NEUTRAL (SWN, $12.10)
Marcellus Gas Producer Working Through Tough Environment; Fairly Priced For Now.
April 26, 2016
Glenn Williams Jr.
We are initiating coverage on Southwestern Energy with a NEUTRAL rating and $13 price target. Despite a strong base of natural gas reserves in Fayettville (Arkansas) and the Marcellus shale (Pennsylvania & West Virginia), we contend that Southwestern is fairly valued at current levels, given the current as well as future outlook for natural gas prices. We value SWN’s equity on the basis of daily production along with its base of proved reserves. In doing so, we arrive at a value of $13 per share, implying 8% of additional upside, given today’s prices.
We think that the worst is over for Southwestern, though we expect a slow road back. We note that Southwestern trades at $12.10 per share, versus prices of $26 per share a year prior (55% decline). As has been the case across the industry, the sharp contraction in natural gas prices, has dragged on every facet of company operations and value. On a fundamental basis, SWN is attacking 2016, by reducing spending more than 70% while reducing its workforce by 40%. On a technical basis, we note a 28% uptick in short interest from year end 2015 that we think may be late to the party (Exhibit 10). While not part of our valuation, we contend that the increased short interest will translate to an increase in shares that will need to be purchased, should prices move higher. However, in looking at our valuation methodology, we see SWN as fairly priced right now, when valuing on the basis of production and proved reserves. We also note that SWN outperforms a number of its Marcellus based peers on the aforementioned metrics as well. Ultimately however, our expectations for realized prices (and resulting cash flows), prevent us from rating SWN a BUY at this point (given our 12 month price horizon).
Again, we base our price target on a blended average of Southwestern’s daily production and base of proved reserves. In doing so, we arrive at a price target of $13 per share (Exhibit 9). Additionally, our model adds $3.68 for a working capital surplus, while deducting $14.46 per share for net debt. Thus, given the 8% implied upside to current prices, we initiate coverage on Southwestern with a NEUTRAL rating.
Source: Capital IQ; National Securities Corporation
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