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We reaffirmed our Neutral recommendation on Southwestern Energy Company (SWN - Analyst Report) 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.

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 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 outperformance.

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 (CHK - Analyst Report). 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 threshold.

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. These include Summit Midstream Partners, LP (SMLP - Snapshot Report) and Enerplus Corporation (ERF - Snapshot Report), which are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).

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