energy core value - annual report · core value 2350 n. sam houston pkwy. e., suite 125...

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Core ValueSouthwestern Energy Company 2010 Annual Report2350 N. Sam Houston Pkwy. E., Suite 125

Houston, TX 77032 281.618.4700

South

weste

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nerg

y Com

pany 2

010

Annual R

eport

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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 “Cautionary 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 2010 Form 10-K.

Design: Michael Thede Design LLCPhotography: Southwestern Energy Companyand Pete Lacker Photography Executive portraits: Pete Lacker PhotographyPrinting: Classic Color

©2011 Southwestern Energy CompanyAll rights reserved.

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

®

CorporateHeadquarters

Southwestern Energy Company2350 N. Sam Houston Pkwy. E.Suite 125Houston, TX 77032281.618.4700281.618.4818 (fax)

International Subsidiary Office

SWN Resources Canada, Inc.Commerce Place633 Main Street, Suite 600Moncton, New Brunswick, Canada E1C9X91.877.796.6223

Annual Meeting

May 17, 2011 at 11:00 a.m. CDTHilton Houston North Hotel 12400 Greenspoint Drive Houston, TX 77060

Independent RegisteredPublic Accountants

PricewaterhouseCoopers LLPTulsa, OK

Investor Relations

Greg D. KerleyExecutive Vice Presidentand Chief Financial Officer

Bradley D. SylvesterVice President –Investor Relations

Website

www.swn.com

Transfer Agentand 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

DomesticSubsidiary Offices

Southwestern Energy Production CompanySouthwestern Midstream Services Company2350 N. Sam Houston Pkwy. E.Suite 125Houston, TX 77032281.618.4700281.618.4818 (fax)

Southwestern Energy CompanySouthwestern Energy Production CompanyDeSoto Drilling, Inc. (DDI)DeSoto Gathering Company, LLC (DGC)1000 SWN DriveP.O. Box 789Conway, AR 72032501.548.6500501.548.6550 (fax)501.548.6600 (DDI)501.548.6852 (DDI fax)501.548.6700 (DGC)501.548.6755 (DGC fax)

A.W. Realty1083 Sain StreetP.O. Box 13408Fayetteville, AR 72703-1004479.521.1141

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We set new records for production,reserves, earnings and EBITDA(1)

Our production and reserves both grew by 35% in 2010, as we continue to show exceptional organic growth powered by our position in the Fayetteville ShaleWe began drilling on our acreage in Pennsylvania targeting the Marcellus Shale and look for that success to continue in 2011We commenced an exploration program for natural gas and crude oil under 32 licenses in New Brunswick, CanadaWe continue to have an industry-leading low cost structure, as our finding and development cost of $1.02 per Mcfe and production costs of $0.93 per Mcfe for 2010 are among the lowest in our industry(2)

We believe that our core strengths of finding and developing new oil and gas reserves, enhancing our efficiencies through economies of scale and our focus on simply doing the Right Things will provide Value+

2010

1 SOUTHWESTERN

ENERGYCOMPANY

2010ANNUALREPORT

(1) EBITDAisanon-GAAPfinancialmeasure.

(2) Findinganddevelopmentcostisanon-GAAPfinancialmeasure. Findinganddevelopmentcostincludesreserverevisions,but excludescapitalrelatedtothecompany’sdrillingrigrelatedequipment, sandfacilityandotherequipment.ProductioncostsperMcfeinclude leaseoperatingexpensesandproductiontaxes.

About our cover: Picture of a thin section of a rock taken at 100 times magnification. Thin sections are rock samples cut and polished to half the thickness of a human hair – so thin that light can shine through the rock. Geologists use thin sections to determine rock mineralogy and porosity (the holes that hold natural gas and crude oil) and to better understand hydrocarbon reservoirs. Porosity appears as shades of blue and is present as blue horizontal layers and thin vertical blue lines.

