Can Southwestern Energy Deliver More Upside?

Southwestern Energy [stock_market_widget type="inline" template="generic" color="default" assets="SWN" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has started 2019 on a bright note. The stock has gained more than 25% so far this year thanks to the company’s strong fourth-quarter results and its plan to boost production efficiency. The natural gas producer delivered impressive annual growth in revenue and adjusted net income for the fourth quarter of 2018, and its guidance suggests that the momentum could continue in the future.

Let’s take a closer look at the company’s latest results and see what’s in store for Southwestern investors this year.

Higher Prices Drive Results

Southwestern’s fourth-quarter revenue increased 46% annually to $1.18 billion, beating Wall Street’s expectations by nearly $200 million. This impressive top-line growth was driven by an increase in Southwestern’s average realized price of natural gas from $2.00 per Mcf in the prior year period to $2.98 per Mcf in the fourth quarter.

Southwestern’s fourth-quarter revenue increased 46% annually to $1.18 billion, beating Wall Street’s expectations by nearly $200 million.

Including oil and natural gas liquids, Southwestern recorded a total weighted average realized price of $3.15 per Mcf as compared to $2.19 per Mcf in the fourth quarter of 2017. Including derivatives, the company’s fourth-quarter average realized price was $2.72/Mcfe as compared to $2.30/Mcfe in the year-ago quarter. The increase in the realized price was strong enough to offset the slight drop in production experienced by Southwestern during the quarter.

More specifically, the company delivered 234 billion cubic feet equivalent (Bcfe) of production during the fourth quarter of 2018, 83% of which was natural gas. That represents a 2.1% decline over the prior-year period’s production thanks to the lower production from the Fayetteville Shale. However, Southwestern’s full-year production increased 5.4% to 946 Bcfe, though that includes production from the company’s divested Fayetteville shale unit.

If we exclude Fayetteville, Southwestern delivered 703 Bcfe of production last year, up from 2017’s adjusted production of 581 Bcfe. But more importantly, Southwestern is on track to grow its production once again this year while reducing costs at the same time.

The 2019 Plan for SWN

For 2019, Southwestern expects production in the range of 750-785 billion cubic feet (Bcfe). The mid-point of that guidance suggests a 9% increase in the company’s output this year. However, this increase in production will be achieved with a capital spending of $1.13 billion, which would be a slight decrease from last year’s outlay of $1.25 billion.

Moreover, Southwestern’s average well costs will go down by 25% in 2019 to approximately $875 per lateral foot, while the average lateral length will increase by 35% to more than 10,000 feet. So the company is all set to enjoy higher capital efficiency this year, which will help it pare its debt further after last year’s $2.1 billion reduction.

But investors need to keep one potential headwind in mind. Southwestern’s 2019 capital plan assumes an NYMEX Henry Hub natural gas price of $2.85 per MMBtu, which is nearly in line with the commodity’s spot price. The Henry Hub natural gas price is currently trading just above $2.82 per MMBtu, having declined from the January highs of around $3.59/MMBtu.

As such, any further drops in natural gas prices will spell trouble for Southwestern, though a decline in inventories should keep prices from dropping further. In all, Southwestern Energy could deliver a solid performance this year (after adjusting for the Fayetteville sale) provided natural gas prices hold their ground.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


Please enter your comment!
Please enter your name here