The Right Balance - Annual Reports
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The Right Balance
Southwestern Energy Company 2350 N. Sam Houston Pkwy. East, Suite 125 Houston, Texas 77032 281-618-4700
Southwestern Energy Company 2007 Annual Report
Southwestern Energy Company 2007 Annual Report ®
113136CVR_r1_MECH07_SWN_AR.indd 1
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ANNUAL MEETING May 6, 2008 at 11:00 a.m. CDT Wyndham Hotel - Greenspoint Houston, Texas
INDEPENDENT PUBLIC ACCOUNTANTS
Southwestern Energy Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax)
PricewaterhouseCoopers LLP Tulsa, Oklahoma
SUBSIDIARY OFFICES
INVESTOR RELATIONS ®
The Right People doing the Right Things, wisely investing the cash flow from the underlying Assets will create Value +®
CORPORATE HEADQUARTERS
Greg D. Kerley Executive Vice President and Chief Financial Officer Brad D. Sylvester Manager, Investor Relations 281-618-4897
WEBSITE www.swn.com
TRANSFER AGENT AND REGISTRAR Computershare Trust Co., N.A. P.O. Box 43069 Providence, RI 02940-3069 800-446-2617 The DirectSERVICE Investment Program c/o Computershare Trust Co., N.A. P.O. Box 43081 Providence, RI 02940-3081 800-446-2617
Southwestern Energy Production Company Southwestern Midstream Services Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax) SEECO, Inc. 1083 Sain Street P.O. Box 13408 Fayetteville, Arkansas 72703-1004 479-521-1141 479-521-0328 Arkansas Western Gas Company 1001 Sain Street P.O. Box 13288 Fayetteville, Arkansas 72703-1002 479-521-5400 479-582-4747 Southwestern Energy Company Southwestern Energy Production Company SEECO, Inc. DeSoto Drilling, Inc. (DDI) DeSoto Gathering Company, LLC (DGC) 23 Nabco Avenue Conway, Arkansas 72032 501-548-6500 501-548-6550 (fax) 501-548-6600 (DDI) 501-548-6852 (DDI fax) 501-548-6700 (DGC) 501-548-6755 (DGC fax)
Southwestern Energy Company’s Form 10-K for the fiscal year ended December 31, 2007, 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 2007 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2007 Form 10-K. Design: Michael Thede Design Photography: Cover – GettyOne; Introduction, Fayetteville Shale Play, Arkoma Basin and East Texas – DOXA; Executive portraits – Pete Lacker Photography Printing: Classic Color ©2008 Southwestern Energy Company All rights reserved.
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2007 • We set records for net income, EBITDA(1), production, reserves and reserve replacement(2) • Significant progress realized in our Fayetteville Shale play • Solid results from our conventional Arkoma Basin activities and new plays being pursued in East Texas and Appalachia • Meaningful growth in our Midstream business • Laid the foundation for another year of substantial growth in 2008 (1) EBITDA (2) Includes
is a non-GAAP financial measure. reserve revisions.
Southwestern Energy Company 2007 Annual Report pg. 1
TO OUR STOCKHOLDERS:
The
close of 2007 recorded another banner year at Southwestern Energy —
production volumes grew in 2007 at a record rate of 57% over 2006 and our reserves increased by 41% to 1.45 Tcfe. Our reserve replacement ratio of 474% in 2007 means we booked nearly 5 times as many new reserves as we produced during the year. The most heartening aspect of our 2007 success was the progress we made in our Fayetteville Shale play in Arkansas which greatly contributed to our results. During the year, we made strides in perfecting our completion techniques for the Fayetteville Shale, increased our 3-D seismic database to 525 square miles which improves our ability to reduce risk in our drilling program, and began drilling and completing longer laterals, all of which led to higher productivity in our horizontal wells. As we look forward to 2008 and beyond, we find ourselves in a very desirable position relative to many of our peers. Our 900,000+ net acreage position in the Fayetteville Shale project continues to deliver positive results and positions us with an attractive drilling program for many years. In addition, our drilling in the conventional plays in East Texas and the Arkoma Basin are growing our opportunity set. What then are Southwestern Energy’s challenges? In the past, I have often described our E&P business as a teeter-totter. On the one end rests the opportunity set generated by the enterprise and on the other end is capital. When our opportunity set has become heavy, we have used debt and equity to bring the equation into balance. While the reality for most companies over the past several years is that they have been short on opportunities, this has not been the case for Southwestern Energy. About 10 years ago we set out to be, and have in fact become, an opportunitygenerating machine. Today, I find myself using a different analogy to describe Southwestern Energy’s challenges — it’s more like a three-bladed helicopter. Two of the blades are familiar — “opportunity sets” and “capital,” but the third blade represents today’s reality — the need for the human resources necessary to increase activity levels and otherwise get the job done.
