Q2 2023 Southwestern Energy Company Earnings Call
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Yes.
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Good morning, ladies and gentlemen, and thank you for standing by and welcome to southwestern Energy second quarter 2023 earnings call.
Management will open the call.
Call for a question and answer session. Following prepared remarks in the interest of time, please limit yourself to two questions and re queue for additional questions. This call is being recorded I will now turn the call over to Brittany Raiford.
So western Energy's director of Investor Relations you may begin.
Thank you Sarah good morning, and welcome to southwestern Energy second quarter 2023 earnings call. Joining me today are Bill way Chief Executive Officer.
Clay Carroll, Chief operating Officer, Carl Giesler, Chief Financial Officer, and goodness priced senior Vice President of marketing and transportation before we get started I'd like to point out that many of the comments we make during this call are forward looking statements that involve risks and uncertainties affecting outcomes. Many of these are beyond our control and are discussed in more detail in the risk factors and the forward looking statements.
<unk> of our annual report and quarterly reports as filed with the Securities and Exchange Commission. Although we believe the expectations expressed are based on reasonable assumptions. They are not guarantees of future performance actual results or developments may differ materially and we are under no obligation to update them. We may also refer to some non-GAAP financial measures, which help facilitate comparisons.
Across periods and with peers for any non-GAAP measures, we use a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release available on our website.
I'll now turn the call over to Bill way.
Thank you Britney and good morning, everyone. We appreciate you joining us today to discuss our second quarter operating and financial results.
Southwestern energy strong quarterly performance reflects the disciplined execution of our strategy of responsibly and efficiently developing our tier one dual basin inventory.
We are generating long term economic value for our shareholders by capitalizing on <unk> advantaged assets.
Scale expertise and assured access to deliver our natural gas to premium markets of choice, including LNG across the Gulf Coast.
We believe the execution of our strategy translates our strong E&P business.
Into greater economic returns and equity value for our shareholders.
As we continue to progress our actionable corporate priorities.
We expect to narrow the gap between the intrinsic value of our business and the company's current market valuation.
Our top priorities remain strengthening the balance sheet through debt reduction improved capital efficiency and maintaining the companys productive capacity, while generally investing at maintenance capital levels.
Progress, we're making on these objectives continues to improve the resilience and strategic positioning of the business through the commodity price cycle.
This quarter clearly demonstrates the positive trajectory of our capital efficiency. Our strong production performance was primarily due to improved completion efficiencies that resulted in reduced cycle times and additional producing days during the quarter.
And as clay will detail shortly.
We also continue to see encouraging results from our inflation mitigation efforts.
Additionally, the company continues to demonstrate the inherent flexibility in our business by adjusting our development program in response to overall and relative to commodity price levels.
Our updated guidance reflects both our production outperformance year to date.
And the ongoing activity optimization and inflation reduction efforts that have allowed us to invest less capital to generate that production.
Consistent with our capital allocation strategy free cash flow generated from our capital savings will be applied towards debt further strengthening the balance sheet.
We expect to reduce debt year over year from annual free cash flow and proceeds from our noncore asset sale in the second quarter.
We ultimately plan to reduce debt to our target range of three and a half to $3 billion.
And as we approach this range return capital to shareholders.
Our constructive outlook for natural gas is supported by both supply and demand fundamentals.
Regarding supply we believe the capital discipline that we've seen through the industry wide activity reductions will result in moderating if not declining sector production heading into next year.
Regarding demand both strong power burn and increased LNG imports should provide additional price support.
With another facility, reaching <unk> last month, nearly 12 Bcf per day of incremental LNG liquefaction projects are now under construction along the Gulf Coast.
These projects have been in service dates as early as next year with nearly eight Bcf per day expected to become operational by the end of 2025.
We believe natural gas pricing would need strengthened materially to incentivize the production growth necessary to meet this next wave of LNG demand.
While Permian associated gas growth is expected to provide some of the needed supply, particularly to this facilities on the South Texas Coast, We believe that the haynesville given its advantaged proximity will be critical to supply. The majority of this increased LNG demand.
Southwestern energy is already both the largest haynesville producer and gas supplier to existing U S LNG facilities.
