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Southwestern Energy: Potential Drivers Coming Up In 2018


  • Southwestern Energy has finally seen some relief as investors are happy with the 2018 outlook.
  • The company will be able to grow production in the coming year without incurring much higher capital spending.
  • Investors furthermore like the potential of a monetization of the Fayetteville assets, although no valuation is pegged on the assets.
  • Appeal relies largely on development of gas prices going forward and the price obtained for the Fayetteville assets, both unknown at this time.
  • I am potentially attracted to the situation and will follow the story with great interest and update once a valuation for Fayetteville comes in.

Investors in Southwestern Energy (NYSE:SWN) have finally received some good news after a long time of continued struggles.

The company has been listed for a long time and between the 1970s and 2000, shares were essentially trading at around a dollar. The company was a major beneficiary of the emerging shale revolution as shares rose to $40 in 2008 and while incurring some volatility, still traded at same levels in 2014, the year in which oil prices started cracking.

Ever since it has all been downhill as shares fell to level in the $3s in recent weeks. A relative strong fourth quarter and upbeat guidance for 2018 made that shares jumped 20% from the lows towards $4.50 per share, warranting a review of the situation.

The Business

Southwestern produces (mostly) natural gas in three areas being the Northeast Appalachia, the Southwest Appalachia and the Fayetteville Shale. Each of these shales have different profiles, as discussed next.

The Northeast Appalachia is the smallest region, containing little over 190,000 net acres. It produces 395 Bcf, making it the greatest production asset of the company, responsible for 44% of total production. The 4.1 Tcf in reserves represent 28% of total reserves.

The Southwest Appalachia contains 290,000 net acres and has the largest reserves with 7.0 Tcf, nearly half of total reserves. Production comes in at 183 Bcf, about 20% of total production.

The Fayetteville shale is by far the largest with over 900,000 net acres. Reserves of 3.7 Tcf represents a quarter of total reserves as production of 316 Bcf is equivalent of a little over a third of total production. Most of the company´s drilling locations can be found in the Southwest Appalachia, as most of the Northeast Appalachia has already been explored. The Fayetteville has a relatively low number of drilling locations at current prices, but

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Comments (84)

unfortunately I don't see quarterly earnings reports having a lasting impact on the stock. Rigs are rising and prices are going lower than anyone currently believes, which is typical. Soon you will hear of capital budget cutbacks due to the "unforeseen" drop in gas prices. What a joke. Any zag in strategy will, as always, come too late. Conference calls will all include the old "prices are lower than we forecast and therefore we are cutting back until prices recover" two step...No one will ask if management plans to blow more cash if prices manage to move above 2.50 next year. When companies claim victory in the current year because of their brilliant hedges look for a total collapse over the next 12 months. Sub 2 dollar gas is probably where we are headed. This routine is so predictable it is comical.

The NEO's seems to be fairly new at their respected positions and I only been around for six months or so but I like what I see so far....
By the way, wouldn't Fayetteville sale of $2B+, Debt Repayment of $1.5B, and Special Dividend of $500M+ or $1 per share sounds nice, doesn't it? Yes, I understand that they have to find a buyer and someone to folk out $2B+ but you never know, LOL.

It would be very nice to burn the shorts with this Special Dividend.

Yeah you are correct, didn't see that second flag pole, as of yet.... Few more weeks until Q1 and possible update on the Fayetteville assets. I am also hoping to hear positive development in SW Appalachia LNG wells.

Also, I feel pretty good about $3 natural gas spot price when this injection season starts but we'll see.
WallBuster I think shareholders don't need anymore "pole", painted or otherwise. I remember when folks here were claiming contrarion this and negative sentiment that...hows that working out? Wasn't 4.30 a big bargain price soon to be in the rearview mirror? How much have shareholders paid this brilliant management team since then? How much of their own cash has management ponied up to bet on their multi- million dollar brilliance?
Rig count continues to climb and production with it. if the best SWN and other managements can do is spend spend spend and raise production into the existing glut, will shareholders finally realize their companies are paying these guys millions for pathetic results? Rig count should be closer to 0 than 200.
tipster99 profile picture
The goal is cheap energy. Shareholders do not factor into this primary goal except as a continued source of funds to finance the energy producers.
SWN looks like it is ready to paint another POLE right thru/to $5 area.

I agree the natural gas burn will be powerful from here weather independent. I have been in Coal my entire career, believe deeply in it but I am also a realist. Market share for natural gas in electricity generation will continue to climb and SWN will benefit from a share price standpoint becaus It is deeply under valued.

