Notes below are from Neal Dingmann at Truist Financial (a very sharp energy sector analyst).
Southwestern Energy Company (SWN)
Top Positioned E&P for Continued Strong Gas Prices; Increasing PT To $11 From $7, Upgrading To Buy
We believe Southwestern has ample takeaway capacity, positive upcoming financials, and
efficient operations that will all take advantage of the continued strong natural gas prices
we forecast. Specifically, we believe dry gas prices have the potential for a “super-spike”
this winter and next year as upticks in demand may be met with limited incremental supply,
causing prices to spike to what the market will dictate in certain regions. We are surprised the
shares have only appreciated the same as our coverage group YTD despite ample catalysts,
which we believe provides an opportune entry point.
If Oil Prices Have You Worried, Better To Be Dry Than Wet
While a potential recession has been commanding the macro environment over the past few
weeks and could continue to do so for several more week/months, we note the relationship
between oil and NGLs remains much stronger than that of natural gas. As a result, we believe
operators in the dry gas Haynesville could be somewhat more insulated than the liquids rich
northeastern names. We model SWN with only a 12% liquids cuts in FY23 and expect the
Haynesville to command more capital going forward, firmly placing Southwestern in the dry
gas category in investors’ screens. < VERY BULLISH for Comstock Resources (CRK), which is 99% dry gas with lots of running room in the Haynesville.
While the industry typically is not discriminatory based on
liquids cuts or hedging profiles, some liquids gas operators stocks and various other overall
liquids levered stocks have underperformed in recent weeks and could continue for a bit
longer. Further, we think the potentially stronger cash flows for dry gas names especially
those like SWN that have low priced hedges rolling off in an oil pullback could allow the gassy
players to ramp share buybacks or increase relative payouts, leading to outperformance in
the stocks.
CRK's hedges after December, 2022 are collars with very high ceilings.
Natural Gas "Super Spike" possible this winter - Oct 3
Natural Gas "Super Spike" possible this winter - Oct 3
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Natural Gas "Super Spike" possible this winter - Oct 3
One Of The Few Names Left To Flip To Shareholder Returns
With most of our coverage already cementing a rigid shareholder return program centered around FCF distribution, we favor SWN for its
ability to differentiate itself with an upcoming change to its strategy as it hits its debt targets in the coming quarters. If the stock remains
near the current price then we expect share buybacks to be the primary use of upcoming incremental payouts though a base dividend is
also likely to play a part in attracting investors with a slow and steady growth element to the payout used to establish a track record for
generalists. Potentially more exciting is the potential for internal and external growth upside that would translate into notable FCF. The
company is one of few companies that should have ample capacity for Haynesville production growth when desired, with the ability to
simultaneously remain active on the consolidation front to build further scale in the Haynesville though with a mindful eye on the midstream
required to get any acquired gas volumes to favorable markets. While we anticipate few LNG driven benefits in the basin in the next few
years, we believe investors will rewards operators that can build a sizable position in the near-term with ample inventory and takeaway
sufficient to sign long-term LNG agreements, which we believe should be the case for SWN.
Updating Estimates, Price Target Increased To $11 from $7
We have adjusted our model to include incremental inflation in ’23 and other volume/price nuances while also increasing our multiple
assumption (to 3.5x from 3.0x) and decreasing our yield assumption (to 12% from 15%) as we expect investors will better appreciate the
company’s long-term outlook as it achieves IG status, reduces leverage, and positions itself to benefit from LNG upside. Our $11 price
target is derived from two equally weighted methodologies, with the first being our ’23 EV/ EBITDAX multiple of 3.5x (3.0x prior and 3.6x
peer group average) applied to our 2023E EBITDAX estimate of $4,467MM ($4,147MM prior and $4,266MM consensus) and the second
being a FCF/EV Yield assumption of 12.0%.
Potential Catalysts
• Investment grade status
• Additional accretive deals and vertical integration benefits
• Stacked Haynesville and Bossier opportunities
• LNG leveraged contract agreements
• Trading multiple re-rate
With most of our coverage already cementing a rigid shareholder return program centered around FCF distribution, we favor SWN for its
ability to differentiate itself with an upcoming change to its strategy as it hits its debt targets in the coming quarters. If the stock remains
near the current price then we expect share buybacks to be the primary use of upcoming incremental payouts though a base dividend is
also likely to play a part in attracting investors with a slow and steady growth element to the payout used to establish a track record for
generalists. Potentially more exciting is the potential for internal and external growth upside that would translate into notable FCF. The
company is one of few companies that should have ample capacity for Haynesville production growth when desired, with the ability to
simultaneously remain active on the consolidation front to build further scale in the Haynesville though with a mindful eye on the midstream
required to get any acquired gas volumes to favorable markets. While we anticipate few LNG driven benefits in the basin in the next few
years, we believe investors will rewards operators that can build a sizable position in the near-term with ample inventory and takeaway
sufficient to sign long-term LNG agreements, which we believe should be the case for SWN.
Updating Estimates, Price Target Increased To $11 from $7
We have adjusted our model to include incremental inflation in ’23 and other volume/price nuances while also increasing our multiple
assumption (to 3.5x from 3.0x) and decreasing our yield assumption (to 12% from 15%) as we expect investors will better appreciate the
company’s long-term outlook as it achieves IG status, reduces leverage, and positions itself to benefit from LNG upside. Our $11 price
target is derived from two equally weighted methodologies, with the first being our ’23 EV/ EBITDAX multiple of 3.5x (3.0x prior and 3.6x
peer group average) applied to our 2023E EBITDAX estimate of $4,467MM ($4,147MM prior and $4,266MM consensus) and the second
being a FCF/EV Yield assumption of 12.0%.
Potential Catalysts
• Investment grade status
• Additional accretive deals and vertical integration benefits
• Stacked Haynesville and Bossier opportunities
• LNG leveraged contract agreements
• Trading multiple re-rate
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group