The company is well positioned to supply the next wave of LNG from Haynesville and Additionally, we have further optionality in our business to leverage our direct access from Appalachia to the Gulf coast through our firm transportation portfolio.
And we have the required scale and inventory depth to remain a key natural gas supplier to the LNG sector for years to come.
As we transition into what we believe will be a more constructive natural gas macro are improving capital efficiency and strengthening balance sheet will position us well to drive increased economic return and shareholder value.
Let me turn the call over to clay now for some operational updates.
Thank you Bill and good morning.
The team delivered another strong operating quarter with production of 423 Bcf.
Our production consisted of four Bcf per day of natural gas and 106000 barrels per day of liquids, including nearly 16000 barrels per day of oil.
We saw outperformance across our portfolio driven by accelerated turn in lines improved well performance less.
Less downtime and increased ethane recovery.
During the quarter, we invested $595 million of capital in place 50 wells to sales.
In Appalachia, we placed 28 wells to sales with an average lateral length of more than 17300 feet.
19 of those were in our liquids rich acreage in West, Virginia, and nine wells were across our dry gas areas in Ohio and Pennsylvania.
In Haynesville, we placed 22 wells to sales with an average lateral link of 8500 feet.
16 of the wells were in the Haynesville interval and six were in the middle Bossier.
From an industry perspective, we have seen a nearly 20% reduction in gas directed drilling activity year to date.
With continued moderation expected as we move through the second half of the year.
Lower sector activity combined with an improved global supply chain has provided the opportunity for our strategic sourcing team to mitigate and in some cases reversed the.
The inflationary cost pressures, we had expected at the beginning of the year.
We have captured savings across the board.
Particularly in chasing frac horsepower in chemicals.
We are continuing to work with our service providers to further align costs with the current commodity price environment.
Our original guidance assumed 10% to 15% inflation this year.
But our successes to date have decreased our outlook to low single digit inflation for the year with the potential for deflationary impacts next year.
We're particularly encouraged by the deflationary cost reductions and capital efficiency gains, we have been able to achieve in the haynesville.
And in 2024, we expect well cost to be 10% to 15% lower than this year.
Those savings are already helping to improve the company's capital efficiency metrics and free cash flow generation in 2023.
As we shift into the back half of the year, we are formally updating our full year guidance <unk>.
Consistent with the previously communicated activity adjustments and to reflect the team's outperformance year to date.
We are lowering our 2023 capital guidance by approximately 10% or $200 million.
To a range of 2 billion to $2 3 billion with only a modest impact to production.
From an activity perspective, we expect approximately Tim last drilled wells and 15 last wells completed and turned to sales than originally planned.
Given this moderating activity, we expect capital investment will decrease roughly a $100 million in the third quarter from the second quarter.
The team has done an excellent job delivering on our plan in the first half of the year and we have strong operational momentum heading into the second half.
Now I'll turn the call over to Carl.
Thank you clay.
Consistent with our front loaded capital program and the seasonality of natural gas prices.
Our investment outpaced our operating cash flow during the quarter by approximately $140 million.
We nonetheless ended the quarter with net debt in line with last last quarter.
<unk> 4.0 or $1 billion.
Approximately $120 million in proceeds from our noncore, Pennsylvania Utica asset sale.
Largely offset our quarterly cash outspend and seasonal working capital outflow.
Our leverage increased modestly to one four times still within our target leverage range of one five to 1.0 times.
We remain on track to deliver our annual program within cash flow.
Anticipate year end 2023 debt to be lower than that at year end 2022.
We expect to direct free cash flow and proceeds from our noncore asset sales to debt reduction.
Bill noted our target debt range remains three five to three point Bill.
We believe debt reduction directly translates to increased shareholder value.
Lower than that transfers enterprise value from lenders to shareholders growing our market capitalization.
Reducing debt also lessons both financial risk to our future cash flows as well as the volatility in our stock both of which we believe lower our cost of capital.
Addressing towards our target debt range will further position swim to be able to sustainably.
Sustainably and returned capital to shareholders and return to investment grade.
On the hedging front, we added to our base layer 2025, natural gas hedge position during the quarter and currently stand at approximately 40% and 10% hedged respectively for 24 and 2025 we.
We continue to target a more moderate hedged production range of 40% to 60%.
