all or nothing, or can they take partial interest or on parts of the acreage?

Without getting into too much detail on this, it's a pref right and there's fairly clear pref rights and that's all
I'll say right now.

Okay, just last question, marketing contract, can you talk about marketing contract and strategy that you're inheriting from Chesapeake and what you expect your strategy to be going forward for liquids in particular?

I won't go into detail. We do get both liquids and gas with this and as we've been working through the various negotiations over time. There's been some opportunities that Chesapeake has had to commit to some future and we helped them with those commitments; and we will talk more about that down the road. But we do have plenty of liquid contracts that come with this deal.

All right, great, thanks.

Our next question comes from the line of Matt Portillo with Tudor, Pickering & Holt. Please go ahead with your question.

Good morning, Steve. Just a quick question, you guys have mentioned in the past your midstream assets potentially being used as an opportunity if the right deal came along to help finance a transaction and potentially selling that down. Is that something you guys would consider alongside your non-strategic components of your portfolio, or could you provide some more context around your views on financing here?

We're still working on the financing component. Certainly we're going to look at a lot of different ways to do that and make sure that it's done the best way possible. Specifically when it comes to midstream, I don't know that it's high on our list of potential right now, but we just have to wait and see how this plays out.

Great, and then just a second question and I don't know if you guys will address this later on or not, but you laid out the rig count schedule here through 2017. Is there any color you could provide us in terms of the current production today as you hold on to that rig count, where this kind of asset could get to in terms of the production by that 2017 timeframe, or is that something that you guys will provide later on?

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We'll provide later on, but it can certainly grow as fast as our current Marcellus is growing.

Great, thank you.

The next question comes from the line of Charles Meade of Johnson Rice. Please go ahead with your question.

Good morning, Steve and to the rest of your team there. You touched on this in your prepared remarks, but I wonder if you could speak a little bit more about how this deal evolved and your market view that led you to this. Maybe it was a top down? It sounds like it was top down and you have a feeling about North American natural gas and whether this is a deliberate effort to stay gassy and it represents a departure
for some of your more oil directed new ventures efforts lately.

We've talked about in the past that number one point I talk about, we're going to be disciplined in what we go after and we're going to make good returns, but we're not necessarily worried about making good returns in oil or gas. Having said that for the last two or three years, we've been watching gas prices in particular and even as early as early 2013 we thought that we were at the lows in 2012 and there was a
lot of fundamentals that said it ought to get better going in the future, and we see that. And we're starting to see the evidence of that and it's mainly demand driven and so in this case certainly there's some fundamentals about that, because if you didn't think that gas was something important in the future, you wouldn't look at this asset.
Now the other part that drives this asset is the geology. This is great rock and it's got enough wells in it to show it's good rock. At early development that we have planned, it will be mainly Marcellus because we know more about it, but I think there are a lot of good surprises there heading up in the future just like we had good surprises in Fayetteville, just like really good surprises in the Marcellus.
And then part of your question was how did we come about this, I said in the past that we contact people all the time and look at areas that we would like to get into, and sometimes they're interested in talking to us. Sometimes they're not interested in talking to us. I don't know anything about what they did and what their process was. I can say that we were interested and they knew we were interested.

Got it, that's great added detail, Steve. I was going to ask you about some of the really exciting things that I was going to hold off on that question, because I recognize until you get through this pref right period, you don't want to talk about it too much; but I can tell a lot of us are looking at some of the deeper Utica tests there. I didn't know if that's anything that you could comment on. Whether you evaluated it and whether it's ascribed any value or something you're interested in.

Certainly the Utica on this acreage has not had many tests on it, but as you said there's a lot of very exciting tests around the acreage, and so it was part of the evaluation, but it was also part of what I talked about where we value this on the knowns and then we've got the upside, so that's probably all I'll say on that right now.

Thanks for that, Steve.

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Our next question is from the line of David Kistler with Simmons & Company. Please go ahead with your question.

Good morning, guys. Real quickly, thinking about what this means for capital spending for next year and the possibility of living within cash flow, can you comment on a four to six rig program and what that does to that outlook?

