Southwestern Energy : 3rd Quarter Earnings Teleconference Transcript

Participants

Michael Hancock - Vice President of Investor Relations Bill Way - President and Chief Executive Officer Jennifer Stewart - Chief Financial Officer

Jack Bergeron - Senior Vice President of Operations

Jason Kurtz - Vice President of Marketing and Transportation David Cecil - Executive Vice President of Corporate Development Paul Geiger - Senior Vice President of SWN Advance

Analysts

Charles Meade - Johnson Rice Arun Jayaram - JPMorgan

Kashy Harrison - Simmons Piper Jaffray David Deckelbaum - KeyBanc Capital Markets Josh Silverstein - Wolfe Research

Michael McAllister - MUFG Securities James Spicer - Wells Fargo

John Abbott - Bank of America Brian Singer - Goldman Sachs Scott Hanold - RBC Capital Markets

Presentation

Greetings, and welcome to the Southwestern Energy Company Third Quarter 2017 Earnings Teleconference 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 Michael Hancock, Vice President of Investor Relations for Southwestern Energy Company.

Thank you, Tim. Good morning, and thank you for joining us today. With me today are Bill Way, our President and Chief Executive Officer; Jennifer Stewart, our Chief Financial Officer; Jason Kurtz, our Vice President of Marketing and Transportation; Jack Bergeron, our Senior Vice President of Operations; Paul Geiger, our Senior Vice President of SWN Advance; and David Cecil, Executive Vice President of Corporate Development.

If you've not received last night's press release regarding our third quarter 2017 financial and operating results, you can find it 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 that involve risks and uncertainties affecting outcomes. Many of these are beyond our control and are discussed in more detail in the risk factors and the forward-looking statement section of our annual and quarterly filings with the Securities and Exchange Commission.

Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance and actual results or developments may differ materially. We may also refer to some non- GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non-GAAP

measures we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release available on our website.

I'll now turn the call over to Bill Way to discuss our results and recent activity.

Thank you, Michael. Good morning, everyone, and thank you for joining us. We're delighted to be here today to discuss the strong third quarter results we disclosed in last night's press release and 10-Q. These results emanate from our strategy of focused, risk-adjusted value growth and continued the trend of delivering on the commitments we laid out earlier in the year.

Our strategy consists of five key elements that define who we are as a company and how we are delivering value. First, we have premier quality, large scale, and long-life assets. We leverage the quality, scale and diversity in this portfolio, along with the leading performance from our vertical integration and operational teams, to enhance the economics of each investment and of the deep inventory of future value-adding projects in our company.

Second, we demonstrate rigorous financial discipline. We invest within cash flow and backstop the economics we commit to deliver for each project through our risk management program to protect cash flows and investment returns while retaining a large portion of the upside should commodity prices or basis improve.

Third, we have a stringent value-focused capital allocation process where we require each $1 invested to create at least a $1.30 of present value discounted at 10%, and we prioritize those investments by where we see the highest value added. We utilize strip pricing for economic analysis because we can hedge the strip, bringing greater transparency to the performance against commitments of our investment program.

Fourth, we are increasing capital efficiency and margin expansion across the portfolio. We are laser-focused on delivering the full potential value from our assets and continue to add to the list of numerous accomplishments in this arena, including strategic negotiations of third-party contracts to improve margin, technical and operating improvements in the way we drill and complete wells to drive down F&D cost, and operational process improvements including water handling and flow-back optimization, all of which are contributing material savings to both our individual well costs and to the company. Jack will discuss a couple of new additional items that will improve margins even further in a few moments.

And finally, our leading technology, operating and commercial capabilities allow us to stay on the front line of innovation. This has been evidenced by the leading completion testing in the Appalachia Basin, along with our drilling technology advancement from our company-owned drilling rigs, which has resulted in the achievement of significantly higher percentage of wells being placed nearly 100% in a targeted zone while setting lateral length records for SWN. Both of these are major contributors to the step change in well performance we have delivered this year and our operational and financial results are clearly demonstrating the effectiveness of this strategy.

