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Why Southwestern Energy Stock Is Underperforming Natural Gas

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Why Southwestern Energy Stock Is Underperforming Natural Gas PART 1 OF 5

Why Southwestern Energy Stock Is on the Decline

Southwestern Energy and natural gas prices

Last week, Southwestern Energy’s (SWN) stock price fell. It underperformed natural gas (UNG) prices by a wide margin. In fact, natural gas prices clocked a gain of ~2% last week by increasing from $3.26 per mmBtu (million British thermal units) to $3.31 per mmBtu. Contrary to natural gas prices Southwestern Energy’s stock price followed the opposite path, falling ~7% from $7.11 to $6.11.

Why Southwestern Energy Stock Is on the Decline

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Last week, in general, natural gas exploration and production companies (FCG) underperformed natural gas prices and the broader market. The S&P 500 ETF (SPY) was up last week.

Currently, SWN is trading below its 200-day and 50-day moving averages. On May 26, 2017, SWN’s stock price closed at $6.61, whereas its 200-day and 50-day moving averages stand at $10.28 and $7.54, respectively. Currently, SWN’s 200-day and 50-day moving averages are trending downward.

Southwestern Energy’s major concern

Southwestern Energy has the majority of its operations in Appalachia. Recently, despite higher-trending natural gas prices, SWN’s stock price has been unable to rally because of its high debt levels. Generally, higher debt reduces financial flexibility and demands curtailment in capital expenditure. In turn, lower capital expenditure affects future production growth and earnings growth.

Even though SWN is working on sorting out its debt situation, it has little success so far. As of 1Q17, SWN’s total debt-to-equity ratio, or leverage, stands at ~362%. This level of leverage is high for a natural gas producer. Range Resources (RRC), Encana (ECA) and Consol Energy (CNX) have total debt-to-equity ratios of ~67%, ~88%, and ~66%, respectively.

Let’s now analyze the possible trading range for SWN’s stock this week based on implied volatility.

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