(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following updates information as to Southwestern Energy Company's financial condition provided in our 2019 Annual Report and analyzes the changes in the results of operations between the three and six month periods ended June 30, 2020 and 2019. For definitions of commonly used natural gas and oil terms used in this Quarterly Report, please refer to the "Glossary of Certain Industry Terms" provided in our 2019 Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the risks described in "Cautionary Statement About Forward-Looking Statements" in the forepart of this Quarterly Report, in Item 1A, "Risk Factors" in Part I and elsewhere in our 2019 Annual Report, and Item 1A, "Risk Factors" in Part II in this Quarterly Report and any other quarterly report on Form 10-Q filed during the fiscal year. You should read the following discussion with our consolidated financial statements and the related notes included in this Quarterly Report. OVERVIEW Background Southwestern Energy Company (including its subsidiaries, collectively, "we," "our," "us," "the Company" or "Southwestern") is an independent energy company engaged in natural gas, oil and NGL exploration, development and production, which we refer to as "E&P." We are also focused on creating and capturing additional value through our marketing business, which we call "Marketing" but previously referred to as "Midstream" when it included the operations of gathering systems. We conduct most of our businesses through subsidiaries, and we currently operate exclusively in the lower 48 United States. E&P. Our primary business is the exploration for and production of natural gas, oil and NGLs, with our ongoing operations focused on the development of unconventional natural gas reservoirs located in Pennsylvania and West Virginia. Our operations in northeast Pennsylvania, which we refer to as "Northeast Appalachia," are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. Our operations in West Virginia and southwest Pennsylvania, which we refer to as "Southwest Appalachia," are focused on the Marcellus Shale, the Utica and the Upper Devonian unconventional natural gas and oil reservoirs. Collectively, our properties in Pennsylvania and West Virginia are herein referred to as "Appalachia." We also operate drilling rigs located in Pennsylvania and West Virginia, and we provide certain oilfield products and services, principally serving our E&P activities through vertical integration. Marketing. Our marketing activities capture opportunities that arise through the marketing and transportation of natural gas, oil and NGLs primarily produced in our E&P operations. Recent Financial and Operating Results Significant second quarter 2020 operating and financial results include: Total Company Net loss of $880 million, or ($1.63) per diluted share, decreased compared to net income of $138 million, or $0.26 per diluted share, for the same period in 2019. The decrease was primarily due to a $650 million non-cash full cost ceiling test impairment, a $261 million negative impact of derivatives (which included an $86 million improvement in settled derivatives as compared to the same period in 2019) and lower margins associated with reduced commodity prices. Table of Contents Operating loss of $756 million compared to operating income of $22 million for the same period in 2019 on a consolidated basis primarily due to a $650 million non-cash full cost ceiling test impairment in the second quarter of 2020. Excluding the non-cash impairment, operating loss of $106 million decreased $128 million compared to the same period in 2019 as lower margins associated with reduced commodity prices were only partially offset by increased natural gas and liquids production. Net cash provided by operating activities of $94 million decreased 7% from $101 million for the same period in 2019 as improvements in settled derivatives discussed above and working capital combined with higher production was more than offset by lower commodity prices and marketing margin along with a decrease in capitalized interest expense. Total capital investment of $245 million decreased 33% from $368 million for the same period in 2019. We repurchased $27 million in aggregate principal amount of our outstanding senior notes at a discount and recognized a gain on the extinguishment of debt of $7 million. E&P E&P segment operating loss of $748 million decreased from operating income of $30 million for the same period in 2019, primarily related to the non-cash impairment of $650 million in the second quarter of 2020 and lower margins associated with reduced commodity prices. Total net production of 201 Bcfe, which was comprised of 79% natural gas and 21% oil and NGLs, increased 8% from 186 Bcfe in the same period in 2019, and our liquids production increased 12% over the same period primarily associated with our oil production. Excluding the effect of derivatives, our realized natural gas price of $0.98 per Mcf decreased 46%, our realized oil price of $15.69 per barrel decreased 68% and our realized NGL price of $6.43 per barrel