
Southwestern May Set Tone for Gas Players Like Chesapeake Energy
Southwestern Energy (SWN) - Get Report had the unpleasant duty of being among the first oil and gas exploration and production companies to report second-quarter earnings in a period of continued sector distress fueled by commodity uncertainty.
But that didn't stop the Spring, Texas-based company, which focuses on natural gas production and has a $6.8 billion market capitalization, from coming out with a roar Friday.
Southwestern slightly beat analysts expectations for earnings for the sector and boldly announced plans to resume development activity with rising gas prices.
Natural gas prices have climbed well since May, and although the commodity has suffered a bit of a slump in July, contracts for August delivery were trading up more than 3% Friday afternoon to $2.78 per 1 million British Thermal Units, somewhat supporting the company's optimism.
Still, the brass shown by Southwestern impressed analysts and the market Friday, and may very well set the tone for energy companies soon to follow with earnings reports, especially those similarly focused on gas, such as Chesapeake Energy (CHK) - Get Report .
Southwestern saw its stock climb by as much as 12% Friday afternoon and close by more than 9.5% above the previous day's mark at $14.17 per share. Chesapeake also benefited from the positive forecasts and surging natural gas prices, closing up 8.45%, to $5.39, per share.
While Southwestern succeeded in significantly strengthening its balance sheet -- the company reported an adjusted loss of 9 cents per share on revenues of $522 million for the second frame -- the surge in stock prices has much more to do with its bold guidance and optimistic outlook than with a 1-cent per share earnings beat, according to industry followers.
Analysts were certainly impressed with the company's plans to increase by five rigs by the end of the third quarter, which compares to KLR Group's expectation of a two to three rig program for the second half of the year.
"The strong quarter will likely be a sideshow to the revised capital program," Simmons analysts wrote Friday. They added, "SWN is increasing activity with far more gusto than we had originally envisioned; however, with the balance sheet ultimately governing the activity levels and an integrated platform providing flexibility to slow down if necessary, we like the company's return to normalized operations."
Moreover, the company emboldened analysts on its conference call Friday with the claims that it sees $700 million in capital expenditures in 2017 being sufficient to hold production flat year-over-year, it intends to spend within cash flow next year, and it anticipates a $185 million improvement in its cash flow for every 25-cent uptick in the price of natural gas.
Capital One Securities analyst Brian Velie said in an email to The Deal that the firm estimates, on a $3 price deck, that Southwestern will hit $1.1 billion in cash flow next year.
"That means they could budget up to that full $1.1B and actually grow volumes modestly in 2017," he wrote. "Quite a turnaround from the Street's expectation for a 12% production decline next year."
Seaport Global analysts, who continue to rate Southwestern's stock as Neutral, agreed Friday that investors will not harp on an earnings loss largely caused by lower-than-expected natural gas prices for the period. The firm pointed to the company's plans to increase rigs from zero to five and the number of wells brought online in fiscal year 2016 by 500% as the rightful focus of attention.
Still, caution remains the call for some industry followers, including Jefferies analysts, who rate the stock an Underperform and said Friday tough times remain for the natural gas space.
But even the cautious see clearly when considering Southwestern's need to make some kind of move in order to maintain long-term value for investors. Jefferies, along with the majority of company followers, agrees with Southwestern's decision to significantly increase its development investment. And as demonstrated Friday, so too does the market.









