Southwestern Energy (SWN) is an independent oil and gas company with low-cost natural gas operations in the Fayetteville Shale in Arkansas and the Marcellus Shale in Pennsylvania. While the company's shares have been negatively impacted by the decline in natural gas prices over the last few years, our investment in Southwestern is premised more on the view that the company will be able to create value by reinvesting in high-return gas projects, even in a low price environment, by virtue of its low-cost asset base. Indeed, our analysis shows that while commodity producer stocks are positively correlated with changes in the price of the underlying commodity over short periods of time, commodity producer stocks tend to be much more closely correlated with changes in net asset value and returns on invested capital over longer periods of time – as is the case in any industry. After studying Southwestern Energy's reinvestment opportunities and analyzing the unit-level economics of the projects that the company will be pursuing over the next 3-5 years, we remain of the view that Southwestern Energy will continue to generate very strong rates of return which should support double-digit growth in net asset value (NAV) annually, even in a low commodity price environment. In addition, with a strong balance sheet and multi-year drilling inventory, we believe Southwestern is well-positioned to benefit from any potential improvement in natural gas fundamentals over the next few years.
From RS Investments' RS Value Fund Third Quarter Letter.