Southwestern Energy's (NYS: SWN) stock price is now trading near its 52-week low due to plummeting natural gas prices, and there's no relief in sight. If the price of natural gas ever heads up in the future, a low-cost producer like Southwestern is probably a good place to look. Southwestern's low cost structure will allow the company to chug along even if the price of natural gas decides to lay low for a while, whereas a high-cost producer might be fighting just to fight another day.
TTM Operating Cash Flow
Source: S&P Capital IQ. TTM = trailing 12 months.
Southwestern trades at a modest multiple of cash flow and carries a pretty low amount of debt for an E&P. Its debt-to-capitalization ratio stands at 26% and its earliest debt maturity is its revolving credit facility in February 2016, so the company is on solid financial footing.
Taking a closer look
Southwestern controls 4.5 million net acres of land that includes the Fayetteville and Marcellus shales, and the Brown Dense, Arkoma Basin, East Texas, and New Brunswick areas. The majority of production comes from the Fayetteville shale, where the company has almost a million net acres. In the third quarter, 87% of total production came from the Fayetteville.
Southwestern is targeting production of 570 BCFE to 580 BCFE in 2012, which would represent growth of about 15%. The company plans on spending $2.3 billion in its 2012 capital spending plan, up from $2.1 billion in 2011. That includes 580 to 590 gross wells in its core Fayetteville shale play, 490 to 500 of which will be operated. The company plans to engage in pad drilling on almost all of its Fayetteville shale wells, which should help continue its focus on drilling efficiencies.
Truly low costs
In 2012, Southwestern hopes to decrease its average time per well in the Fayetteville shale to 7.4 days, down from the eight days projected for 2011. The "days to drill" number has steadily come down from 2007, when it took 17 days to drill each well. If Southwestern can achieve its goal of 7.4 days per well in the Fayetteville shale in 2012, that will represent a 56% improvement in five years.
That type of ongoing improvement is what one would hope for out of a low-cost producer. When producing a commodity like natural gas, it's important to keep one's costs low. Companies can't control the price of the commodity, but they can keep their expenses and extraction costs low. Southwestern's performance in the Fayetteville is a great example of a company that has lowered its costs through its ownership of a large contiguous block of acreage, operating its own rigs, and striving for continual improvement.
In addition to expense control, Southwestern maintains an active hedging program. For 2012, the company has hedged 265.7 BCF at an average price of $5.17. The company has also hedged 185.2 BCF of production in 2013 at a price of $5.06 per MCF, more than double the going spot price for natural gas today.
Foolish bottom line
Southwestern is a conservatively managed low-cost producer of natural gas. The past few years have been very ugly for companies that rely heavily on natural gas, but Southwestern has managed to increase reserves and production at a strong clip despite the tough operating environment. If the price of natural gas goes up in the future, Southwestern is likely to be in prime position to reap the benefits.
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At the time thisarticle was published Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up to date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul does not own shares in any companies mentioned. Motley Fool newsletter services have recommended writing puts in Southwestern Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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