Southwestern Energy Shares Have 57% Upside -- Barron's

Southwestern Energy ( SWN: NYSE)

By Imperial Capital ($31.91, Oct. 30, 2014)

We are initiating coverage of Southwestern Energy shares with an Outperform rating and a one-year price target of $50. Our price target is about 57% above the recent share price.

We believe Southwestern (ticker: SWN) is capable of sustained 15% per annum growth in U.S. natural-gas output the next few years. While this is not hypergrowth, it is rapid and impressive growth, considering Southwestern is the fourth-largest U.S. natural-gas producer. In our opinion, Southwestern should also remain one of the lowest-cost producers in the U.S. and will potentially benefit from serving rising U.S. natural-gas demand and in taking market share in the midst of a major step up in U.S. demand that we see as likely in the 2016-2017 period.

Reduced well costs, fewer days to drill, more efficient well completions, vertical integration into oil-field service investments, and ownership of substantial midstream assets should keep Southwestern's two core areas, the Fayetteville shale and Northeast Marcellus shale plays, at the forefront of low costs and growth. Additionally, we believe investors can look forward to a recent major $5.4 billion property purchase in the Southwest Marcellus and Utica play region from financially distressed Chesapeake Energy ( CHK), which potentially provides the company with another new core area for future, low-cost growth.

As a low-cost producer, Southwestern is one of the few U.S. exploration and production (E&P) companies that has the potential to flourish in a low $4.00 per thousand cubic feet (Mcf) U.S. natural-gas-price environment, which is likely over the next few years. Southwestern's early entry and large-scale investments in two of the best U.S. natural-gas shale plays each in a different geographic setting make it a preferred provider of low-cost supplies to multiple U.S. markets. Last year, Southwestern's finding and development costs (F&D) was 45 cents per Mcf in the Fayetteville shale and 73 cents per Mcf in the Marcellus shale, leaving it plenty of margin to fund future growth.

A recent $5.4 billion property acquisition fits what Southwestern does best and can become a third low-cost core-growth area. The acquired properties are being purchased at a low price from Chesapeake and provide Southwestern excellent rock to work with in the upper Devonian, Marcellus, and Utica shales in West Virginia. Generally, these are "stacked pays" in this region, providing unusual scale and efficiency opportunities from a development standpoint. The concentrated nature of the properties also gives Southwestern the ability to do what it has done best in its other two other core areas -- vertical integration; continuous improvement, and focus to drive down costs.

Southwestern's shares traded down sharply on the property purchase announcement; we believe investors should take advantage of that. The transaction was announced by the company on Oct. 16 and on that day, its shares fell 10.4% to $31.97. Its shares have only slightly recovered since. Uncertainties as to how Southwestern will finance the purchase and why it pursued a natural-gas-oriented property package (as opposed to a crude-oil package) probably led to the selloff, in our opinion.

-- Bob Christensen

The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.

To be considered for this feature, please send material to

Comments: E-mail [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires