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Strong Yield Drives Southwestern Earnings

Zacks Equity Research

Independent natural gas operator, Southwestern Energy Co. (SWN) reported stellar fourth quarter results. A solid production growth more than offset the subtle drop in realized prices.

Southwestern reported adjusted earnings of 54 cents per share, surpassing the Zacks Consensus Estimate of 52 cents and improving from the prior-year quarter earnings of 45 cents.

Quarterly operating revenues of $907.1 million comfortably beat the Zacks Consensus Estimate of $876.0 million and increased significantly from $777.4 million in the fourth quarter of 2012.

For 2013, the company reported adjusted earnings per share of $2.00, in-line with the Zacks Consensus Estimate but up 43.9% from $1.39 in 2012. Revenues of $3,371.2 million surpassed the Zacks Consensus Estimate of $3,341.0 million and increased from the year-ago level of $2,730.0 million.

Production and Realized Prices

During the reported quarter, the company’s oil and gas production grew 18.0% year over year to 177.0 billion cubic feet equivalent (Bcfe) – almost entirely gas – driven by increased Marcellus Shale activity. Production from Southwestern’s Fayetteville shale plays decreased 1.5% from the year-earlier period to 123.2 Bcfe. However, output from the Marcellus shale plays jumped 151.3% from the prior-year quarter to 48.5 Bcfe.

The company’s average realized gas price, including hedges, decreased 1.6% to $3.68 per thousand cubic feet (Mcf) from $3.74 per Mcf in the year-ago period. Oil was sold at $98.41 per barrel, marginally up from the year-earlier level of $98.17 per barrel. Natural gas liquids (NGL) were sold at $41.54 per barrel.

Segmental Highlights

Operating income for the Exploration and Production (E&P) segment increased 14.7% year over year to $227.7 million in the fourth quarter. Increased output level aided the results but were partially offset by lower natural gas price realization and increased operating expenses.

On a per-Mcfe basis, lease operating expenses were 89 cents versus 81 cents in the prior-year quarter. On the other hand, general and administrative expense per unit of production increased to 26 cents from 25 cents in the prior-year quarter.

The Midstream Services segment’s operating income increased 15.0% to $89.6 million in the fourth quarter from $77.7 million in the year-earlier quarter. Improvement in operations related to gathering from the Marcellus and Fayetteville shale plays and higher gas marketing margins aided the results. It was, however, partially offset by higher operating costs.

Proved Reserves

As of Dec 31, 2013, Southwestern’s gas and oil proved reserves totaled 6,976 Bcfe, up 74% from 4,018 Bcfe at the end of 2012. The substantial increase reflects higher Fayetteville and Marcellus Shale drilling activities. Almost all of Southwestern’s estimated proved reserves were natural gas, of which 61% were classified as proved developed at year-end 2013. During 2013, the company added 3,615 Bcfe to proved reserves. These additions replaced approximately 550% of its production.

Capex and Debt

The company’s total capital expenditure in 2013 was approximately $2.2 billion, of which $2.1 billion was invested in E&P activities and $158 million in the Midstream segment.

As of Dec 31, 2013, long-term debt was $1,950.1 million, representing a debt-to-capitalization ratio of 35.0%.

Zacks Rank

Southwestern currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next 1 to 3 months.

Meanwhile, one can consider better-ranked players from the same industry such as Warren Resources Inc. (WRES), Range Resources Corporation (RRC) and Ultra Petroleum Corp. (UPL). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on RRC
Read the Full Research Report on SWN
Read the Full Research Report on UPL
Read the Full Research Report on WRES

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