We believe this range balances protecting our financial strength.
With appropriate risk adjusted upside exposure.
This approach should improve price realizations, given our constructive natural gas outlook.
We are actively executing across multiple facets across the business.
Translate the significant value of the company into greater value for shareholders.
Operator, please open the line for questions.
Okay.
Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time to your question has been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to two questions and re queue for additional questions.
At this time, we will pause momentarily to assemble our roster.
Okay.
Okay.
Our first question comes from Charles Meade with Johnson Rice. Please go ahead.
Yeah.
Good morning, Bill Clay and Carl.
I I have a question.
I appreciate the color you've already gone through some of the deltas on the wells drilled and turned to sales and that sort of thing and I appreciate the.
The detail you guys offer in Europe .
In your updated guide in your press release, but I wonder if I could rather than look at each individual piece. Just you know maybe tickets take a stab at cutting through to the two.
To the Oh, I guess the meaning.
It looks like with 15.
Wells turned to sales in <unk>. It looks like that you guys are pulling are or have pulled some completions forward in time.
Because of your efficiencies and the question is if that's the case that you pulled some completions out of <unk> you went up into <unk>, we're out of <unk> into <unk>.
Are you going to reload.
The the <unk> completion schedule.
You know that that's the that's the best part of the curve right now and I guess.
I guess, maybe it's a long way of asking are you biased towards the high end up that our wells to sales guide.
Sure.
So given where commodity prices are right now our guide is reflecting that we won't go add incremental completions back in the fourth quarter, but that optionality still exist, if we see a price surge.
<unk>.
Allows us to go forward with that.
All of that consistent with the way we guided in the first quarter call and you are right. Our completion efficiency gains caused us to have more wells turned to sales in <unk> than the original budget and guidance at the start of the year.
All of that consistent with the.
Operational improvements that we've been continuing to focus on and we're seeing them show up.
Okay. Thank you for that play and then Oh on your presentation your.
You you've gotten you've given us some new detail on on slide 15, and I just wanted to ask a question because there was one thing on this on this slide that surprised me and specifically it was that in the Desoto East area, you're Bossier wells are actually more productive than the Haynesville wells, which in and I think this is also would you be.
Identified as your your your most productive area. So I wonder if you can if you could perhaps.
A dresser, whether that's that was a surprise to you as well and and perhaps does this is this an artifact or some kind of a downstream result of all the faulting in the area.
Sure. So we had a good feel for the Desoto East <unk> fault zone area from the beginning.
Was part of why we targeted the.
Assets that we acquired and the fact that there were stock tier one middle Bossier and Haynesville in that area.
It was another big part of why we focused on that area.
When you look at the soda we used as you mentioned there are some different fault blocks included in that broader area and.
Both the Haynesville and Middle Bossier performed essentially the best Damn Haynesville in that area. There is a.
Certain fault block, where middle Bossier does outperform the haynesville, but on average across Desoto east they almost look identical in there some of our highest IP and EUR.
Parts of the Haynesville field.
Thank you for that detail.
Sure.
Okay.
Our next question comes from Doug Leggate with.
Bank of America. Please go ahead.
Good morning, guys. Thanks, good morning.
Everyone. Thanks for having me on loved.
Loved the messaging on the on the improving equity volatility. So thank you for thank you for reinforcing that message I have two quick ones if I may.
I want to hit the 800 pound gorilla in the room, Bill, which is your step down in spending it seems to me that youre not done yet.
And I Wanna I'm talking specifically on <unk>.
Understanding is that you're testing different.
Fluid loadings different completions in the Haynesville in particular.
It seems to me that saw a big potential low hanging fruit to drop capital improve efficiency. Even further so I wonder if you could just address thought maybe it's a question quickly but.
But it seems to us that saw another area. That's still got some running room can you elaborate on that please.
Certainly.
We've been active around all of the completion optimization efforts for some time now across both Appalachia and Haynesville fluid loading has has been an area that has benefited the production performance across both areas we continue to optum.
<unk> completions across different parts of our field to come up with the best combination to deliver the best well performance and so that will continue I think some of our other peers.
Talked about making some movement in that place I think those are things we've been doing over time, and we will continue to do.
Do you think you can get the capital back under $2 billion.
