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2008 Annual Report

OUR WAY

2350 N. Sam Houston Pkwy. East, Suite 125Houston, Texas 77032 281-618-4700

Southw

estern Energy Com

pany 200

8 Annual Report

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Corporate Headquarters

Southwestern Energy Company2350 N. Sam Houston Pkwy. EastSuite 125Houston, Texas 77032281-618-4700281-618-4818 (fax)

Annual Meeting

May 19, 2009 at 11:00 a.m. CDTHilton Houston North Hotel - GreenspointHouston, Texas

Independent PublicAccountants

PricewaterhouseCoopers LLPTulsa, Oklahoma

Investor Relations

Greg D. KerleyExecutive Vice Presidentand Chief Financial Officer

Bradley D. SylvesterVice President,Investor Relations

Southwestern Energy Company’s Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission (SEC) includes the required certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. The Company also has filed with the New York Stock Exchange (NYSE) the 2008 annual certification of the Chief Executive Officer confirming that Southwestern Energy Company has complied with the NYSE corporate governance listing standards.

Forward-looking statements: This annual report contains forward-looking statements regarding Southwestern Energy Company’s future plans and performance based on assumptions the Company believes are reasonable. A number of factors could cause actual results to differ materially from these statements. For further information regarding these factors, see “Cautionery Statement About Forward-Looking Statements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Risk Factors” in the Company’s 2008 Form 10-K.

Design: Michael Thede Design LLC; Photography: Cover – GettyOne; Introduction, Fayetteville Shale Play, Arkoma Basin and East Texas – DOXA; Executive portraits – Pete Lacker Photography; Printing: Classic Color

©2009 Southwestern Energy Company All rights reserved.

Website

www.swn.com

Transfer Agent and Registrar

Computershare Trust Co., N.A.P.O. Box 43036Providence, RI 02940-3036800-446-2617

By overnight delivery: c/o Computershare Investor Services 250 Royall StreetCanton, MA 02021

Direct Stock Purchase andDividend Reinvestment Plan ComputershareInvestor ServicesP.O. Box 43081Providence, RI 02940-3081800-446-2617

Subsidiary Offices

Southwestern Energy Production CompanySouthwestern Midstream Services Company2350 N. Sam Houston Pkwy. EastSuite 125Houston, Texas 77032281-618-4700281-618-4818 (fax)

SEECO, Inc.1083 Sain StreetP.O. Box 13408Fayetteville, Arkansas 72703-1004479-521-1141479-521-0328

Southwestern Energy CompanySouthwestern Energy Production CompanySEECO, Inc.DeSoto Drilling, Inc. (DDI)DeSoto Gathering Company, LLC (DGC)23 Nabco AvenueConway, Arkansas 72032501-548-6500 501-548-6550 (fax)501-548-6600 (DDI)501-548-6852 (DDI fax)501-548-6700 (DGC)501-548-6755 (DGC fax)

®

The Right People doing the Right Things, wisely investing the cash flow from the underlying Assets will create Value +®

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2008Record achievements in net income, EBITDA(1), production, reserves and reserve replacement(2)

Significantly improved performance in our Fayetteville Shale play

Continued success in leveraging our expertise in our East Texas and Arkoma Basin operations

Pro-actively managed our capitalstructure, creating a solid balance sheet and financial flexibility

Well-positioned in 2009 as we continue our focus on organic growth and value added per dollar invested (1) EBITDA is a non-GAAP financial measure. (2) Includes reserve revisions.

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1 Southwestern Energy Company 2008 Annual Report

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OUR WAY is really quite simple, but hard to achieve. We began this journey of building a leading energy company about 10 years ago.”

OUR WAY… it sounds like a great song!

In this 2008 Annual Report, we will give you a sense of ‘OUR WAY.’ To those of you who have been around our Company for a number of years, please join us in celebrating the position we are in, and, for those who might be new to our Company, think about becoming a part of OUR WAY.

OUR WAY is really quite simple, but hard to achieve. We began this journey of building a leading energy company about 10 years ago. Our starting point was building a team of quality people who could create in their minds the opportunity areas for us to invest in. Some people to recognize would be those like Al Stevens and, more recently, Richard Lane who have moved on to other adventures, but who have left an indelible mark on the process of finding oil and gas at Southwestern Energy. Today, we find ourselves with a culture focused on organic growth and value creation as solidly as any time in our history.

