We reaffirmed our Neutral recommendation on
Southwestern Energy Company
) on Jun 12, 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 #2, which is equivalent to a
short-term Buy rating.
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 May 3, the company reported
better-than-expected first-quarter 2013 earnings mainly on the
back of higher production, primarily at its Fayetteville shale
operations. Lower operating expenses also aided the
During the quarter, 102 Fayetteville wells came on-stream,
driving net production of 485.5 billion cubic feet (Bcf).
Notably, the costs averaged $2.1 million per well versus $2.3
million per well in the prior quarter. The average time to drill
also decreased to 5.4 days from 5.7 days in the fourth quarter of
2012. With an efficient management team, the company's low-cost
operations exhibit a solid upside potential. This has helped
Southwestern to maintain its full-year total production target in
the 631-642 Bcfe range, or 13% above the 2012 level.
Southwestern also remains proactive in the development of the
fertile Marcellus play, where it held leases for approximately
337,300 net acres as of April 30, 2013. Subsequently in May, the
company acquired approximately 162,000 net acres in the Marcellus
Shale in Pennsylvania from
Chesapeake Energy Corporation
). The production from the region averaged 23.5 Bcf in the first
quarter, up approximately 118.6% year over year. The company
expects to spend approximately $705 million to drill 86-88 gross
wells in Marcellus. Southwestern has almost doubled its expected
gas production to 160-165 gross Bcf in 2013 as compared to 2012.
This will provide the company exposure to a play with a low cost
structure and additional acreage. Marcellus reserves
increased more than 40% to 816 Bcf at the end of 2012.
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 (PVI)
and intends to only drill projects that meet that return
Further, taking into account the strong price fundamentals for
natural gas in the near term, we see room for above-market
performance. These also justify our Zacks Rank #2.
Over the last 7 days, we witnessed no earnings momentum for the
stock for the second quarter of 2013. The Zacks Consensus
Estimate is currently pegged at 46 cents per share, reflecting a
year-over-year increase of 77.6%.
Other Stocks to Consider
There are other stocks in the sector that appear more rewarding.
Summit Midstream Partners, LP
), which are expected to perform impressively over the next few
months and carry a Zacks Rank #1 (Strong Buy).
CHESAPEAKE ENGY (CHK): Free Stock Analysis
ENERPLUS CORP (ERF): Free Stock Analysis
SUMMIT MIDSTRM (SMLP): Free Stock Analysis
SOUTHWESTRN ENE (SWN): Free Stock Analysis
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