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The Bull Case For Southwestern (SWN)

|Includes: Southwestern Energy Company (SWN)

Southwestern is extremely undervalued.

The stock presents a once in a lifetime opportunity to invest at historic lows.

Gas is in oversupply and the world is ending!

Please stop the nonsense. Now is the best time ever to get into Southwestern Energy. Let me explain why in a short analysis.

Macro Situation:

  1. US gas production is up. Associated gas production is up. Both true. You know what cures low prices? Low prices. The key in any industry is to be the lowest cost marginal producer. Marcellus gas fills that niche and will continue to fill that niche as pipeline projects come online. More importantly, the key to managing natural gas price swings is to hedge. Something that Southwestern does in spades.
  2. The stock market is collapsing. We have been in a bull market for many years now. You know what is overvalued? Technology stocks which lose hundreds of millions of dollars yearly, but somehow are worth billions (Tesla and Uber come to mind). Somehow these stocks get credit for future growth and expansion, but natural gas stocks don’t even though they power the entire USA. SWN has been in business over eighty years and it is at close to a twenty year low. Natural gas is the future of energy and the Marcellus will continue to deliver for the next fifty years.
  3. Gas is replacing coal. Power plants are converting. LNG is growing. Exports to Mexico are increasing. Well-managed natural gas companies are not going bankrupt. The marginal cost to produce natural gas continues to drop as companies refine and improve completion designs

The case for SWN:

  1. The company is extremely undervalued. The equity right now sells for less than the PV10 reserve value and cash minus the debt.  The company recently announced they have $5.8 Billion in reserves. Beyond that the company has over $1 billion in cash and cash equivalents.  Additionally, their acreage in the Marcellus and pipeline assets is worth a tremendous amount of money. Using metrics from publicly announced sales in the area has values ranging from $6,000 to $15,000 per acre. There is not a single energy company right now that has equity available for purchase that sells for these types of metrics. Someone could buy this company right now, break it up, and expect to immediately double their money in selling the parts.
  2. Growth is expected to continue to ramp up as SWN expands in the Marcellus based on their new and impressive reserve report.
  3. It is generating over a billion dollars of cashflow a year and has a low P/E multiple
  4. The company is profitable and has positive earnings. How often do you have that in an E&P company in spite of low prices?
  5. Planned divestitures could cut debt  in half in 2018 and turn the company into a pure play Marcellus/Utica company.
  6. The company has liquids rich options within their mostly dry gas acreage. Based on the recent reports, they are prioritizing projects such as these that generate the best returns.
  7. The company has weathered low gas price environments before and will continue to act prudently
  8. Debt is not due until 2022 and the company has a large cash position. They have funded growth and development out of cash flow.
  9. The company may be bought out or merged into EQT or one of its neighbors at a large multiple
  10. Hedged for all of 2018 and will add hedges as the year goes on.

Admittedly, I am biased and have a large position in this company. Usually equity is overvalued in the stock market. Southwestern provides a unique opportunity where it is not based on almost all objective metrics. Sometimes when a stock is on fire is when it is the best time to invest if the fundamentals are sound. This is one of those times.

Feel free to discuss or argue with the Author in comments.

Disclosure: I am/we are long swn.