Southwestern Energy is one of the lowest-cost producers in the upstream energy space in terms of both lifting cost (including items such as natural gas gathering costs, natural gas compression costs, and water disposal costs) and finding and development cost (which includes the cost of acreage rights and drilling wells) on a per-unit basis.
There are a few major drivers of this trend. Firstly, the majority of SWN’s production comes from the Fayetteville Shale, where it was a first mover and was able to obtain acreage at very low prices. Southwestern states that it was able to gain acreage rights in the area at ~$300 per acre. For reference, premier acreage in hot plays can trade at a much higher cost per acre. Over the past few years, acreage in plays like the Bakken and Eagle Ford has changed hands for over $10,000 an acre in some instances. Low acreage costs have helped to keep SWN’s finding and development costs per unit down.
Plus, Southwestern has been successful in increasing efficiency over time, which has also helped to depress finding costs. Well costs in the Fayetteville have generally decreased over time. Meanwhile, SWN has been able to increase the lateral length of wells significantly, which increases overall production from each well. SWN states that since 2007, well lateral lengths in the Fayetteville have increased by 94%, while well costs have decreased by 21%.
Southwestern also has a vertical integration program that has helped it keep costs low. As part of the program, the company owns its own sand plant, which helps to keep hydraulic fracturing costs down, as sand is a major input cost into the well completion process. SWN estimates that its vertical integration has lowered well costs by ~$380,000 per well in 2013.
Lastly, SWN’s operations are concentrated in areas that have proven to have solid production—the Fayetteville and Marcellus Shales. In the Fayetteville specifically, SWN has been able to grow production from each well as it optimizes well designs. The more production the company can sell, the lower the cost per unit.
Operators such as Range Resources (RRC) and Cabot Oil and Gas (COG) are also extremely low-cost and are similar to SWN in that they were early entrants into super-prolific natural gas basins (specifically the Marcellus Shale).
For more analysis on Southwestern Energy Company, see this Market Realist series.
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