Southwestern Energy : First Quarter 2016 Earnings Teleconference Transcript

V Southwestern Energy Company First Quarter 2016 Earnings Teleconference April 22, 2016

Participants

Michael Hancock - IR Bill Way - CEO Craig Owen - CFO Randy Curry - SVP Midstream Paul Geiger - SVP Southwest Appalachia Division

Analysts

Neil Dingmann - SunTrust Michael Rowe - Tudor, Pickering, Holt Charles Meade - Johnson Rice Subash Chandra - Guggenheim Partners Brian Singer - Goldman Sachs Holly Stewart - Scotia, Howard, Weil John Abbott - Bank of America Merrill Lynch Bob Christensen - Drexel Hamilton Jeffrey Campbell - Tuohy Brothers James Spicer - Wells Fargo Marshall Carver - Heikkinen Energy Advisors

Presentation

Operator

Greetings and welcome to the Southwestern Energy Company's First Quarter 2016 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 any additional questions. (Operator instructions.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Michael Hancock, Director of Investor Relations for Southwestern Energy Company.

Michael Hancock - IR

Thank you Rob. Good morning and thank all of you for joining us today. With me today are Bill Way, our President and Chief Executive Officer; Craig Owen, our Chief Financial Officer; Randy Curry, Our Senior Vice President of Midstream; and Paul Geiger, Our Senior Vice President of our Southwest Appalachia Division.

If you've not received a copy of last night's press release regarding our first quarter 2016 financial and operating results, you can find a copy on our website at swn.com.

Also, I would 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 which are beyond our control and are discussed in more detail in the risk factors and the forward-looking statements 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.

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

Bill Way - CEO

Good morning everyone. Before we get started, parts of the Greater Houston area, which is our home here at Southwestern Energy have experienced some epic flooding and it continues to impact the city. I just ask you all to keep people of the Greater Houston area in your hearts and minds and ask you all on the call to support any kind of relief efforts through your time or your treasure. Lots of the energy companies in the United States are

headquartered here, and it's impacting a lot of folks. So please keep them, again, in your minds and help out where you can.

When I look at to the company at the moment, on our last call I walked through our strategic initiatives for this year and discussed how we would proactively drive through the current price environment to strengthen and cross the bridge to the future. As you read in last night's press release, we are delivering on that plan that we laid out. The first quarter demonstrated our focus and our resolve to deliver results as we exceed guidance on production volumes and delivered better margins than anticipated through production enhancements and cost savings initiatives.

Our results are demonstrating a number of reasons to be confident about investing in Southwestern Energy. I would like to take a few minutes and walk through few of those this morning with you. Much of the gas price challenge being faced today is largely the result of the impact of one of the warmest winters on record. There are a number of sign posts, however, indicating that the macro picture is changing and that a commodity price improvement may not be far away.

With an over $45 billion reduction in industry wide capital investments compared to 2015, a supply response, potentially significant, is underway in the industry. In the Marcellus and Utica areas alone where some of the best dry gas rock is located, there were over 90 rigs running in the Northeast in 2015, while today there are fewer than

40. This pattern has repeated itself across the country and, in many cases, even more extreme level than in the Northeast.

The recent EIA data released shows production in January of 2016 has flattened remaining at levels back from in the summer of 2015. With these results being from very early 2016, the supply slowdown largely does not factor in the impacts of the 60% reduction in capital investment from last year. As we all know, it takes time for this investment slowdown to demonstrate its impact on the supply, and in our view this means the supply decline will likely even be greater as we move through the year. Recent data is estimating that the current U.S. dry gas production is lower year-over-year by over 1 Bcf per day for the month of April so far. The slowing supply is coming at a time when a strong demand story is no longer just a vision but is a visible reality. For years the industry has discussed the upcoming LNG facilities, coal plant retirements, petrochemical expansions and pipeline exports. In 2016, we're seeing these materialize and tangibly increase U.S. demand.