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Theseeminglymonotonouslayersoforganic

matter and extremely fine grained sedimentary material

havealwaysbeenimportanttotheproductionofoil

andgasfortworeasons.First,athickshalesection

aboveconventionalreservoirscreatesasealthatmakes

thedifferencebetweenalargehydrocarbonaccumulation

andaprospectwithlittleornooilandgas.Second,the

organicmatterintheshaleisthesourceoftheconventional

oilandgas.Theshalesectionisburiedtodepthswith

sufficient heat and pressure to break the organic matter

intohydrocarbons.Undertherightconditions,expulsion

ofthehydrocarbonintonearbyconventionalreservoirrock

allowsforaccumulationineconomicquantitiesthatwe

cantargetindrilling.Manyshalezoneswereknownto

havehighporosityanditwaswellestablishedthatthe

sourcerockoftenhadhighresidualconcentrationsofoil

or gas. The ability of the shale to flow hydrocarbons in

commercialquantitieswasalwaystheissue.

Overthepastseveralyears,industrythinkingabout

shalehasradicallychangedaswehavelearnedhow

shaleispotentiallyasource,sealandreservoirforoiland

gas.SimilartotheenlightenmentprovidedbytheHubble

telescoperegardingthedetailsofdeepspace,focusing

onthesmalldetailsoftheporesystemsinshalehas

producedstunningpicturesofwhatweoncethoughtwas

monotonous.Onthecoverandthroughoutourannual

reportareseveralphotosofthinsectionstakenfromcores

invariousshaleformations.Theyhaveart-likequalities

and,likegreatart,theyrevealsomethingdeeper.Forthe

skilledobserver,theyunfoldwhyshaleformationscan

beexcellentreservoirs.

Itiseasytoforgetthattheinformationlockedinthese

pictureswasalwaysthere.Itwasliterallypartoftheway

theshaleworks.Thesepictureshavevaluebecausethey

showunexpecteddetailsandanswerquestionsthatwere

notaskeduntilnow.Answeringquestionsnotyetasked

andworkingthroughthedetailstoprovideresultsnoone

expectsisahallmarkofSouthwesternEnergy.Theresult

hasbeenanotherrecordyearin2010forourcompany.

Productionandreserveseachgrew35%whileEBITDA

increased more than 17%. Our finding and development

costsandproductioncostsremainassomeofthelowestin

theindustry.In2010,weconcentratedondeterminingthe

rightspacingintheFayettevilleShaleanddiscoveredatleast

20%ofthetestedacreagecanbedrilledwithtwicethe

To our shareholders:Shale has been studied for hundreds of years and was thought to be well understood by the scientific community.

On the cover and throughout our annual report are several photos of thin sections taken from cores in various shale formations. They have art-like qualities and, like great art, they reveal something deeper.

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3 SOUTHWESTERN

ENERGYCOMPANY

2010ANNUALREPORT

Answering questions not yet asked and working through the details to provide results no one expects is a hallmark of Southwestern Energy.”

“

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number of wells previously thought. We continued to

drive down the days to drill a well in the Fayetteville Shale

and at the same time have increased the horizontal

lateral length by 10%. The shorter time to drill combined

with the full year of supplying stimulation sand from our

own plant has caused the average well cost to decrease

by more than 3%.

Wealsoplacedourfirstwellsonproductionin

Pennsylvania and exited the year producing more than

35 MMcf per day gross from 7 wells. In addition, our

acreage in New Venture projects increased to more than

3,000,000 net acres. Of that approximately 2,500,000

net acres were leased in New Brunswick, Canada

by looking at old data in a new way.

Like the details of the shale, the success in 2010 was

intrinsic to who we are and how we work. Innovation, focus

and the drive to create “Value+” for our shareholders are

at our core. Our 2011 programs will extend our core values

in many exciting ways. We will exit the year drilling mainly

development wells from pads in the Fayetteville Shale and

expect to decrease the average time to drill our wells from

11 days in 2010 to around 8 days per well by year-end

2011. An increase from one to two rigs is planned in

Pennsylvania, more than doubling the wells drilled

compared to 2010 with the expectation of achieving a gross

production rate of more than 100 MMcf per day by

year-end.Inaddition,weplantodrillourfirstwellon

another idea we have been working on the past two years

and are permitting to shoot regional 2-D seismic in

NewBrunswicktohelplocateourfirstwelltherein2012.