“As we look forward to 2008 and beyond, we find ourselves in a very desirable position relative to many of our peers.” This not only means the ability to carry on the operation, but to absorb, understand and make use of all the information that flows out of a large operation. Our industry is particularly challenged today and will be for the foreseeable future in the human resource arena — people are in short supply. Over the past two years, Southwestern has added over 700 people to our team and, with such a large inventory of wells to drill, we will need to recruit more good people to meet our needs. So, this is our primary challenge today, but it will change from time to time. Ten years ago we were short on ideas, but we recruited a team of people to generate ideas and have done better than most at this. In early 2003 and again in 2005, we needed capital to take advantage of all the opportunities in front of us. Today and into the future, the real challenge for our company will be to keep the proper balance of ideas, people and capital to ensure that we keep Southwestern climbing up and to the right. We have a huge opportunity set in front of us in the Fayetteville Shale, along with exciting new opportunities we have seeded in East Texas and the Marcellus Shale in Pennsylvania. In addition, we have a strong balance sheet and an organization that is growing to fill our needs. The greatest limitation today is the shortage of people needed to accelerate our program — however, we are working hard on that. As I think about these challenges, they are good ones to have! In closing, we expect another very fine year in 2008 as we begin to hit our stride in the Fayetteville Shale. My thanks to the many stockholders of the Company who have enjoyed this time with us and most of all to the Right People of Southwestern Energy who have been doing the Right Things. Sincerely, Harold M. Korell, President & CEO
Southwestern Energy Company 2007 Annual Report pgs. 2/3
Financial & Operating Highlights ’07
’06
’05
Operating revenues (in millions) Operating income (in millions)
$ 1,255.1 $ 381.5
$ 763.1 $ 246.3
$ 676.3 $ 245.9
Net income (in millions)
$ 221.2
$ 162.6
$ 147.8
Diluted earnings per share EBITDA (in millions)(1) Capital investments (in millions) Average diluted shares outstanding (in millions)
$ 1.27 $ $ 675.4 $ $1,503.1 $ 173.7
FINANCIAL
0.95 $ 414.5 $ 942.4 $ 171.3
0.95 345.9 483.1 156.3
EXPLORATION & PRODUCTION
Total proved reserves (Bcf equivalent) 1,450.3 1,026.3 96% 95% Percent of reserves natural gas 64% 65% Percent of reserves proved, developed Total production (Bcf equivalent) 113.6 72.3
Average gas price ($/Mcf) Average oil price ($/barrel)
Reserve replacement ratio(2) Reserve life (years)
$ 6.80 $ 69.12
$ 6.55 $ 58.36
474% 12.8
826.8 93% 73% 61.0 $ 6.51 $ 42.62
386% 14.2
399% 13.6
4.1 5.3 72.7 14.6
5.7 6.0 61.9 2.3
MIDSTREAM SERVICES
Operating income (in millions) EBITDA (in millions) Gas volumes marketed (Bcf ) Gas volumes gathered (Bcf )
(1) EBITDA
(2)
$ $
13.2 18.8 145.7 78.7
$ $
is a non-GAAP financial measure. Includes reserve revisions.
In 2007 we set records for net income, EBITDA, production, reserves and reserve replacement.
$ $
Financial & Operating Highlights continued
113.6 $675.4
$1,503.1
474%
$221.2
399% 386% 365% 72.3
$414.5 $942.4
$162.6 $147.8
61.0 54.1
$345.9 $255.3
$103.6
313%
41.2 $483.1
$151.4
$295.0
$48.9
$180.2
’03 ’04 ’05 ’06 ’07
’03 ’04 ’05 ’06 ’07
’03 ’04 ’05 ’06 ’07
’03 ’04 ’05 ’06 ’07
NET INCOME
EBITDA
CAPITAL INVESTMENTS
PRODUCTION
(in millions)
(in millions)
(in millions)
(Bcfe)
’03 ’04 ’05 ’06 ’07
RESERVE REPLACEMENT RATIO
Southwestern Energy Company 2007 Annual Report pgs. 4/5
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Pvs!Gbzfuufwjmmf!Tibmf qmbz!jt!uif!qsjnbsz! gpdvt!pg!pvs!cvtjoftt-! xifsf!xf!ipme! bqqspyjnbufmz! :17-811!ofu!bdsft/!!! We made tremendous strides in our Fayetteville Shale play during 2007. Not only did we accelerate our drilling activity, but the advancements in our completion techniques, our move to longer completed lateral lengths and the growing use of 3-D seismic data led to results which exceeded expectations. During 2007, we drilled a total of 415 wells, compared to 196 wells in 2006 and 67 wells in 2005. As a result, our gross production volumes increased dramatically from approximately 100 MMcf per day at the beginning of 2007 to approximately 325 MMcf per day at year-end, resulting in net production of 53.5 Bcf in 2007, compared to 11.8 Bcf in 2006 and 1.8 Bcf in 2005. Total proved gas reserves booked in the play also grew to 716 Bcf at year-end 2007, compared to 300 Bcf at year-end 2006 and 101 Bcf at year-end 2005.
