Energy & Natural Resources: Oil & Gas E&P

Transcription

1 Southwestern Energy Company (SWN $37.61*) Energy & Natural Resources: Oil & Gas E&P Raise Price Target Houston, TX Outperform February 25, 2011 Price Target: $45.00 STOCK DATA 52 Week Range $45.30 $ Month ADTV 5,032,128 Dividend Yield 0.00% Market Cap (mil) $13,043.1 Shrs Outstanding (mil) Beta 0.97 Float (%) 97.9 Fiscal Year-End December EARNINGS DATA EPS Dec 2010E 2011E 2012E 1Q $0.49A $0.50 $0.86 Prior 1Q -- $0.45 $0.75 2Q $0.36A $0.56 $0.91 Prior 2Q -- $0.50 $0.79 3Q $0.47A $0.80 $0.96 Prior 3Q -- $0.71 $0.83 4Q $0.44A $0.86 $1.00 Prior 4Q $0.42 $0.75 $0.86 FY $1.77 $2.73 $3.74 Prior FY $1.75 $2.41 $3.24 EPS: Adjusted earnings per diluted share DCF Dec 2010E 2011E 2012E 1Q 1.23A Prior 1Q Q 0.99A Prior 2Q Q 1.22A Prior 3Q Q 1.15A Prior 4Q FY Prior FY DCF: Discretionary operating cash flow per diluted share Value of a platform to us goes beyond existing cash flows or potential of cash flows from existing assets. The company s core current franchise (Fayteville + Marcellus + Haynesville and other) 3P NAV to us is worth $57 per share. Given the strength of the platform, however, and its ability to deliver game-changing results, we would like to be ahead of the news flow expected during second half of the year. During the second half of the year, we expect the company to announce results on its domestic oil shale venture as well as monetization of its midstream business. As such, we are maintaining our Outperform rating and increasing our 12-month price target to $45/share from $40. Our price target is based on the stock trading at 80% of our 3P NAV and 5.4x our 2012 TEV multiple. Important disclosures can be found on pages 7-9 of this report. What is the Fayteville worth? The recent CHK transaction would imply $11.5 billion or $33.00 per share. Our DCF-driven value (assuming a further 10% capital cost savings per well and 10% improvements in productivity and $5.50/mcf natural gas price) is about $16.5 billion value for the Fayteville assets. This includes a 12x off of midstream assets and 2012 $300 million EBITDA for the business. We are of the opinion that the difference in value is driven by the rate and magnitude of capital allocation. What is Marcellus + Haynesville + other worth? Assuming a reasonable capital deployment to Marcellus and Haynesville, we calculate a combined $10.00 per share value for these two asset bases. What about the new ventures group? We expect the stealth play(s) acreage to increase from the current 500,000 level to something reasonably higher. The company plans to drill a few wells sometime during the second half of the year. As such, the maturation of the option value should not be too far away. Also, we are optimistic about the potential for its New Brunswick assets. Changing Estimates. We are raising 2011 EPS/CFPS to $2.73/$6.27 per share from $2.41/$5.65 per share and 2012 EPS/CFPS to $3.74/$8.08 per share from $3.24/$7.07 per share Our 2011 and 2012 TEV/DACF multiples are 6.2x and 4.5x. Rehan Rashid rrashid@fbr.com Saurabh Lele slele@fbr.com FBR CAPITAL MARKETS

2 The primary risk of investing in an oil and gas producing company is a depressed oil and gas price environment, which reduces the company's cash flow, and, consequently, its future production and reserve growth. Because Southwestern Energy is a small-cap producer, the results of exploration wells can have a significant impact on the company's valuation. Additionally, the smaller market capitalization results in increased liquidity risk. A significant portion of Southwestern Energy's valuation is based on the future development of a new play: the Fayetteville Shale. If horizontal well results are not as expected, or if the play does not have a geographic extent as expected, the valuation could be revised downward. Southwestern Energy Company is a mid-cap energy company that is focused on natural gas and crude oil exploration and production, natural gas distribution and marketing, and transportation. The company's exploration, development, and production activities are focused in Arkansas, Oklahoma, Texas, New Mexico, and Louisiana. The company is more than 90% natural gas weighted. The company is currently developing a major new gas shale play in Arkansas, targeting the Fayetteville Shale. The development of this play will be the key growth driver for the company and represents the majority of our valuation. Page 2