decreased 39% as compared to the same period in 2019. Excluding the effect of derivatives, our total weighted average realized price of $1.05 per Mcfe decreased 47% from the same period in 2019. E&P segment invested $245 million in capital; drilling 30 wells, completing 31 wells and placing 31 wells to sales. Outlook We expect to continue to exercise capital discipline in our 2020 capital investment program, and we remain committed to our focus on optimizing our portfolio by concentrating our efforts on our highest return investment opportunities, looking for ways to optimize our cost structure and maximize margins in each core area of our business and further developing our knowledge of our asset base. Lower natural gas, oil and NGL prices present challenges to our industry and our Company, as do changes in laws, regulations and investor sentiment and other key factors described in "Risk Factors" in our 2019 Annual Report and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. During the first half of 2020, the economic impact of the COVID-19 pandemic and related governmental and societal measures (discussed below), along with the disagreements between OPEC and Russia on production levels, have caused oil prices to decrease 36% since the beginning of 2020. In the first half of 2020, gains on settled derivatives offset a large portion of the impact of the recent decline in prices, and as of July 28, 2020, we currently have derivative positions in place for over 85% of our expected remaining 2020 production. There can be no assurance that we will be able to add derivative positions to cover the remainder of our expected production at favorable prices. See "Quantitative and Qualitative Disclosures About Market Risk" in Item 3 and Note 7 - Derivatives and Risk Management , in the consolidated financial statements included in this Quarterly Report for further details. The Impact of COVID-19 on Our Business
During the first half of 2020, we did not experience any material impact to our ability to operate or market our production due to the direct or indirect impacts of the COVID-19 pandemic. In early March 2020, we instituted additional health measures at our facilities and banned nonessential travel. In mid-March, in advance of state and local governments restricting business operations and imposing "stay-at-home" directives in Pennsylvania, West Virginia and Texas (where our operations and offices are located), we notified employees that those whose work does not require a physical presence should work from home. Although we began a phased program of office-based employees returning in early June, we resumed work-from-home later in the month as local case numbers rose. Almost all employees working at our sites today are engaged in the physical drilling, completion and operation of wells, and we have instituted additional measures designed to prevent the possible spread of the virus, including social distancing and appropriate personal protective equipment (PPE). The Cybersecurity and Infrastructure Security Agency in the U.S. Department of Homeland Security classifies individuals engaged in and supporting exploration for and production of natural gas, oil and NGLs as "essential critical infrastructure workforce," and to date, state and local Table of Contents
RESULTS OF OPERATIONS The following discussion of our results of operations for our segments is presented before intersegment eliminations. We evaluate our segments as if they were stand-alone operations and accordingly discuss their results prior to any intersegment eliminations. Restructuring charges, interest expense, gain (loss) on derivatives, gain on early extinguishment of debt and income taxes are discussed on a consolidated basis. E&P For the three months ended June For the six months ended 30, June 30, (in millions) 2020 2019 2020 2019 Revenues $ 211 $ 371 $ 555 $ 913 Operating costs and expenses (1) 959 341 2,789 673 Operating income (loss) $ (748) $ 30 $ (2,234) $ 240 Gain on derivatives, settled (2) $ 120 $ 34 $ 213 $ 24
(1)Includes $650 million and $2,129 million related to non-cash full cost ceiling test impairments for the three and six months ended June 30, 2020, respectively, and $5 million related to the non-cash impairment of other non-core assets for the three and six months ended June 30, 2020, respectively.
Three months ended June 30, Natural (in millions except percentages) Gas Oil NGLs Total 2019 sales revenues $ 267 $ 46 $ 58 $ 371 Changes associated with prices (129) (37) (25) (191) Changes associated with production volumes 17 7 7 31 2020 sales revenues $ 155 $ 16 $ 40 $ 211 Decrease from 2019 (42) % (65) % (31) % (43) % Six months ended June 30, Natural (in millions except percentages) Gas Oil NGLs Total 2019 sales revenues (1) $ 688 $ 85 $ 139 $ 912 Changes associated with prices (348) (50) (63) (461) Changes associated with production volumes 54 33 14 101 2020 sales revenues (2) $ 394 $ 68 $ 90 $ 552 Decrease from 2019 (43) % (20) % (35) % (39) %
(1)Excludes $1 million in other operating revenues for the six months ended June 30, 2019 primarily related to third-party water sales.
