Houston based independent energy company, Southwestern Energy Company ($SWN) is scheduled to report quarterly earnings results on Thursday, February 25 after the market close. The street is forecasting the company to report, on average, a profit of 45 cents per share on revenue of $474.75 million for the 4th quarter of 2009.
The highest analyst earnings estimate is 58 cents a share and the low estimate is calling for 36 cents profit per share. The company reported a profit of 30 cents a share for the same quarter in 2008. Earnings for the last two quarters have been in-line with consensus estimates of 35 cents and 34 cents.
Southwestern Energy is primarily focused on natural gas and crude oil exploration, development and production within the United States. The Company operations also include natural gas gathering, transmission, and marketing, as well as natural gas distribution. The company is developing the Fayetteville Shale asset on the Arkansas side of the Arkoma Basin. It has additional production in Oklahoma, Texas and Pennsylvania. Southwestern Energy is a component of the S&P 500 index.
Looking forward, there are two catalysts for share price growth at Southwestern Energy for 2010. The first is higher natural gas prices for 2010 compared to 2009. The second is organic production growth at Southwestern Energy.
Higher Natural Gas Prices Forecast for 2010
One of the catalysts for a boost in earnings for the fourth quarter at the company is that natural gas prices having doubled since late August 2009. The Henry Hub Natural Gas Spot price started the quarter at about $2.50 per Mcf and was about $5.50 by the end of December 2009.
Cold weather picked up a lot of slack in the market. The pace of withdrawal from natural gas storage shows the withdrawal rate was well above five-year averages. Looking beyond the fourth quarter, natural gas injection to storage in 2009 set a new record, providing increased confidence that the supply overhang has the potential to revert to more normal levels. NYMEX natural gas futures contracts for most of 2010 are projected to rise from just under $5 mmbtu for the April contract to $5.90 mmbtu for December 2010. More optimistic analysts are forecasting an average price of almost US$6 per mmbtu for 2010, compared to just under USS$4 mmbtu during 2009.
2010 is showing a more closely aligned supply and demand picture for natural gas than in 2009. The continued rapid development of shale gas in the U.S. could put a wrinkle in this supply/demand alignment.
Morgan Stanley initiated coverage of Southwestern Energy two weeks ago with an Overweight rating and a $60.00 price target based on the perception of a very positive risk to reward ratio. The firm cited a competitive cost structure, sustainable production and reserve growth (more than 20 percent annually over a 3-5 year commodity price cycle), and a long-term strategy to invest through the commodity price cycle.
Southwestern Energy was given a Buy rating by Stifel Nicolaus in December 2009 with a target price of $56, based on guidance of 41 percent production growth. In addition, the new sand plant should lower drilling costs by $100,000-$150,000 per well. The firm gave Southwestern a mildly qualified endorsement based on external risks such as fluctuations in crude oil and natural gas prices. Southwestern Energy has hedged about 12 percent of its estimated 2010 production.
Barclays Capital also revised their target price for Southwestern Energy from $54 to $58 in early December 2009.
Southwestern Energy is a strong growth play in the natural gas industry. The company has been one of the fastest growing companies in the natural gas industry over the past 5 years. Total assets and shareholders equity have growth from about $1 billion in 2005 to almost $4.5 billion and $2.2 billion respectively (see chart below).
Southwestern Energy closed yesterday at $42.74 a share. The share price has seen higher-highs and higher-lows over the past year amid rising 50-day and 200-day moving averages. The share price has recently fallen just under the 200 day moving average of $42.98, a key support level. However, if the pattern of higher-highs and lower-lows continues, the share price should remain above $40.50. This analysis suggests an entry point for new investors seeking a high probability of a gain based on price patterns would be any price below $41 a share.
The relative strength index (RSI) indicates the stock may be mildly oversold. Southwestern Energy’s share price could see some further downward movement. But like the previous share price pattern, the RSI analysis suggests a higher probability of upside share pricing than downside (see chart below).
Growth investors may want to consider Southwestern Energy as part of their portfolio for 2010. An earnings beat on Friday could provide a lift to the share price well above $43.
Southwestern Energy is expected by many analysts to continue to outperform peers over the next few years as the Fayetteville shale deposit boosts production and cash flow. The company has been mentioned as a potential buy-out candidate in a recent New York Times piece.
A $55 price handle sometime during 2010 seems like a reasonable price target, especially if natural gas stabilizes in the $6 mmbtu range this year as forecast by some analysts.
Disclosure: No positions