With Cheniere's Sabine Pass LNG terminal now up and running, incremental demand is online and forecasted to increase to over 1 Bcf per day by the end of 2016. Recent data also continues to show Mexican imports increasing, with these exports now totaling over 3.5 Bcf per day. This is up over 1.5 Bcf per day from 2015 levels. Another key source of the growing demand is power generation, where coal plant retirements and increasing gas fired power demand are forecasted to increase demand by over 2 Bcf per day by the end of the year.

In addition to the improving macro position, another reason to be confident about Southwestern Energy is the progress being made on the strategic initiatives we've previously discussed that will set us up for differentiating value adding growth when commodity prices do recover. Just a few months into the year we are well on our way to delivering on that plan as we promised. I appreciate you all have keen interest in the options being considered, whether that is in maintaining our already strong liquidity position, managing our balance sheet or our asset sales efforts. Please allow us to continue to work on these.

As I've commented to you before and have committed to you before, at the appropriate time we will talk in detail about the actions we have already taken to strengthen the balance sheet, and be assured we've made good progress and our resolve to complete this work is clear as recently demonstrated by the tangible steps we took in the first quarter to maximize each of the available options to address strengthening the balance sheet and again, we will discuss the pertinent options as we complete them throughout the year.

Another key contributor to our confidence surrounding the company is associated with our ability to drive cost out of the system since we last spoke. Consistent with our historical approach of driving down costs, in less than two months since our call we've identified an additional $40 million of 2016 cost savings. This is in addition to the

$200 million previously disclosed. As we continue to look for ways to expand this number, Paul will discuss some

of the main contributors to these savings to date in a few moments, but each area in the company has found ways to enhance their margins in the first quarter of 2016.

Finally, I'm confident that with our vertical integration we stand ready to respond as commodity prices support additional investment activity. Owning our own rig fleet and completion equipment and having terrific teams to manage them will allow us the ability to bring wells to sales very quickly as market conditions warrant.

Now let me turn over to Craig to discuss some of our financial highlights, and he will be followed by Paul, who will discuss some of our operational highlights for the first quarter.

Craig Owen - CFO

Thanks, Bill, and good morning, everyone. As Bill mentioned, we had a strong quarter, exceeding the guidance we released in February and are making progress on each of the strategic initiatives we outlined at that time.

One of the key focus items was to strengthen our balance sheet. In the first quarter we maintained our emphasis on liquidity by adjusting our activity level with cash flow. Our net cash flow was $147 million, while our capital investments were $122 million in the quarter. This demonstrates our differentiating capital discipline. We also enhanced our liquidity with a decision to pay our April preferred dividend in common shares, preserving $27 million in cash.

We used our strong liquidity position to temporarily borrow $1.55 billion at the end of the quarter to maximize our secured and subsidiary debt capacity. This entire amount was paid back in full on April 1st. We appreciate that there are many questions and heightened interest regarding our plans if any to utilize this secured and subsidiary debt capacity to address our debt maturities; however, and as Bill mentioned, we will not be addressing further details or specifics on what we are considering, possible terms, status of discussions or anything else on the topic today.

Another component of strengthening the balance sheet includes potential asset sales. As the press release noted last night, our asset sales process is continuing. As bids are received we will make a decision on which assets sales make the most sense to move forward with as an option to address our debt levels. We will update you more as these decisions are finalized.

In an effort to further protect the balance sheet in this challenging commodity price environment, we were also able to add commodity hedges in the first quarter. We now have hedges for 107 Bcf or approximately 20% of our estimated 2016 remaining production, utilizing a combination of swaps and puts at an average price of $2.43.

Approximately 100 Bcf of this amount covers April to October production when we see commodity remaining most challenged, as storage levels are worked back toward normal ranges. We will continue to monitor market conditions and look for opportunities to add to our hedge portfolio.

I'll now turn over to Paul to discuss a few of the first quarter operating highlights.

Paul Geiger - SVP Southwest Appalachia Division

Thanks, Craig, and good morning, everyone. I'll briefly run through some of our first quarter activities for our E&P and Midstream businesses. We completed 9 wells and brought 12 wells to sales. We expect to place an additional 11 wells to sales in the second quarter.

