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Southwestern’s Increased Debt Load Induced an 80% Capex Cut

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Southwestern Energy’s debt load

Southwestern Energy (SWN) is one of the primary victims of low energy prices. Things started going downhill for the company after it spent ~$5.4 billion to purchase oil and gas assets in the Marcellus shale from Chesapeake Energy (CHK) in 2014. The aftermath was a huge debt load combined with lower price realizations, a bad combination.

As of December 31, SWN had $4.7 billion in total debt, which is more than its current market capitalization of ~$3 billion. Its stock is down 65% year-over-year.

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Assessing SWN’s cash flows

Southwestern Energy (SWN) held nearly no cash by the end of 4Q15 and long-term debt of ~$4.7 billion. Its cash flow from operations in 4Q15 was $353 million, and its capital expenditure (or capex) was $403 million, resulting in free cash flow (or FCF) of -$50 million.

In the above image, we can see that SWN has improved its FCF since its acquisition of Chesapeake’s assets in 4Q14, which had resulted in an FCF of over -$5 billion.

Southwestern Energy’s capex

In 2016, Southwestern Energy expects to reduce its capex by ~80%. SWN’s capex cut is massive compared to its other natural gas–heavy peers. Chesapeake Energy (CHK) announced a capex reduction of 57% in 2016 while Cabot Oil and Gas (COG) and QEP Resources (QEP) announced capex cuts of 58% and 50%, respectively.

COG, CHK, and SWN make up ~0.8% of the iShares Global Energy ETF (IXC).

For 2016, SWN is committed to spending within its cash flows. Moreover, the company believes that future cash flows from its current producing wells and midstream assets exceed its total debt obligations. To read about SWN’s debt and liquidity profile, continue on to the next part.

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