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On Mar 4, we maintained our long-tern Neutral recommendation on Southwestern Energy Company (SWN - Analyst Report). 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 #3, which is equivalent to a short-term Hold rating.
Reasons for Reiteration
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 Feb 20, the company reported better-than-expected fourth-quarter 2012 earnings mainly on the back of higher production, primarily at its Fayetteville shale operations.
During the quarter, 111 Fayetteville wells came on-stream, yielding a net of 125.1 billion cubic feet per day (Bcf/d), up 7.4% from the year-ago level. Notably, the costs also decreased 11.5% sequentially to $2.3 million per well. The average time to drill also decreased sequentially to 5.7 days from 6.8 days. With an efficient management team, the company’s low-cost operations exhibit a solid upside potential.
Southwestern also remains proactive in the development of the fertile Marcellus play, where it held leases for approximately 176,298 net acres as of Dec 31, 2012. The quarterly production from the region climbed 138.3% year over year. Southwestern has almost doubled its expected gas production year over year to 160–165 gross Bcf for 2013. This will provide it exposure to a play, where reserves increased over 40% at the end of 2012, with a low cost structure and additional acreage.
Southwestern announced a tentative joint venture contract in the New Ventures play that is expected to include a cash advance and a 3-year drilling carry. The company also remains busy in testing plays in DJ Basin (Marmaton) and Montata (Bakken/Three Forks).
However, taking into account the uncertain price fundamentals for natural gas plus drilling challenges, we see little room for above-market performance.
The quarter’s earnings surpassed expectations, but deteriorated by a penny from the year-earlier quarter. The decline was primarily due to the drop in natural gas prices.
Southwestern’s year-end 2012 proved reserves decreased 31.8% and almost 100% of the reserves were natural gas. The downward revision was due to lower gas prices in 2012. The weak natural gas scenario in the U.S. due to continued oversupply and low demand also compels us to remain sidelined.
Over the last 7 days, we witnessed no earnings momentum for the stock for the first quarter of 2013. The Zacks Consensus Estimate is currently pegged at 37 cents per share, reflecting a year-over-year increase of 20.1%.
Other Stocks to Consider
In the energy sector, Atmos Energy Corporation (ATO - Snapshot Report), Chesapeake Utilities Corporation (CPK - Snapshot Report) and The Laclede Group Inc. (LG - Snapshot Report) display better fundamentals and currently carry a Zacks Rank #2 (Buy).