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Analyst Blog

On Mar 20, 2014, we issued an updated research report on Southwestern Energy Company (SWN - Analyst Report). The company posted adjusted earnings of 54 cents per share, surpassing the Zacks Consensus Estimate of 52 cents and improving from the prior-year quarter earnings of 45 cents. Quarterly operating revenues of $907.1 million comfortably beat the Zacks Consensus Estimate of $876.0 million and increased significantly from $777.4 million in the fourth quarter of 2012.

During the fourth quarter, the company’s oil and gas production grew 18.0% year over year to 177.0 billion cubic feet equivalent (Bcfe) – almost entirely gas – driven by increased Marcellus Shale activity. Production from Southwestern’s Fayetteville Shale plays decreased 1.5% from the year-earlier quarter to 123.2 Bcfe. However, output from the Marcellus Shale plays jumped 151.3% from the prior-year quarter to 48.5 Bcfe.

As of Dec 31, 2013, Southwestern’s gas and oil proved reserves totaled 6,976 Bcfe, up 74% from 4,018 Bcfe at the end of 2012. The substantial increase reflects higher Fayetteville and Marcellus shale drilling activities. Almost all of Southwestern’s estimated proved reserves were natural gas, of which 61% was classified as proved developed at year-end 2013. During 2013, the company added 3,615 Bcfe to proved reserves. These additions replaced approximately 550% of its production.

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.

Key Picks from the Sector

Southwestern currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can consider better-ranked players in the energy sector like Range Resources Corporation (RRC - Analyst Report), Patterson-UTI Energy Inc. (PTEN - Analyst Report) and Helmerich & Payne, Inc. (HP - Analyst Report). All the stocks sport a Zacks Rank #1 (Strong Buy).

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