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Northeast producer Southwestern Energy plans to cut capex 20% in 2020

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Northeast producer Southwestern Energy plans to cut capex 20% in 2020

Appalachian operator Southwestern Energy Co. joined other large-scale U.S. shale producers with plans to cut its capital investment in 2020, as it slowly grows production through increased drilling and completion efficiencies and utilizes hedges to offset poor natural gas prices.

Despite cutting capital investments to around $900 million, or 20% less than 2019, the company expects its Appalachian production to grow by 9% in 2020, it said Feb. 27 in its fourth-quarter 2019 earnings report. It will accomplish this in part due to a 10% reduction in well costs and by increasing lateral lengths by an average of 20% to more than 12,000 feet.

Southwestern also plans to continue to focus on wet areas in Appalachia due to lower returns from dry gas wells.

"Foundational to the company's resilience, especially in the current pricing environment, are a strong balance sheet, capital discipline, unique Tier 1 condensate and liquids-rich acreage and a multi-year hedge position," Southwestern President and CEO Bill Way said in the earnings release. "Importantly, we further reduced the cost structure of the company, enhanced well performance while materially lowering well costs and improved operational efficiencies, all adding to economic inventory."

Low natural gas prices have plagued Northeast operators throughout 2019, and there are no signs of price improvements in the short term, with the first quarter of 2020 expected to average $2.14/MMBtu, according to S&P Global Platts Analytics.

Throughout the latest round of earnings reports, the bulk of operators have called for capital expenditure reduction of 20% or more in 2020 and minimal production gains. For example, Antero Resources Corp. plans to cut capex by 10%, Seneca Resources Corp. by 20%, Cabot Oil & Gas Corp. by 27%, CNX Resources Corp. by 35% and Montage Resources Corp. by 44%.

Most of the operators in the Northeast are focused on generating free cash flow and are looking to implement a "maintenance-mode" type program for the year, based on the sample of operators that have already released their official 2020 guidance.

A steady decline in drilling rigs over the past year has shifted the production outlook for the Northeastern U.S. From 2017 through 2019, Northeast production rocketed from 22.3 Bcf/d to 32.6 Bcf/d. However, the latest forecast has Northeast volumes growing by only 200 MMcf/d to 32.8 Bcf/d by the end of 2021, according to Platts Analytics.

The Utica Shale averaged 16 active rigs during 2019. It has averaged only 11 so far in 2020, according to Platts Analytics. The decline has been precipitous in the Marcellus, where an average of 52 rigs operated in 2019 but only 37 year-to-date in 2020.

Although a similar scenario of reduced spending and higher production occurred in 2019, many operators were able to meet production goals by bringing more wells online during the second half of the year.

Brandon Evans is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.