We'll talk more about next year in the future, but as I said, we're committed to get our balance sheet and keep our balance sheet in good order, so we can take advantage of more opportunities, so we're not going to be investing significantly above cash flow as we look out in the future.

Okay, I appreciate that. And then maybe with respect to the overall acreage position if you could break it down on that 413,000 acres for us in terms of what you think is prospective Utica, or Marcellus, Devonian, or at least how you thought about this is the section that we have high confidence in and sets our base case and then all the rest being gravy. That would be helpful.

When you look at geology, that panhandle area of West Virginia is the epicenter for several different zones. As I said before, the one that has most drilling on it today is in the Marcellus and that's what we know most about. That's where we built most of our valuation on. Above that, there are three or four zones in the Devonian that other companies in the area have tested and we have at least as thick, if not better looking zones there. And then when you start getting to the Utica and even potentially deeper than the Utica down the road what we see with the acreage that we have and the wells around us, is that it's very comparable and it would be when you think about it that the upper Devonian is dry gas, the
Marcellus has liquids with it. That's where most of your liquids are and then the Utica will be dry gas.

Thank you.

(Operator instructions.) We ask that you limit yourself to two questions. The next question comes from the line of Bob Christensen with Imperial Capital. Please go ahead with your question.

Yes, congratulations, Steve. The question is what kind of pipeline transportation do you have for the gas and what's lined up for the future to get the gas out of the region? And then same question pertinent to the liquids what kind of arrangements did Chesapeake have and what do you spot for the future?

We'll talk more of the specifics of what pipeline and how much production and what kind of processing that is out there for the liquids. But I'll remind everyone that, that southwest corner of Pennsylvania, Ohio and northern West Virginia was ahead of the game very quickly as we first started seeing Utica development and as Marcellus in Pennsylvania and Ohio. It's got more new projects coming on there than anywhere else in the northeast, so we're going to get a combination from Chesapeake of some of
the older projects that they had in place where they were growing production and had put the contracts in place to help them grow production and then some of this new stuff coming on the next few years. Once we get to a point where we're talking about budgets and the next couple years and those things we'll outline what that farm is and what the process and capabilities are. Rest assured that the five rig
program that we're talking about next year, we're very comfortable that we have the capacity to handle that; and we're very comfortable that we either have, or will have, the capacity to go to that larger rig

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program in 2017. We've built our acquisition parameters on making sure that we could also have the firm
analytic process underneath to handle whatever comes up in the future.

Will you hedge aggressively the current production? It's not that it's that much production, but will that be hedged and will you be in effect hedging some future production even to stabilize the EBITDA of the company, the revenues of the company over the year or so to get it all smoothed out?

We will certainly look at that as part of the way to finance and look at the future. I'll remind everyone that our current production base, again, we're getting 300 million a day on basically 2.1 Bcf a day that we currently have, current production basis hedged about 30% next year. And then when you add that midstream to it and you add the fact that we're very integrated between costs and all of those factors, we're well over 50% hedged now on our cash flow, so we feel comfortable of what our base cash flow; and as you said, the 300 million a day is important and there may be a little bit more hedging, but I don't think it's going to change significantly our current hedging strategy.

If I could just take one more question pertaining to vertical integration, would you have your own drilling rigs there before too long and invest in your own equipment like you did in the Fayetteville and have it working for yourself? Can we expect that in an 11 rig program relatively short order?

You can expect that we will vertically integrate very quickly and I'll just remind everyone we're in the process of upgrading several of our rigs and we have the option and had originally planned to sell some rigs as we upgraded. We have the option now to keep some of those rigs and put them to work in this new acquisition, so we can scale up with some of our equipment very quickly; and we're already looking at how we might do more than just the rig component, but I think over the next 12 months once we get into it, you'll see significant vertical integration in this overall process.

Thank you.

Our next question comes from the line of James Campbell with CalPERS. Please go ahead with your question.

Good morning, gentlemen. Just two questions, first with regards to this acquisition, I'm just wondering if any of the property that is included here has some of the volume metric production payments associated with the December 2007 deal, or is that property excluded from this acquisition?

There is nothing on any of this acreage.

Great, okay.

