Southwestern Stays Neutral - Analyst Blog
We are maintaining our Neutral recommendation on Southwestern Energy Co. ( SWN ), based on its impressive third quarter results that reflected robust volume growth and operational efficiency. These were partially offset by the uncertain price fundamentals for natural gas and drilling challenges.
Based in Houston, Texas, Southwestern engages in the exploration, development and production of natural gas and crude oil in the United States. The company operates in two segments -- Exploration and Production, and Midstream Services. The company is one of the largest producers of natural gas in the U.S. with core Fayetteville Shale properties spreading over 889,000 net acres.
With the drilling efficiency achieved by Southwestern in the Fayetteville Shale and the emerging position in the Marcellus Shale, management raised its 2011 production guidance to the range of 496-500 billion cubic feet equivalent (Bcfe) from the previous projection of 483-491 Bcfe. The improved guidance represents a 23% increase over the 2010 level. The company also lifted its fourth quarter oil and gas production estimate to 129-133 Bcfe from 126-130 Bcfe.
Southwestern exhibits a strong balance sheet with significant liquidity and financial flexibility. We believe that the company's continuous endeavor of focusing on its return on investment, coupled with its large drilling inventory, uniquely positions it to create significant value for shareholders.
However, these positive sentiment revolving Southwestern are negated by the weak natural gas scenario in the U.S. arising from continued oversupply and low demand. A volatile macro backdrop also adds to the company's negative aspects, forcing it to perform below expectations.
We believe that Southwestern faces the dearth of a geographically diversified asset portfolio, with most of its activities concentrated in the Fayetteville Shale, Arkoma and East Texas fields. Thus, the company's earnings and cash flow stream are sensitive to regional pricing or upheavals.
Additionally, the company's operations are exposed to various technological disruptions and harsh weather conditions that might result in a delay of well completion. Coupled with high services costs, these headwinds will likely restrict Southwestern's profitability in the near-to-medium term.
Considering these factors, we believe that there exists limited upside potential for the stock and expect Southwestern to perform at par with other industry players such as Chesapeake Energy Corporation ( CHK ) and Williams Companies ( WMB ).