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Low gas prices pushing Southwestern Energy to conservative strategy in 2020

Southwestern Energy Co. expects to see natural gas production growth in the single digits as it focuses on improving drilling efficiencies to be able to operate within cash flow during a prolonged period of low commodity prices, CEO Bill Way said in an interview with S&P Global Platts.

"Our focus is on growth of the EBITDA line, and production for us is an outcome of that," Way said Dec. 6. "We're very disciplined in how we invest at gas prices that support economics for shareholder return."

Although the shale gas producer is not expected to release its full-year 2020 production guidance until it sets its budget in February, Way indicated that Southwestern was basing its conservative approach to production growth in no small part on expectations that natural gas prices will remain tepid in the coming year. He added that if gas prices rise significantly during the year, Southwestern "will make adjustments" to its drilling strategy.

Way said the company's long-term free-cash-flow strategy was put in place with the sale of its gas-producing assets in the Fayetteville Shale to private equity-backed Flywheel Energy in December 2018. "We're on a very deliberate path, post-selling the Fayetteville, to return to free cash flows for our business," Way said.

Southwestern reported total hydrocarbon production of 202 Bcfe in its third-quarter results, an 8% increase compared with the year-ago quarter, excluding its assets in the Fayetteville.

Reflecting the loss of Fayetteville volumes, gas production in the quarter fell to 158 Bcf, (1.72 Bcf/d) compared with 215 Bcf (2.34 Bcf/d) in the same quarter of 2018. At 1.4 million barrels, liquids production increased by 42% compared with the third quarter of 2018.

Way said the company would let economics dictate where it will spend in 2020. Southwestern has two core assets: the liquids-rich region of southwestern Appalachia and the high rate-of-return dry gas region of northeastern Pennsylvania. Southwestern is also investing in the final installment of a water system "that has reduced well cost by up to $800,000 per well and eliminated hundreds of thousands of truckloads of water from the roads."

Way said he expects to see growth in demand for Appalachian Basin natural gas coming from several sources. "The demand side is quite positive for natural gas," he said. "There are additional gas-fired power generation units even now being built in the Appalachian Basin. That provides a little bit of in-basin demand."

He added he expects to see a growth in gas demand for export. "The LNG complex has continued to exceed expectation and we continue to supply additional gas to them," he said. "Assuming we have a winter, we ought to see some recovery for gas (prices)."

In addition, the lack of takeaway pipeline capacity that plagued the gas-producing Appalachian region several years ago has largely been resolved, Way said. "At the current moment in northeast Appalachia, Southwestern Energy has all the long-haul takeaway capacity that it needs to deliver on our development plan," he said. "It's low-cost, it's flexible and it goes to some high-value markets."

Several major interstate pipeline projects are being built or have been completed in recent years in its southwestern Appalachia operations area. "There is a lot of unused capacity, which is enabling Southwestern to acquire additional capacity below market value and not to take it or pay for it until 2021," Way said.

Jim Magill is a reporter for S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.