Friday, January 16, 2009

Southwestern Energy INCREASING Capital Budget

Southwestern Energy, one of the main players in the Fayetteville Shale, announced last month (press release; link to resentation summarizing the company's operations) that it has increased its capital budget 17.6% to $2 billion. This is a stark contrast to other natural gas E&P companies that have been slashing their capital budgets.

Southwestern is able to do this because the company has relatively strong financials and spent 2008 behaving in a prudent manner (i.e. selling some assets during the height of high prices rather than when they were forced to). Southwestern is making a bold statement that it wants to be the leader when the country emerges from this recession. Other gas companies are limited by the fact that the credit markets, upon which they depend to expand their operations, are largely frozen. Investors are pressuring these companies to be more conservative and hoard cash. In my mind the main reason Southwestern is able to do this is that the company did not get caught up in the Haynesville frenzy. Southwestern is big in the Fayetteville and Marcellus Shales but didn't get into NW Louisiana. They have some exposure in East Texas, but it doesn't seem to be at Haynesville depths.

This action is not without risk. If the recession deepens or is continues for a long time, Southwestern's spending might be premature. Additionally, much of the investment will require midstream assets (i.e. pipelines) that might have to be provided by companies that are more capital constrained and not able to make the investment in time for the Southwestern investment to pay off.

For those with an interest in the Haynesville Play, this is good news/bad news. It's good news to see a company bucking the trend of cutbacks, but it's bad news that it's not a Haynesville company. It's clear that the leasing activities of 2008 have injured some of the Haynesville participants. Done in by their own success.

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