Southwestern Energy Company (NYSE:SWN) is a growing independent energy company primarily engaged in natural gas and crude oil exploration, development and production within North America. SWN is also focused on creating and capturing additional value through natural gas gathering and marketing businesses, which they refer to as Midstream Services.
The following are the top 5 reasons why I feel SWN is poised to pop.
- MAJOR UNDERVALUATION - Southwestern Energy (SWN) is hugely undervalued, perhaps by greater than two times the current market value based on the recent price paid by BHP Billiton (NYSE:BHP) for Chesapeake Energy's (NYSE:CHK) Fayetteville assets. If you add up and include SWN's assets (proven reserves and implied value of undeveloped lease holds), the stock price should be in the range of $80 per share. SWN is currently trading at $38. You do the math. Can you say major discount? Additionally, based on current and past JVs and take-outs, the prices for these assets seems to be rapidly rising, not falling. It is a sellers market, as they say in the real estate business.
- 2011 GUIDANCE RAISED - Southwestern is targeting total gas and oil production of 465 to 475 Bcfe, up approximately 18% over the company’s expected 2010 levels. Approximately 410 to 420 Bcf of the 2011 targeted gas production is projected to come from the company’s activities in the Fayetteville Shale play, up from the 2010 projected production of approximately 346 to 349 Bcf. With guidance raised 18% and the stock price flat to down from last year, it does not take a rocket scientist to understand the value that will be created and the opportunity to take advantage of that is now.
- HEDGING STRATEGY - As of December 16, 2010, the company had NYMEX hedges in place on notional volumes of 128.6 Bcf of its 2011 projected natural gas production hedged through fixed price swaps and collars at a weighted average floor price of $5.43 per Mcf. With natural gas currently at $3.90 per Mcf and not predicted to make a major move any time soon, the hedging strategy seems to be working well.
- ESTIMATED ULTIMATE RECOVERY (EUR) IMPROVEMENTS - The Estimated Ultimate Recovery (EUR) is an estimate of the amount of hydrocarbons that can be economically recovered from a well or field during its lifetime. This figure is derived by the operator based on the initial production, production decline curve and other data associated with a well. As oil and gas exploration companies innovate and invent new methods and designs for horizontal drilling and hydraulic fracking, improvements in EUR for wells in unconventional North America Shale plays is inevitable. Petrohawk (NYSE:HK) recently tested a new hydraulic fracturing design on horizontal wells and reported up to a 50% improvement in the EUR compared to the older designs. This bodes well for possibly raising the guidance even further or at the very least, creates a greater opportunity to exceed current guidance.
- M&A ACTIVITY AND JOINT VENTURE TRANSACTIONS - Chesapeake Energy (CHK) has created enormous value through JV transactions. Chesapeake Energy (CHK) and BHP Billiton (BHP) announced that BHP will acquire all of Chesapeake's Fayetteville assets for $4.75 billion in cash. The assets represent 487,000 acres of leasehold and producing properties, pumping 415 million cubic feet of natural gas equivalent daily, plus the 420 miles of midstream pipelines servicing the area. Enterprise Products partners (NYSE:EPD) offered $42/share to buy Duncan Energy (NYSE:DEP), a 29% premium to Duncan's previous closing price. Several other JVs, CNOOC (NYSE:CEO) & Chesapeake (CHK), and buy outs, XTO Energy (XTO) by Exxon (NYSE:XOM), have occurred recently. This activity has spotlighted SWN's assets. SWN has been discussed as an excellent take-out target by many analysts, including the great Jim Cramer on a recent episode of Mad Money. With a market cap of approximately 13 billion, SWN is a bite sized meal for one of the major O&G companies and the CEO of SWN seemed willing to entertain the idea during his interview on Mad Money.
With the current chaos and turmoil in the Middle East bringing a halt to certain amounts of current production and causing the major global oil players to rethink future investment plans for the Middle East , not to mention oil at nearly $100 a barrel, don't be surprised if the majors start hunting down at taking out some of the smaller independent O&G players with access the North American unconventional shale plays sooner rather than later.
Although the current Middle East situation may seem desperate, the US oil and gas Industry just may rise out of the Middle Eastern ashes like a phoenix and become a savior for US energy needs. If the government gets on board, it will be a huge positive for SWN and others. I believe the latest developments will finally bring to fruition many of these changes in policy, and owners of shares in SWN will be the beneficiaries.
Disclaimer: These are my personal opinions regarding these stocks. Information was gathered from SWN.com and CHK.com websites regarding company details.