Production Volumes For the three months ended June 30, For the six months ended June 30, Production volumes: 2020 2019 Increase/(Decrease) 2020 2019 Increase/(Decrease) Natural Gas (Bcf) Northeast Appalachia 113 113 -% 227 225 1% Southwest Appalachia 45 35 29% 87 66 32% Total 158 148 7% 314 291 8% Oil (MBbls) Southwest Appalachia 1,079 931 16% 2,474 1,780 39% Other 4 6 (33)% 8 11 (27)% Total 1,083 937 16% 2,482 1,791 39% NGL (MBbls) Southwest Appalachia 6,110 5,493 11% 12,237 11,095 10% Other 1 4 (75)% 2 5 (60)% Total 6,111 5,497 11% 12,239 11,100 10% Production volumes by area: (Bcfe) Northeast Appalachia 113 113 -% 227 225 1% Southwest Appalachia (1) 88 73 21% 175 143 22% Total 201 186 8% 402 368 9% Production percentage: (Bcfe) Natural gas 79 % 79 % 78 % 79 % Oil 3 % 3 % 4 % 3 % NGL 18 % 18 % 18 % 18 %
(1)Approximately 87 Bcfe and 73 Bcfe for the three months ended June 30, 2020 and 2019, respectively, and 174 Bcfe and 142 Bcfe for the six months ended June 30, 2020 and 2019, respectively, were produced from the Marcellus Shale formation.
For the three months ended June 30, For the six months ended June 30, 2020 2019 Increase/(Decrease) 2020 2019 Increase/(Decrease) Natural Gas Price: NYMEX Henry Hub Price ($/MMBtu) (1) $ 1.72 $ 2.64 (35)% $ 1.83 $ 2.89 (37)% Discount to NYMEX (2) (0.74) (0.84) (12)% (0.57) (0.52) 10% Average realized gas price, excluding $ 0.98 $ 1.80 (46)% $ 1.26 $ 2.37 (47)% derivatives ($/Mcf) Gain (loss) on settled financial basis (0.05) (0.03) 0.03 (0.03) derivatives ($/Mcf) Gain (loss) on settled commodity derivatives 0.57 0.17 0.43 0.04 ($/Mcf) Average realized gas price, including $ 1.50 $ 1.94 (23)% $ 1.72 $ 2.38 (28)% derivatives ($/Mcf) Oil Price: WTI oil price ($/Bbl) $ 27.85 $ 59.81 (53)% $ 37.01 $ 57.36 (35)% Discount to WTI (12.16) (10.26) 19% (9.46) (9.75) (3)% Average oil price, excluding derivatives $ 15.69 $ 49.55 (68)% $ 27.55 $ 47.61 (42)% ($/Bbl) Gain on settled derivatives ($/Bbl) 25.95 2.05 16.53 2.19 Average oil price, including derivatives $ 41.64 $ 51.60 (19)% $ 44.08 $ 49.80 (11)% ($/Bbl) NGL Price: Average realized NGL price, excluding $ 6.43 $ 10.51 (39)% $ 7.29 $ 12.50 (42)% derivatives ($/Bbl) Gain on settled derivatives ($/Bbl) 1.79 2.11 2.21 1.34 Average realized NGL price, including $ 8.22 $ 12.62 (35)% $ 9.50 $ 13.84 (31)% derivatives ($/Bbl) Percentage of WTI, excluding derivatives 23 % 18 % 20 % 22 % Total Weighted Average Realized Price: Excluding derivatives ($/Mcfe) $ 1.05 $ 1.99 (47)% $ 1.37 $ 2.48 (45)% Including derivatives ($/Mcfe) $ 1.65 $ 2.17 (24)% $ 1.90 $ 2.54 (25)%
(1)Based on last day settlement prices from monthly futures contracts.
Volume (Bcf) Basis Differential Basis Swaps - Natural Gas 2020 145 $ (0.44) 2021 150 (0.14) 2022 122 (0.46) Total 417 Physical NYMEX Sales Arrangements - Natural Gas 2020 142 $ (0.26) 2021 130 (0.26) Total 272
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Jul 31, 2020
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