In January 80 millionnnew shares were issued to convertible holders who aren’t in the business of owning common stock without material yield. Look at the cliff SWN fell off in January, then the flattening out. By the time earnings came they were largely gone, the short position was high and we are headed back to a normalized $9 from here. After that it gets tougher but SWN clearly is a long term key holding given the assets they own and their progress in developing NGLs from their holdings.
pro8 profile picture

In February 2018, natural gas-fired generation gained market share in Texas, according to the most recent demand and energy report from Electric Reliability Council of Texas (ERCOT). The share of generation from natural gas-fired power plants increased by 3.2 percentage points to almost 42% from January to February.

Additional generation capacity projects planned to come in service in ERCOT between 2018 and 2022 are nearly two-thirds natural gas-fired, according to EIA’s generator inventory report.

Just go check out the SWN reports on what they have done and are doing with NGL development. The % keeps rising and with it margins expand.

It is in last October's investor report and the materials issued this year surrounding their capital program and earnings report.

Buckle up for a multi year share price ride higher.
Fpalmer: I initially bought before earnings for a trade, but I think I am going to give it time. The EIA is projecting 4 BCF/day in consumption growth in 2018. Of this, only 1.5 is power burn. I think they are wrong on this point. Power Burn growth will be more than 1.5 at current prices. The entire industry will grow 20 percent over the next three years.
Gilariverman profile picture
Black, please don’t tell me you place any reliance on eia forecasts! They are atrocious at forecasting!

Blacksaleem knows what he is about. Trade UNG and I am sure you are good at it. But do not short SWN as they are very very good at what they do. And a triple in their NGL production from here is transformational at $60 WTI., even with $3 natural gas.
johnwayne888 profile picture
only if processing and gathering were free
Gilariverman profile picture
It is almost free if you have already paid, or are obligated to pay, the demand charge or the cost of service charge for the gathering/processing capacity weather you use it or not!
johnwayne888 profile picture
Cost only sunk after the fact. To triple NGL production you'd have to be making additional decisions on the TG&P side
If production has to rise 10 bcf/d to meet 2019 demand consider production is up 7 bcf/d yoy according to this week's EIA report. Rigs aren't going down. A full year of around 200 rigs or less will easily increase production by 10 bcf, especially when you consider climbing oil rig count and desperate Canadian producers.
pro8 profile picture
The reason Canadian NG producers are desperate is that they lack pipelines to even export NG as LNG let alone get it to markets outside Canada... and here into the U.S. but they are going to build at least one or maybe even two chem/plastics plants in Alberta to take some of the strain off and there are still plans to try and get the Coos Bay LNG plant built that will take Canadian NG ...

if some of the New England states were to pull their heads out of their asses they would have much cheaper electrical prices if they allowed some pipelines to get built and all it may take is the increasing elec pwr prices to crack that egg ...as it weakens their economies..

there are plans and construction going on right now to open more chem/plastic plants in the South and Southeast to take advantage of NG and at least 3 other LNG facilities under construction and a few adding trains to already working facilities thus acting like there is nothing at all to use up some of the produced NG is not telling the whole story.....

