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Why Wall Street has great expectations for Southwestern Energy

A deeper look at Southwestern Energy’s promising statements (Part 11 of 11)

(Continued from Part 10)

Outlook

To conclude this series, let’s look ahead at Southwestern Energy Company’s (SWN) future. What do Wall Street analysts forecast for the company in the years ahead?

Growth

Analysts expect SWN to post decent growth numbers for 2014, and some great numbers by 2016. Based on 2013 levels, analysts expect SWN’s revenues to expand by ~85% to nearly $6.2 billion in 2016, and its operating earnings, to grow by ~50% to just under $1.8 billion.

SWN is projected to clock earnings of ~$1.1 billion in 2016, ~54% greater than 2013’s ~$700 million.

Returns

Wall Street analysts expect SWN’s return on equity to drop a little, but its return on assets should rise a little each year until 2016. So, we’ll set returns aside as having no major effect on our expectations for SWN’s future.

Financial position

SWN’s debt is expected to balloon more than three-fold to ~$6.7 billion by 2016, likely as a consequence of its recent and future acquisitions. These could prove to be a drag on SWN if energy prices don’t pan out as the company hopes.

Meanwhile, analysts project SWN’s operations will improve drastically. It’s expected to clock a positive free cash flow—operating cash less capital expenditures—in 2016, despite capital expenditures steadily rising from ~$2.3 billion in 2014 to ~$2.9 billion in the year. This is perhaps as clear a sign as any of the faith analysts have in the company’s future.

Valuation

SWN currently trades at ~14x its trailing 12-month EPS (earnings per share). So, assuming it actually earns $3 per share in 2016 as analysts expect, and still trades at 14x, then this implies a price of ~$42 in 2016 for SWN. That’s ~30% higher than current levels near $32.

Also, SWN trades at 2.6x its book value per share (or BVPS) today. Again, assuming its BVPS grows to $20 in 2016 as analysts project, and it trades at ~2.5x, we get a 2016 price of ~$50 per share. That’s ~56% higher than current levels.

Key peers and ETFs

ETFs are a great way to gain diversified exposure to various sectors and broad markets. SWN is part of the upstream exploration and production sector, which can be tracked via the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

The XOP ETF also includes other independent upstream companies, such as Continental Resources, Inc. (CLR), Diamondback Energy Inc (FANG), and Gulfport Energy Corporation (GPOR), among its holdings.

For more such analyses and company overviews, check out our Energy & Power page.

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