Over the years, I have spoken about the importance of the concept of value added per dollar invested, we call it PVI for short. The equation is —

We have as our threshold target to invest in projects that generate a PVI of at least 1.3. OUR WAY is to tightly focus on PVI for a very simple reason — it can be proven mathematically that if each discretionary dollar of cash flow is invested in projects that generate the highest PVI, you will maximize the Net Present Value of the enterprise and therefore the Net Asset Value per share. We believe that stock price will ultimately follow Net Asset Value per share. This is a strategy which we have faithfully followed for ten years and I believe that the performance of Southwestern Energy is a testament to the success of this strategy.

So, how has OUR WAY positioned us for 2009? On the numbers side of things, we are leading the industry in both production and reserve growth, while at the same time benefiting from one of the lowest finding and development and operating costs in the industry. On the project side, we have thousands of wells to drill on 875,000 net acres in the Fayetteville Shale project in Arkansas, with quite possibly the most economic position in a shale play in the United States.

TO OUR SHAREHOLDERS:

“

PVI =

Present value of futurerevenues minus costs,

discounted at 10%

Investment

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On the people side, we are strong and getting even stronger as we continue to add top talent across our Company. On the financial front, moves that we made in 2008 have placed us in great condition, with a debt-to-total capitalization ratio of 23% and nearly $200 million of cash on hand at year-end, and with a $1 billion unsecured credit facility with nothing borrowed on it. We are so fortunate to have pursued OUR WAY.

For 2009, we have a planned capital program of investment of $1.9 billion, approximately 80% of which will go to the development and further assessment of our acreage position in the Fayetteville Shale, with the flexibility to modify our activity if we find ourselves in a challenged commodity price environment for an extended period of time. The key thing to know about OUR WAY is that when our industry comes out the other side of this commodity price cycle —

Southwestern Energy will be financially healthy and growing significantly and at low cost levels. Where else would we have planned to be?

In closing, as we look beyond the current downturn, we are very well-positioned with a quality team of people, discipline in our decision making, a very low cost structure and highly visible, profitable projects in which to invest. Thanks so much to our people for continuing to innovate and create new opportunities allowing us to be an industry leader. Also, thanks to our shareholders who have believed in PVI and have entrusted us with their money as our capital to wisely invest — .

Sincerely,

Harold M. Korell, CEO & Chairman of the Board


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’08 ’07 ’06Financial Operating revenues (in millions) $ 2,311.6 $ 1,255.1 $ 763.1 Operating income (in millions) $ 886.8 $ 381.5 $ 246.3

Net income (in millions) $ 567.9 $ 221.2 $ 162.6

Diluted earnings per share(1) $ 1.64 $ 0.64 $ 0.47 EBITDA (in millions)(2) $ 1,362.3 $ 675.4 $ 414.5 Capital investments (in millions) $ 1,796.2 $ 1,503.1 $ 942.4 Average diluted shares outstanding (in millions)(1) 346.2 347.4 342.6

Exploration & Production Total proved reserves (Bcf equivalent) 2,184.6 1,450.3 1,026.3 Percent of reserves natural gas 100% 96% 95% Percent of reserves proved developed 62% 64% 65% Total production (Bcf equivalent) 194.6 113.6 72.3

Average gas price ($/Mcf) $ 7.52 $ 6.80 $ 6.55 Average oil price ($/barrel) $ 107.18 $ 69.12 $ 58.36

Finding and development cost ($/Mcfe)(3) $ 1.53 $ 2.54 $ 2.72 Reserve replacement ratio(4) 523% 474% 386% Reserve life (years) 11.2 12.8 14.2

Midstream Services Operating income (in millions) $ 62.3 $ 13.2 $ 4.1 EBITDA (in millions)(2) $ 73.9 $ 18.8 $ 5.3 Gas volumes marketed (Bcf) 258.0 145.7 72.7 Gas volumes gathered (Bcf) 224.1 78.7 14.6

(1) 2007 and 2006 restated to reflect two-for-one stock split effected on March 25, 2008.(2) EBITDA is a non-GAAP financial measure.(3) Finding and development cost is a non-GAAP financial measure. Includes reserve revisions but excludes capital invested in drilling rigs.(4) Includes reserve revisions.

