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Southwestern (SWN) Up 31.7% in 3 Months: More Growth Ahead?

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·4 min read
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Southwestern Energy Company’s SWN shares have jumped 31.7% in the past three months compared with the industry’s 29.7% rise. As the upstream energy industry recovers rapidly from coronavirus woes, Southwestern has managed to move ahead of its peers. The Spring, TX-based company — with a market c­­­­­­ap of $3.7 billion — is one of the largest natural gas producers in the United States.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Can It Retain Momentum?

The answer is yes and here’s why we think so:

Southwestern Energy has a diversified reserve base in multiple U.S. basins and remains focused on investments in high-return areas such as Appalachia. A significant chunk of its investments is apportioned for Southwest Appalachia. Northeast Appalachia is expected to continue generating free cash flow, while production is expected to rise. Moreover, the Zacks Rank #3 (Hold) company generated $88 million of free cash flow in first-quarter 2021. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Last August, Southwestern’s acquisition of Montage Resources boosted its Appalachian Basin footprint with high-return Marcellus and Utica assets, creating the third-largest producer in the basin. It recently agreed to acquire a private natural gas producer, Indigo Natural Resources, which will enable Southwestern to further ramp up net output to 4.1 billion cubic feet of natural gas equivalent per day (Bcfe/d). The deal is expected to boost synergies, reduce unit costs and increase the company’s 2022 EBITDA by 54% to $2 billion. Free cash flow for 2022 will likely rise 96% for the combined entity to $470 million. Importantly, its E&P margin in 2022 is likely to increase 12% to $1.30 per Mcfe due to the acquisition.

Most importantly, the bullish natural gas price outlook is likely to keep favoring the stock. Increasing liquefied natural gas (LNG) exports and domestic demand will likely drive the prices. Demand for the commodity is likely to rise in commercial, industrial and residential areas. The U.S. Energy Information Administration anticipates the Henry Hub spot price to average $3.05 per million British thermal units (MMBtu) in 2021 and $3.02 per MMBtu in 2022, indicating a significant increase from the 2020 average of $2.03. Higher natural gas prices will likely boost Southwestern’s profit levels.

What’s Holding Back the Stock?

As of Mar 31, 2021, the company’s cash and cash equivalents were only $4 million. Moreover, its long-term debt for the first quarter amounted to $2,812 million. The figure represents a debt-to-capitalization of 82.8%, reflecting significant debt exposure. This can affect its financial flexibility. However, we believe that systematic and strategic plan of action will drive the company’s long-term growth.

Estimates

The Zacks Consensus Estimate for Southwestern’s bottom line for 2021 is pegged at $1.03 per share, signaling a 171.1% year-over-year rise. It has witnessed five upward revisions and only one downward movement in the past 30 days. Moreover, the consensus mark for 2021 revenues indicates a jump of 68.4% year over year.

Southwestern beat estimates in the trailing four quarters, with an earnings surprise of 110%, on average. It continues to benefit from prolific Appalachian Basin resources.

Key Picks

Some better-ranked players in the energy space include Earthstone Energy, Inc. ESTE, Pembina Pipeline Corporation PBA and PHX Minerals Inc. PHX, each having a Zacks Rank #2 (Buy).

Earthstone’s sales for 2021 are expected to jump 87.7% year over year.

Pembina Pipeline’s bottom line for 2021 is expected to rise 37.4% year over year.

PHX Minerals’ bottom line for 2021 is expected to surge 140% year over year.

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Southwestern Energy Company (SWN) : Free Stock Analysis Report

Pembina Pipeline Corp. (PBA) : Free Stock Analysis Report

Earthstone Energy, Inc. (ESTE) : Free Stock Analysis Report

PHX Minerals Inc. (PHX) : Free Stock Analysis Report

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Zacks Investment Research