Southwestern Energy: Unable to Rally Despite Rising Gas Prices?

Southwestern Energy in decline

For the week ending January 19, Southwestern Energy’s (SWN) stock was down ~6.0%, from $5.47 to $5.14. Southwestern Energy’s stock fell strongly on Tuesday, Thursday, and Friday in the holiday-shortened week. On Friday, SWN’s stock hit a lower low on the daily chart, which is a bearish signal for the stock’s trend.

Southwestern Energy: Unable to Rally Despite Rising Gas Prices?

SWN lagging natural gas prices

The worrying thing is SWN’s stock declined strongly by ~6.0% last week despite almost flat price action in natural gas (UNG)(UGAZ). Natural gas prices declined marginally from $3.20 per MMBtu (million British thermal units) to $3.18 per MMBtu.

In the last five weeks, SWN is clearly lagging natural gas prices. In last five weeks, SWN is up less than a percentage point, whereas natural gas prices are up more than 21%.

The possible reasons for SWN’s underperformance are as follows.

  • As of September 30, 2017, Southwestern Energy has a total debt of ~$4.4 billion, which is a primary concern for the stock. Despite SWN’s debt reduction measures, its total debt-to-equity ratio or leverage is very high, at around 269%.
  • Due to the high level of debt, SWN has less financial flexibility, so it’s trying to achieve the production growth by investing with cash flows. SWN’s 3Q17 production of 232 Bcfe (billion cubic feet equivalent) is still ~7% below its peak production of 249 Bcfe (billion cubic feet equivalent) in 4Q15.
  • As of September 30, more than 50% of SWN’s 2018 production is hedged with a ceiling price in a range of $3.37 per MMBtu to $3.56 per MMBtu. In other words, going forward, if natural gas prices rise further, SWN will enjoy natural gas upside only on the half of its unhedged production.

Due to marginally lower natural gas (UNG) prices last week, the First Trust Natural Gas ETF (FCG) decreased by ~2.9%. FCG underperformed the SPDR S&P 500 ETF (SPY) last week. SPY increased by ~0.9%.

In the next part of this series, we’ll look at SWN’s correlation coefficient with natural gas prices.