During 2008 and for the second consecutive year, we intend to invest more than $1 billion in the Fayetteville Shale play (including capital investments in gathering systems), which will bring our total planned investment to more than $2.5 billion by the end of 2008. We expect to participate in approximately 475 horizontal wells in 2008 (75% operated), over 50% of which will be drilled with lateral lengths greater than 3,000 feet and developed on multi-well pads. In addition, approximately 75% of our wells drilled in 2008 will have the benefit of our growing 3-D seismic database, compared to about 20% in 2007. We also plan to drill approximately 40 vertical wells in the play area targeting the shallower conventional reservoirs above the Fayetteville Shale, up from 11 wells drilled in 2007. With this planned level of activity, we expect that our capital program will generate a significant increase in our production volumes from the play, which could reach as high as 450 MMcf per day by the end of 2008 and could result in net production of 90.0 to 95.0 Bcf for the year. During 2007, we also saw meaningful growth in our Midstream Services business which, when combined with our company-operated drilling rigs, are two of the key reasons why we have made such significant progress in the play over a short period of time.
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Xf!fyqfsjfodfe! tvctuboujbm!hspxui! gspn!pvs!dpowfoujpobm! Bslpnb!bdujwjujft! jo!3118/ In 2007, we invested approximately $148 million and participated in 114 wells in our conventional Arkoma properties, 81 of which were successful and 23 were in progress at year-end, resulting in an 89% success rate and new reserves additions of 60.6 Bcf. We experienced 18% growth in our production volumes during 2007, primarily driven by the continued successful delineation of our Ranger Anticline area. We produced 23.8 Bcf in 2007, compared to 20.1 Bcf in 2006 and 20.2 Bcf in 2005. Our reserves in the basin grew as well to 304 Bcf in 2007, compared to 277 Bcf in 2006 and 271 Bcf in 2005. Prior to 2007, our production over the last few years from our conventional drilling activities in the Arkoma Basin was fairly consistent, as new production stemming from our drilling program offset the natural production decline from existing wells.
During 2007, we successfully completed 52 out of 67 wells at Ranger (excluding 12 wells in progress at year-end), which added 25.5 net Bcf of new reserves. Net production from the field increased by 67% to 9.5 Bcf during 2007, compared to 5.7 Bcf in 2006 and 5.6 Bcf in 2005. We began drilling at our Midway prospect area, located approximately 11 miles north of Ranger, two years ago and through year-end 2006 we had drilled a total of six wells. In 2007, we began to accelerate our program at Midway, drilling 26 wells which were all either productive or in progress at year-end. Our wells at Midway primarily produce from the same productive zones as our wells at Ranger. Depending on the performance of these wells, there may be significant additional drilling potential on our Midway acreage. We are planning another very active year in our conventional Arkoma program in 2008 by investing approximately $132 million and drilling approximately 100 to 110 wells, including 40 wells at the Ranger Anticline and 45 wells at Midway.
Southwestern Energy Company 2007 Annual Report pgs. 8/9
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Uif!efwfmpqnfou!pg! pvs!Pwfsupo!Gjfme! jt!b!hsfbu!fybnqmf! pg!ipx!uif!bqqmjdbujpo! pg!pvs!Gpsnvmb!ibt! jodsfbtfe!uif!wbmvf! pg!uijt!bttfu/ Our drilling program in East Texas began in 2000 with the acquisition of approximately 11,000 gross acres in the Overton Field in Smith County, Texas. Since that time and through December 31, 2007, we had drilled 365 wells at Overton, all of which were successful. Our accomplishments at Overton have been a great example of how the Right People doing the Right Things, which includes creative thinking, using new technologies and process improvements, will contribute to the significant increase in the value of an asset.
development areas located in four different counties in East Texas, has the potential to contribute greatly to our future success in East Texas. Through year-end 2007, we held 87,000 gross acres at Angelina and had drilled a total of 59 wells primarily targeting the Travis Peak or James Lime formations, with all but one well being successful. In 2007, we invested approximately $88 million and drilled 31 wells at Angelina. Net production from the area was 2.5 Bcfe in 2007, compared to 1.8 Bcfe in 2006 and 0.9 Bcfe in 2005. In December 2007, we completed our first operated horizontal well targeting the James Lime formation, the Timberstar-Mills 1H, which had an initial production rate of 12.1 MMcfe per day. In 2008, we intend to participate in an additional 10 to 15 James Lime horizontal wells in both our Angelina and Jebel prospect areas. We will continue to be active in East Texas and plan to invest $122 million in the area during 2008, drilling between 30 and 35 wells in our Angelina and Jebel areas.
Over the years as we expanded our development at Overton, we were also working on expanding our other activities in East Texas. Our Angelina River Trend area, concentrated in several separate
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DIRECTORS
As Shown from left to right: Robert L. Howard (13), Retired, Shell Oil Company; Vello A. Kuuskraa (5), President and Chairman of the Board, Advanced Resources International, Inc.; Lewis E. Epley, Jr. (10), Retired, Attorney at Law; Harold M. Korell (11), President, Chief Executive Officer and Chairman of the Board, Southwestern Energy Company; Kenneth R. Mourton (13), Managing Partner, Ball and Mourton, Ltd., PLLC; Charles E. Scharlau (56), Retired CEO, Southwestern Energy Company (Years of service with the company are shown on this page in parentheses.)
