We reaffirmed our Neutral recommendation on Southwestern Energy Company (SWN) on Dec 23, 2013. The company’s strong acreage positions in the Fayetteville and Marcellus shale plays remain subdued by its natural gas weighted production as well as reserves profile. The stock retains a Zacks Rank #3, which is equivalent to a short-term Hold rating.
Why Maintained?
Southwestern Energy is one of the largest producers of natural gas in the U.S., with core Fayetteville Shale properties spreading over 913,502 net acres. On Nov 1, the company reported better-than-expected third-quarter 2013 earnings mainly on the back of higher production, primarily at its Marcellus shale operations as well as higher gas price realization.
During the reported quarter, the company’s oil and gas production grew 19.5% year over year to 172.4 billion cubic feet equivalent (Bcfe) – almost entirely gas – driven by increased Marcellus Shale operations. Production from Southwestern’s Fayetteville shale plays decreased 0.7% from the year-earlier period to 122.7 Bcfe. However, output from the Marcellus shale plays increased 196.0% from the prior-year quarter to 44.7 Bcfe. Southwestern has also increased its production guidance for 2013 to 653–655 Bcfe from its earlier estimate of 643–651 Bcfe.
The company’s average realized gas price, including hedges, jumped 5.6% to $3.60 per thousand cubic feet (Mcf) from $3.41 per Mcf in the year-ago period. Oil was sold at $106.72 per barrel, up 7.1% from the year-earlier level of $99.67 per barrel. Natural gas liquids (NGL) were sold at $42.05 per barrel.
Southwestern boasts a strong balance sheet with significant liquidity and financial flexibility. Moreover, the company’s continuous endeavor of focusing on return on investment, coupled with its large drilling inventory, uniquely positions it to create significant value for shareholders. Southwestern remains focused on generating economic returns. It is committed to projects returning at least 1.3x the present value index and intends to only drill projects that meet the return threshold.
However, taking into account the uncertain price fundamentals for natural gas and drilling challenges, we see little scope for above-market performance.
Other Stocks to Consider
Stocks in the sector that are currently performing well include Blueknight Energy Partners, L.P. (BKEP), Harvest Natural Resources Inc. (HNR) and Clayton Williams Energy, Inc. (CWEI). All these sport a Zacks Rank #1 (Strong Buy).
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