Southwestern Energy's Strong Asset Base To Boost Growth

On Jul 8, 2016, we issued an updated research report on Houston-based Southwestern Energy Company (NYSE:SWN) .

Southwestern Energy has the first mover advantage in the core Fayetteville Shale properties, which still comprise a considerable portion of its production. The economies of scale help the company to witness rapid growth. With an efficient management team, the company’s low-cost operations hold a solid upside potential.

Southwestern Energy’s reserves and production are heavily gas weighted. Hence, the substantial improvement in natural gas prices from the 17-year low reached in March should prove to be highly beneficial for the company.

Earlier, Southwestern Energy invested heavily for the development of the fertile Marcellus play, where it held leases for approximately 337,300 net acres. Subsequently, the company increased its acreage in the Marcellus Shale in Pennsylvania by acquiring equity interest from other stakeholders. This exposed the company to a play with a low cost structure and additional acreage. Notably, Southwestern Energy’s gas production increased to 899 billion cubic feet (Bcf) in 2015 from 766 Bcf in 2014.

Southwestern Energy has a diversified reserve base in multiple U.S. basins and remains focused on investments in high-return areas such as Fayetteville, Appalachia and New Ventures. Moreover, we expect the company’s competitive cost structure to support steady growth and returns throughout the business cycle.

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The company also expects reduction in operating cost of over $40 million annually through margin enhancement efforts. Of this, it achieved over $15 million in the first quarter of 2016. Cost-saving initiatives are crucial for boosting profitability amid commodity price concerns.

However, an oversupplied U.S. natural gas market with low demand provides little space for Southwestern Energy to flourish. A volatile macro backdrop also raises caution regarding the company’s performance.

Moreover, Southwestern Energy’s asset portfolio lacks geographical diversification with most of its activities concentrated in the Fayetteville Shale, Arkoma and East Texas fields. Thus, the company's earnings and cash flow streams are sensitive to regional pricing or upheavals.

Zacks Rank and Stocks to Consider

Southwestern holds a Zacks Rank #2 (Buy). Other well-ranked players from the energy sector are Braskem S.A. (NYSE:BAK) , Murphy USA Inc. (NYSE:MUSA) and ReneSola Ltd. (NYSE:SOL) . Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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