Southwestern Energy (SWN)

[dan_s]

I know it is hard to ignore a $2.8 Billion impairment charge, but SWN does continue to generate solid operational results and decent cash flow. Cash flow from operations of $330 million was very close to my forecast. They are on-track to generate approximately $1.5 Billion cash flow from operations this year.

Hurting SWN the most right now are low natural gas and NGL prices in the Marcellus. The company's realized price for natural gas was $3.72/mcf in 2014, compared to $2.21/mcf in Q3. Worse yet, their realized price for NGLs was $15.72/bbl in 2014 and $4.75/bbl in Q3. In 2013, SWN was selling NGLs for over $40/bbl.

Several midstream projects in the Northeast will soon be completed that should result in big increase in both gas and NGL prices early in 2016. My 2016 forecast for SWN assumes realized gas prices of $2.50/mcf and realized NGL prices of $7.50/bbl. Based on those prices, SWN should generate approximately $4.30 cash flow per share.

Impairment charges (non-cash) are caused by low commodity prices at the end of a quarter. SEC and GAAP rules require the company to assume those prices will last forever and they must writedown their oil & gas assets to the net present value assuming those prices. These assets are not abandoned and the oil & gas in the ground is still there. The good news is that impairment charges reduce the DD&A rate going forward, which results in higher reported earnings when commodity prices improve.

Assuming we have seen the lows for natural gas and NGL prices, SWN will report positive earnings going forward and they will continue to generate strong cash flow from operations. SWN can live within cash flows and continue to increase production and proven reserves.

My updated forecast model for SWN will posted to the EPG website this afternoon. My Fair Value Estimate is $25.30/share, compared to First Call's Price Target of $22.11.