Southwestern Energy

SWN : NYSE : US$39.03
Target: US$51.00

Southwestern Energy is a natural gas focused E&P company with operations in the Fayetteville Shale of Arkansas and the Marcellus Shale of Pennsylvania.
All amounts in US$ unless otherwise noted

Energy — Oil and Gas, Exploration and Production
Investment recommendation
We reiterate our BUY rating on SWN in light of its expanded 2014 capex
and production guidance released last night. The company announced a
$2.3B capital budget, up from 2013 and in line with our estimate. We
reckon that the company’s 14% growth guidance is conservative given
the level of capex. We believe another solid year is in store for SWN.
Key points
 We maintain 17% production growth in 2014: SWN’s 14%
production guidance is a fine starting point in our view, but given its
historically strong productivity performances in its key plays – the
Fayetteville and Marcellus – we see no reason to change our 17%
growth outlook for next year.
 SWN should remain one of the lowest cost U.S. gas producers: Cost
guidance was essentially flat versus 2013 and in line with our model
suggesting SWN will remain one of the lowest cost producers of
natural gas in the U.S. All-in costs should be $2.36/Mcf in 2014.
 14 vertical wells planned for LSBD; 3x 2013’s effort: This provides
added encouragement to us that SWN sees commerciality is at
hand. The company just drilled four “corner-post” wells on the 120k
acres it deems prime and in Q3/13 announced its first commercial
well with an 700 MBoe EUR. SWN’s step-up in drilling says to us it
sees substantial upside to NAV ahead. We see 150 MMBoe or $3.0B
($8.50/share) over the next few years.
We value SWN using a discounted NAV and a multiple of EV/EBITDA. By applying a 20% discount to our $65 NAV and averaging that with an 8.0x EV/EBITDA multiple on 2014E EBITDA of $2.4B, we arrive at our $51 price target.


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