You keep asking is that.
I think that dependent upon commodity price dependent upon activity levels.
Dependent upon the continued deflation reduction <unk>.
I think there is a range of outcomes that may be is similar to what we guided to for 2023.
That has a mid point of the 215 billion, but a range of $2 billion to $2 3 billion.
Alright, consistent with the messaging. Thank you for that my follow ups, a micro question and it's just a real quick one.
I asked this to one of your peers. The other day, but there's a perception that the haynesville has a big overhang of uncompleted wells, but when we look at the disclosure you guys put out last night relative to some of the third party services, there seems to be a massive gap between the perception and the reality of what you think is your DUC backlog. So can you.
I Wonder if you could just address that what do you think the dotcom situations looks like relative to the perception that it's you know, it's a big load of supply that could come on stream until higher gas price.
Yeah, we agree with your comment that the public data has it way over stated.
You know maybe by more than half dependent upon the different services.
Sure.
<unk>.
The public duct count on one of the ones. We look at for Haynesville right. Now says we have 30, and we actually have little more than half of that right. Now. So we think it's overstated.
Agree with your thoughts on that.
Great stuff. Thanks, so much guys.
Yes.
Okay.
Our next question comes from Omar.
She'd Hari with Goldman Sachs. Please go ahead.
Hi, good morning, and thank you for taking my questions.
So my first question would love your thoughts on the gas macro you had thoughts on the setup.
In the back half of the yard and then how are you thinking about risk management through hedging I noticed you added some hedges in the back half of 'twenty three and then some in 'twenty five.
Okay.
I think bill addressed very well our outlook on natural gas over the next couple of years, but when you narrow into the balance of 2023.
A lot of our view is derived around a very constructive fundamental picture that we've seen emerge this summer with increased gas burns and a rebound in exports of LNG offset perhaps a little bit by the overhang and storage and so when we think about the balance of 2023.
It's really a question of where inventory levels end up in October and how does that position us going into the winter. So yes. You are correct that we did add some downside protection to that part of the curve in the event that we see.
A warmer than normal start to winter.
So we wanted to increase our downside protection in case that was to materialize.
But.
Generally speaking, we're very opportunistic about how we add hedges to our book.
Guided by our view of the market and so when you think broader about our risk management strategy is focused on exactly that opportunistic.
Adding to our portfolio to increase our downside protection, but still allow us some upside participation.
That's very helpful and then a little bit on the operation and how youre thinking about it.
Efficiency gains was obviously very strong.
Strong update from you guys in <unk>.
You have increased your DUC inventory for the end of the yard. So that gives you some optionality towards increasing activity to the extent the macro does improve.
Especially for the winter so I'm trying to understand the balancing act here in terms of obviously, keeping our balance sheet strong and maintain the strength of the balance sheet, but also.
Maintaining a productive capacity and I think you mentioned production is declining in the back half of the year.
Yes, with the adjustments, we made to the completions and the drilling count.
The DUC inventory moved up like we would have expected.
And you are right. It does provide us optionality as we move into.
2024, again, it's going to be driven by where.
Commodity prices are at.
And where we see the.
Deflation and it'll all be clearer as we get closer to the end of the year and we're able to fully put together the 2024 planned but optionality is what we want to have.
Gotcha, that's very helpful.
<unk>.
Our next question comes from John <unk> with Stifel. Please go ahead.
Hey, good morning, all and thanks for taking my questions.
For my first one with the understanding that 2020 for planning is still ongoing could you offer some high level comments on what the revised 2023 plan means for production and capital cadence in 'twenty four.
Sure.
As we think about 2024, we always have.
Slightly frontloaded program and that will continue again as we plan out 2024.
In some ways that could be a little accentuated with the reduction in activity that we just guided into for 2023.
That profile for 2024, I think will look similar to our past profiles with the front end loading.
Sure.
Youll see the greater production volumes showing up in <unk> and <unk>.
Normal year, where we're not pulling back the activities because of the front end loaded in the front half.
As we talked about.
We want to be positioned to benefit from the constructive commodity price environment.
That shows up in early 'twenty four late 'twenty for more than 25, we're going to keep.
Reading those tea leaves and what we think about the fundamentals two then.
