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Why Did Low Energy Prices Affect FANG and SWN Differently?

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Jun. 9 2016, Updated 10:38 a.m. ET

Diamondback Energy and Southwestern Energy

In 2014, Diamondback Energy (FANG) and Southwestern Energy (SWN) both expanded their production volumes. However, the companies chose different paths towards this end. Diamondback Energy chose a systematic and conservative approach towards its existing crude oil properties in the Permian Basin, whereas Southwestern Energy opted for a one-time leveraged buyout of natural gas properties in the Marcellus Shale. At that time, natural gas and crude oil were trading at much higher levels than today, comfortably higher than many upstream companies’ production costs.

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Cyclical behavior of energy commodities

Unfortunately, in February 2014 and June 2014, natural gas (UNG) (UGAZ) (DGAZ) and crude oil (USO) (UWTI) (DWTI) changed their prevailing multiyear uptrends, and started to decline. To everybody’s surprise, the decline in energy commodities turned out to be quite a brutal one. Since their highs in 2014, crude oil is down ~62%, and natural gas is down ~59%.

Diamondback Energy hits all-time high

Despite such a brutal decline in crude oil prices, Diamondback Energy hit new record highs in the week to June 10, mainly on the back of lower production costs and higher margins from its acreage in Wolfberry in the Permian Basin. The company also has the lowest leverage among its peers. Other bigger players from the Permian Basin like Pioneer Natural Resources (PXD) and EOG Resources (EOG) are still down ~30% and ~28%, respectively, from their highs.

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Southwestern Energy closer to bottom than top

Southwestern Energy is still down by ~70% from its high in April 2014. Its ill-timed leveraged buyout, stressed balance sheet, and higher total production costs relative to natural gas prices have impacted the stock negatively. Other natural gas producers like Range Resources (RRC) and Gulfport Energy (GPOR) are down by ~52% and 62%, respectively, from their highs.

In this series

We’ll begin this series with Diamondback Energy to see why it’s one of the best upstream energy companies from a fundamental perspective, even during times of lower crude oil prices. Later, we’ll delve into Southwestern Energy’s fundamentals to study why it has one of the most leveraged balance sheets among natural gas producers and how the company can be a risky investment if natural gas prices stay low.

Let’s start by analyzing Diamondback Energy’s strong production growth.

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