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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 22, 2002
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SOUTHWESTERN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Arkansas 1 - 8246 71-0205415
(State of incorporation (Commission (I.R.S. Employer
or organization) File Number) Identification No.)
2350 N. Sam Houston Pkwy., E., Suite 300, Houston, Texas 77032
(Address of principal executive offices, including zip code)
(281) 618-4700
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year; if changed
since last report)
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-1-
Item 7.(c)
Exhibits Reference
(99.1) Conference Call Summary dated April 22, 2002. p. 3 - 9
Item 9.
Regulation FD Disclosures
Southwestern Energy Company is furnishing under Item 9 of this Current
Report on Form 8-K the information included as exhibit 99.1 to this report.
Note: The information in this report (including the exhibit) is furnished
pursuant to Item 9 and shall not be deemed to be "filed" for the purposes of
Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the
liabilities of that section. This report will not be deemed an admission as to
the materiality of any information in the report that is required to be
disclosed solely by Regulation FD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHWESTERN ENERGY COMPANY
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Registrant
DATE: April 23, 2002 BY: /s/ GREG D. KERLEY
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Greg D. Kerley
Executive Vice President
and Chief Financial Officer
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Southwestern Energy Company Conference Call Summary
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2002 First Quarter Results Cponference Call
Monday, April 22, 2002
Chaired by
Harold Korell
President and Chief Executive Officer
Korell: Good morning, and thank you for joining us today. With
me are Richard Lane, our Executive Vice President of
Exploration and Production, and Greg Kerley, our Chief
Financial Officer. After some preliminary comments, I'll turn
the floor over to Richard for an update of our E&P operations
and then to Greg for comments on our financial results. After
that we will be available for questions.
If you have not received a copy of the press release
announcing our first quarter results, you can call Carole Ann
at 281-618-4710, and she'll fax a copy to you. Also our
attorneys have asked that I point out that some of the
comments during this teleconference may be regarded as forward
looking statements that involve risks and uncertainties, which
are detailed in the Company's Securities and Exchange
Commission filings. While we believe they are reasonable
representations of the Company's expected performance, actual
results could differ materially.
Well, how did we do in the first quarter 2002? From a drilling
standpoint the quarter would appear slow. We participated in
13 gross wells in the first quarter of 2002 versus 32 gross
wells in the first quarter of 2001. Oil and gas prices clearly
had an impact on our activity level. We drilled less wells in
the Arkoma, but continued drilling at a measured pace in our
other operating areas.
Although we began the year with an E&P budget of $61 million,
as prices have firmed and costs associated with drilling have
come down, we're feeling some pressure to increase our budget
to allow for additional drilling in our Overton Field in East
Texas.
With regard to results, our focus on growing organically
through the drill bit yielded a 15% growth in production in
the first quarter compared to the same period last year. We
reported solid financial results for the quarter; however,
they were down from the same period last year as a result of
significantly lower commodity prices.
Overall I'm very pleased with our first quarter results. They
confirm the fact that our formula is working. I also believe
we're beginning to stand out from the rest of our peers,
primarily because of our focus on value added per dollar
invested. We continue to believe that the long-term
fundamentals for the natural gas market are very strong, and
that our overall strategy will leave us well positioned to
benefit from it.
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Southwestern Energy Company 2002 First Quarter Earnings Conference Call
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That concludes my comments. I will now turn the conference
over to Richard for an update of our E&P operations.
Lane: Thank you Harold, and good morning. In the first quarter
of 2002, we continued to achieve good operating results from
our active exploration and development programs in the Arkoma
and Permian basin, East Texas, and South Louisiana. Production
for the quarter was 10.3 Bcfe, a 15% increase over the 9.0
Bcfe we produced in the first quarter of 2001. The daily
production rate in the first quarter was 115 Mmcfepd, up
slightly from the average rate in the fourth quarter of 2002.
In total we participated in 13 wells that were spud during the
first quarter. Of these, 7 were successful and 5 were in
progress at the end of the quarter.
We participated in just two wells in the Arkoma basin in the
first quarter. However, with the improvement in gas prices,
our activity in the Arkoma basin has increased significantly.
