Southwestern Energy Company (SWN)
Supporting Arguments
• Natural Gas Price Recovery.
• Undervaluation.
Investment Thesis
Southwestern Energy Company (SWN) is one of the largest natural gas producers in the US. By the end of 2023, natural gas accounted for 74% of the Company’s hydrocarbon revenue, despite the collapse in gas prices that year, with liquefied natural gas standing at 17% and oil sales at 9%. Southwestern Energy operates solely in the US market, which accounts for 100% of its revenue.
In our view, the Company's stock could face potential gains in the coming months due to several positive factors.
Natural Gas Price Recovery. In July, the average natural gas prices in the U.S. experienced a significant decline of 21% compared to June. This drop can be attributed to multiple factors, including the impact of Hurricane Beryl, which led to the shutdown of the Freeport LNG plant, subsequently reducing LNG export volumes from the States. Additional pressure on quotes was exerted by the forecast from the U.S. National Oceanic and Atmospheric Administration (NOAA) predicting lower temperatures in the USA during the second half of July. However, NOAA forecasts higher-than-average temperatures across much of the U.S. in August, which is expected to boost natural gas consumption for power generation needed for cooling purposes. Furthermore, Freeport LNG's export capacity is slated to commence operations in early August, adding another layer of support for gas prices.
The low cost of natural gas could negatively impact the production volumes of this crucial fuel. One of the leading U.S. natural gas producers, EQT Corporation (EQT), has announced a total reduction of 90 billion cubic feet in production for the second half of the year.
Increased demand, juxtaposed with reduced production, has the potential to drive natural gas prices up to $3 per million British thermal units – an increase of 50% from current levels. This price surge could positively impact the financial performance of natural gas producers.
Undervaluation. At present, natural gas-producing companies are undervalued based on multiples, primarily due to higher debt levels and lower shareholder payouts compared to oil companies. Debt reduction and increased payouts could lead to a significant revaluation in favor of gas producers. SWN's estimated EV/EBITDA ratio for 2024 is 5.6. FactSet expects the multiple to decline to 3.8 in 2025.
We maintain a Buy rating on SWN stock with a price target of $7.15. A stop-loss order is recommended at $5.8.
• Natural Gas Price Recovery.
• Undervaluation.
Investment Thesis
Southwestern Energy Company (SWN) is one of the largest natural gas producers in the US. By the end of 2023, natural gas accounted for 74% of the Company’s hydrocarbon revenue, despite the collapse in gas prices that year, with liquefied natural gas standing at 17% and oil sales at 9%. Southwestern Energy operates solely in the US market, which accounts for 100% of its revenue.
In our view, the Company's stock could face potential gains in the coming months due to several positive factors.
Natural Gas Price Recovery. In July, the average natural gas prices in the U.S. experienced a significant decline of 21% compared to June. This drop can be attributed to multiple factors, including the impact of Hurricane Beryl, which led to the shutdown of the Freeport LNG plant, subsequently reducing LNG export volumes from the States. Additional pressure on quotes was exerted by the forecast from the U.S. National Oceanic and Atmospheric Administration (NOAA) predicting lower temperatures in the USA during the second half of July. However, NOAA forecasts higher-than-average temperatures across much of the U.S. in August, which is expected to boost natural gas consumption for power generation needed for cooling purposes. Furthermore, Freeport LNG's export capacity is slated to commence operations in early August, adding another layer of support for gas prices.
The low cost of natural gas could negatively impact the production volumes of this crucial fuel. One of the leading U.S. natural gas producers, EQT Corporation (EQT), has announced a total reduction of 90 billion cubic feet in production for the second half of the year.
Increased demand, juxtaposed with reduced production, has the potential to drive natural gas prices up to $3 per million British thermal units – an increase of 50% from current levels. This price surge could positively impact the financial performance of natural gas producers.
Undervaluation. At present, natural gas-producing companies are undervalued based on multiples, primarily due to higher debt levels and lower shareholder payouts compared to oil companies. Debt reduction and increased payouts could lead to a significant revaluation in favor of gas producers. SWN's estimated EV/EBITDA ratio for 2024 is 5.6. FactSet expects the multiple to decline to 3.8 in 2025.
We maintain a Buy rating on SWN stock with a price target of $7.15. A stop-loss order is recommended at $5.8.
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