Finally, we plan to maintain our low cost structure and

a strong balance sheet to help insure success in any gas

price environment.

Our promise to you is to search beyond the current

vantage point, discover the key details and create

opportunities for stunning results. That is what our formula

is all about – . Our performance over the past

severalyearsconfirmthatitispartofourcore.Itissimply

“Core Value+”.

Sincerely,

Steven L. MuellerPresident&ChiefExecutiveOfficer


404.7

72.3

113.6

194.6

300.4

’06 ’07 ’08 ’09 ’10

Production (Bcfe)

Financial Charts $ 604.1

$ 162.6

$ 221.2

$ 567.9$ 522.7

’06 ’07 ’08 ’09 ’10

Adjusted Net Income (in millions)(1)

We again set new records for production,4,937

1,026

1,450

2,185

3,657

’06 ’07 ’08 ’09 ’10

Reserves (Bcfe)

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Operating revenues (in millions) $ 2,610.7 $ 2,145.8 $ 2,311.6

Adjusted operating income (in millions)(1) $ 1,021.2 $ 872.8 $ 886.8

Adjusted net income (in millions)(1) $ 604.1 $ 522.7 $ 567.9

Adjusted diluted earnings per share(1) $ 1.73 $ 1.52 $ 1.64

EBITDA (in millions)(2) $ 1,612.3 $ 1,368.1 $ 1,362.3

Capital investments (in millions) $ 2,120.1 $ 1,809.1 $ 1,796.2

Average diluted shares 349.3 343.4 346.2 outstanding (in millions)

Total proved reserves (Bcf equivalent) 4,937.3 3,656.7 2,184.6

Percent of reserves natural gas 100% 100% 100%

Percent of reserves proved developed 55% 54% 62%

Total production (Bcf equivalent) 404.7 300.4 194.6

Average gas price ($/Mcf) $ 4.64 $ 5.30 $ 7.52

Average oil price ($/barrel) $ 76.84 $ 54.99 $ 107.18

Finding and development cost ($/Mcfe)(3) $ 1.02 $ 0.86 $ 1.53

Production cost ($/Mcfe)(4) $ 0.93 $ 0.86 $ 1.00

Reserve replacement ratio(5) 430% 592% 523%

Reserve life (years) 12.2 12.2 11.2

Operating income (in millions) $ 191.6 $ 122.6 $ 62.3

EBITDA (in millions)(2) $ 220.5 $ 141.9 $ 73.9

Gas volumes marketed (Bcf) 495.8 382.5 258.0

Gas volumes gathered (Bcf) 588.3 387.1 224.1

Financial & Operating Highlights 2010 2009 2008Financial

Exploration& Production

MidstreamServices


FOOTNOTES

(1) Adjustedoperatingincome, adjustednetincomeand adjusteddilutedEPSexclude a$907.8millionnon-cash ceilingtestimpairment ($558.3millionnetoftaxes) ofthecompany’snaturalgas andoilpropertiesresulting fromlowernaturalgasprices recordedinthefirstquarter of2009.

(2) EBITDAisanon-GAAP financialmeasure.

(3) Findinganddevelopment costisanon-GAAPfinancial measure.Includesreserve revisionsbutexcludescapital relatedtothecompany’s drillingrigrelatedequipment, sandfacilityandotherequipment.

(4) ProductioncostperMcfe includesleaseoperating expensesandproductiontaxes.

(5) Includesreserverevisions.

5 SOUTHWESTERN

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2010ANNUALREPORT

$ 1,612.3

$ 414.5

$ 675.4

$ 1,362.3 $ 1,368.1

’06 ’07 ’08 ’09 ’10

EBITDA (in millions)(2)

$ 1.02

$ 2.72

$ 1.53

’06 ’07 ’08 ’09 ’10

Finding &Development Cost ($/Mcfe)(3)

$ 2.54

$ 0.86

$ 0.93$ 1.00

’06 ’07 ’08 ’09 ’10

$ 0.95

Production Cost ($/Mcfe)(4)

$ 0.86 $ 0.86

reserves, earnings & EBITDA in 2010

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Operating revenues (in millions) $ 2,610.7 $ 2,145.8 $ 2,311.6

