Firm to curb Fayetteville Shale funds

— Southwestern Energy Co. plans to spend less money in the Fayetteville Shale next year, a move energy analysts attribute to relentlessly low natural-gas prices.

The Houston-based company said in a report that it expects to invest about $830 million into the Fayetteville Shale in 2013, compared with the $1.02 billion it is projected to have spent this year.

The exploration and production company also expects its total capital investments to fall from about $2.1 billion in 2012 to just under $2 billion next year, according to Southwestern’s capital program and guidance for 2013. The report was released earlier this week.

Southwestern’s decision to invest less in the Fayetteville Shale is part of a slowdown in natural-gas drilling the shale formation has seen this year.

At the beginning of 2012, there were 33 drilling rigs operating statewide. On Friday, there were 15, according to Baker Hughes, an oil-field service company.

The slowdown in drilling is tied to modest natural-gas prices, which have yet to hit $4 per million British thermal units on the New York Mercantile Exchange this year.

When drilling in the Fayetteville Shale, which extends across 10 counties in north central Arkansas, was at its peak in 2008, natural-gas prices ranged from $6 per million Btu to $10 per million Btu - one month, prices spiked to $13.50 per million Btu.

Prices started to rebound last month and reached about $3.90, but warm temperatures forced them back down. On Friday, the price for natural gas for January delivery settled at $3.45 per million Btu on the New York Mercantile Exchange.

James Williams, an energy analyst who operates WTRG Economics near Russellville, said he expected natural-gas prices to be up to $4 per million Btu by now, but the “moderate winter” has prevented it.

“[Southwestern] will do some minimum level of exploration at almost any price, but they are not going to even approach previous levels until natural gas prices pass about $4,” he said. “As mild as December has been, that might not be until later next year.”

Energy analysts say Southwestern is focusing on other shale formations in the country, such as the Marcellus Shale in the northeast, where the company can drill for natural-gas liquids and oil, which are more profitable commodities than dry natural gas, which is common in the Fayetteville Shale.

“You are looking at a reaction to current commodity prices,” said Scott Hanold, an analyst with RBC Capital Markets. “The Marcellus Shale has more economic return.”

Will Green, an analyst with Stephens Inc., said Southwestern gets about a 20 percent to 25 percent pretax rate of return from wells in the Fayetteville Shale, compared with a 30 percent to 35 percent rate in the Marcellus Shale, located in Pennsylvania, New York, West Virginia and Ohio.

Williams, the analyst from Russellville, said some of the wells in the Marcellus Shale have natural-gas liquids, which can double the price a company gets for gas.

Southwestern also has six wells in the Lower Smackover Brown Dense in southern Arkansas and northern Louisiana.

In its report, the company said two of those wells are connected to a pipeline and that some wells are producing both oil and gas.

Hanold, the analyst from RBC Capital, said it is too early to tell how the wells in the Brown Dense are doing.

“In the next couple of months, you will get a better feel for if this [area],” he said.

Andrew Coleman, an analyst for Raymond James and Associates, said Southwestern is not the only operator to cut back on drilling because of natural gas prices. BHP Billiton Ltd. and XTO Energy, a subsidiary of Exxon Mobile Corp., the two other large operators in the state, have also slowed drilling.

Southwestern referred questions about its operations to its capital guidance report. A spokesman for BHP Billiton could not be reached Friday and a spokesman for XTO Energy had no comment.

Southwestern took two separate write-downs - $441.5 million and $935.9 million - on its natural-gas assets in its third and second quarter of 2012.

Business, Pages 27 on 12/22/2012

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