Financial &Operating Highlights

In 2008 we set records fornet income, EBITDA, production,reserves and reserve replacement.

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Financial &Operating Highlights continued

’08

$567.9

NetIncome(in millions)

’07

$162.6

’06

$147.8

’05

$103.6

’04

$221.2

’08

$1.53

Finding and Development Costs($/Mcfe)

’07

$2.72

’06

$1.70

’05

$1.43

’04

$2.54

’08

194.6

Production(Bcfe)

’07

72.3

’06

61.0

’05

54.1

’04

113.6


’08

$1,362.3

EBITDA(in millions)

’07

$414.5

’06

$345.9

’05

$255.3

’04

$675.4

’08

523%

ReserveReplacementRatio

’07

399%

’06

386%

’05

365%

’04

474%

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It was just a little over four years ago when we announced to the world that we had discovered and started producing natural gas from a shale reservoir in Arkansas called the Fayetteville Shale. Today, the Fayetteville Shale is the primary focus of our business and, with a position of 875,000 net acres, we know there are thousands of wells to drill here over many years to come. During 2008, we drilled a total of 604 wells, up from 415 wells in 2007, resulting in exceptional growth in both our production volumes and reserves. Our gross operated production grew dramatically from approximately 325 MMcf per day at the beginning of 2008 to approximately 720 MMcf per day at year-end, resulting in net production of 134.5 Bcf in 2008, compared to 53.5 Bcf in 2007. Total proved gas reserves booked in the play more than doubled to 1,545 Bcf at year-end 2008, up from 716 Bcf at year-end 2007.

During 2008, we continued to improve our drilling practices in the Fayetteville Shale play, meaningfully reducing our drilling time while significantly increasing our lateral lengths. Our horizontal wells had an average completed well cost of $3.0 million per well, average horizontal lateral length of 3,619 feet and average time to drill to total depth of 14 days from re-entry to re-entry in

2008, compared to an average completed well cost of $2.9 million per well, average horizontal lateral length of 2,657 feet and average time to drill to total depth of 17 days from re-entry to re-entry during 2007. During the past two years, we have made continuous improvements in our completion practices, with wells placed on production in 2008 averaging initial production rates of 2,777 Mcf per day, compared to average initial production rates of 1,687 Mcf per day in 2007. We believe that, along with longer lateral lengths, closer perforation cluster spacing techniques that we began to test in our horizontal wells in 2008 contributed to higher initial production rates. We are currently planning to utilize this technique on all planned wells in 2009. For 2009, we are planning to invest approximately $1.6 billion in our Fayetteville Shale play, including drilling up to 650 wells and investing up to $200 million in our gathering systems. In 2009, our drilling program will focus on continuing to develop our large acreage position while also testing different well spacing patterns to better understand the scale of the play.

Fayetteville Shale Play

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Our key accomplishment in 2008 was the progress of our Fayetteville Shale play, the driver of our significant production and reserve growth and

a project with thousands of wells remaining to be drilled on our very large acreage position.

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Our East Texas drilling program is a perfect example of how we turn creative geologic ideas into value for our shareholders.

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We have a history of creating value through the generation of new ideas and innovative drilling and completion techniques. There is no better example of this than our Overton Field. We entered East Texas in 2000 with the barely-noticed purchase of approximately 11,000 acres with a few wells on it. Since that time, we have drilled over 370 wells in our Overton Field in Smith County, Texas, all of which were successful. We have produced over 145 Bcfe of cumulative production from the field through year-end 2008 and have 273 Bcfe of booked reserves at December 31, 2008. While our roots in East Texas are at Overton, we continue to create and implement new ideas in this historic basin.

Building on our success in Overton, we began to acquire a significant acreage position in the Angelina River Trend, an area which spans four separate counties in East Texas. We began drilling in 2004 targeting primarily the Travis Peak formation and, in late 2007, we completed our first horizontal well in the James Lime formation.

