The management team of Southwestern Energy Co. sees strengthening natural gas prices on the horizon, as U.S. producers tap the brakes on output and LNG exports continue to rise.
CEO Bill Way hosted a conference call to discuss third quarter results for the natural gas-weighted independent, which operates in the Appalachian Basin and the Haynesville Shale.
“We believe we have materially improved our capital efficiency and positioned the company for enhanced through-the-cycle price realizations with a more moderate go-forward hedging practice,” said Way. “Our progress on these priorities this year has further strengthened the business and positions us for differentiated value capture as we shift towards an improving macro environment driven primarily by growing [liquefied natural gas] demand.”
He added, “We've been encouraged by the industry-wide discipline and activity reductions in response to this year's natural gas prices. Rig counts remain well off their highs from the beginning of the year, particularly in the Haynesville, where rig counts are down approximately 40% year-to-date.
“Given the production profile of wells in the Haynesville, we expect overall Haynesville basin production to decline, at least into early next year, giving us further confidence in a strengthening macro view.”
Meanwhile, “LNG exports are up over 2 Bcf per day year-over-year, recently exceeding 14 Bcf per day, while weather-adjusted power demand is up 2 Bcf a day and exports to Mexico are up almost 1 Bcf a day,” Way said. “These factors have helped to significantly dampen the end-of-season storage surplus, with new LNG in service dates beginning next year.”
Southwestern expects LNG exports to grow to 16 Bcf/d by the end of 2024, with over 90% of that amount located along the Texas and Louisiana Gulf Coast.
Southwestern in 2021 acquired Haynesville pure-play Indigo Natural Resources LLC for $2.7 billion, followed by a $1.85 billion acquisition of GEP Haynesville, then the third-largest private explorer in the Haynesville and Middle Bossier formations.
“When we acquired our Haynesville assets, one of our guiding tenets was firm access to markets of choice,” Way said. “Both of our Haynesville acquisitions included strategic connectivity to advantaged markets along the Gulf Coast, including to LNG, which we increased shortly after closing.
“With a portion of that expanded capacity already in service and additional capacity expected to go into service by next year, we are well positioned to supply the next wave of LNG facilities as the largest current supplier of natural gas to LNG exporters.”
Way said that, “As we look ahead to 2024, we expect new LNG facilities to increase demand throughout the year. However, we believe strip prices are not yet high enough to incentivize production growth.”
As a result, “we intend to continue optimizing free cash flow and capital investment to meet our dual priorities of progressing towards the $3.5 billion top end of our target debt range while maintaining the flexibility and optionality in the business. Our unique asset base provides capital allocation flexibility between basins, commodity windows, as well as assured firm market access.”
Way said that Southwestern aims to hedge 40-60% of its natural gas volumes when heading into a new year to protect against price volatility.
“During the third quarter our basis hedging program helped offset wider Appalachia basis differentials and we expect to continue layering on additional protection for future periods as we look to next year,” Way said. “While commodity prices in 2023 are well off the highs we experienced last year, we have successfully progressed our key enterprise priorities.”
Southwestern is targeting fourth quarter production of 400-420 Bcfe. This compares to output of 425 Bcfe (86% natural gas) recorded in 3Q2023 and 443 Bcfe in 3Q2022.
Appalachia accounted for 262 Bcfe/d of production during the latest quarter, while the Haynesville supplied 163 Bcfe/d.
Southwestern fetched an average realized natural gas price after hedging of $2.13/Mcf, compared to $2.81 a year earlier.
Southwestern’s capital investments totaled $454 million in 3Q2023, versus $543 million in 3Q2022. The company reported net income of $45 million (4 cents/share) for the third quarter, versus a profit of $450 million (40 cents) in the same period last year. Operating revenues plunged to $1.44 billion from $4.54 billion.