We're beginning to see both more non-operated well proposals
and increased participation in our operated wells. The Hunt
#1-10 well in our Ranger Anticline Area of Yell County,
Arkansas was drilled, and penetrated over 100 feet of Upper
Borum pay at a depth of approximately 4,200 feet. Two zones in
the well tested at a combined rate of 3.6 Mmcfpd. Southwestern
operates this well with a 77% working interest. We currently
have four rigs drilling in the Basin now. Although our
drilling activity in the first quarter was reduced, we have
continued to aggressively pursue our workover program. To date
in 2002 we have performed 13 workovers and have realized a net
production increase of 4.6 Mmcfpd. One workover of note is the
stimulation of our Currier #1-35 well. Gross production from
this well has increased from 125 Mcfpd to over 1 Mmcfpd as a
result of the workover.
In the Permian Basin, we made a discovery at our North Roepke
Prospect in Crane County, Texas. This prospect is located 5
miles northwest of our 2001 earlier Roepke discovery. The
Cowden Ranch "58" #1 was drilled to a total depth of 7,960
feet, and was completed in a Lower Devonian at a depth of
7,600 feet. We operate this well, which tested at a rate of
119 Bopd, and have an 88% working interest. Pending additional
evaluation, we may have offset development locations to the
"58" #1 well. Additionally, we are currently drilling at about
5,000 feet at our Empire Deep Prospect located in Eddy County,
New Mexico. Southwestern operates this well, targeting the
Morrow formation at 11,000 feet, with a 50% working interest.
At our Overton Field in Smith County, Texas, we have continued
our very successful development drilling program. In the first
quarter we drilled 5 wells, of which 4 were successful and 1
was still in progress. Included in this well count is the
second well that we drilled on our South Overton farm-in
acreage. The results from Overton continue to be very
encouraging. We surpassed an important milestone last week
with our gross production from the field exceeding 20 Mmcfpd.
Our high working interest and net revenue interest in this
area make it a significant contributor to our overall effort.
We have also realized a significant reduction in drilling
costs at Overton. Current costs are approximately 25 to 30
percent lower than they were at their peak in mid-2001. This
reduction is due to a combination of lower service costs, and
our continuing improvements in operating time required to
drill and complete these wells. We have agreements with
several of our primary vendors to provide their services at
current rates for the remainder of 2002.
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Southwestern Energy Company 2002 First Quarter Earnings Conference Call
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At our last teleconference in February, I reported that we had
just made a discovery at our Crowne prospect in Cameron
Parish, Louisiana. The Miami Corporation #27-1, the test well
for the prospect was put on production in February and is
currently producing 12.2 Mmcfpd, 42 Bopd, with a flowing
tubing pressure of 8,450 Psi. An offset well, the Miami
Corporation #34-2 drilled during the first quarter to extend
this discovery, did not penetrate the objective sand. This
well has been temporarily abandoned and we are evaluating the
possibility of sidetracking the well. Southwestern operates
the Crowne wells with a 40% working interest.
In March, we commenced drilling operations on our Tulleymore
Prospect, also located in Cameron Parish. This exploratory
test, which we operate with a 40% working interest, reached
total depth of 12,600 feet earlier this week. The well did not
encounter commercial quantities of gas in the objective
Planulina sand and is being plugged and abandoned.
We have begun acquisition of our 140 square mile Duck Lake 3D
project in St. Mary and St. Martin Parishes adjacent to
previously successful exploration areas for Southwestern.
Southwestern is operating this shoot with a 50% working
interest. It is anticipated that the seismic data will be
delivered for interpretation during the fourth quarter of
2002. We expect that this shoot will lead to a number of
exploration prospects that we will begin to test in 2003.
In summary, we are pleased with the results of our
year-to-date 2002 E&P program. We achieved strong operating
results as demonstrated by the year-on-year 15% increase in
production rates. We have set a goal to reduce our overall
operating cost per Mcfe over last year's levels, and we're
already seeing progress. Operating expenses in the first
quarter were $0.43/Mcfe as compared to $0.51/Mcfe in the first
quarter of 2001, and $0.45/Mcfe for the full year 2001. We
continue to have a strong inventory of internally generated
drilling prospects in our core area, and continue to evaluate
new areas for additional future growth. Our focus continues to
be on maximizing the value of every dollar we invest, while
building our production and reserve base.
I will now turn the teleconference over to Greg Kerley who
will discuss some of the Company's financial information.
Kerley: Thank you, Richard, and good morning. As Harold
indicated, we had solid financial results for the quarter;
however, they were down from the same period last year as a
result of significantly lower c ommodity prices. We reported
net income of $6.7 million, or $0.26 per share for the quarter
as compared to $16 million, or $0.63 per share for the same
period last year. Cash flow from operating activities before
working capital changes was $25.9 million compared to $38.6
million for the first quarter of 2001.
