Curt you may also find this interesting in particular the investment of Southwest to the tune of 2 billion dollars for faster drilling.
Staying Neutral on Southwestern Energy - Analyst Blog
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We are maintaining our long-term Neutral recommendation for Southwestern Energy Company (SWN) following its impressive second quarter 2011 results. However, a tempered outlook due to the weak natural gas scenario in the U.S. keeps us on the sidelines.
Southwestern reported better-than-expected earnings backed by improved production growth, primarily at its Fayetteville shale operations. During the reported quarter, oil and gas production experienced a 25% year-over-year jump encouraged by striking Fayetteville Shale operations wherein production surged 28% to 107.4 Bcfe from the year-earlier period. In fact, volumes from Fayetteville shale formed more than 87% of the total oil and gas production.
The company’s industry-leading holdings in Northern Arkansas’ Fayetteville Shale play make it one of the highest quality natural gas discoveries in North America in the recent years. This year, Southwestern expects approximately 425–435 billion cubic feet (Bcf) of the total hydrocarbon volume to come from the Fayetteville Shale.
Notably, the company also remains upbeat on a prospective unconventional horizontal oil play and expects to drill and complete two test wells by this year end. Southwestern has collective 460,000 net acres in the Lower Smackover Brown Dense play in southern Arkansas and northern Louisiana. It expects to receive a permit during the third quarter to spud its first test well, drill a second well by the end of 2011 and add up to 10 wells in 2012 to test the concept.
Hence, Houston, Texas-based Southwestern’s industry leading presence in the Fayetteville shale and its emerging position in the Marcellus Shale provide ample opportunities for newer natural gas discoveries. For 2011, the company plans to invest a total of $2.0 billion, mainly for faster drilling activities at its Fayetteville shale play. Again, its healthy financial position (with a debt-to-capitalization ratio of 27% in the last quarter) along with operational effectiveness provide comparative advantages.
However, the company’s results are vulnerable to the negative near-term outlook for natural gas, which accounts for most of its reserve and production base. Moreover, an oversupplied U.S. natural gas market and lower demand provide little space for Southwestern to flourish.
Southwestern also faces a dearth of a geographical diversity in its asset portfolio, with most of its activities concentrating on Fayetteville Shale, Arkoma and East Texas fields. Thus, the company's earnings and cash flow stream are sensitive to regional pricing or upheavals.
Competition from its peers, such as Chesapeake Energy Corporation (CHK), also remains a threat.
As of now, we don't see any obvious catalyst in Southwestern’s business to significantly push the stock price higher. Consequently, we see the company’s shares performing in line with the broader market. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
SOUTHWESTRN ENE (SWN): Free Stock Analysis Report
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