Perhaps the two most important aspects in analyzing an energy business are cashflow and management effectiveness. On both aspects Southwestern Energy Company (SWN) scores high grades. That makes it a company worth considering if you are searching for profitable plays in the energy space.
1. Management Effectiveness
Southwestern CEO and President is Steven Mueller, has been at the helm since early 2009. Mueller first joined the company in 2008 in the role of COO and president. His background is in the oil and gas industry. Harold Korell used to be CEO and is still executive chairman on the board. On the table I marked return on equity track records of both men. On average the returns are very good, although Steven Mueller needs a few good years before his record is on par with Korell's.
The stellar record of return on equity has not been achieved by returning a lot of cash to shareholders but mostly by growing production and reserves. You could make the argument that's it's either easier to accomplish or more difficult. In any case it's different from returning cash to shareholders, and actual future returns of cash to shareholders, when management runs out of growth opportunities, will likely be more modest.
Southwestern's top executives hold small stakes in the total company. On a personal level these stakes are most likely still meaningful. This helps aligning the executive goals with those of minority shareholders.
2. Cash flow
The heart of the matter is cash flow and Southwestern's cash flow doesn't look to good on the surface. FCF has been negative over the past ten years. On the other side of the coin over the same past 10 years management has grown earnings by an average 26% per year.
Cash from operations has been growing steadily. Management didn't return cash to shareholders in the form of buybacks or dividends. But it did successfully plow the cash back into expansion of its reserves and larger operations.
The company is keeping up book value with increasing operating cash flow and meanwhile management succeeded in keeping costs in check.
Negative free cash flow isn't a positive trait but operating cash flow is solid and capital expenditures are a positive given management's track record of value creation as discussed in point 1. So far SWN has been compounding shareholders money effectively.
When comparing EV / Free Cash Flow Southwestern Energy compares favorably to competitors in the energy space. Like ConocoPhilips (COP), Occidental Petroleum Corporation (OXY) and BLC Group PLC ADR (BDDRY). Current numbers are a lot more attractive. But even looking back to 2012 and 2011 levels, the current valuation is on the bottom of the range of valuations.
Southwestern has an experienced CEO and ex-CEO on board with positive track records of creating value by allocating capital to expand the business. This adds to my confidence they will be successful to put cash in hands of shareholders and or grow the business further by investing when opportunities are promising to be profitable above average.
The company has a solid growing cash flow that has been channeled back into expansion but that could be used to pay shareholders as well. Last but not least these qualities are available at a price that attractive when compared to prices paid for competitors.