December 26, 2008 / 11:11 AM / 10 years ago

BUY OR SELL-Are Southwestern shares a bargain?

BANGALORE, Dec 26 (Reuters) - Shares of Southwestern Energy Co (SWN.N), an independent oil and gas company, have continued to outperform its peers, despite a volatile energy market and an extreme commodity price environment.

While most exploration and production (E&P) companies have cut their 2009 production outlook and capex budgets to conserve cash in a tough credit environment, Southwestern has projected a 48 percent jump in its oil and gas production for the year.

Last week, the company also forecast a capex budget of $2 billion for 2009, up from about $1.7 billion for 2008. [ID:nBNG422701]

Southwestern, which operates mainly in the Arkoma Basin — including the Fayetteville Shale — and East Texas, has been able to weather these extremes, mainly because of a strong balance sheet, solid assets and effective well economics, according to analysts who cover the stock.

Shares of the company have fared significantly better than the wider Dow Jones U.S. Exploration and Production Index .DJUSOS, losing only about 5 percent of their value since the start of the year compared to a 46 percent drop in the index.

But is the company’s stock worth investing in, given the currently depressed E&P space that has been battling a precipitous drop in oil and gas prices from record highs in July?


“It is unusual. They are definitely going against the grain and are actually planning on outspending cash flow next year,” Thomas Weisel Partners analyst Michael Scialla said by phone.

“I think it really speaks of two things — the quality of their assets and the strength of their balance sheet.”

Scialla has an “overweight” rating on the company’s stock.

“Given the company’s above-average growth rate and financial position and the economics of the core Fayetteville Shale play, the stock likely will outperform within the sector,” J.P. Morgan analyst Joseph Allman said in a note to clients.

Allman also rated Southwestern stock “overweight.”


Houston-based Southwestern currently has an untapped credit line of $1 billion, which is not tied to a reserve borrowing base, and a little over $200 million in cash, giving it a lot of flexibility to pursue its drilling program, RBC Capital Markets analyst Scott Hanold said.

As the company’s credit facility is unsecured — most other E&Ps have secured revolvers — Southwestern will not have to undergo a redetermination of its assets with its bank, said Hanold, who has an “outperform” rating on the stock.

The first part of 2009 is expected to witness “a tough gas market” and Hanold expects a lot more E&Ps to announce additional capex cuts.

“Southwestern is one I definitely would look to be owning, because it has got a very attractive growth profile, with highly economic assets and they are going to be a leader in the business,” Hanold said.


“We believe the (company’s) strong outlook is a function of more efficient wells (longer laterals, tighter perforation spacing) achieved with little cost increase,” Macquarie Research analyst Jason Gammel said in a note to clients.

Gammel also has an “outperform” rating on the stock.

Southwestern has got its well economics to a point where it can generate very solid rates of returns, Gammel said by phone, adding that even if natural-gas prices slid to $4 per million British thermal units, the company could continue drilling and still make money.


However, Johnson Rice & Co analyst Kenneth Carroll kept an “equal weight” rating on the stock, citing “near-term macro gas concerns” and the fact that Southwestern shares are trading at a significant premium to peers. (Editing by Himani Sarkar)

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