Adjusted operating income (in millions)(1) $ 1,021.2 $ 872.8 $ 886.8

Adjusted net income (in millions)(1) $ 604.1 $ 522.7 $ 567.9

Adjusted diluted earnings per share(1) $ 1.73 $ 1.52 $ 1.64

EBITDA (in millions)(2) $ 1,612.3 $ 1,368.1 $ 1,362.3

Capital investments (in millions) $ 2,120.1 $ 1,809.1 $ 1,796.2

Average diluted shares 349.3 343.4 346.2 outstanding (in millions)

Total proved reserves (Bcf equivalent) 4,937.3 3,656.7 2,184.6

Percent of reserves natural gas 100% 100% 100%

Percent of reserves proved developed 55% 54% 62%

Total production (Bcf equivalent) 404.7 300.4 194.6

Average gas price ($/Mcf) $ 4.64 $ 5.30 $ 7.52

Average oil price ($/barrel) $ 76.84 $ 54.99 $ 107.18

Finding and development cost ($/Mcfe)(3) $ 1.02 $ 0.86 $ 1.53

Production cost ($/Mcfe)(4) $ 0.93 $ 0.86 $ 1.00

Reserve replacement ratio(5) 430% 592% 523%

Reserve life (years) 12.2 12.2 11.2

Operating income (in millions) $ 191.6 $ 122.6 $ 62.3

EBITDA (in millions)(2) $ 220.5 $ 141.9 $ 73.9

Gas volumes marketed (Bcf) 495.8 382.5 258.0

Gas volumes gathered (Bcf) 588.3 387.1 224.1

Financial & Operating Highlights 2010 2009 2008Financial

Exploration& Production

MidstreamServices


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Shales are often perceived as homogeneous and monotonous, but in detail they can be microstructurally very complex. This complexity increases the number of fractures, and thus the ability of the rock to store natural gas, as shown here in our Neal 9-8 #2-26 well located in Cleburne County, Arkansas. The rock is clearly laminated, and has been folded and subsequently cut by carbonate-filled (blue) and open (pink) fractures. This picture was taken from a thin section which was approximately 0.2 inches wide and 0.3 inches in length.

<

The Fayetteville Shale continues to deliver exceptional results.

During2010,weinvestedapproximately$1.3billioninourFayettevilleShaleplayandparticipatedindrilling658wells,comparedtoinvestingapproximately$1.3billionfor570wellsin2009.Resultsfromthisworld-classnaturalgasplaycontinuetoimpress,asournetproductionfromtheFayettevilleShalewas350.2Bcfin2010,up44%from243.5Bcfin2009.OurgrossdailyproductionfromouroperatedwellsintheFayettevilleShaleplayincreasedfromapproximately1,225MMcfperdayatthebeginningof2010toapproximately1,635MMcfperdaybyyear-end.

TotalprovednetgasreservesbookedintheFayettevilleShaleplayatyear-end2010were4.3Tcf,up39%fromreservesbookedattheendof2009.Withover2,000operatedwellsdrilledsinceweannouncedtheplayin2004,weknowthatthereisstillmuchmoreworktobedoneinthefuture.Ontheacreagewehavedrilledtodate,webelievethatwehaveaninventoryofthousandsofadditionalwellsremainingtobedrilledandcompletedovertime,basedondatafromourwellspacingstudies.

Wealsocontinuedtoimproveourdrillingandcompletionpracticesin2010,asouroperatedhorizontalwellshadanaveragecompletedwellcostof$2.8millionperwell,comparedtoanaverageof$2.9millionperwell in 2009. The decrease in our drilling times and other savings and benefits from more efficient operations have morethanoffsetlongeraveragelaterallengths.Ouraverageinitialproducingratesofapproximately3.4millioncubic feet per day were roughly flat compared to last year’s 3.5 million cubic feet average rate. During 2010, 40% of our operated wells were drilled along the periphery of the field as the first well in a section, which created aslightlydifferentmixofwellscomparedtoour2009results.

In2011,weplantoinvestapproximately$1.15billionintheFayettevilleShaleplay,whichincludesparticipatinginapproximately530to540grosshorizontalwells,440to450ofwhichwillbeoperated.

