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Frank Sands Picks Up RS Investment Management’s Drop

April 22, 2014 | About:

As conventional oil and gas reserves continue to dwindle in the U.S., the industry continues to increase the exploration and production of unconventional reserves. The trend is expected to deepen in response to a rising demand for fossil fuels by the North American market, as the consequences of the last economic crisis fade away and industrial activities return to normal.

In order for the exploration and production to remain environmentally safe, companies need to integrate technology developments, management practices and regulatory policies. Nonetheless, strategic planning by both companies and regulatory agencies will be key to unlocking potential growth. In this sense, Southwestern Energy (SWN) will be analyzed as a prospect long-term investment.

Solid Performance Backs Long-Term Investment

Frank Sands (Trades, Portfolio) purchased stock of Southwestern Energy since early on 2011. When looking at market performance, the timing was not the most appropriate, and the guru recognized better opportunities later. Hence, position increments repeated ever since throughout the following two years. The decision was confirmed as correct since performance during the first quarter of 2014 was above the market average. Most important, overall performance by the company during the last four years showed noticeable improvements.

For fiscal year 2013, Southwestern Energy reported gas and oil production of 656.8 billion cubic feet equivalent, up 16%, and total proved reserves of approximately 7.0 trillion cubic feet, up 74%, compared to 2012 levels. Also, adjusted net income was up 45%, or $703.9 million, or $2.00 per diluted share, and net cash provided by operating activities before changes in operating assets and liabilities reached $2.0 billion, up 24% compared to 2012 levels. Most important, the reserve replacement ratio climbed to 550%, including reserve revisions.

Backed by the successful performance registered for fiscal year 2013, Southwestern Energy announced the acquisition of approximately 312,000 net acres in northwest Colorado targeting crude oil, natural gas liquids and natural gas contained in the Niobrara formation from Quicksilver Resources (KWK) and SWEPI LP, a wholly owned subsidiary of Royal Dutch Shell (RDS.A) for approximately $180 million. The transaction is expected to close in the second quarter of 2014.

Preparing to Exploit Rumors

Analysts have recently raised the target price for Southwestern Energy as the company is expected to benefit from a favorable natural gas environment. Between Cowen and Co., Deutsche Bank, Sterne Agee, Sandford C. Bernstein, and Stifel Nicolaus target price averages slightly above the $50 mark. Additionally, Sandford C. Bernstein, Stifel Nicolaus, and ISI Group gave the stock a “Buy” rating. The remaining financial institutions — Zacks, Citigroup, and FBR Capital Markets — are less optimistic and settled on a “Neutral” rating.

Southwestern Energy's future prospects are backed by lower operating expenses and higher production, primarily at its Fayetteville shale operations. An important position is also held at the Marcellus shale and a new asset is under construction at New Ventures. While the hidden asset, expected to unleash growth catalysts is Brown Dense. Most important, the company is one of the largest producers of natural gas in the U.S., and is expected to spend approximately $705 million to drill 86 to 88 gross wells in Marcellus.

Currently, Southwestern Energy trades at 24.3 times its trailing earnings, and carries a 24% discount to the industry average. In addition, the company has a strong balance sheet with significant liquidity and financial flexibility. Most important, the recent strong performance allowed for a full recovery of revenues and net income, while at the same time recovering the high operating margin.

Given Frank Sands (Trades, Portfolio) behavior, a split 2:1 quarterly dividend payment, and below industry average debt, Southwestern is an interesting stock for a long-term investment. The stock is not cheap, but responsible management and solid growth, backed by strong finances, make the stock a great option for any investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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