Operating income for the exploration and production segment
was $7.3 million, down from $22 million for the same period
last year. The reduction in operating income resulted
primarily from lower oil and gas prices, which were partially
offset by our increase in production. We realized an average
gas price of $2.76 per Mcf in the first quarter, which was 38%
lower than our realized price for the same period in 2001.
With commodity prices strengthening in the last few weeks,
we've taken the opportunity to increase our hedge position to
approximately 72% of our remaining 2002 gas production.
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Southwestern Energy Company 2002 First Quarter Earnings Conference Call
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Our hedges have the effect of placing an average floor price
of approximately $3.00 per Mcf on a little over 21 Bcf of our
production for the remainder of 2002, but still leaving room
for upside on the unhedged volumes and the collared volumes.
Our detailed hedge position is available on our web page and
is also included in our Form 10-Q filed at the end of last
week.
Our E&P segment continues to benefit from very low production
and operating costs. Lifting costs on an equivalent unit of
production basis were $0.43 per Mcf for the quarter, down from
$0.51 per Mcf in the first quarter of 2001. Our production
taxes also decreased during the quarter to $0.15 per Mcf, down
from $0.23 per Mcf for the same period last year.
Depreciation, depletion and amortization expense for the E&P
segment was up in the first quarter due to our higher
production volumes and a higher amortization rate. The
amortization rate for the full cost pool averaged $1.16 per
Mcfe in the first quarter compared to $1.08 per Mcfe in the
prior year period.
Our gas distribution segment reported operating income of $8.7
million in the first quarter of 2002, compared to $9.4 million
in the first quarter of 2001. The decrease in operating income
was primarily due to warmer weather, which was 5 percent
warmer than both normal and the prior year.
Our energy marketing efforts also provided $800,000 in
operating income during the first quarter compared to $1.1
million for the same period last year. We were able to pay
down approximately $7 million of debt during the quarter and
our interest expense decreased 20 percent during the period
due to our lower average borrowings and our lower average
interest rate.
Our capital investments totaled $21.4 million for the first
three months of 2002, including $19.9 million of exploration
and development expenditures.
That concludes my comments and now we'll turn back to the
operator who will explain the procedure for asking questions.
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Questions and Answers
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1. Harold I know you mentioned that you might be increasing the
budget. When do you think you'll be firming those numbers?
Korell: When we get convinced that we should, I guess is the
real answer to that, and I would say that as we speak, we're
increasing it incrementally because we're continuing with one
drilling rig running at Overton. So although we haven't
announced anything specific, any increase in capital would
likely be related to continued drilling at Overton.
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Southwestern Energy Company 2002 First Quarter Earnings Conference Call
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2. The second question actually relates to Overton. The new wells
that you are drilling out there, is that with the minority
interest partnership still?
Korell: No sir, that was drilled up last year. The 14 wells
that we had in that partnership ended with last year's
drilling. So the drilling we're doing this year is not within
the partnership. It's entirely on our interest.
3. One final question regarding the Crowne drilling. I know you
had several wells targeted for that area. With the results of
the offset well, does that change your time-line or the
outlook for that area?
Korell: Basically, some people might have called the second
well we drilled at Crowne a development well, although we were
moving along on strike into its southerly, southwesterly
direction. The results of the second Crowne well will affect
that location only. It won't affect our activity at Cameron
Prairie shoot itself. We have five or six more wells planned
to be drilled within that shoot that are totally independent
of this second well we drilled, specifically at Crowne.
4. Farm-in acreage at South Overton. Richard, you mentioned the
one well that you drilled there. With the size of the acreage,
how many wells will you have to put down on that area to
outline it and start feeling this is as low risk as the other
Overton areas that you've successfully drilled?
Lane: Well, you'll recall we did drill one there last year as
well that was successful. One of the first quarter wells, as
you said, was on that acreage, so we now have two good wells
on that acreage. We have farmed-in approximately 5,800 acres
at South Overton. In terms of how many wells it will take to
get the same kind of comfort level we have to the north there
in Overton, the circumstances are similar to what they were
when we started on Overton in that each unit was a 640 acre
unit and already had a well in it. So if you think about it,
it's sampled consistently across the acreage. So I think we're
close to being there now in terms of our level of confidence
in the southern area. We'll do probably two to three more
wells on that acreage during 2002.
In our south Louisiana area, the primary thing that you'll
want to keep an eye on there is that you are generating
quality prospects and that you've appropriately assessed risk.
The size of those are large enough to where accurately
assessing risk is more important almost than price. The
Permian Basin would be the area that we'd need to keep the
closest eye on, because the finding costs tend to be a little
higher there for us and the operating costs are higher than
the Arkoma Basin.