Our 2008 drilling program was primarily focused on developing the James Lime formation in our Jebel prospect area located in Shelby County, Texas. During 2008, we participated in 32 James Lime horizontal wells (20 of which we operated) and placed 15 operated wells on production at an average gross initial production rate of 9.1 MMcfe per day with 5 wells in progress at year-end. Net proved reserves in the Angelina area were 74 Bcfe at year-end 2008, compared to 33 Bcfe at year-end 2007, while net production from our Angelina properties was 11.3 Bcfe in 2008, compared to 2.5 Bcfe in 2007. At December 31, 2008, we held approximately 103,000 gross acres at Angelina.

In 2009, we plan to invest up to $110 million to drill approximately 40 wells in East Texas, 34 of which are planned to be horizontal wells targeting the James Lime formation.


East Texas

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Our strategy in the Arkoma Basin is to continue to develop our large acreage position while also identifying new trends and plays using our extensive expertise in the area. In 2008, we invested approximately $133 million and participated in 81 wells in our conventional Arkoma drilling program, of which 67 were successful and 8 were in progress at year-end, resulting in a 92% success rate and adding new reserves of 37 Bcf, excluding revisions. Production over the last few years from the basin has increased with new production from our drilling program more than offsetting the natural production decline of existing wells. Net production from our conventional Arkoma properties was 24.4 Bcf in 2008, compared to 23.8 Bcf in 2007. At December 31, 2008, we had approximately 281 Bcf of reserves that were attributable to our conventional Arkoma properties.

In recent years, our Arkoma Basin development program has focused primarily on the Ranger Anticline area and the Midway area. We began drilling at our Midway prospect area located approximately 11 miles north of Ranger in 2005 and, through year-end 2008, we had drilled a total of 59 wells. At year-end 2008, we held approximately 31,000 gross acres in our Midway prospect area. From 1997 through year-end 2008, we had successfully drilled 215 wells at Ranger. At December 31, 2008, we held approximately 96,640 gross acres at Ranger, of which 24,320 acres were developed.

In 2009, we plan to invest approximately $60 million in our conventional Arkoma program and will drill approximately 25 wells.

Arkoma Basin


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For over 65 years, we have been producing clean-burning natural gas from the resource-rich Arkoma Basin.

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Executive Officers

As Shown from left to right: Gene A. Hammons (4), President, Southwestern Midstream Services Company; Steven L. Mueller*, President and Chief Operating Officer, Southwestern Energy Company; Harold M. Korell (12), Chief Executive Officer and Chairman of the Board; Greg D. Kerley (19), Executive Vice President and Chief Financial Officer; Mark K. Boling (7), Executive Vice President, General Counsel and Secretary

Harold M. Korell (12)Chief Executive Officer and Chairman of the Board

Robert L. Howard (14)Retired,Shell Oil Company

Vello A. Kuuskraa (6)President and Chairman of the Board, Advanced Resources International, Inc.

Kenneth R. Mourton (14)Managing Partner,Ball and Mourton,Ltd., PLLC

Lewis E. Epley, Jr. (11)Retired, Attorney at Law

Directors

Charles E. Scharlau (57)Retired CEO, Southwestern Energy Company

Corporate Officers

Harold M. Korell (12)Chief Executive Officer and Chairman ofthe Board

Steven L. Mueller*President and Chief Operating Officer

Greg D. Kerley (19)Executive Vice Presidentand Chief Financial Officer

Mark K. Boling (7)Executive Vice President,General Counsel andSecretary

Dee W. Hency (31)Vice President –Administration and ChiefInformation Officer

Timothy J. O’Donnell (18)Treasurer and Vice President – Human Resources

SubsidiaryOfficers

Southwestern EnergyProduction Company, SEECO, Inc. and DeSotoDrilling, Inc.

