Southwestern Energy (SWN) is a focused, smaller producer in the booming domestic natural gas exploration business. Success with shale gas production has flooded the market, however, making it harder for all gas companies to continue to spend on building gas supply as prices fall.
Southwestern Energy is a natural gas and oil exploration, development and production company which operates mainly in the United States in the shale reserves of Arkansas (in the Fayetteville Shale) and Pennsylvania (the Marcellus Shale), as well to a lesser extent as in Texas, Oklahoma and Louisiana, as well as in Canada. It also operates a midstream business that serves its production and those of third parties.
In 2011, 77 percent of operating income and 84 percent of earnings before interest, taxes and depreciation came from exploration and production.
“Our primary focus is to maximize the value of our significant acreage position in the Fayetteville Shale play, which has provided significant production and reserve growth since we began drilling in the play in 2004,” management said at the end of 2011.
The Fayetteville play accounts for about 87 percent of total proved oil and natural gas reserves controlled by the company. “Additionally, we are actively drilling on portions of our 186,893 net acres in the Marcellus Shale and believe our production and reserves from this play will grow substantially over the next few years,” management said.
Southwestern Energy is a $9.92 billion market cap company in a sector in which the average firm size is $48.63 billion. Its trailing 12-month P/E ratio is 15.60, slightly under the average for oil & gas producers.
Southwestern Energy’s five-year project price-to-earnings-growth (PEG) ratio is 1.88, vs. a sector average of 0.02. Its projected earnings per share growth for the coming year is 23.94 percent, compared to 15.44 percent for the sector.
Analysts are mixed on Southwestern Energy, with a broad divergence of views on its prospects. Credit Suisse expects the stock to underperform and Thomas White International calls it a sell.
Yet Goldman Sachs and UBS are in the buy camp and Friedman, Billings, Ramsey & Co. thinks the stock will outperform.
Capital expenditures in support of the Fayetteville play are expected reach $4 billion in the three years ending 2012 even as natural gas prices sink on oversupply. The spending will put Southwestern in a good position once gas prices improve; however, it might need to borrow to keep up such spending, point out the analysts at Standard & Poor’s Equity Research.
“As gas prices fall, we see capex and production funded via cash flow and a credit revolver.We think the stock has been hampered by aggressive capex in the past,” S&P wrote.
Southwestern Energy next reports on May 3.
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