Southwestern Energy Company (SWN)

[value1008]

GF, there was a lot of excellent back-and-forth discussion on SWN today over at the busy Ihub "Savvy Trades" board. I downloaded a bunch of the messages into my MSWord file on SWN. Note especially the posts by Researcher59, who had a lot of good things to say about SWN after the weak earnings report after hours on 8/3/17.


SSK: They earned .08 and missed badly [by 0.07 EPS]. Furthermore nat gas prices are now down .40+ from the average in q2. Hence we need a 15% increase in nat gas just to get back to q2 levels which didn't produce good results by anyone imagination. Maybe you will be right, I have often been surprised by stock price action more in 2017 than any other year, but to me the fundies should get even worse in q3 versus q2, those are the facts, based on nat gas being down .40+ from q2 average of the commodity. I sold around $5.30 or so, I don't think we will see much if any upside in 2017 from this, swn could be a 2018 story if nat gas really rises, but we are not gonna see winter until late 2017, and we will have heavy tax loss season and a probably worse report in q3 versus q2. So if anything it is either dead money or losing money from where I sold for the rest of 2017, based on the fundies. All is just my opinion…

R59: SWN is now at a 12 year low. I doubt you got a good sell price. The stock was higher when NG hit $1.61/mcf 17 months ago and they were losing money. NG is volatile. It was $3.40/mcf just 12 weeks ago. It will rally again and so will SWN. I think you focus way too much on one quarter and ignore the big picture.

SSK: You might be right at SWN, but I'm focusing on more than 1 quarter -- this quarter wasn't great and it is very likely next quarter probably will be worse; that is two [weak qtrs] by my math. You’re right about nat gas prices with volatility, but this quarter was waaaaaaaaaaaaay worse than I expected, which makes me lower the q3 estimate even more than I already had because of lower nat gas prices which were known before the quarter was reported. I'm not even sure they will report a profit in q3, based on where nat gas is right now.
Maybe SWN will go up; this one was less obvious, because as you said it is beat up [s/p was way down before earnings]. I just think we will continue the downtrend and probably have a 4 in the first number of SWN and will probably not go much above $5.30 or so, all of 2017, in the meantime I would rather take a tax loss, and free up capital, that way if I want to buy back when we get to winter I already took my tax loss, and probably able to buy back cheap which is a possibility for me.

R59: SWN +.05 to 5.27, evidently other investors are seeing the big picture. If we get a normal or cold winter I predict this stock will hit $7+ within the next 6 months. I'm taking a longer term view than just Q3.

SSK: I sold at $5.30, I would still be down if I held it from where I sold [since it is back up around 5.27]. To me if the stock is flat/down in the coming months, if you want to buyback before winter you can, there seems to be no catalyst right now to drive it significantly higher, and what we have coming, is waaaaaaay lower ng prices then q2 average, looking at a bad quarter, next quarter is likely to be worse, and winter doesn't get here for another 3-4 months. In the meantime taking a tax loss now makes a lot of sense if you want to buy it back you will probably get the chance at the same or lower prices, if you want to stay out you can do that, and you can take advantage of a tax loss right now as well. I don't see why my action doesn't make sense. had a nice loss on it, gives me the option to buyback in a month if I so desire, if I feel ng prices are gonna start going up, but in the meantime, not something I would want to be taking a tax loss in the dead of winter if the weather gets cold, taking it now makes far more sense to keep my options open.

R59: SWN catalyst for a rally could come if NG prices rally .... they're oversold now as the EIA inventory surplus continues to diminish. The cool weather forecast for mid August could change quickly and that could spike NG prices.
http://www.cpc.ncep.noaa.gov/products/predictions/814day/814temp.new.gif
But your tax loss trade does have some merit !

Bobwins: Permian drillers are producing a lot of ngas and since they are the primary drilling basin, that is not helping ngas supplies. In addition, pipelines to Mexico haven't increased exports enough to offset significant inventory builds. Domestic pipelines are catching up and allowing stranded ngas in the Marcellus to hit the market. I wouldn't bet on a big buildup in ngas pricing this fall/winter.

