Some E&P veterans lament that the days of wildcatting are long gone. In the offices of Southwestern Energy Co., wildcatting remains a way of doing business that has brought the company from the depths of lawsuit despair to the pioneer soil of the new Fayetteville Shale play that could someday rival the Barnett. At the helm of this operation is Harold Korell. As chairman, chief executive and president, Korell has maintained his strategy of finding instead of acquiring assets and returning $1.30 for every dollar invested, even in the face of near-bankruptcy. This determination was fostered at the Colorado School of Mines, where Korell received an engineering degree and then began his career with Mobil Oil Corp., Tenneco Oil Co., McCormick Resources and American Exploration Co. Korell joined Southwestern in 1997 while it was based in Arkansas and had a steady utility business but foundering E&P unit. The E&P business was gaining momentum when, in June 2000, the company lost a lawsuit representing half of its total market cap. Nonetheless, the company survived the near-death experience and since that time, Korell has transformed Southwestern into a formidable upstream, midcap producer. Now, the Houston-based company is perched upon what could be the next big U.S. gas play-and in its own former backyard of north-central Arkansas. Analysts laud the Fayetteville Shale's potential and Southwestern's competitors big and small are fighting to get a piece of the action, where Southwestern sits on some 800,000 acres and is not looking now to taking a partner on any of its leases. The company has even become its own supplier of drilling rigs in the play, virtually eliminating one of its biggest frustrations. Oil and Gas Investor recently sat down with Korell to discuss Southwestern's strategy of organic growth, where the money is really made in the energy business, and why sticking with it is the greatest lesson he has learned. Investor What brought you to the Fayetteville Shale? Korell In early 2002 we were doing a mapping project of a sandstone reservoir, the Wedington Sand. We'd had wells that had been completed in the Wedington Sand and realized these wells had produced more gas than our maps indicated they should have. That's where the light bulb went on for us-the Fayetteville Shale, which surrounds the sandstone reservoir, was contributing gas to the production. The Fayetteville is of the same geologic age as the Barnett Shale. As a result of the realization that the shale was contributing gas production, we undertook to assess its potential. We began a project to map the shale in the basin to understand what the lateral distribution was. We basically spent a whole year working on this and drilled a few wells where we took sidewall core samples from the shale itself to look at gas content and thermal maturity. By the end of 2002, we thought we were on to something and we were excited enough to begin leasing land in early 2003. We're still leasing land today; we have more than 800,000 acres. We didn't start out saying, "Hey, let's go chase the Fayetteville Shale." We discovered it through our analysis while looking for something else, which is oftentimes the way you find oil and gas. Investor Are others becoming interested in the Fayetteville? Korell Apparently, no one else had focused on this; so, we were able to lease land there without competition for the first year and a half. At mid-year 2004, we announced our plans for drilling to test the play. This generated a lot of calls from companies wanting to partner with us-which we declined. Now some of them are leasing very aggressively. Chesapeake Energy Corp. has been very forward about that and so has XTO Energy, as well as a number of smaller companies. Investor Is the Fayetteville as promising as you suspected? Korell Yes. We've now actually drilled wells-more than 60-and we know there's gas there. Fifty or so are on production now and selling into the pipeline. We've learned a lot about how to complete the wells. By the end of 2006, we will have drilled pilot wells to test a large portion of our acreage. One can presume the rest is just as good, or it's not as good, but we won't know that until we drill in those areas. We're happy with what's transpired. Investor What improvements will be needed to take-away capacity as you bring production on? Korell At this time, there's capacity out there with existing pipelines to take away in excess of 200 million cubic feet per day. We're presently producing 10- to 11 million per day, so there's a lot of remaining room. We are studying alternatives for capacity to take away larger volumes of gas as needed. Investor In the Fayetteville, what difficulties have you encountered? Korell Rigs have been a real issue for us. The equipment in the Arkoma Basin is not designed to drill these types of wells; they were designed to drill the shallower Atokan sands using air systems for circulating the hole clean. Through the drilling program, we've encountered tremendous downtime. The rigs are breaking all the time. So, we've chosen to buy some drilling rigs. We have 10 on order that are being constructed by a company in Odessa, Texas. The first (was to) arrive at the end of November. We've hired people to manage this drilling business for us; we're going to become our own drilling company. It's come to where it's our only alternative. Investor Will you export cash flow from existing regions of operation to fund this new area? Korell We did a secondary equity offering in September of this year and raised about $580 million that will ultimately be put into this Fayetteville Shale play, so we won't be taking away from other plays. We don't do much acquiring; our capital goes to drilling wells and that's the way we've built this company, by finding oil and gas. Investor Has that helped you to attract investors? Korell We've been on a constant, continuous strategy of organic growth. Our main focus is to create at least $1.30 of present value for each $1 we invest in our E&P business. Wall Street and investors say we know what we're doing because we continue to deliver. We're not buying someone else's production, we're finding it, and that's where you really make the money. Investor Will you expand in your other areas of operation? Korell We still have a lot of drilling to do in the Overton Field in East Texas and we have a new area, the Angelina River Trend in East Texas, where we've been acquiring drilling rights. We're also looking at other unconventional plays. Investor How are you preparing financially for the possibility that prices decline? Korell Hedging. But, prices can decline a long way from where they are and a lot of these projects will still work pretty darn well. If prices drop, you're going to see a lot of companies quit drilling. If they quit drilling, the supply-side is going to go in the tank. Of course, at the same time, investors would flee the energy sector. I think a cycle like this would last no longer than six to eight months-so we hedge to protect against such an eventuality and to lock in our returns. Investor What prepared you prior to joining Southwestern to turn the company's outlook around from a small utility and foundering E&P company? Korell Probably my greatest preparation was the 17 years I was with Tenneco Oil Co. I had the good fortune to work with a lot of really good people who knew how to find oil and gas. Every person I've ever rubbed shoulders with has left some little piece of something on me. If you try to pick up the good things and don't pick up the bad habits, hopefully you come out the other end in the right place at the right time. That's really what's happened here. Investor What have you learned while at Southwestern that has further helped you lead the company to such prosperity? Korell Patience and hard work and staying at it. Things from Day One did not always go well here. After I joined and started trying to build a team of E&P people who I thought could find oil and gas, we lost a major lawsuit about an old gas contract. We lost $109 million when our market cap was about $200 million. Our objective had always been to create value. We stuck with that strategy in spite of that a lot of people thought we were going under. Persevere and stick with what you know is right. Investor Did the fact that you had just joined Southwestern when you faced a major setback make you think that you'd made the wrong decision in joining the company? Korell It definitely did because I'd left a pretty good job at American Exploration. But I'd made a commitment here. I could have given up, but I'd made a commitment. I recruited people I believed in and we stuck with it. And, here we are today.