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Can Southwestern (SWN) Soar Further After Gaining 27.7% YTD?

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Southwestern Energy Company’s (SWN - Free Report) shares have jumped 27.7% in the year-to-date period against the industry’s 27.2% plunge. While the upstream energy industry is grappling with coronavirus woes, Southwestern has managed to navigate through the challenges. The Spring, TX-based company — with a market c­­­­­­ap of $1.9 billion — is one of the largest natural gas producers in the United States.

Southwestern beat estimates in the trailing four quarters, with an earnings surprise of 130.7%, on average. It continues to benefit from prolific Appalachian Basin resources.

Can It Retain Momentum?

The answer is yes and here’s why we think so:

Southwestern 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 for Southwest Appalachia. The company is expected to continue generating free cash flow from Northeast Appalachia and production from the region is expected to rise. Total production is estimated to grow from 778 billion cubic feet natural gas equivalent (Bcfe) in 2019 to 874-881 Bcfe in 2020. The Zacks Rank #3 (Hold) company expects production volumes for the December quarter of 2020 to be sequentially higher, which can be attributed to improvement in well performance. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Southwestern’s acquisition of smaller natural gas producer, Montage Resources, boosted 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/d. 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 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 divested Fayetteville Shale assets for net proceeds of around $1,650 million. The company is focused on streamlining its portfolio, thereby impairing debt burden and increasing shareholder value.

Most importantly, the bullish natural gas price outlook is likely to keep favoring the stock. Rising domestic demand, LNG exports and decreased production are boosting the commodity’s price. Throughout 2021, natural gas prices are expected to average $3.01 per million British thermal units (MMBtu), reflecting a rise from the estimated 2020 figure of $2.07 per MMBtu, per U.S. Energy Information Administration. Higher natural gas prices will likely boost Southwestern’s profit levels.

Factors Holding Back the Stock

At the end of third-quarter 2020, the company had total long-term debt of $2,450 million, and cash and cash equivalents of only $95 million. Its total debt-to-capitalization ratio stands at 0.86, reflecting significant debt exposure.

The company is expected to have $2 billion in liquidity under the revolving credit facility, following the Montage acquisition, 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 its long-term debt, due for repayment after 12 months, which has been rising over the last few quarters. However, we believe that systematic and strategic plan of action will drive its long-term growth.

Key Picks

Some better-ranked players in the energy space include Covanta Holding Corporation (CVA - Free Report) , Ameresco, Inc. (AMRC - Free Report) and Canadian Natural Resources Limited (CNQ - Free Report) , each holding a Zacks Rank #2 (Buy).

Covanta Holding’s bottom line for 2021 is expected to rise 93% year over year.

Ameresco’s bottom line for 2021 is expected to rise 18.8% year over year.

Canadian Natural Resources’ sales for 2021 are expected to rise 18% year over year.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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