R59: Bobwins - EIA weekly reports show the NG inventory surplus versus the seasonally adjusted 5 year avg has steadily ratcheted LOWER over the past 17 months since peaking at around 800 BCF in March of 2016 after a very warm winter. The surplus is now below 100 BCF and trending lower. So for the past 17 months, on average, demand has exceeded supply on a seasonally adjusted basis and that despite a 2nd consecutive warm winter.
Weather is the big wildcard and nobody can predict what this winter will be like, but if it's a normal winter rather than a 3rd straight mild winter, NG prices should rise significantly.
I provide a weekly EIA update on the UGAZ board which you can thread through to see how the NG surplus has trended lower over the past 17 months - today's EIA reported NG inventory build for last week was 24 Bcf below normal for this time of year, helped by hot weather -
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=133537187

Bobwins: we'll see how the winter goes. The lower prices may be discouraging production AND the export volumes make it harder for EIA to estimate demand/supply. Mexico and the activation of new LNG export trains certainly are helping the dwindling surplus.
I also agree that it won't be the absolute change in prices that is most important to SWN. IF sentiment changes, and people expect higher ngas prices, all the producers will rally from oversold conditions.

Abh3vt: Anyone check the math on the adjusted net income used for the Q2 eps of 0.08? I'm having a hard time reconciling the proforma tax rate they used....seems like a very high tax to me. If they had used a 38% rate the adjusted net income would have been a lot higher, along with eps. I also excluded any impacts from the converts on the net income and assumed their full conversion into stock, using a fd share count of nearly 580mm.
Ex:
GAAP Pretax: 284 (in MM)
Less net gain on derivatives -134
less gain on sale -2
plus loss on debt ext +10
less inventory valuation -1
==============
Adj Pretax (non-GAAP): 157 MM
Adj Net: 40MM
PF tax rate: 75%
If they had used a 38% tax rate, the quarterly net (adj) would have been 97.34MM
FDS (GAAP): 498.2MM
Add the mandatory converts: 80MM
ADJ non-GAAP fds: 578MM
ADJ non-GAAP fd eps (ABH): 0.17
I must be missing something....

R59: adjusted tax rate might not be possible to derive based on the limited info they provide including a large adjustment for "discreet tax items'. But the footnote states a 38% tax rate before valuation allowance.
They do have roughly $3B in Fed tax loss carryforwards as of 12/31/16, so won't be paying taxes for the next few years. If adj EPS of $0.08 includes the 38% tax, then that's $0.13 untaxed.

Abh3vt: You can derive the non-gaap tax rate for SWN, but you have to back in to it the way I explained, by starting with GAAP pretax and then looking at the pretax adjustments they provide in the PR to arrive at non-gaap pretax income. They provide the non-gaap net, so the difference is the non-gaap tax assumption. That is complicated in SWN's case because of the valuation allowance accounting rules and the presence of the mandatory convertible preferreds.

R59: were you able to conclude what the tax rate was for the adjusted EPS figure ?
Abh3vt: Yes, the tax rate was close to 75% of adjusted pretax. Seems crazy high to me, so I wanted someone else to check my math. I did find a BAML analyst note on the subject:
In-line quarter based on CFPS
SWN reported adj. EPS / CFPS of $0.08 / $0.50 compared to consensus of $0.15 / 0.49 (BofAML of $0.09 / $0.50) after we add back our capitalized interest estimate to our operating CF. Based on CFPS, we see the quarter as in-line. The earnings miss versus the Street we see as likely due, in part, to the treatment of the mandatory preferred.
Production of 222 Bcfe was in the lower half of guidance (220-225 Bcfe); sequential growth of 8% was driven by NE PA (up 10% qoq or 99 mmcfe/d) followed by SW Appalachia which hit a new record level of 500 mmcfe/d in June with production averaging 472 MMcfe /d during the quarter (up 19% qoq or 77 mmcfe/d). FY production and capex guidance are unchanged at 2%-4% and 1,175-1,275mm, respectively.
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I think that is part of the story, but they should have gone through the tax portion of the non-GAAP breakdown more thoroughly. I'll check the CC transcripts when they are available, missed the call this AM.

R59: wow, if you're right that means adj untaxed EPS of $0.32 and fully taxed at 38% of $0.20 .... the company really should have provided more clarity on this issue. Thanks !

SSK: By my calculation I disagree with ABH, if the taxes were at a 38% clip, earnings would have been .11 (actually .106 to be more exact). Now admittedly didn't notice this last night, but I certainly don't agree with the higher assessment than that, if you look at their adjusted earnings it is pretty easy to figure out, they took a net 45 million in taxes, and they had pre tax profits of 85 million. if 85 million was taxed at a 38% rate we would get 52.7 million adjusted. Hope this helps. All is just my opinion

R59: I come up with adj EPS of $0.128 using the statement they provide on pg 8 of the PR, but I think it's an overly simplistic calculation. Maybe they provided some clarification in the conf call which I'll read when the transcript becomes available.

[Value1008: I didn't find any mention of taxes In that conf call when the transcript came out this afternoon.]