While the focus on returns and capital discipline has recently started getting more attention in the industry, this is not a new concept for us, but rather it defines who we are, and we will continue the returns-focused culture that we believe so strongly in and consistently demonstrate. As you should have come to expect, this disciplined return-focused culture will be at the core of our 2018 plans as well. We'll discuss the detailed plan in February once we see how the winter impacts 2018 commodity prices, so we can be sure to align projected activity with projected cash flows. But our approach is clear. We will invest within cash flow and allocate capital to the highest returning projects, and production will be an outcome of our drive for improving value creation.

Let me briefly touch on a few third quarter highlights. In the third quarter, we delivered 5% of sequential value- adding production growth, once again within guidance range we provided in February, despite one-off gathering and transportation challenges from third-party providers. We partially mitigated the impacts from the downed compressor station we discussed in August and downtime associated with three days of unplanned maintenance on one of our long-haul transportation third-party pipelines.

Flexibility in our leading transportation portfolio also helped us limit the impact of these two challenges on this quarter's production volumes, and we still hit guidance. As we mentioned previously, these were one-off issues and are no longer needing attention.

We ended the quarter with a strong finish. We achieved a record gross daily exit production rate in the Appalachian Basin of almost 2.4 billion cubic feet equivalent per day. This included over 1.4 Bcf per day from the Northeast Appalachia assets and 958 million cubic feet equivalent per day from the Southwest Appalachia assets. The momentum we've built in these two assets positions us for a strong finish to 2017.

Price realizations have received a lot of attention recently from the investment community as new infrastructure in-service dates move around. However, the combination of our diversified transport portfolio, our basis hedges and our people mitigate the risk for Southwestern when compared to peers. Despite the delays in some of the larger new pipelines, our combined Appalachia differentials were $0.05 per Mcf better during the third quarter compared to the same period in 2016, and this is in addition to the $0.09 of financial basis hedge gains that were realized in Northeast Appalachia in the quarter.

Looking forward to the fourth quarter, in Northeast Appalachia, basis differentials continue to be a challenge for many, but we have substantial basis hedges in place for October and the fourth quarter, which we expect to have positive impact of approximately $0.40 per Mcf and $0.11 per Mcf for October and the fourth quarter, respectively. In line with our risk management process, we continue to add basis hedges moving into 2018 to align our basis hedge protection with our commodity hedge protection. Jennifer will speak to you about the next steps we took on our liability management plan to strengthen our liquidity and balance sheet strength.

Looking forward, we're excited about delivering the value that we continue to unlock through our continuous capital efficiency and margin enhancement drive. We have a clear path to further improving well economics and driving additional value out of each investment that is made.

Our core focus remains to improve economic contribution of every $1 we invest, which strengthens the economic value and investment returns of our vast inventory and drives growth through the value-generating capability of our investments.

Let me now turn over to Jennifer, who'll discuss some highlights for the quarter.

Thanks, Bill, and good morning, everyone. We had another strong quarter as we continue to focus on improving margins and providing meaningful corporate-level returns. We generated $248 million in net cash flow, a 43% increase compared to the third quarter of 2016. This increase was primarily the result of positioning ourselves to take advantage of improving commodity prices, with liquids providing a $0.14 per Mcfe price uplift compared to a

$0.01 per Mcfe uplift in the third quarter of 2016.

Our total NGL barrel realizations, inclusive of transportation charges, was $14.47 per barrel, or 30% of WTI, up 105% compared to the third quarter of 2016. These realizations were a record high for our Southwest Appalachia asset, and we believe these should continue to improve as incremental demand for NGLs increase.

As Bill mentioned, financial discipline is a core tenet of our strategy. We took meaningful liability management steps this quarter by opportunistically extending our maturities in an attractive debt capital markets environment. In September, the company improved its debt maturity profile through a $1.2 billion notes offering and tender offer for our 2020 notes. The successful offering was used to fully repay our $327 million unsecured term loan and retire 89% of our 2020 notes, leaving only $92 million of bond debt due before 2022.

