Southwestern Energy ( SWN: NYSE)
By Imperial Capital ($31.91, Oct. 30, 2014)
We are initiating coverage of Southwestern Energy shares with an
Outperform rating and a one-year price target of $50. Our price
target is about 57% above the recent share price.
We believe Southwestern (ticker: SWN) is capable of sustained
15% per annum growth in U.S. natural-gas output the next few years.
While this is not hypergrowth, it is rapid and impressive growth,
considering Southwestern is the fourth-largest U.S. natural-gas
producer. In our opinion, Southwestern should also remain one of
the lowest-cost producers in the U.S. and will potentially benefit
from serving rising U.S. natural-gas demand and in taking market
share in the midst of a major step up in U.S. demand that we see as
likely in the 2016-2017 period.
Reduced well costs, fewer days to drill, more efficient well
completions, vertical integration into oil-field service
investments, and ownership of substantial midstream assets should
keep Southwestern's two core areas, the Fayetteville shale and
Northeast Marcellus shale plays, at the forefront of low costs and
growth. Additionally, we believe investors can look forward to a
recent major $5.4 billion property purchase in the Southwest
Marcellus and Utica play region from financially distressed
Chesapeake Energy ( CHK), which potentially provides the company
with another new core area for future, low-cost growth.
As a low-cost producer, Southwestern is one of the few U.S.
exploration and production (E&P) companies that has the
potential to flourish in a low $4.00 per thousand cubic feet (Mcf)
U.S. natural-gas-price environment, which is likely over the next
few years. Southwestern's early entry and large-scale investments
in two of the best U.S. natural-gas shale plays each in a different
geographic setting make it a preferred provider of low-cost
supplies to multiple U.S. markets. Last year, Southwestern's
finding and development costs (F&D) was 45 cents per Mcf in the
Fayetteville shale and 73 cents per Mcf in the Marcellus shale,
leaving it plenty of margin to fund future growth.
A recent $5.4 billion property acquisition fits what
Southwestern does best and can become a third low-cost core-growth
area. The acquired properties are being purchased at a low price
from Chesapeake and provide Southwestern excellent rock to work
with in the upper Devonian, Marcellus, and Utica shales in West
Virginia. Generally, these are "stacked pays" in this region,
providing unusual scale and efficiency opportunities from a
development standpoint. The concentrated nature of the properties
also gives Southwestern the ability to do what it has done best in
its other two other core areas -- vertical integration; continuous
improvement, and focus to drive down costs.
Southwestern's shares traded down sharply on the property
purchase announcement; we believe investors should take advantage
of that. The transaction was announced by the company on Oct. 16
and on that day, its shares fell 10.4% to $31.97. Its shares have
only slightly recovered since. Uncertainties as to how Southwestern
will finance the purchase and why it pursued a natural-gas-oriented
property package (as opposed to a crude-oil package) probably led
to the selloff, in our opinion.
-- Bob Christensen
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