Southwestern Energy Company ( SWN Quick Quote SWN - Free Report) is likely to gain from its huge acreage position in the Appalachia Basin. However, its high debt level is a concern. The stock has popped 6.9% in the past three months.
Based in Spring, TX, Southwestern Energy engages in the exploration, development and production of natural gas, crude oil and natural gas liquids (NGLs) in the United States. It holds significant properties in the prolific Appalachian Basin, which is famous for its natural gas reservoirs. The $1.4-billion upstream company currently has a Zacks Rank #3 (Hold).
Currently, Southwestern Energy has a
VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities for investors. You can see . the complete list of today's Zacks #1 Rank stocks here Northbound Estimates
Earnings estimate revisions have the greatest impact on stock prices. Over the past two months, the Zacks Consensus Estimate for Southwestern Energy for the current year has jumped 61.9%. During this time period, the stock has witnessed four upward revisions and three downward movements.
Positive Earnings Surprise History
Southwestern Energy outpaced the Zacks Consensus Estimate in two of the trailing four quarters and met once. It delivered a four-quarter average earnings surprise of 27.9%.
Southwestern Energy has a diversified reserve base in multiple U.S. basins and remains focused on investments in high-return areas such as Appalachia. A significant chunk of its investments is apportioned for Southwest Appalachia. Northeast Appalachia is expected to continue generating free cash flow, while production is expected to rise. Total production is estimated to grow from 778 Bcfe in 2019 to 830-865 Bcfe in 2020. The upstream energy player expects production volumes in the June quarter of 2020 to be mostly unaffected, thanks to improvement in well performance.
Management has also been working diligently. It has not been shy of divesting assets, particularly those that do not fit into the company’s long-term growth plan. As part of this initiative Southwestern Energy divested its Fayetteville Shale assets for net proceeds of around $1,650 million. It reiterated its focus on streamlining its portfolio, thereby easing its debt burden and increasing shareholder value.
There are some negative factors that are holding back the company from attaining its growth potential.
At the end of first-quarter 2020, the company had total debt of $2,425 million, and cash and cash equivalents of only $5 million. The company’s total debt-to-capitalization stands at 58.8% compared with the industry’s 36%. In fact, the ratio of the company has been consistently higher than the industry over the past five years, reflecting a more levered balance sheet.
The company has $1.3 billion in liquidity under its revolving credit facility, which can easily cover short-term debt of $32 million and also a portion of long-term debt of $2,393 million. However, a noticeable declining trend in the company’s revenue picture over the past few quarters shows weakness in overall operations. This raises questions over the upstream energy player’s ability to pay a portion of its long-term debt, due for repayment after 12 months, which has been rising over the past two quarters.
With the current weak gas price scenario, the company's bottom line is under pressure. Worryingly, the situation is not expected to improve anytime soon, primarily due to lower energy demand triggered by the coronavirus pandemic.
To Sum Up
Despite significant production growth opportunities, increasing debt and volatile commodity prices are concerns. Nevertheless, we believe that its systematic and strategic plan of action will drive long-term growth.
Stocks to Consider
Some better-ranked players in the energy space include NGL Energy Partners LP (
NGL Quick Quote NGL - Free Report) , Cheniere Energy, Inc. ( LNG Quick Quote LNG - Free Report) and Centennial Resource Development, Inc. ( CDEV Quick Quote CDEV - Free Report) , each holding a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
NGL Energy Partners’ bottom line for second-quarter 2020 is expected to rise 92.7% year over year.
Cheniere Energy’s bottom line for second-quarter 2020 is expected to rise 200% year over year.
Centennial Resource’s second-quarter earnings estimates have improved over the past 30 days, with three upward estimate revisions and no downward movement.
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