At Overton, the reserves that we're finding there make that a
project that we're excited about drilling on at these price
levels. So, overall we're really not changing our capital
plan.
5. Could you give us a roadmap or schedule of the exploration
wells-- the high impact wells? I know it's fluid but give us a
schedule of what we should be watching for over the next two
or so quarters?
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Southwestern Energy Company 2002 First Quarter Earnings Conference Call
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Lane: In South Louisiana the wells that we have queued up for
the second quarter include our Belmont, Piedmont, and
Bushmills prospects. Piedmont and Bushmills are certainly the
ones we control the most. Belmont is outside operated, and
Piedmont and Bushmills should both start during the second
quarter. We have some more working interest we'd like to place
in those before starting, so depending on how that goes it
will dictate which one of those prospects starts first. And
they're both fairly significant for us in terms of reserve
potential on a net reserve basis. Piedmont has 15 to 20 Bcf of
potential net to us, and Bushmills is about 25 Bcf. Piedmont
is in our Old Henry project area and Bushmills is another
exploratory test within our Boure project area.
6. Could you give us a sense of field flow or prospect flow? You
guys have done a great job of originating prospects and
filling them down to mitigate your risk. What's the market
like today both from selling the prospects and I guess
acquiring the acreage on that end?
Lane: In terms of acquiring the acreage on ideas we generate
-- we like to call it land capture. We are finding that it is
still fairly favorable. We're very competitive along those
lines, and are able to lease most of the things we're after.
The deal flow in terms of place and working interest is still
a little bit slow. I would say it never really got very high
last year and it's at the levels it was the previous year. So
that's part of the effort, getting those other working
interest owners signed up.
7. The Overton field has been a home run for you guys. Any more
properties like that or potential acquisitions that you can
see looking at down the pipeline?
Lane: Well, the team that manages that project for us is doing
work along those lines. We are currently mapping out away from
the Overton area, looking at other properties and evaluating
similar opportunities.
8. You mentioned in the press release a utility rate increase.
Just had some questions about what impact that could have on
the timing? Really is it a 2003 impact or some guidance on
that? Approximately when would the potential rate increase
have an effect on your operating results?
Kerley: The rate increase would be a 2003 impact. With the
Arkansas Public Service Commission you file for a rate
increase, and then there's about a 10-month period before you
can put the new rates into effect. They audit your requested
increase and allow time for testimony. We expect to file in
the second half of this year and will try to have the increase
in place before the end of 2003, before the start of the
winter period.
9. May we get an update on the hedging program? Your thoughts,
like in your strategy on hedging in terms of how far you go
out, how you lay this stuff in, and how it relates to price
sensitive basins, maybe like the Overton area and the Arkoma?
Korell: Our hedging strategy for the last couple of years,
given our debt level, is to be hedged at the 50 percent level
at least one year out. This is fundamentally where we like to
be. We generally prefer to hedge using collars in order to
have a floor price and also participate in some amount of
upside. At the present time we are more heavily hedged in the
remaining 3 quarters
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Southwestern Energy Company 2002 First Quarter Earnings Conference Call
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of this year. In the first quarter of 2002, we were concerned
that prices were going to be low in the second and third
quarters, particularly the second quarter; therefore, we
hedged using swaps in the second quarter of 2002. Normally we
would not be as hedged in a given year. We've hedged
approximately 40% of 2003 production using both swaps and
collars and 1 Bcf per quarter of 2004 production using
collars. Our main hedging concept is to layer our hedges
because we can't necessarily pick the price peaks. Your second
question was how our hedging relates to specific projects. If
we are 50% hedged, these hedges are not tied to specific
projects, so notionally each marginal dollar invested in a
project is not hedged. We don't assign our hedges to specific
projects.
Kerley: Thank you for joining us today, and please feel free
to call me or our Manager of Investor Relations, Brad
Sylvester, with any other questions you may have or for other
information you may need. That concludes our conference. Thank
you.
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Southwestern Energy Company 2002 First Quarter Earnings Conference Call
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Southwestern Energy Company
P.O. Box 1408
Fayetteville, AR 72702-1408
April 23, 2002
Securities and Exchange Commission
ATTN: Filing Desk, Stop 1-4
450 Fifth Street, N.W.
Washington, DC 20549-1004
Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission, submitted
herewith for filing on behalf of Southwestern Energy Company is Form 8-K dated
April 22, 2002.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Very truly yours,
Stan Wilson
Controller