EXECUTIVE OFFICERS
CORPORATE OFFICERS
SUBSIDIARY OFFICERS
Harold M. Korell (11) President, Chief Executive Officer and Chairman of the Board
Southwestern Energy Production Company and SEECO, Inc.
Greg D. Kerley (18) Executive Vice President and Chief Financial Officer Harold M. Korell (11) President, Chief Executive Officer and Chairman of the Board
Greg D. Kerley (18) Executive Vice President and Chief Financial Officer
Richard F. Lane (10) Executive Vice President Mark K. Boling (6) Executive Vice President, General Counsel and Secretary Dee W. Hency (30) Vice President – Administration and Chief Information Officer
Richard F. Lane (10) Executive Vice President and President, Southwestern Energy Production Company and SEECO, Inc.
Mark K. Boling (6) Executive Vice President, General Counsel and Secretary
Gene A. Hammons (3) President, Southwestern Midstream Services Company
Alan N. Stewart (4) President, Arkansas Western Gas Company
Richard F. Lane (10) President J. Alan Stubblefield (10) Senior Vice President – Southwestern Energy Production Company John D. Thaeler (9) Senior Vice President – SEECO, Inc. Jim R. Dewbre (10) Senior Vice President – Land and Business/ Organizational Development
Timothy J. O’Donnell (17) Vice President – Human Resources and Treasurer
John C. Gargani (14) Vice President – Economic Planning and Acquisitions
Stanley T. Wilson (22) Controller and Chief Accounting Officer
Alan R. Clemens (10) Vice President – Geosciences and DeSoto Planning James L. Bolander, Jr. (7) Vice President – DeSoto Operations
Southwestern Midstream Services Company Gene A. Hammons (3) President Arkansas Western Gas Company Alan N. Stewart (4) President Charles V. Stevens (36) Senior Vice President Ricky A. Gunter (35) Vice President – Rates and Regulation Bob Lamb (17) Vice President – Community Development Jeffrey L. Dangeau (22) General Counsel and Secretary Glenn M. Morgan (31) Controller and Treasurer
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ANNUAL MEETING May 6, 2008 at 11:00 a.m. CDT Wyndham Hotel - Greenspoint Houston, Texas
INDEPENDENT PUBLIC ACCOUNTANTS
Southwestern Energy Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax)
PricewaterhouseCoopers LLP Tulsa, Oklahoma
SUBSIDIARY OFFICES
INVESTOR RELATIONS ®
The Right People doing the Right Things, wisely investing the cash flow from the underlying Assets will create Value +®
CORPORATE HEADQUARTERS
Greg D. Kerley Executive Vice President and Chief Financial Officer Brad D. Sylvester Manager, Investor Relations 281-618-4897
WEBSITE www.swn.com
TRANSFER AGENT AND REGISTRAR Computershare Trust Co., N.A. P.O. Box 43069 Providence, RI 02940-3069 800-446-2617 The DirectSERVICE Investment Program c/o Computershare Trust Co., N.A. P.O. Box 43081 Providence, RI 02940-3081 800-446-2617
Southwestern Energy Production Company Southwestern Midstream Services Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax) SEECO, Inc. 1083 Sain Street P.O. Box 13408 Fayetteville, Arkansas 72703-1004 479-521-1141 479-521-0328 Arkansas Western Gas Company 1001 Sain Street P.O. Box 13288 Fayetteville, Arkansas 72703-1002 479-521-5400 479-582-4747 Southwestern Energy Company Southwestern Energy Production Company SEECO, Inc. DeSoto Drilling, Inc. (DDI) DeSoto Gathering Company, LLC (DGC) 23 Nabco Avenue Conway, Arkansas 72032 501-548-6500 501-548-6550 (fax) 501-548-6600 (DDI) 501-548-6852 (DDI fax) 501-548-6700 (DGC) 501-548-6755 (DGC fax)
Southwestern Energy Company’s Form 10-K for the fiscal year ended December 31, 2007, 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 2007 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2007 Form 10-K. Design: Michael Thede Design Photography: Cover – GettyOne; Introduction, Fayetteville Shale Play, Arkoma Basin and East Texas – DOXA; Executive portraits – Pete Lacker Photography Printing: Classic Color ©2008 Southwestern Energy Company All rights reserved.