Gilariverman profile picture
Demand has been up more than supply YOY....
APB: The rule of thumb on Associated Gas is 1.5 BCF/day per 1 Million Barrels per day in production growth. So it's very relevant if they can get it to market. The 8 BCF/day growth was from a depressed level. I would view the growth at 6 BCF/day. It's still growing but I think the growth rate will be more labored with many of the largest players focusing on Wet Production.
I find a few flaws in the analysis and here they are. Their price realizations are actually good and are going to get a lot better. The basis on Dry Gas from the Marcellus will improve with more takeaway. Much of the price in the Fayetteville is captured by SWN's own Midstream. They have also negotiated much better Interstate Fees for the Fayetteville going forward. Then as their Liquids Production triples over the next two years, the net realizations per Mcfe will rise dramatically. Firm Crude Oil prices are a must. Then there is the lag effect. Much of the CapEx in SW Appalachia has not made its way to the Market. Production there is going to explode. Then there is the Natural Gas Market. Production is going to need to rise 10 BCF/day by mid 2019 to meet demand. This is a growth industry and SWN is in a great position to capture market share. They also have a long history of low balling guidance. I believe the Market Sentiment towards these Companies is going to improve dramatically as they deliver FCF to Investors who are demanding it.
Gilariverman profile picture
Right on Blacksaleem!
When you look at what SWN management has paid itself since 2008 and how the stock is now worth one tenth of its former value it is clear corporate governance is a scam. SWN and many others have no business being independent. Paying management millions upon millions has resulted in business as usual strategy that does not work in this new reality, but many prefer too make excuses as managements laugh their way to the golf course and then their way to their palatial homes. Management's have done nothing to fix these companies. Millions in compensation have resulted in more excuses more failure and lower share prices. Nothing SWN management is doing will right this mess, but what do they care? Millions upon millions doesn't get you much in the way of management genius these days. Company should have been sold years ago to salvage some shareholder value. It's been nothing but failure after failure as share price evaporates. The undeniable fact is managements at companies like RRC, SWN, UPL and others have prospered and shareholders have gotten porked.
The biggest thing SWN did wrong was to buy into the Marcellus at exactly the wrong time. They would have done much better returning cash to shareholders via dividends or buybacks and just managed their existing business as a declining asset. Not so exciting to management agreed. Shame.
As export capacity projections increase we are seeing yet again a larger increase in production ahead of time. Just a sniff of higher demand has already seen big increases in hyper-productive rigs. Sadly this is the reality and how this business works now as gas is so easy to get out of the ground and managements get rich and give shareholders the finger. There is no incentive for management to earn their untold millions as they get rich whether the company prospers or fails. Even as gas prices step toward the precepis producers will push rigs over 200 soon. 200 rigs each completing multiple wells each month? That is insane. The dream of a storage shortfall is turning into a full capacity storage nightmare. Virtually every prediction for a balanced market has failed. More pipeline completions and the death spiral continues, for shareholders anyway. Viva la Nina...
It is what it is. Bulls have been crazy hoping for $5 gas, then $4 gas. Now the long term average is a shade under $3. Sure, we may have occasional winters where prices jump but this will be balanced by times when prices crash.

Unless you are a weather speculator in the commodity itself, you have to look at the long term picture and how it affects equities. Natural gas is a competitive commodity. The average company will just clear their cost of capital and good companies will do better and bad ones worse. It is just a dog eat dog world. Nothing wrong with that--that is how free markets work.

And yes, some companies are still hurting from debt from years ago. But for new projects (or new stock purchasers), this is already priced in, a sunk cost.
SWN q4/q4 total prod bcfe 239/202 , o/w gas 210/183 bcf, gas % 88/90
While most companies are projecting 10 percent annual growth, please note that they are projecting Mcfe's. In many cases, such as SWN and RRC, over half of the growth will be liquids. As liquids increase versus dry gas, so do the price realizations per Mcfe. This was covered extensively in both conference calls.
Yep, matter of time as export capacity increases as Dominion's Cove Point came online yesterday, 2nd export terminal in the US. In addition, Corpus Christi and Cameron should be in service this year and Freeport next year.
May be challenging $4.40 shortly here. Maybe form SG13 after market close? Please TP, take an active position to put little pressure here....
pro8 profile picture
U.S. natural gas exporters predict new boom, thanks to surge in demand from China

"In the U.S., we have a low-cost, abundant, diverse resource base with large growth that we see coming down the pipeline," Brown said. Tortoise is one of the largest shareholders in Cheniere.
Brown said the United States also has the largest infrastructure in place.
"We've have the workforce, and we've been building out these gas-processing facilities, these pipelines and all the infrastructures that's required to really support the big LNG boom that we expect to see in the second wave of LNG in the U.S.," Brown said.
my_city, folks were saying la Nina would drive storage below the bottom of the five year range. That's not happening. in fact we may see an early increase in storage level as companies get cranking on dumping more gas into their mess. Based on some recent hedges I have seen I really think most companies realize gas isn't going over 3 bucks for a looong time. My only question is how low are managements willing to go to collect their production bonuses. The bluster over increasing production is reminisant of a few years ago when gas went sub 2 bones. Power plant managers are licking their chops as gas producers jump hand stands to destroy their own companies to give away gas. What power plant is going to hedge gas even close to 3 dollars as gas producers telegraph more suicidal intentions to grow their losses?
@APB. Agree. That's why I said we are in a hopeless over supply situation unless there is a miracle to 10X the LNG export terminals in 5 years.

The alternative is for NG to drop below $2 again.
LuvMyBonds profile picture
APB, what power plant can store natural gas on site?
Wait till the bid offers come in for their assets sale! Kaboom higher we go- $4.30 is a steal
Still under $6? Perhaps not for long.
That's what I thought long ago. Big money must see a different picture of the situation than I do.
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