Lay out our capital plan for 2024 in line with all of that so more to come there and as I've said, we're seeing.
Cost deflation showing up and hopefully as we move into 2024, we're going to be able to get service cost more in line with the current commodity price environment.
Terrific and for my follow up if I am.
I'm not mistaken you achieved a company record in terms of average lateral length in Appalachia this quarter with the notable uptick in industry commentary this earning season regarding e&ps achieving positive results on wells with laterals in that 15% to 20000 foot range could you provide color on your inventory depth that would.
To support extended laterals and are there any technical limitations or concerns with drilling laterals closer to that 20000 foot level.
So I'll start with.
I think we've got close to 10 wells now that have exceeded 20000 feet in the quarter, we completed a well in Ohio.
That was almost 24000 feet I think our vertical integration.
The experience of our <unk>.
Drilling and completion teams are all leading to us being able to.
Really have a competitive advantage in that place.
We have done the majority of that in Appalachia in the 17000 foot average lateral length in <unk> as an example of that that knowledge and experience we're moving into the Haynesville. The haynesville is a little bit different with some of the fault blocks and with the higher bottom.
Hold pressure and temperatures, but we think we're going to make progress.
In the Haynesville also to capture those benefits of longer laterals.
In late <unk> early <unk>, we TD wells in the Haynesville that had a close to 13000 foot lateral length and one that was over 14000 feet. So progress is being made there are inventory continues to be in.
Improved by our land groups.
Doing acreage trades picking up leases. So that we can continue to add to the contiguous nature of the lease position. So that we have the optionality to go longer.
I appreciate all the color and congrats on a positive update.
Thank you.
Yeah.
Our next question comes from Bertrand <unk>.
Please go ahead.
Hey, good morning, guys.
On the first question is just on the LNG front, maybe last quarter I wouldn't put it in the category.
Conservative.
Towards locking in a contract but may be you or your recent commentary and maybe even the personnel that you brought with you on your recent marketing trips or maybe you suggested that you are getting a little more interested or maybe the deal coming available and more attractive to you. So I guess the first part of it is that fair and then the second part is.
Are there are there any of the new kind of dynamic of the LNG contracts standing out to you above just Henry hub premium kind of deal.
Sure No I think Thats fair.
As bill alluded to in his opening remarks, we are the largest supplier of natural gas to the U S. LNG exporters right now with over a bcf in a half a day currently sold to a wide variety of buyers.
We feel like we understand this market very well and we believe that there are and will continue to be plenty of internationally priced supply opportunities for us.
And since we have.
Two Bcf a day of production that currently reaches the LNG corridor.
We think we will remain a major supplier to the sector going forward. So more pointedly to your question. We're evaluating all of these opportunities to potentially leverage our position into an attractive risk adjusted global will you price supply agreement, but I think regardless of how we price our.
Transactions.
We believe our scale and direct connectivity to the corridor will allow us to benefit differentially from.
The growing demand from the next wave of LNG.
Youre right.
Structure of contracts is shifting a bit the market is maturing and we're taking a very disciplined risk aware approach to how we contract. The next tranche that we sell.
That sounds great and then the second one.
Three Q differential guidance for gas.
It shows the.
The realities of a bit more challenged.
Water, but your full year outlook seems to remain pretty strong. So I was just wondering if you or are you already seeing something maybe intra quarter or maybe could you just talk about the relative difference between your differential in the Haynesville and Marcellus maybe one is outperforming the other considering maybe the ducks coming on our MBP impacts. Thanks.
Yeah.
Yeah, I think so.
Obviously the basis market in the northeast has weakened as we moved from the second quarter into the early third quarter.
Driven primarily by.
Mild winter and the resulting buildup in east region storage levels.
Plus throw in a little bit of pipeline maintenance as well on top of that.
I think.
When you think about how that affects us companywide.
We have oh.
A large portion of our production in the basin hedged.
Plus we have access to the Gulf coast via our firm transportation arrangements. So we're very comfortable despite this volatility in near term basis in the northeast.
Comfortable with our full year guidance range on differentials.
Just a real quick correction to my comment on on lateral lengths. We've got 23 that are over 20000 feet. So.
I misstated it earlier sorry.
No problem I appreciate it guys.
Our next question comes from Paul Diamond with Citi. Please go ahead.