As Bill mentioned earlier, one of our key focus areas during the first three months of 2016 has been an aggressive pursuit of margin enhancements. This emphasis has been placed on both the revenue side and cost side of margin. On the revenue side, we exceeded the top end of our production guidance by 2 Bcfe as a result of our production enhancement efforts in the first quarter. This was the result of a number of initiatives, including the increased production from compression and gathering system optimization projects. Also, across the company strong well performance resulted in a shallower decline of our base production than previously estimated.

In Southwest Appalachia, we placed seven wells to sales in 2015 with lateral lengths over 10,000 feet. The declines on these wells continue to outperform offset wells in the area, and we are learning a lot from the performance of these wells that will be applied in future drilling to enhance value. Another example of

outperformance is the Alice Edge pad, which was brought online in November 2015. This pad is currently producing 85 million cubic feet equivalent per day from 9 wells after almost 5 months of production.

In addition to production improvements, we have realized over $15 million of operating expense savings in the first quarter through a review of operational practices, vendor usage and contract terms. This savings is in addition to the more than $35 million in annual savings associated with the gathering contract changes that were finalized early in the first quarter. With this focus on cost reductions, our E&P cash costs, which include LOE, G&A and taxes other than income taxes, decrease to $1.15 per Mcfe for the first quarter of '16 as compared to

$1.28 per Mcfe in the first quarter of 2015. In the first quarter we were able to reduce our water handling cost through reduced contractual rates with our vendors and by finding more efficient routes to move water.

In Midstream, we are finding ways to further optimize our compressor fleet to align with production level changes. In the first quarter we realize $4 million in savings primarily through equipment and maintenance optimization. As a result of these and other efforts we have identified over $40 million in expected annual savings for 2016.

The company's differentiating firm transportation and sales portfolio once again provided tangible benefits. For the first quarter of 2016, our Appalachia firm transportation and sales portfolio added over $30 million in value compared to selling produced volumes into local production area indices. In addition to the pricing benefits we receive from our own natural gas, we were able to utilize some of the unused capacity within our firm transportation portfolio to generate additional margin. Our Appalachian transportation and sales portfolio will continue to be an asset that we leverage as we move forward. As a remainder, in Northeast Appalachia, we have built an outstanding firm transportation portfolio that allows us to move our gas to multiple markets with volume and term flexibility.

Another way we are working to create value plus in today's environment is by focusing on increasing our learnings from historical drilling and completion techniques and results. For example, our teams are redrilling wells on paper to identify improvement opportunities and fine tune their geologic models to further increase the efficiency of future drilling activities. With these learnings, the company expects to further optimize our well economics and to add shareholder value.

That concludes today's prepared comments. We will now turn it back to the operator, who we explain the procedure for asking questions.

Operator

We will be now conducting a question-and-answer session. (Operator instructions.) Our first question comes from the line of Neil Dingmann with SunTrust. Please go ahead with your questions.

Q: Nice quarter considering the environment out there. Bill, just a couple of questions. First on the 10,000 foot, it sounds like listening to you guys that the economics are really improving on those. I'm looking at the slide that kind of breaks out the number of locations. I guess two questions around the 10,000 footers. I mean is that the direction you're headed to do much more of those and if so, how should we think about locations if that's going to be sort of the protocol?

Bill Way - CEO

Good morning. Thanks for the question. I think initially we are looking at these 10,000, and we have some actually that are up to 12,000 foot in length. We've successfully been able to drill and complete them, bring them online. We want to do some operating and flow testing and get some production history under our belts to make sure that from a stage contribution perspective as well as overall well perspective that our theory that it makes sense to do those longer laterals is in fact true. Once we get a little production history behind us then we can know. We've done economics back in forth to make sure that we're comparing apples to apples in wells. Our models are all built on 7,500 foot lateral lengths, and so there is an opportunity to improve efficiency and capital efficiency in that program should these actually be the length that we choose.

Q: Got it, and then just one last one if I could. Obviously you've got a great locations status out there now after the acquisition and everything that you guys have. What's your thoughts looking at West Virginia, thinking about drilling some Utica there? Is it more just weighing on take-away or I guess maybe a better way to say that is just