Fayetteville Shale Play

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This Marcellus Shale sample was recovered in our Greenzweig #1-V well located in Bradford County, Pennsylvania. The matrix consists of quartz silt, detrital clay, organic matter, and scattered bioclastic debris of bethonic and pelagic fauna. This rock has good porosity (blue) and, in combination with the organic material buried at the right depths and temperatures, has generated natural gas within the reservoir.

<

We are focused on diversifying our existing portfolio through our Marcellus Shale operations in Pennsylvania and our New Ventures ideas.

WekickedoffourMarcellusShaledrillingprogramin2010,investingapproximately$118millioninPennsylvaniaandparticipatingin21wells,ofwhich6weresuccessfuland15wereinprogressatyear-end.These6wellsarealloperatedhorizontalMarcellusShalewellslocatedinourGreenzweigareainBradfordCountythatproductiontestedbetween4and8MMcfperday,resultinginnetproductionfromourPennsylvaniapropertiesof1.0Bcfin2010.WeanticipateourMarcellusactivitytogrowsubstantiallyin2011andplantoinvestapproximately$265million,whichincludesparticipatinginatotalof40to45wells,allofwhichwillbeoperated.Fromthisplan,webelievethatourgrossdailyproductionfromtheMarcellusShalecouldgrowtoapproximately100MMcfbyyear-end2011.

OurMarcellusoperationswillcontinuetobecomplementedbyourEastTexasoperations,whichwefirst began in 2000 with the purchase of the Overton Field in Smith County, Texas and our conventional Arkoma Basinprogram.In2010,weinvestedapproximately$150millioninEastTexasandparticipatedin25wells,ofwhich17weresuccessfuland8wereinprogressatyear-end.NetproductionfromEastTexaswas34.3Bcfein 2010, compared to 34.9 Bcfe in 2009. In our conventional Arkoma Basin program, we invested approximately $13 million and participated in 9 wells. Net production from our conventional Arkoma properties was down 13%to19.2Bcfin2010primarilyduetoalowerlevelofinvestmentascomparedtopreviousyears.In2011,aswecontinueconcentratingontheFayettevilleandMarcellusShales,wewillbereducingourplannedinvestments in the East Texas and conventional Arkoma Basin drilling programs.

We also actively seek to find and develop new oil and gas plays with significant potential, which we refer to as “New Ventures.” At December 31, 2010, we held over 3 million net undeveloped acres in connection withourNewVenturesprospects,ofwhichover2.5millionnetacreswerelocatedinNewBrunswick,Canadaandtheremainingapproximately490,000netacresarelocatedintheU.S.In2010,weinvestedapproximately$145millioninourNewVenturesprogramsandin2011weplantoinvestapproximately$170million,whichincludesdrillinginatleastonenewarea.

U.S. Exploitation &New Ventures

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This picture of a thin section sample uses ultra-violet light and shows light blue, horizontal layers of clay that contain bright blue patches of porosity. This thin section also shows horizontal layers of very dark organic matter between the light blue bands (organic matter is the source for gas and oil when it is heated at certain depths and temperatures in the earth).

<

Our Midstream Services business supports and complements our E&P business and is well-positioned to increase our overall returns.

OurMidstreamServicessegmentgeneratesrevenuefromgatheringfeesassociatedwiththetransportationofnaturalgastomarketandthroughthemarketingofnaturalgas,primarilyforourE&Psubsidiaries.OurgatheringassetsarecurrentlyconcentratedinourFayettevilleShaleplay,whereourgatheringsystemisalreadyoneofthelargestinthecountry.AsofDecember31,2010,wehadinvestedapproximately$788.5millioninthe1,569milegasgatheringsystembuiltforourFayettevilleShaleplay,whichwasgatheringapproximately1.8Bcfofgasperdayfromusandotheroperatorsatyear-end.ThisgatheringsystemisastrategicassetthatnotonlysupportsourE&Poperationsbutalsowillincreaseouroverallreturnsonastandalonebasisinthefuture.Wearecurrentlyconsideringvariousstrategicalternativesformaximizingand/orrecognizingthevalueofthisasset.

