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Southwestern Energy Could Sustain Its Recent Momentum

The company is in top shape

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May 03, 2022
Summary
  • The market underestimated Southwestern's asset portfolio.
  • The stock is undervalued relative to its peers.
  • Momentum could be a determining factor.
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Southwestern Energy Co. (

SWN, Financial) has been one of the most frequently traded stocks on the market over the past three months, with an average daily volume of around 33 million. The company's exposure to the natural gas space adds to its appeal and investors have realized the stock is undervalued.
After a gain of more than 65% since the turn of the year, Southwestern will likely remain a stock that many traders are interested in.

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Recent activities

One of Southwestern Energy's significant value-adds is that it partakes in unconventional oil extraction, meaning it has the ability to extract natural gas from tight pores.

The company's been able to profit dearly from its exploration activities. For example, Southwestern recently beat its first-quarter earnings target by 3 cents per share. There's no doubt that Southwestern has received systemic support from natural gas prices that have risen by more than 80% since the turn of the year. However, even with the potential of flattening in natural gas prices, the company's outlook remains bright.

Some highlights from the quarter include:

  • Adjusted earnings of 40 cents per share versus an estimate of 37 cents per share.
  • The company generated $317 million in free cash flow and paid down $508 million worth of debt.
  • Production of 4.7 billion cubic feet equivalent, which is in line with its fourth-quarter guidance.

Valuation

Southwestern's stock exhibits solid valuation metrics; however, I've reason to believe the market has underestimated its exploration portfolio.

The first matter to bear in mind is that the oil and gas space is supported with significant systemic momentum as energy prices are flourishing. This means Southwestern is in a cyclical peak, and a peer comparison would be the best way of valuing the stock.

Southwestern's price-earnings is trading at a sector discount of 49.06%, indicating its earnings per share has not yet been priced in by the market. Additionally, the price-sales and price-to-cash flow ratios are trading at sector discounts of 54.50% and 36.90%, respectively, meaning the stock is undervalued on both a cash and accrual basis.

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Momentum

Southwestern's stock is trading above its 50-, 100- and 200-day moving averages, suggesting it has performed a momentum pattern.

Momentum investing has been one of the most prevalent techniques since the turn of the century. The famous Carhart four-factor model, developed by Mark Carhart, illustrates this by suggesting the best-performing stocks of the previous month often beat the poorest-performing stocks.

Needless to say, Carhart's theory doesn't always hold. However, it can be argued that Southwestern's momentum pattern could be sustained if one considers the systemic and idiosyncratic features of the stock.

The bottom line

Southwestern is one of the better capital gains plays on the market. The company has exceeded expectations with robust production results. Additionally, it is a significantly undervalued stock, and systemic support from the oil and gas market could help it reach fair value.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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