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
rn E
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
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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
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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
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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.
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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.
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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.
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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).
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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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