Southwestern bulks up investment in Haynesville Shale in Q1 2022: earnings

Southwestern Energy's strategic pivot to the Haynesville Shale tilted even further to the Louisiana basin than expected in the first quarter of 2022, driven in part by improved well performance and legacy planning from its two acquisitions, company executives told analysts in an April 29 earnings call.

In the first quarter of 2022, Southwestern deployed 60% of capital toward the Haynesville and 40% to the Marcellus. The producer's 2022 guidance had a 55/45 Haynesville-Appalachia split, with COO Clayton Carrell saying that this ratio will become more balanced heading into the rest of the year.

Southwestern's gross wells to sales for the Haynesville totaled 21 in the most recent quarter, nearly double the 11 wells that went to sales in the Marcellus and Utica, according to the company's quarterly results statement. Executives explained that some of the wells were already locked in from recent acquisitions Indigo Natural Resources and GEP Haynesville, which were more fully integrated into Southwestern's operations during the most recent quarter. The GEP Haynesville acquisition closed on Dec. 31 and the Indigo acquisition was completed Sept. 1.

The company's Haynesville natural gas production came in at 166 Bcf, or around 1.8 Bcf/d, for the most recent quarter, up from 102 Bcf in the fourth quarter of 2021. The higher quarter-over-quarter production is largely the result of the newly included GEP Haynesville volumes, although executives also pointed to operational gains.

"We've seeing improved initial production performance," Carrell said. "Last quarter, we talked about the average of the wells coming to sales was about 26 MMcf/d IP. And the wells that came to sales this quarter are close to 34 MMcf/d initial production rates."

Southwestern's average lateral length in the Haynesville increased in the most recent quarter as well, widening to an average of 8,215 feet from 6,875 feet in the previous quarter. Longer laterals can increase cost efficiency by boosting production with less drilling time, but typically come at a higher cost per well.

Well performances across the Haynesville Shale have improved substantially in recent years, according to an April 28 report from the Energy Information Administration. The average initial production rate for a well in the basin increased to 17.3 MMcf/d in 2020, up from 8.1 MMcf/d in 2014, the report said.

Hedging strategy

Despite espousing an optimistic macro outlook on US natural gas fundamentals and pricing, Southwestern has maintained a comprehensive hedging program for 2022 and 2023 expected production, in part to support the financing of the company's 2021 acquisitions.

As of March 31, Southwestern had hedged 982 Bcf of 2022 expected gas production -- around 65% using the mid-point of the company's production guidance— with a combination of fixed price swaps and costless collars. The producer had a similar volume hedged for 2023, with 938 Bcf of hedging positions in place. The 2023 hedging program incorporates a larger percentage of costless collars than the 2022, in potential acknowledgement of the sunnier pricing outlook.

Southwestern executives received pushback on the company's hedging strategy during analyst Q&A.

"The one thing that, Bill, to be fully candid with you, that is kind of holding us back for a more constructive view is that you've kind of hedged away a lot of the upside, as your balance sheet is moving to investment grade, as you pointed out, as you've diversified the portfolio and arguably improve the underlying business," Bank of America's Doug Leggate said, before asking if the company had plans to reduce its hedging positions in the future.

"In our view, assuming the constructive price for gas is there, our progress on debt reduction, company's financial strength, I would anticipate that future hedging levels will continue to moderate to the low end of the company's range," CEO Bill Way said.

"We do continue to believe that a certain level of hedging is the responsible thing to do from an enterprise risk management perspective," Way continued.

For the quarter ended March 31, Southwestern Energy reported a net loss of $2.7 billion, or $2.40 per share, compared with a net income of $80 million, or 12 cents per share, for the corresponding quarter a year earlier.

Similar to other operators who reported both sizeable free cash flow and substantial net losses for the most recent quarter, Southwestern attributed the quarterly loss to unsettled mark-to-market commodity derivatives.