Back to top

Analyst Blog

Zacks Equity Research

Mixed 3Q for Southwestern

SWN CHK

 ZacksTrade Now

This page is temporarily not available.  Please check later as it should be available shortly. If you have any questions, please email customer support at support@zacks.com or call 800-767-3771 ext.  9339.

Independent natural gas operator Southwestern Energy Co. (SWN - Analyst Report) reported third-quarter 2012 earnings of 38 cents per share, exceeding the Zacks Consensus Estimate by 6 cents mainly on higher production. The quarterly result, however, declined 24% from the year-earlier profit of 50 cents. The underperformance was primarily due to the drop in natural gas prices.

Third-quarter revenue declined 10.6% to $685.8 million from the year-ago level of $767.3 million. The revenue also lagged the Zacks Consensus Estimate of $661.0 million.

Production and Realized Prices

During the reported quarter, the company’s oil and gas production grew nearly 12% year over year to 144.3 billion cubic feet equivalent (Bcfe) – almost entirely gas – driven by the Fayetteville Shale operations. Production from Southwestern’s Fayetteville Shale play increased 10.5% to 123.6 Bcfe from the year-earlier period.

The company’s average realized gas price, including hedges, dropped almost 21.0% to $3.40 per thousand cubic feet (Mcf) from $4.30 per Mcf in the year-ago period. Oil was sold at $99.67 per barrel, up 12.8% from the year-earlier level of $88.35 per barrel.

Segmental Highlights

Operating income for the Exploration and Production (E&P) segment dropped more than 36.4% year over year to $145.4 million in the third quarter. The decrease was due to lower gas price realization as well as increased operating costs and expenses related to higher production, partially toned down by the increased output level.

On a per-Mcfe basis, lease operating expenses were down to 79 cents versus 86 cents in the prior-year quarter. On the other hand, general and administrative expense per unit of production was down by 16% year over year to 21 cents.

The Midstream Services segment’s operating income jumped 13% to $75.5 million in the third quarter from $66.8 million in the year-earlier quarter. The increase was driven by an improvement in gathering revenues related to the Fayetteville and Marcellus Shale plays.

Capex and Debt

The company’s total capital expenditure in the quarter was $470.4 million, of which $421.2 million was invested in E&P activities and $32.2 million in the Midstream segment. Southwestern planned for a total capital expenditure of $2.1 billion for the year.

As of September 30, 2012, long-term debt stood at $1,695.3 million, representing a debt-to-capitalization ratio of 34.3% (versus 32.2% in the preceding quarter).

Hedging

As of September 30, 2012, Southwestern had approximately 67 Bcf of its remaining 2012 expected gas production hedged at an average floor price of $5.16 per Mcf. It has hedged approximately 186 Bcf of its 2013 expected gas production at an average floor price of 5.06 per Mcf.

Guidance

Earlier, Southwestern had issued production guidance for 2012 in the range of 560 Bcfe to 570 Bcfe. The outlook represents a 13% increase over the 2011 level.

Our Take

Southwestern’s industry-leading holdings in Northern Arkansas’ Fayetteville Shale play offer some of the highest quality natural gas discoveries in North America in recent years. Marcellus and Fayetteville shales also hold ample opportunity for newer natural gas discoveries.

We see the company as well positioned for production growth given its streamlined cost structure, upcoming drilling programs in the Fayetteville and Marcellus shales, and a wide acreage in its New Ventures, especially in the Brown Dense play.

However, we remain apprehensive about the weak natural gas scenario in the U.S. given the continued oversupply and low demand. This will likely hurt the company’s as well as other natural gas companies like Chesapeake Energy Corporation’s (CHK - Analyst Report) performance in the near term.

Other risk factors include weaker-than-expected commodity prices, technological failures and the lack of a diversified asset base.

The company holds a Zacks #2 Rank (short-term Buy rating). We maintain our long-term Neutral recommendation on the stock.

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

Learn more

Start for as little as $4.50 per trade.

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
DIXIE GROUP DXYN 15.84 +7.90%
BOFL HOLDING BOFI 85.30 +4.97%
RAMBUS INC RMBS 12.31 +4.41%
VIPSHOP HOLD VIPS 148.73 +4.35%
NETFLIX INC NFLX 345.74 +4.32%