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Angle C
Magenta
Angle M
Yellow
Angle Y
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Angle K
TICC1414 Solid
The Right Balance
Southwestern Energy Company 2350 N. Sam Houston Pkwy. East, Suite 125 Houston, Texas 77032 281-618-4700
Southwestern Energy Company 2007 Annual Report
Southwestern Energy Company 2007 Annual Report ®
113136CVR_r1_MECH07_SWN_AR.indd 1
3/9/08 12:53:59 PM
Angle C
Magenta
Angle M
Yellow
Angle Y
Black
Angle K
TICC1414 Solid
The Right Balance
Southwestern Energy Company 2350 N. Sam Houston Pkwy. East, Suite 125 Houston, Texas 77032 281-618-4700
Southwestern Energy Company 2007 Annual Report
Southwestern Energy Company 2007 Annual Report ®
113136CVR_r1_MECH07_SWN_AR.indd 1
3/9/08 12:53:59 PM
Cyan
Angle C
Magenta
Yellow
Angle M
Angle Y
Black
Angle K
TICC1414 Solid
2nd TICC1414 Angle K
ANNUAL MEETING May 6, 2008 at 11:00 a.m. CDT Wyndham Hotel - Greenspoint Houston, Texas
INDEPENDENT PUBLIC ACCOUNTANTS
Southwestern Energy Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax)
PricewaterhouseCoopers LLP Tulsa, Oklahoma
SUBSIDIARY OFFICES
INVESTOR RELATIONS ®
The Right People doing the Right Things, wisely investing the cash flow from the underlying Assets will create Value +®
CORPORATE HEADQUARTERS
Greg D. Kerley Executive Vice President and Chief Financial Officer Brad D. Sylvester Manager, Investor Relations 281-618-4897
WEBSITE www.swn.com
TRANSFER AGENT AND REGISTRAR Computershare Trust Co., N.A. P.O. Box 43069 Providence, RI 02940-3069 800-446-2617 The DirectSERVICE Investment Program c/o Computershare Trust Co., N.A. P.O. Box 43081 Providence, RI 02940-3081 800-446-2617
Southwestern Energy Production Company Southwestern Midstream Services Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax) SEECO, Inc. 1083 Sain Street P.O. Box 13408 Fayetteville, Arkansas 72703-1004 479-521-1141 479-521-0328 Arkansas Western Gas Company 1001 Sain Street P.O. Box 13288 Fayetteville, Arkansas 72703-1002 479-521-5400 479-582-4747 Southwestern Energy Company Southwestern Energy Production Company SEECO, Inc. DeSoto Drilling, Inc. (DDI) DeSoto Gathering Company, LLC (DGC) 23 Nabco Avenue Conway, Arkansas 72032 501-548-6500 501-548-6550 (fax) 501-548-6600 (DDI) 501-548-6852 (DDI fax) 501-548-6700 (DGC) 501-548-6755 (DGC fax)
Southwestern Energy Company’s Form 10-K for the fiscal year ended December 31, 2007, 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 2007 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2007 Form 10-K. Design: Michael Thede Design Photography: Cover – GettyOne; Introduction, Fayetteville Shale Play, Arkoma Basin and East Texas – DOXA; Executive portraits – Pete Lacker Photography Printing: Classic Color ©2008 Southwestern Energy Company All rights reserved.
113136CVR_r2_MECH07_SWN_AR.indd 2
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2007 • We set records for net income, EBITDA(1), production, reserves and reserve replacement(2) • Significant progress realized in our Fayetteville Shale play • Solid results from our conventional Arkoma Basin activities and new plays being pursued in East Texas and Appalachia • Meaningful growth in our Midstream business • Laid the foundation for another year of substantial growth in 2008 (1) EBITDA (2) Includes
is a non-GAAP financial measure. reserve revisions.
Southwestern Energy Company 2007 Annual Report pg. 1
TO OUR STOCKHOLDERS:
The
close of 2007 recorded another banner year at Southwestern Energy —
production volumes grew in 2007 at a record rate of 57% over 2006 and our reserves increased by 41% to 1.45 Tcfe. Our reserve replacement ratio of 474% in 2007 means we booked nearly 5 times as many new reserves as we produced during the year. The most heartening aspect of our 2007 success was the progress we made in our Fayetteville Shale play in Arkansas which greatly contributed to our results. During the year, we made strides in perfecting our completion techniques for the Fayetteville Shale, increased our 3-D seismic database to 525 square miles which improves our ability to reduce risk in our drilling program, and began drilling and completing longer laterals, all of which led to higher productivity in our horizontal wells. As we look forward to 2008 and beyond, we find ourselves in a very desirable position relative to many of our peers. Our 900,000+ net acreage position in the Fayetteville Shale project continues to deliver positive results and positions us with an attractive drilling program for many years. In addition, our drilling in the conventional plays in East Texas and the Arkoma Basin are growing our opportunity set. What then are Southwestern Energy’s challenges? In the past, I have often described our E&P business as a teeter-totter. On the one end rests the opportunity set generated by the enterprise and on the other end is capital. When our opportunity set has become heavy, we have used debt and equity to bring the equation into balance. While the reality for most companies over the past several years is that they have been short on opportunities, this has not been the case for Southwestern Energy. About 10 years ago we set out to be, and have in fact become, an opportunitygenerating machine. Today, I find myself using a different analogy to describe Southwestern Energy’s challenges — it’s more like a three-bladed helicopter. Two of the blades are familiar — “opportunity sets” and “capital,” but the third blade represents today’s reality — the need for the human resources necessary to increase activity levels and otherwise get the job done.
