Southwestern Energy: Q2 Earnings Might Disappoint

On a year-to-date basis, Southwestern Energy’s (SWN) stock prices have fallen 36.4%. During the same period, Henry Hub natural gas active futures have fallen 23.7%. The company operates with a production mix of 78.6% in natural gas. Southwestern Energy has underperformed the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) by 28.7 percentage points. For the rest of 2019, we might not see any large upside in oil and natural gas prices.

Southwestern Energy: Q2 Earnings Might Disappoint

Earnings expectations

On August 6, Southwestern Energy will report its second-quarter earnings. Based on analysts’ consensus estimates, the company’s adjusted net income per share will likely fall 66.7% sequentially. The adjusted net income will likely fall 50% on a year-over-year basis. At management’s guidance midpoint, the total production is expected to rise 2% sequentially. However, the revenues will likely fall 27.1% sequentially. The fall might be due to natural gas prices reaching a multiyear low in the last quarter. Higher oil prices in the second quarter compared to the first quarter might limit the downside in the company’s earnings. If Southwestern Energy’s earnings are in line with analysts’ consensus estimates, it would be the lowest EPS in the last eight quarters.

Southwestern Energy’s valuations and outlook

Among natural gas–weighted stocks, Southwestern Energy’s net debt-to-EBITDA ratio is at 1.3x—the second-lowest ratio after Cabot Oil & Gas (COG). The company has the least EV-to-EBITDA multiples among its peers. However, if the Fed reduces the interest rates on July 31, Southwestern Energy won’t be the best pick in the energy sector. The company isn’t paying a dividend. For any large upside in oil prices, the stock will be at a disadvantage. If US drillers increase oil production for higher prices, the natural gas production will also rise—a concern for already weaker natural gas prices.

Lower target prices

On July 18, RBC and Susquehanna reduced their target prices on Southwestern Energy by $1.5 to $2.5 and $4.5, respectively. On Tuesday, Goldman Sachs and Jefferies reduced the target price by $0.25 and $2 to $2.5. Earlier in July, Credit Suisse downgraded the stock to “underperform” from “neutral” and reduced the target price by $2.

Analysts’ mean target price for Southwestern Energy is ~$3.72. The target price implies a potential upside of ~71.7% based on the company’s last closing price. EQT and Cabot Oil & Gas’s target prices suggest potential upsides of 42.7% and 23%, respectively. Among the 28 analysts covering the stock, about 29% recommended a “sell” or a “strong sell,” while only one analyst recommended a “buy.”