J. Alan Stubblefield (11)Senior Vice President –Southwestern EnergyProduction Company

John D. Thaeler (10)Senior Vice President –New Ventures & R2

Jim R. Dewbre (11)Senior Vice President – Land and Business/Organizational Development

Jeffrey B. Sherrick*Senior Vice President – U.S. Exploitation

John C. Gargani (15)Vice President – Economic Planningand Acquisitions

Alan R. Clemens (11)Vice President – Geosciences

James L. Bolander, Jr. (8)Vice President – Chief Operations Engineer

John E. Bergeron (1)Vice President – DeSoto Planning and Technology

Sonny H. Bryan (7)Vice President – DeSoto Operations

George A. Sheffer (4)Vice President – E&P Services

Randall D. Ponder (4)Vice President – New Ventures

Martin D. Carley (3)Vice President – DeSoto Drilling, Inc.

Southwestern MidstreamServices Company

Gene A. Hammons (4)President

Josh R. Weber (3)Vice President –Planning andCommercial Operations

Robert C. Owen*Controller and ChiefAccounting Officer

Danny W. Ferguson (4)Vice President –Government Relations

Bradley D. Sylvester (12)Vice President –Investor Relations

Years of service with the company are shown on this page in parentheses, and an asterisk (*) indicates less than 1 year of service.

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Corporate Headquarters

Southwestern Energy Company2350 N. Sam Houston Pkwy. EastSuite 125Houston, Texas 77032281-618-4700281-618-4818 (fax)

Annual Meeting

May 19, 2009 at 11:00 a.m. CDTHilton Houston North Hotel - GreenspointHouston, Texas

Independent PublicAccountants

PricewaterhouseCoopers LLPTulsa, Oklahoma

Investor Relations

Greg D. KerleyExecutive Vice Presidentand Chief Financial Officer

Bradley D. SylvesterVice President,Investor Relations

Southwestern Energy Company’s Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission (SEC) includes the required certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. The Company also has filed with the New York Stock Exchange (NYSE) the 2008 annual certification of the Chief Executive Officer confirming that Southwestern Energy Company has complied with the NYSE corporate governance listing standards.

Forward-looking statements: This annual report contains forward-looking statements regarding Southwestern Energy Company’s future plans and performance based on assumptions the Company believes are reasonable. A number of factors could cause actual results to differ materially from these statements. For further information regarding these factors, see “Cautionery Statement About Forward-Looking Statements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Risk Factors” in the Company’s 2008 Form 10-K.

Design: Michael Thede Design LLC; Photography: Cover – GettyOne; Introduction, Fayetteville Shale Play, Arkoma Basin and East Texas – DOXA; Executive portraits – Pete Lacker Photography; Printing: Classic Color

©2009 Southwestern Energy Company All rights reserved.

Website

www.swn.com

Transfer Agent and Registrar

Computershare Trust Co., N.A.P.O. Box 43036Providence, RI 02940-3036800-446-2617

By overnight delivery: c/o Computershare Investor Services 250 Royall StreetCanton, MA 02021

Direct Stock Purchase andDividend Reinvestment Plan ComputershareInvestor ServicesP.O. Box 43081Providence, RI 02940-3081800-446-2617

Subsidiary Offices

Southwestern Energy Production CompanySouthwestern Midstream Services Company2350 N. Sam Houston Pkwy. EastSuite 125Houston, Texas 77032281-618-4700281-618-4818 (fax)

SEECO, Inc.1083 Sain StreetP.O. Box 13408Fayetteville, Arkansas 72703-1004479-521-1141479-521-0328

Southwestern Energy CompanySouthwestern Energy Production CompanySEECO, Inc.DeSoto Drilling, Inc. (DDI)DeSoto Gathering Company, LLC (DGC)23 Nabco AvenueConway, Arkansas 72032501-548-6500 501-548-6550 (fax)501-548-6600 (DDI)501-548-6852 (DDI fax)501-548-6700 (DGC)501-548-6755 (DGC fax)

®

The Right People doing the Right Things, wisely investing the cash flow from the underlying Assets will create Value +®

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®

2008 Annual Report

OUR WAY

2350 N. Sam Houston Pkwy. East, Suite 125Houston, Texas 77032 281-618-4700

Southw

estern Energy Com

pany 200

8 Annual Report

Yellow Angle Y

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Magenta Angle M

Cyan Angle C

117760CVR_r3_MECH_08_SWN_AR_CVR.1 1 3/11/09 11:30:13 AM

angle c angle m angle y angle k cyan our way - annual report€¦ · annual report yellow angle y...

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