This acreage is for the most part a combination of those older wells that are HBP with some older leases and some very young leases, but there are no incumbrances; there's no ties back on it to anything that Chesapeake did or didn't do.

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Okay, okay, great. My second question goes back to just the balance sheet and your investment grade rating. I know that earlier you said you didn't want to discuss leverage specifically, but what are some of the factors that you're thinking of in general that give you confidence you're going to be able to keep your investment grade rating going forward?

I don't know that there are factors as much as to say that we're basically believe what's in our cash flow right now as a company, we've got a very, as you know a very low debt ratio to begin with. We've got a lot of capacity from a lot of different directions, so we've got several levers we can pull and in the next 30 to 60 days we'll talk about what those are and how we're going to do that.

Great, thank you.

Thank you. Our next question is from the line of Arun Jayaram with Credit Suisse. Please go ahead with your question.

Good morning, gentlemen. Steve, I like the strategic move, but I wanted to talk to you a little bit about the valuation. It looks like the assets were generating at least over the last 12 months about $350 million of EBITDA, so if you just did that math, it looks like a multiple of around 15 times. So I wanted to get maybe your thoughts on the growth of the asset over time and maybe if you could go through and run through your valuation work and how you thought $5.4 billion was an appropriate value for this transaction.

I can tell you that we didn't worry too much about multiples and I'll give you an example. If I got an exploration success in that first well was drilled and I'm excited about it, I've got an infinite multiple, but I could have a Fayetteville shale behind it, and so this acquisition isn't based on the past. It's based on the future, and we believe there's more than enough potential to grow it and the pace we need to grow to make this valuation look very, very good. That 5 to 11 or 8 program we're talking about we think will do that and you will see significant cash flow in just a few years out of this project.

When do you think, Steve, that this would be an accretive at what time period given the growth outlook do you think this would be accretive?

We'll talk more about that at another time, but again, we're very comfortable you'll see significant growth.

Okay, just my follow-up would be in terms of financing the deal in order to maintain that investment grade rating and some equity would be a part of the financing, what about you have a very valuable midstream piece thinking about your midstream assets, would that be a candidate to think about doing an MLP or some sort of strategic deal with your existing midstream?

I would say it's down the list when we're doing that. There are a lot of ways we could finance this and we'll talk about it when we get ready to finalize the financing, but we believe we can finance it without doing anything with our midstream. And as I said before at midstream we believe it is very important to us and it gives us great returns, so we're excited to have the midstream.

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Okay, thank you very much, Steve.

Our next question is from the line of David Heikkinen of Heikkinen Energy Advisors. Please go ahead with your question.

Steve, that's a perfect segue that I just wanted to see who owns and operates the current midstream , assuming, is there a plan I guess, for you to in source that midstream build-out in the future on these assets.

The Marcellus for the most part is tied to third parties and I won't go into details on who those third parties are. When you start talking about the dry gas component of it, those are not tied to anything and so our midstream has the potential to do something there as well. And again, we're going to do the thing that's the most valuable for our shareholders, so we could do it ourselves. We could get someone else to do it or we do some kind of combination. You've seen us do both. You've seen us do it almost all ourselves in the Fayetteville. You've seen us do a combination in the northeast corner of Pennsylvania, so we'll just work through that and all I'll do is promise it'll be the best value we can for our shareholders.

And then can you talk about just the base decline on the assets? They've been pretty underinvested in for 58 in the second quarter, you talk about 56,000 barrels equivalent today. Any thoughts around base decline would be helpful.

And to tell you the truth that September number was a number they supplied. Our most updated data is, let's say a little bit earlier than that, but I can tell you that there is about a 2% growth from May to September.

Okay. All right, thanks, guys.

Our next question is from the line of Bob Christensen with Imperial Capital. Please go ahead with your question.

Yes, Steve, how many rigs are working on these properties at the moment?

I believe there's at least one working on it today. They have other acreage. They kept all their acreage in Ohio and some other areas, and there are two to three rigs that move in and out of the acreage, but I believe today there's one.

And you say you have a pretty concentrated acreage position in the panhandle of West Virginia. That's been where some of these lately big tests have been for Utica. I know Chesapeake had that well. Were there other Chesapeake wells that tested the Utica that I'm unaware of in the area? In Marshall County I think?