“As we look forward to 2008 and beyond, we find ourselves in a very desirable position relative to many of our peers.” This not only means the ability to carry on the operation, but to absorb, understand and make use of all the information that flows out of a large operation. Our industry is particularly challenged today and will be for the foreseeable future in the human resource arena — people are in short supply. Over the past two years, Southwestern has added over 700 people to our team and, with such a large inventory of wells to drill, we will need to recruit more good people to meet our needs. So, this is our primary challenge today, but it will change from time to time. Ten years ago we were short on ideas, but we recruited a team of people to generate ideas and have done better than most at this. In early 2003 and again in 2005, we needed capital to take advantage of all the opportunities in front of us. Today and into the future, the real challenge for our company will be to keep the proper balance of ideas, people and capital to ensure that we keep Southwestern climbing up and to the right. We have a huge opportunity set in front of us in the Fayetteville Shale, along with exciting new opportunities we have seeded in East Texas and the Marcellus Shale in Pennsylvania. In addition, we have a strong balance sheet and an organization that is growing to fill our needs. The greatest limitation today is the shortage of people needed to accelerate our program — however, we are working hard on that. As I think about these challenges, they are good ones to have! In closing, we expect another very fine year in 2008 as we begin to hit our stride in the Fayetteville Shale. My thanks to the many stockholders of the Company who have enjoyed this time with us and most of all to the Right People of Southwestern Energy who have been doing the Right Things. Sincerely, Harold M. Korell, President & CEO
Southwestern Energy Company 2007 Annual Report pgs. 2/3
Financial & Operating Highlights ’07
’06
’05
Operating revenues (in millions) Operating income (in millions)
$ 1,255.1 $ 381.5
$ 763.1 $ 246.3
$ 676.3 $ 245.9
Net income (in millions)
$ 221.2
$ 162.6
$ 147.8
Diluted earnings per share EBITDA (in millions)(1) Capital investments (in millions) Average diluted shares outstanding (in millions)
$ 1.27 $ $ 675.4 $ $1,503.1 $ 173.7
FINANCIAL
0.95 $ 414.5 $ 942.4 $ 171.3
0.95 345.9 483.1 156.3
EXPLORATION & PRODUCTION
Total proved reserves (Bcf equivalent) 1,450.3 1,026.3 96% 95% Percent of reserves natural gas 64% 65% Percent of reserves proved, developed Total production (Bcf equivalent) 113.6 72.3
Average gas price ($/Mcf) Average oil price ($/barrel)
Reserve replacement ratio(2) Reserve life (years)
$ 6.80 $ 69.12
$ 6.55 $ 58.36
474% 12.8
826.8 93% 73% 61.0 $ 6.51 $ 42.62
386% 14.2
399% 13.6
4.1 5.3 72.7 14.6
5.7 6.0 61.9 2.3
MIDSTREAM SERVICES
Operating income (in millions) EBITDA (in millions) Gas volumes marketed (Bcf ) Gas volumes gathered (Bcf )
(1) EBITDA
(2)
$ $
13.2 18.8 145.7 78.7
$ $
is a non-GAAP financial measure. Includes reserve revisions.
In 2007 we set records for net income, EBITDA, production, reserves and reserve replacement.
$ $
Financial & Operating Highlights continued
113.6 $675.4
$1,503.1
474%
$221.2
399% 386% 365% 72.3
$414.5 $942.4
$162.6 $147.8
61.0 54.1
$345.9 $255.3
$103.6
313%
41.2 $483.1
$151.4
$295.0
$48.9
$180.2
’03 ’04 ’05 ’06 ’07
’03 ’04 ’05 ’06 ’07
’03 ’04 ’05 ’06 ’07
’03 ’04 ’05 ’06 ’07
NET INCOME
EBITDA
CAPITAL INVESTMENTS
PRODUCTION
(in millions)
(in millions)
(in millions)
(Bcfe)
’03 ’04 ’05 ’06 ’07
RESERVE REPLACEMENT RATIO
Southwestern Energy Company 2007 Annual Report pgs. 4/5
Gbzfuufwjmmf!Tibmf!Qmbz!
Pvs!Gbzfuufwjmmf!Tibmf qmbz!jt!uif!qsjnbsz! gpdvt!pg!pvs!cvtjoftt-! xifsf!xf!ipme! bqqspyjnbufmz! :17-811!ofu!bdsft/!!! We made tremendous strides in our Fayetteville Shale play during 2007. Not only did we accelerate our drilling activity, but the advancements in our completion techniques, our move to longer completed lateral lengths and the growing use of 3-D seismic data led to results which exceeded expectations. During 2007, we drilled a total of 415 wells, compared to 196 wells in 2006 and 67 wells in 2005. As a result, our gross production volumes increased dramatically from approximately 100 MMcf per day at the beginning of 2007 to approximately 325 MMcf per day at year-end, resulting in net production of 53.5 Bcf in 2007, compared to 11.8 Bcf in 2006 and 1.8 Bcf in 2005. Total proved gas reserves booked in the play also grew to 716 Bcf at year-end 2007, compared to 300 Bcf at year-end 2006 and 101 Bcf at year-end 2005.
