Like fellow natural gas rival Chesapeake Energy Corporation (NYSE:CHK), Southwestern Energy Company (NYSE:SWN) hasn’t exactly had a banner couple of years. The slowdown in drilling activity and prices back in 2015 caused SWN stock to crater. Only to rebound again last year as prices for crude oil and natural gas took off.
But like CHK, Southwestern Energy has spent much of this year riding a roller coaster. And the name of that ride also happens to be debt.
For investors, the situation at SWN mirrors very closely that of Chesapeake. The question now is whether Southwestern can overcome much of its debt woes to be worthy of a portfolio position. Considering its strength of assets, it just may.
High Debts, Low Prices
The story is a familiar one in the energy sector — especially during the last decade of boom and bust. A firm takes on more and more debt to fuel its expansion projects. That high debt load isn’t so much an issue as cash flows from its drilling activities, and production is more than able to pay for the interest expense.
The problem was that prices for all manner of energy — natural gas and crude oil — cratered back in 2015 on the back of high supplies. For Southwestern, that was a kick to the face and its wallet. It struggled hard to keep making its debt payments — much like CHK. That sent shares of SWN stock down about 75% for all of 2015.
With natural gas prices rising throughout much of last year, Southwestern Energy executed decent balance sheet reductions. That included paying down debt and renegotiating deals with many of the pipeline operators — like Williams Companies Inc (NYSE:WMB) — that it uses. The firm also sold plenty of non-core assets to smaller shale players to raise cash.
All of this seemed to help SWN’s fortunes and was really driven by the increase in natural gas prices. When prices for crude oil and natural gas took a turn for the worse this year, Southwestern was once again on the chopping block.
And again, debt is kind of the issue for SWN stock holders.
Despite its efforts to clear and remove much of the debt from its balance sheet, Southwestern Energy’s debt-equity ratio currently sits at whopping 362%. To put that into perspective, top-notch rival Range Resources Corp. (NYSE:RRC) has a debt-equity ratio of around 67. Even beleaguered Encana Corp (USA) (NYSE:ECA) clocks in at only 88%.
That high debt-equity level and nearly $6 billion worth of debt on its balance sheet have once again caused investors to be a tad bit nervous when it comes to SWN stock.
SWN Stock Might Be a Value
Despite the recent hiccups, Southwestern Energy might still be a value for those risk-seeking investors in the energy sector.
For one thing, Southwestern has plenty of quality assets. SWN is one of the largest natural gas E&P firms in the U.S. by production. The bulk of that comes from high producing and low-cost regions in Pennsylvania, West Virginia and Arkansas. We’re talking about 1.5 million acres in the prolific Marcellus and Fayetteville shales. These are high-value assets, and with them, SWN is ranked as the eighth-largest natural-gas player in the U.S., and production continues to rise from these core operations. Moreover, these are the sorts of places that more major natural gas drillers want to be.
Aside from its major asset profile, SWN has been working to reduce its debts and turn cash flow positive. For this year, SWN has matched its capex program to its cash flows and has hedged its production. And the firm has about $1.5 billion in cash on its balance sheet to help bolster its working position.
Moreover, SWN has announced that it plans on retiring several pieces of debt throughout the year that won’t mature until 2018. But doing this, it’ll help with margins and strengthen its cash flows further. That way it can start tackling the bulk of its debt, which is due in 2020, earlier than later. Again, this should help with its long-term picture.
Bottom Line on Southwestern Energy (SWN) Stock
So there is certainly value here with regards to SWN stock. All it takes is a catalyst, such as larger OPEC cuts, to cause a real spike in natural gas prices. And then it’s game on for SWN.
Like CHK, SWN stock has been plagued with high debts and low energy prices. That’s caused plenty of volatility with shares. However, insolvency isn’t the issue here. The firm is cash flow positive and has started to reduce its debt.
The question is whether you want to ride that volatility to happier times later on. At less than $6 per share, it seems worth the gamble for risk seeking investors.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.