Hi, Good morning, Thanks for taking my call I, just wanted to touch base, a little bit on your kind of with the touch about talks a little bit just wanted to get your idea on what.
You guys see as kind of a run rate.
Proper level of inventory for docs in a normalized market.
Yes.
Yes art.
Core philosophy is we don't build ducks, we're about having the right amount of ducks in front of us for the efficient.
Drilling and completion.
In both areas and so that we can make continue to make progress on those and and not <unk>.
But a lot of success on the drilling efficiency gain and then be waiting on the completion that we can line them straight up and so thats in line with the.
DUC inventory that we guided to originally.
The two areas I mean somewhere in the $25 30 range with the program that we had in 2023.
Given the way we're.
Optimizing around gas price right now and we've got a few more ducks like we talked about earlier that will give us some optionality, but were more about the right amount of ducks to keep driving efficiencies.
Understood. Thanks, and just one quick follow up talking to.
Oh.
Looking forward towards activity.
When do you guys kind of viewing.
Bell Weathers for rig cadence what would what would you want to see to start bringing rigs back online and in your mind, what does that really look like in <unk> and 'twenty four.
Yeah.
Yes.
I think we're going to continue to balance that we are at a minimum living within our cash flow with our capital spend and.
See a more sustained view commodity prices going higher.
In the future and remember our portfolio gives us a lot of exposure to liquids, so oil and NGL prices are part of that discussion, but we're mainly a natural gas so natural gas prices will drive that and that.
That will be the guide as we move into the year end.
The the maintaining the productive capacity of the company and stay in that.
Maintenance capital.
Environment that we've been in now for a while and those will be the drivers as we as we move into 2024.
Okay understood. So we just think about it as a kind of cash flow through a good balance there.
Yes.
Understood. Thanks for your time clarity.
Okay.
Our next question comes from Aaron.
Kieran.
J P. Morgan. Please go ahead.
Yes, good morning, Arun <unk> with Jpmorgan.
I had a quick question.
On how we should think about.
The sustaining capex kind of requirements of the business.
Next year.
Jamie you guided to.
Third quarter production of 429 Bcf.
And <unk> at 414, and so as we think about you guys trying to sustain production shall we think about the fourth quarter run rate as being what we saw for the second half average, but just getting thoughts on on how you we should start thinking about 2020 for our production.
That you'd like to hold.
I think all of that range could apply dependent upon where commodity prices are at 2022, we were a little bit above four seven we're going to be four six bcf equivalent a day of net production. This year, the fourth quarter will be a little lower than that as we've talked about so I think that range.
<unk> lives within our view of <unk>.
Maintaining the productive capacity of the company and then we're going to move within that range, given where commodity prices and where cost potentially come down too.
Got it got it and just as my follow up I know, it's been asked a couple of times.
But.
In the second half of the year clay, you're spending around $900 million. If we did our math correct. So youre basically spending youre, saying below sustaining.
This level and maybe a quick follow up on that is we know that you have maybe changed.
Some teams on your own first vendors.
Particularly in the Haynesville. So I was wondering if you could give us maybe a snapshot on where leading edge well costs are trending relative to what you quoted at analyst day.
Perfect.
So youre right about the second half capital spend being below the sustaining capital I think about 72% of our full year guided turn in lines.
Happen through <unk>.
This is the kind of what we're seeing.
On the wells, we're drilling now that have more of the benefit of all the cost reductions that we've seen.
The deflation.
The operational efficiencies that we've had are more in line with what I'm guiding.
Particularly in the Haynesville well cost to for 2024 and that <unk> hundred dollars a foot range. So we've got drill wells that are that are seeing that reduction and then we were ahead of the game on the completion efficiencies right now.
And to your point I mean, we're we've made change outs on the pumping providers. Those are providers that have worked with us in the past there are bedded in the performance has been very good.
Great. Thanks, a lot.
Our next question comes from Noel Parks.
Please go ahead.
Pardon me is your line on mute perhaps.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Bill way for any closing remarks.
I just want to express from the leadership team and all of the employees of southwestern are.
Depreciation for you all joining the call today.
And we look forward to updating.
With you in the quarter.
In the third quarter coming up.
That's it thank you.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.