Increased Production Spikes 2007 Full-Year Revs for Southwestern
Southwestern Energy reported net income for 2007 of $221.2 million, or $1.27 per diluted share, up from $162.6 million, or $0.95 per diluted share, in 2006. The increase in net income in 2007 was a result of increased production volumes partially offset by increased operating costs and expenses and increased interest expense.
The results in 2006 include an after-tax gain of $6.7 million on the sale of the company's 25% interest in the NOARK Pipeline System, Limited Partnership. Net cash provided by operating activities before changes in operating assets and liabilities (non-GAAP; see reconciliation below), was $651.2 million in 2007, up from $413.5 million in 2006.
Operating income from the company's E&P segment was $358.1 million in 2007, compared to $237.3 million in 2006, primarily due to a 57% increase in total equivalent gas and oil production.
Gas and oil production totaled 113.6 Bcfe in 2007, up from 72.3 Bcfe in 2006, and included 53.5 Bcf from the company's Fayetteville Shale play, up from 11.8 Bcf in 2006. During 2007, approximately 97% of the company's production was natural gas, compared to 94% in 2006.
The company has increased its first quarter 2008 total gas and oil production guidance to 35.0 to 36.0 Bcfe, up from 34.0 to 35.0 Bcfe. Southwestern's 2008 total gas and oil production guidance remains at 148.0 to 152.0 Bcfe, an increase of 30% to 35% over its 2007 production, of which approximately 90.0 to 95.0 Bcf is expected to come from the Fayetteville Shale.
Southwestern's average realized gas price was $6.80 per Mcf in 2007, compared to $6.55 per Mcf in 2006, including the effects of hedges. The company's commodity hedging activities increased its average gas price $0.64 per Mcf in 2007 and $0.18 per Mcf in 2006.
Disregarding the impact of commodity price hedges, the average price received for the company's gas production was approximately $0.70 per Mcf lower than average NYMEX spot prices during 2007, compared to $0.90 per Mcf in 2006. Assuming a NYMEX commodity price of $7.00 per Mcf of gas, the company currently expects its differential for the average price received for its gas production for 2008 to be approximately $0.60 to $0.70 per Mcf below the NYMEX Henry Hub index price, including the impact of its basis hedges.
Southwestern's average oil price was $69.12 per barrel in 2007, compared to $58.36 per barrel in 2006, including the effects of hedges. The company's hedging activities lowered its average oil price $4.81 per barrel in 2006. Assuming a NYMEX commodity price of $70.00 per barrel, the company expects the average price received for its oil production during 2008 to be approximately $1.50 per barrel lower than average spot market prices, as market differentials reduce the average prices received.
Lease operating expenses per unit of production for the company's E&P segment were $0.73 per Mcfe in 2007, compared to $0.66 per Mcfe in 2006. Lease operating expenses per unit of production increased in 2007 due primarily to increases in the company's gathering and compression costs related to its operations in the Fayetteville Shale play. The company expects its per unit operating cost to range between $0.85 and $0.90 per Mcfe in 2008 primarily due to increased production volumes from the Fayetteville Shale play.
General and administrative expenses per unit of production were $0.48 per Mcfe in 2007, compared to $0.58 per Mcfe in 2006. The decrease in general and administrative costs per Mcfe in 2007 was due to the effects of the company's increased production volumes which more than offset increased compensation and related costs primarily associated with the expansion of the company's E&P operations due to the Fayetteville Shale play. Southwestern added 243 new employees during 2007, most of which were hired in its E&P segment. Southwestern expects its general and administrative expenses per unit of production to decrease in 2008 and range between $0.42 and $0.47 per Mcfe.
Taxes other than income taxes per unit of production decreased to $0.16 per Mcfe in 2007, compared to $0.30 per Mcfe in 2006, due to changes in severance and ad valorem taxes that primarily result from the mix of the company's production volumes and to the accrual of severance tax refunds related to the company's East Texas production. Assuming NYMEX prices of $7.00 per Mcf of gas and $70.00 per barrel of oil, the company expects taxes other than income taxes to range between $0.20 to $0.25 per unit of production in 2008.
The company's full cost pool amortization rate averaged $2.41 per Mcfe in 2007, up from $1.90 per Mcfe in 2006. The amortization rate is impacted by timing and amount of reserve additions and the costs associated with those additions, revisions of previous reserve estimates due to both price and well performance, proceeds from the sale of properties that reduce the full cost pool and the levels of costs subject to amortization.