During 2008 and for the second consecutive year, we intend to invest more than $1 billion in the Fayetteville Shale play (including capital investments in gathering systems), which will bring our total planned investment to more than $2.5 billion by the end of 2008. We expect to participate in approximately 475 horizontal wells in 2008 (75% operated), over 50% of which will be drilled with lateral lengths greater than 3,000 feet and developed on multi-well pads. In addition, approximately 75% of our wells drilled in 2008 will have the benefit of our growing 3-D seismic database, compared to about 20% in 2007. We also plan to drill approximately 40 vertical wells in the play area targeting the shallower conventional reservoirs above the Fayetteville Shale, up from 11 wells drilled in 2007. With this planned level of activity, we expect that our capital program will generate a significant increase in our production volumes from the play, which could reach as high as 450 MMcf per day by the end of 2008 and could result in net production of 90.0 to 95.0 Bcf for the year. During 2007, we also saw meaningful growth in our Midstream Services business which, when combined with our company-operated drilling rigs, are two of the key reasons why we have made such significant progress in the play over a short period of time.
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Xf!fyqfsjfodfe! tvctuboujbm!hspxui! gspn!pvs!dpowfoujpobm! Bslpnb!bdujwjujft! jo!3118/ In 2007, we invested approximately $148 million and participated in 114 wells in our conventional Arkoma properties, 81 of which were successful and 23 were in progress at year-end, resulting in an 89% success rate and new reserves additions of 60.6 Bcf. We experienced 18% growth in our production volumes during 2007, primarily driven by the continued successful delineation of our Ranger Anticline area. We produced 23.8 Bcf in 2007, compared to 20.1 Bcf in 2006 and 20.2 Bcf in 2005. Our reserves in the basin grew as well to 304 Bcf in 2007, compared to 277 Bcf in 2006 and 271 Bcf in 2005. Prior to 2007, our production over the last few years from our conventional drilling activities in the Arkoma Basin was fairly consistent, as new production stemming from our drilling program offset the natural production decline from existing wells.
During 2007, we successfully completed 52 out of 67 wells at Ranger (excluding 12 wells in progress at year-end), which added 25.5 net Bcf of new reserves. Net production from the field increased by 67% to 9.5 Bcf during 2007, compared to 5.7 Bcf in 2006 and 5.6 Bcf in 2005. We began drilling at our Midway prospect area, located approximately 11 miles north of Ranger, two years ago and through year-end 2006 we had drilled a total of six wells. In 2007, we began to accelerate our program at Midway, drilling 26 wells which were all either productive or in progress at year-end. Our wells at Midway primarily produce from the same productive zones as our wells at Ranger. Depending on the performance of these wells, there may be significant additional drilling potential on our Midway acreage. We are planning another very active year in our conventional Arkoma program in 2008 by investing approximately $132 million and drilling approximately 100 to 110 wells, including 40 wells at the Ranger Anticline and 45 wells at Midway.
Southwestern Energy Company 2007 Annual Report pgs. 8/9
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Uif!efwfmpqnfou!pg! pvs!Pwfsupo!Gjfme! jt!b!hsfbu!fybnqmf! pg!ipx!uif!bqqmjdbujpo! pg!pvs!Gpsnvmb!ibt! jodsfbtfe!uif!wbmvf! pg!uijt!bttfu/ Our drilling program in East Texas began in 2000 with the acquisition of approximately 11,000 gross acres in the Overton Field in Smith County, Texas. Since that time and through December 31, 2007, we had drilled 365 wells at Overton, all of which were successful. Our accomplishments at Overton have been a great example of how the Right People doing the Right Things, which includes creative thinking, using new technologies and process improvements, will contribute to the significant increase in the value of an asset.
development areas located in four different counties in East Texas, has the potential to contribute greatly to our future success in East Texas. Through year-end 2007, we held 87,000 gross acres at Angelina and had drilled a total of 59 wells primarily targeting the Travis Peak or James Lime formations, with all but one well being successful. In 2007, we invested approximately $88 million and drilled 31 wells at Angelina. Net production from the area was 2.5 Bcfe in 2007, compared to 1.8 Bcfe in 2006 and 0.9 Bcfe in 2005. In December 2007, we completed our first operated horizontal well targeting the James Lime formation, the Timberstar-Mills 1H, which had an initial production rate of 12.1 MMcfe per day. In 2008, we intend to participate in an additional 10 to 15 James Lime horizontal wells in both our Angelina and Jebel prospect areas. We will continue to be active in East Texas and plan to invest $122 million in the area during 2008, drilling between 30 and 35 wells in our Angelina and Jebel areas.