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There's a recently drilled Chesapeake well that I believe is either in the last few days put on production or will be put on production in the near future. Once we get some results on that, we'll talk about it.

Sounds great, thanks.

Our next question is from the line of Scott Hanold of RBC Capital Markets. Please go ahead with your question.

Yes, thanks, good morning, guys. Just a couple of questions, obviously a lot has been asked here, but when you take a look at your portfolio, does this change plans at all on some of the exploration projects you had like in the Sand Wash Basin, Smackover, DJ or New Brunswick?

If it changes slightly, as I say we're still going to do exploration. It may be as part of that making sure we kept investment grade and working any kind of ratios down that we go a little bit slower in exploration, so rather than 10% maybe it's at 7% or 8% of our capital budget, but it's not going to be a significant change in what we're doing exploration wise.

Okay, so looking at these liquid plays still remains a core tenet of what Southwestern wants to do going forward.

Yes, you will see us do exploration forever as long as we're around. There are questions how much you
do year to year and what kind of opportunities you have, but we'll continue doing that.

Okay, and then I'm going to ask another kind of a follow-up on the midstream question. I know you've answered this like five different times in different ways, but maybe I can be a little bit more targeted with my question.

Should we do it six times?

Yes, that's right, six times is a charm. But certainly Chesapeake in the past has discussed this as being an area that's been constrained and so it's not been high on their capital development plans for a bit of time. When you look at your firm capacity, it's good to hear that you guys can run say five rigs next year and still not be constrained. But my sense is that the firm that you got transferred to you by Chesapeake was below what your production is right now, and does that mean you guys have sourced them on your own or used interruptible? And maybe as a quick follow-up, what other constraints do you see to these assets as you look ahead to your development plans?

I'll start with the second part of your question. I don't know about the other constraints that we see. We've built in a lot of risks into our valuation and as I said, we evaluated on what we knew and not on what we were hoping for, so there's a lot of that built in. As far as the future capacity, I don't know anything about whether Chesapeake thought they were constrained or more constrained, but I can tell you that we're comfortable that we have the capacity to grow at the pace that we say we can grow. It certainly is dynamics with this, and part of that dynamics is in commitments that Chesapeake has made

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that will be coming online that they don't have today, but we're comfortable that those will be online, be online at the right time and we'll be able to do it.

Okay, I appreciate that, thanks, guys.

Thank you. Our next question is from the line of Andrew Coleman with Raymond James. Please go ahead with your question.

Good morning and thanks for taking my questions. First one is do you have all the people you need up in the region to roll these properties in?

Yes, we certainly have the skill set throughout the company to add five rigs into the schedule. As a matter of fact if you look back about three years ago, we were running about four to five more rigs than we are running today, so we've got that capacity. As far as the field goes, we will have the opportunity to hire some of the Chesapeake people in the field, so I think we're in good shape in that direction.

Okay, great. And then the second one is I guess as you look at all the, there are some more coal mines in this area. Does that produce any surface issues when you're working with the coal operations, or is that a diminutive piece on the acreage that you purchased?

I don't know if it's a diminutive piece. This is coal country and we will be working on some of the acreage with the coal mines, but Chesapeake has been doing that and they've been doing it very successfully, so we just have to step into those shoes and continue doing it well.

All right, great, thanks so much for taking the questions.

Thank you. (Operator instructions.) Please limit yourself to two questions. Thank you. We'll poll for questions. Thank you, ladies and gentlemen, at this time we have reached the end of our allotted time for questions. I'd like to turn the floor back to Mr. Mueller for closing comments.

Thank you. Obviously we're excited about this acquisition and I talked early on that it fits Southwestern perfectly, and I know you've got a lot of questions, and that goes back to when I talked about the innovation and curiosity. I'm excited about your curiosity. If you'd see us around here, we're excited about our curiosity also; and I think this is going to be a great trip for the investors. It's going to be a great trip for our company and it's going to be providing a great future for us, so I'm excited about the fact that we can innovate together and head on down the road. I look forward to talking to you again next week on our earnings call. With that, we'll close this conference call.

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