Southwestern Energy Company (SWN - Free Report) is likely to gain from its huge acreage position in the Appalachia Basin. However, high debt level is a concern.
Based in Spring, TX, Southwestern Energy engages in the exploration, development and production of natural gas, crude oil and natural gas liquids in the United States. It holds significant properties in the prolific Appalachian Basin, which is famous for its natural gas reservoirs. The $1.7-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.
Earnings estimate revisions have the greatest impact on stock prices. Over the past month, the Zacks Consensus Estimate for Southwestern Energy’s earnings for the current year has increased 4.4%. During this time period, the stock has witnessed four upward and three downward estimate revisions.
Positive Earnings Surprise History
Southwestern Energy outpaced the Zacks Consensus Estimate in three of the trailing four quarters and met once. It delivered a four-quarter average earnings surprise of 55.7%.
Southwestern Energy has a diversified reserve base in multiple U.S. basins and remains focused on investing in high-return areas such as Appalachia. A significant chunk of its investments is apportioned to Southwest Appalachia. Northeast Appalachia is expected to continue generating free cash flow and production from the same is expected to rise. Total production is estimated to grow from 778 billion cubic feet of natural gas equivalent (Bcfe) in 2019 to 843-861 Bcfe in 2020. The upstream energy player expects production volumes for the September quarter of 2020 to be higher sequentially, thanks to improvement in well performance.
Moreover, Southwestern Energy’s acquisition of smaller natural gas producer, Montage Resources is expected to boost its Appalachian Basin footprint with high-return Marcellus and Utica assets. The move is expected to create the third-largest producer in the Appalachian Basin that will produce around 3 Bcfe per day. The deal will likely help the combined company to save $30 million per annum in general and administrative expenses, as well as enhance free cash flow while improving the acquirer’s returns.
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 Fayetteville Shale assets for net proceeds of around $1,650 million. It confirms that the company is focused on streamlining its portfolio, which can reduce debt burden and increase shareholder value.
There are some negative factors that are holding back the company from attaining its growth potential.
At the end of second-quarter 2020, the company had total long-term debt of $2,440 million, and cash and cash equivalents of only $10 million. Its total debt-to-capitalization ratio stands at 0.75, reflecting significant debt exposure.
The company has $1.3 billion in liquidity under the revolving credit facility, which can cover a portion of long-term debt of $2,440 million. However, a noticeable declining trend in the company’s revenue picture over the last few quarters shows weakness in overall operations. This raises questions over the upstream energy player’s ability to pay a portion of long-term debt, due for repayment after 12 months, which has been rising over the last two quarters.
Southwestern Energy's total production comprises more than 78% of natural gas. Given 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, which will further affect its profit levels.
To Sum Up
Despite significant production growth opportunities, high 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 Concho Resources Inc. (CXO - Free Report) , EOG Resources, Inc. (EOG - Free Report) and Royal Dutch Shell plc (RDS.A - Free Report) , each holding a Zacks Rank #2 at present.
Concho Resources’ bottom line for 2020 is expected to rise 34.4% year over year.
EOG Resources’ sales for 2021 are expected to rise 18.8% year over year.
Shell’s bottom line for 2021 is expected to rise 112.5% year over year.
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