Over the years as we expanded our development at Overton, we were also working on expanding our other activities in East Texas. Our Angelina River Trend area, concentrated in several separate
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DIRECTORS
As Shown from left to right: Robert L. Howard (13), Retired, Shell Oil Company; Vello A. Kuuskraa (5), President and Chairman of the Board, Advanced Resources International, Inc.; Lewis E. Epley, Jr. (10), Retired, Attorney at Law; Harold M. Korell (11), President, Chief Executive Officer and Chairman of the Board, Southwestern Energy Company; Kenneth R. Mourton (13), Managing Partner, Ball and Mourton, Ltd., PLLC; Charles E. Scharlau (56), Retired CEO, Southwestern Energy Company (Years of service with the company are shown on this page in parentheses.)
EXECUTIVE OFFICERS
CORPORATE OFFICERS
SUBSIDIARY OFFICERS
Harold M. Korell (11) President, Chief Executive Officer and Chairman of the Board
Southwestern Energy Production Company and SEECO, Inc.
Greg D. Kerley (18) Executive Vice President and Chief Financial Officer Harold M. Korell (11) President, Chief Executive Officer and Chairman of the Board
Greg D. Kerley (18) Executive Vice President and Chief Financial Officer
Richard F. Lane (10) Executive Vice President Mark K. Boling (6) Executive Vice President, General Counsel and Secretary Dee W. Hency (30) Vice President – Administration and Chief Information Officer
Richard F. Lane (10) Executive Vice President and President, Southwestern Energy Production Company and SEECO, Inc.
Mark K. Boling (6) Executive Vice President, General Counsel and Secretary
Gene A. Hammons (3) President, Southwestern Midstream Services Company
Alan N. Stewart (4) President, Arkansas Western Gas Company
Richard F. Lane (10) President J. Alan Stubblefield (10) Senior Vice President – Southwestern Energy Production Company John D. Thaeler (9) Senior Vice President – SEECO, Inc. Jim R. Dewbre (10) Senior Vice President – Land and Business/ Organizational Development
Timothy J. O’Donnell (17) Vice President – Human Resources and Treasurer
John C. Gargani (14) Vice President – Economic Planning and Acquisitions
Stanley T. Wilson (22) Controller and Chief Accounting Officer
Alan R. Clemens (10) Vice President – Geosciences and DeSoto Planning James L. Bolander, Jr. (7) Vice President – DeSoto Operations
Southwestern Midstream Services Company Gene A. Hammons (3) President Arkansas Western Gas Company Alan N. Stewart (4) President Charles V. Stevens (36) Senior Vice President Ricky A. Gunter (35) Vice President – Rates and Regulation Bob Lamb (17) Vice President – Community Development Jeffrey L. Dangeau (22) General Counsel and Secretary Glenn M. Morgan (31) Controller and Treasurer
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ANNUAL MEETING May 6, 2008 at 11:00 a.m. CDT Wyndham Hotel - Greenspoint Houston, Texas
INDEPENDENT PUBLIC ACCOUNTANTS
Southwestern Energy Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax)
PricewaterhouseCoopers LLP Tulsa, Oklahoma
SUBSIDIARY OFFICES
INVESTOR RELATIONS ®
The Right People doing the Right Things, wisely investing the cash flow from the underlying Assets will create Value +®
CORPORATE HEADQUARTERS
Greg D. Kerley Executive Vice President and Chief Financial Officer Brad D. Sylvester Manager, Investor Relations 281-618-4897
WEBSITE www.swn.com
TRANSFER AGENT AND REGISTRAR Computershare Trust Co., N.A. P.O. Box 43069 Providence, RI 02940-3069 800-446-2617 The DirectSERVICE Investment Program c/o Computershare Trust Co., N.A. P.O. Box 43081 Providence, RI 02940-3081 800-446-2617
Southwestern Energy Production Company Southwestern Midstream Services Company 2350 N. Sam Houston Pkwy. East Suite 125 Houston, Texas 77032 281-618-4700 281-618-4818 (fax) SEECO, Inc. 1083 Sain Street P.O. Box 13408 Fayetteville, Arkansas 72703-1004 479-521-1141 479-521-0328 Arkansas Western Gas Company 1001 Sain Street P.O. Box 13288 Fayetteville, Arkansas 72703-1002 479-521-5400 479-582-4747 Southwestern Energy Company Southwestern Energy Production Company SEECO, Inc. DeSoto Drilling, Inc. (DDI) DeSoto Gathering Company, LLC (DGC) 23 Nabco Avenue Conway, Arkansas 72032 501-548-6500 501-548-6550 (fax) 501-548-6600 (DDI) 501-548-6852 (DDI fax) 501-548-6700 (DGC) 501-548-6755 (DGC fax)
Southwestern Energy Company’s Form 10-K for the fiscal year ended December 31, 2007, 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 2007 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2007 Form 10-K. Design: Michael Thede Design Photography: Cover – GettyOne; Introduction, Fayetteville Shale Play, Arkoma Basin and East Texas – DOXA; Executive portraits – Pete Lacker Photography Printing: Classic Color ©2008 Southwestern Energy Company All rights reserved.
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Southwestern Energy Company 2350 N. Sam Houston Pkwy. East, Suite 125 Houston, Texas 77032 281-618-4700
Southwestern Energy Company 2007 Annual Report
Southwestern Energy Company 2007 Annual Report ®
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