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Southwestern Energy: A Glimmer of Hope for Late 2024 Southwestern Energy: A Glimmer of Hope for Late 2024

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Oil pump, oil industry equipment

So, Southwestern Energy (NYSE:SWN) had a bit of a lackluster quarter for q3’23 due to a rough natural gas pricing backdrop. Management made the strategic decision to tamp down production amidst the languishing natural gas market, expecting a potential upswing in gas prices. I reckon their smarts in managing production volumes, alongside resource development in the Haynesville/Bossier Basin in anticipation of burgeoning US Gulf of Mexico export capacity, could put them on the path to leveraging the opening of Golden Pass come the end of 2024. Given the current state of the gas market, I’m tipping my hat to SWN with a HOLD recommendation and a near-term price target of $6.32/share.

Operations

I’m looking at Southwestern Energy in the long run, and I can’t help but feel bullish given their asset exposure in the Haynesville/Bossier Basin. Despite the higher D&C costs when compared to the Appalachia region, I have a hunch that Southwestern can seize some cost savings in midstream and transportation fees as the basin is further developed to fill export capacity in the Gulf of Mexico amidst robust LNG demand. Management is also eying some 5% cost-cutting in the Appalachia region and a more impressive 15% in the Haynesville Basin. So, the total rig count in the Haynesville/Bossier basin has dipped by 40% YTD thanks to the tough natural gas market.

Beyond reduced activity and the slowdown in supply growth that suggests LNG exports are up over 2 Bcf per day year-over-year, recently exceeding 14 Bcf per day, while power demand, adjusted for weather, is up 2 Bcf a day, and exports to Mexico are up almost 1 Bcf a day. These factors have helped to significantly dampen the end-of-season storage surplus with new LNG in service dates beginning next year. By the end of ’24, we expect LNG exports to grow to 16 Bcf per day, over 90% of which is located along the Texas and Louisiana Gulf Coast.

Bill Way

According to the EIA, there are currently 5 LNG export projects that are currently under construction with a combined export capacity of 9.7Bcf/d of LNG. These facilities include Golden Pass, Plaquemines, Corpus Christi Stage III, Rio Grande, and Port Arthur. Both Golden Pass LNG and Plaquemines LNG are anticipated to commence operations in 2024.

As a result of the softer gas market, management has shifted operations to more liquids-rich assets to derisk cash flows. Looking ahead to 2024, management discerned that they will be cutting back on production in the first half of the year with an upswing in production in the latter half.

Corporate Reports

This jibes well with the macro narrative for new LNG capacity coming online in the latter half of 2024. Management expects to make $2-2.3b in capital investments throughout 2024 with the first half of the year being more heavily weighted in anticipation of the upswing.

Corporate Reports

Overall, I’m foreseeing a soft q4’23 as the gas market continues to remain on the down-low. However, despite Southwestern’s robust 40-60% gas hedging outlay, the stock tends to move with the ups and downs of natural gas prices.

Debt Reduction

Given the challenging gas market, management chose to up their debt load and dip into their revolver, resulting in a total debt load of $4.1b for a leverage ratio of 1.6x TTM EBITDA by the end of the quarter. As the firm reduces production in the face of the soft strip pricing, management keeps their eyes on the prize—generating free cash flow and lowering debt towards the top end of their range to $3.5b, reducing leverage to their target range of 1-1.5x trailing EBITDA.

Shareholder Value

Corporate Reports

Southwestern is currently trading at 3.40x trailing EV/EBITDA, slightly higher than its peer group of gas producers. I’m giving SWN shares a HOLD recommendation based on the peer average 3.30x EV/EBITDA, with a price target of $6.32/share.

Corporate Reports

It’s worth noting that management hasn’t yet mentioned any merger and acquisition activity but has hinted at strategic consolidation. I had previously shared my thoughts in an article covering the Reuters report hinting at a potential Chesapeake Energy (CHK) and Southwestern energy merger. Although no names have been dropped, there’s still the chance of a merger between the two firms or others in the sector. My bet is that a merger or acquisition might involve a firm that will bolster Southwestern’s Haynesville/Bossier assets, like Comstock (CRK) or a private producer.

Corporate Reports

Management teased some additional shareholder benefits to pump up their equity value, whether in the form of reinstating the buyback program or initiating a base dividend.

I think as we said all along, we’d probably continue, reinitiate, if you will, share buyback, given what we believe our value is relative to our intrinsic value or at least our share prices to that… If we can sustainably generate free cash flow and we believe we’ll be able to, particularly with lower debt, the way you kind of prove that, put in some sort of base dividend. So that would be something that we certainly would consider.

Carl Giesler