InsupportofourotherE&Poperations,wehavealsoinvestedapproximately$29.0millionin37milesofgasgatheringlinesinEastTexasandPennsylvaniainsupportofourE&Pactivitiesinthoseareas.During2010,ourMidstreamServicessegmentgatheredapproximately588.3Bcfofgas,comparedtoapproximately387.1Bcfofgasin2009.

Ourgatheringvolumes,revenuesandexpensesareexpectedtocontinuetogrowasproductionfromourFayettevilleShaleplayincreasesandaswedevelopourAppalachianproperties.OperatingincomefromourMidstreamServicessegmentwas$191.6millionin2010,comparedto$122.6millionin2009,whileEBITDAgrewto$220.5millionin2010from$141.9millionin2009.

Weplantoinvestapproximately$225millioninourMidstreamServicessegmentin2011andcontinuetheexpansionofourinfrastructureintheFayettevilleShaleandinPennsylvania.

Midstream Services

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Corporate and Subsidiary Officers

From left to right – Back row: John D. Thaeler (12); Jim R. Dewbre (13); Robert C. Owen (2); J. Alan Stubblefield (13); Jeffrey B. Sherrick (2); Dee W. Hency (33); Mark K. Boling (9) Front Row: Jennifer N. McCauley (1); Greg D. Kerley (21); Steven L. Mueller (2); Gene A. Hammons (6)

Steven L. Mueller (2)President and Chief Executive Officer

Harold M. Korell (14)Chairman of the Board

Kenneth R. Mourton (16)Managing Partner, Ball and Mourton, Ltd., PLLC

Lewis E. Epley, Jr. (13)Retired, Attorney at Law

Robert L. Howard (16)Retired,Shell Oil Company

Directors

Vello A. Kuuskraa (8)President and Chairman of the Board, Advanced Resources International, Inc.

Charles E. Scharlau (59)Retired CEO, Southwestern Energy Company

Greg D. Kerley (21)Executive Vice President and Chief Financial Officer

Alan H. Stevens*Retired, SouthwesternEnergy Company

CorporateOfficers

Steven L. Mueller (2)President and Chief Executive Officer

Greg D. Kerley (21)Executive Vice Presidentand Chief Financial Officer

Mark K. Boling (9)Executive Vice President,General Counsel andSecretary

Dee W. Hency (33)Senior Vice President –Administration and ChiefInformation Officer

Jennifer N. McCauley (1)Senior Vice President –Human Resources

Robert C. Owen (2)Controller and ChiefAccounting Officer

Danny W. Ferguson (6)Vice President –Government andCommunity Relations

James A. Tramuto (1)Vice President –Governmental andRegulatory Strategies

James L. Bolander, Jr. (10)Vice President –Health, Safety andEnvironmental

William N. Banks (1)Vice President – Treasurer

Jennifer E. Stewart*Vice President – Tax

Timothy J. O’Donnell (20)Vice President –Corporate Affairs

Bradley D. Sylvester (14)Vice President –Investor Relations

SubsidiaryOfficers

Southwestern EnergyProduction Company,SEECO, Inc. andDeSoto Drilling, Inc.

J. Alan Stubblefield (13)Senior Vice President – DeSoto

John D. Thaeler (12)Senior Vice President –New Ventures and R2

Jim R. Dewbre (13)Senior Vice President – Land and Business/Organizational Development

Jeffrey B. Sherrick (2)Senior Vice President – U.S. Exploitation

Joanne C. Hresko (2)Vice President – DeSoto Development, Planning and Technology

John E. Bergeron (3)Vice President – Economics, Planningand Acquisitions

Sonny H. Bryan (9)Vice President – DeSoto Operations

George A. Sheffer (6)Vice President – E&P Services

Randall D. Ponder (6)Vice President – New Ventures

Martin D. Carley (5)Vice President – DeSoto Drilling, Inc.

Southwestern MidstreamServices Company, DeSoto Gathering Company

Gene A. Hammons (6)President

John C. Gargani (17)Vice President – Midstream Planning andCommercial Operations

John R. Lee III (1)Vice President – Midstream Field Operations

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

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