This is important. Our secured term loan that matures in 2020 contains a springing maturity feature. It requires if we do not retire or refinance 90% of our 2020 notes prior to the fall of 2019, the maturity springs to 2019. With this successful tender of 89% of the 2020 notes, we are within approximately $7 million of eliminating this springing maturity, which we can easily address in the near future. Additionally, we and our banks modified

covenants in our existing credit facility, which include the easing of liquidity requirements if certain thresholds are met.

We continue to add to our hedge portfolio as part of our commitment to ensure economic returns on our capital investment. As of October 24th, we had 473 Bcf of our 2018 production hedged at an average swap or purchased put strike price of approximately $3, with upside exposure up to $3.39 per Mcf on approximately 62% of those protected volumes. The company also had 165 Bcf of 2019 production hedged at an average swap or purchased put strike price of approximately $2.97, with upside exposure up to $3.32 on approximately 66% of those protected volumes. Our 2018 and 2019 positions continue to be predominantly collars in order to retain upside exposure to expected improvements in commodity prices.

I'll now turn it over to Jack for an operational update.

Thanks, Jennifer, and good morning, everyone. In the third quarter, we invested approximately $320 million in our E&P business and reached many operational milestones across the company. For example, in Southwest Appalachia, we achieved record drilling times, drilling over 6,200 feet in a 24-hour period while drilling 100% in our 10- to 15-foot target zone. The team continues to focus on cycle time reduction to maximize capital efficiency.

Additionally, as Bill mentioned earlier, we had a record gross exit production rate in the Appalachian Basin of almost 2.4 billion cubic feet equivalent a day, an increase of over 40% compared to the third quarter of 2016. Across the portfolio we continue to look for opportunity to expand margins and increase capital efficiency, thereby increasing the value of our inventory.

In the third quarter, we finalized several commercial development projects that will provide significant long-term value enhancement. In Southwest Appalachia, we commenced a water infrastructure project throughout our West Virginia Panhandle acreage that is expected to generate savings of approximately $500,000 per well beginning in late 2018. This project increases our operational flexibility and will reduce the breakeven gas price economics by approximately $0.25 per Mcf.

We also finalized an agreement that expanded our wet gas Marcellus processing capacity in Marshall and Wetzel counties in West Virginia that will provide capacity up to 660 net million cubic feet per day at immediately reduced processing rates. This agreement also provides connectivity options to several premium gas outlets and NGL hubs while reducing gathering fees.

Combined with our enhanced completion designs, these improvements are expected to create significant long- term value, and will increase the net present value for each well by approximately $2.8 million, with large upside remaining still, on over 900 wet Marcellus wells in the Panhandle of West Virginia. This agreement also provides gathering services for our future Utica development in the southern portion of the West Virginia Panhandle at very competitive rates.

In Fayetteville, we announced the successful renegotiation of our firm transportation agreement, which remains subject to FERC approval. This agreement is expected to provide savings of $70 million from 2017 through 2020, through the reduction of current excess capacity. The savings in 2018 alone are estimated to be approximately

$45 million. Additionally, this secures flexible takeaway capacity beginning in 2021 at $0.10 per MMBtu, a 60% reduction compared to the current average rates.

We also continued our delineation efforts across the portfolio in the third quarter with encouraging results in each asset. In Northeast Appalachia, the company placed its first four-well development pad to sales in Tioga County, with a combined maximum rate of over 80 million cubic feet per day flowing against 1,200 PSI of line pressure.

The performance of this pad demonstrates the high quality of this previously undeveloped acreage and continues our drive to lower the economic threshold of our inventory. Based on the successful results we've seen there to- date, the company plans to place two additional wells to sales in the fourth quarter with additional development across the approximately 28,000 acres in 2018.