3 Southwestern Energy Company SWN Ticker Net Asset Value Summary Time Period - from Year-End: Current TEV TEV/DACF $/MMcfe FBR Price Target: $ $ 16, $ 8.14 Latest Close: $ $ 13, $ 6.84 Upside to Price Target (%): 19.6% Net Asset Value Summary FBR Base Volumes $MM $/Share $/Mcfe Risking Proved Developed (Bcfe) 1,979 $ 2,588.5 $ 7.62 $ 1.31 Other Assets $ 5,131.8 $ $ 2.59 Acreage $/acre $ $ 1.77 $ 0.31 Developed Acreage $100 $ 43.8 $ 0.13 $ 0.02 Undeveloped Acreage $500 $ $ 1.64 $ 0.29 Working Capital $ $ 2.34 $ 0.41 Midstream Assets (CY EBITDA) 12.0x $3,600 $ $ 1.82 Other Assets (BV) 1.3x $97 $ 0.28 $ 0.05 Liabilities $ 1,276.9 $ 3.66 $ 0.65 Long Term Debt $ 1,215.3 $ 3.48 $ 0.61 Minority Interest $ 4.0 $ 0.01 $ 0.00 Other Liabilities $ 57.7 $ 0.17 $ 0.03 Net Asset Value (Pre-Tax) 1,979 $ 6,443 $ 18 Very Low Fayetteville Shale 45,000 $ 9,980.9 $ $ 0.22 Low Haynesville 5,000 $ 70.8 $ 0.20 $ 0.01 Low Marcellus 12,500 $ 3,482.0 $ 9.98 $ 0.28 Low 3P Net Asset Value (Pre-Tax) 64,479 $ 19,977 $ 57 $ 45 Page 3

4 02/25/11 Southwestern Energy Company Operating Statistics Rehan Rashid Ticker: SWN Saurabh Lele Total Production Year 1QA 2QA 3QA 4QA Year 1QE 2QE 3QE 4QE Year Daily Production (Mmcfe/d) 801 1,000 1,080 1,141 1,211 1,108 1,294 1,348 1,390 1,434 1,367 Daily Production (Mboe/d) Production (Bcfe) Production (MMboe) Growth [Period] (%) 50% 41% 32% 44% 38% 38% 29% 25% 22% 18% 23% Natural Gas Production Daily Production (Mmcf/d) ,077 1,138 1,209 1,105 1,286 1,338 1,378 1,420 1,356 Production (Bcf) Crude Oil Production Daily Production (Mbbls/d) Production (Mbbls) Production Distribution (%) A 2011E Natural Gas (%) 97% 100% 100% 100% 100% 100% 99% 99% 99% 99% 99% Crude Oil (%) 0% 0% 0% 0% 0% 0% 1% 1% 1% 1% 1% Realized Prices Natural Gas ($/Mcf) $5.20 $5.40 $4.26 $4.67 $4.34 $4.62 $4.12 $4.18 $5.07 $5.15 $4.61 Crude Oil ($/Bbl) $61.73 $78.58 $77.93 $75.97 $83.71 $79.05 $80.42 $81.23 $81.42 $81.48 $81.14 Benchmark Commodity Prices Natural Gas HHUB ($/Mcf) $4.28 $3.66 $4.34 $4.50 $4.50 $5.50 $5.50 $5.00 $5.50 $5.50 $5.50 WTI Oil ($/Bbl) $75.97 $83.71 $79.05 $80.42 $81.23 $81.42 $81.48 $81.14 $81.20 $80.98 $80.84 Source: Company Reports; FBR Capital Markets Proprietary to FBR Capital Markets Page 4

5 02/25/11 Southwestern Energy Company Income Statement ($M) Rehan Rashid Ticker: SWN Saurabh Lele A 2011E Year 1QA 2QA 3QA 4QA Year 1QE 2QE 3QE 4QE Year Oil & Natural Gas Sales $ 1,525 $ 483 $ 421 $ 493 $ 485 $ 1,882 $ 487 $ 522 $ 658 $ 691 $ 2,358 Interest & Other $ 549 $ 185 $ 171 $ 195 $ 190 $ 741 $ 39 $ 42 $ 53 $ 55 $ 189 Total Operating Revenue $2,074 $668 $592 $688 $676 $2,623 $526 $564 $711 $746 $2,546 Lifting Costs Other Cash Operating Expenses 1, D.D. & A Other Non Cash Operating Costs Total Operating Expenses $2,151 $380 $384 $412 $414 $1,589 $270 $282 $294 $302 $1,033 Operating Income -$77 $288 $208 $276 $262 $1,034 $255 $282 $417 $445 $1,513 Interest Expense (14) (6) (5) (6) (6) (28) (5) (5) (5) (4) (58) Other Expense (Income) Income Taxes (Benefit) Effective Tax Rate (Net of Credits) 38% 39% 38% 39% 40% 40% 40% 40% 40% 40% 40% Preferred Dividends Reported Net Income (Loss) $21 $110 $78 $106 $103 $384 $117 $131 $187 $200 $545 Reported Net Income (Loss) Per Share $0.39 $0.49 $0.36 $0.47 $0.44 $1.77 $0.50 $0.56 $0.80 $0.86 $2.73 Extraordinary Items Recurring Net Income (Loss) -$57 $125 $127 $165 $155 $572 $176 $196 $281 $300 $952 Reported Net Income (Loss) Per Share ($0.17) $0.36 $0.37 $0.48 $0.45 $1.66 $0.51 $0.57 $0.81 $0.87 $2.75 Reccurring Net Income (Loss) Per Share $1.43 $0.49 $0.36 $0.47 $0.44 $1.77 $0.50 $0.56 $0.80 $0.86 $2.73 Discretionary Cash Flow ($ MM) $1,383.5 $428.9 $345.7 $426.0 $400.6 $1,554.4 $440.2 $479.8 $618.4 $652.8 $2,191.2 Cash Flow per Share $3.98 $1.23 $0.99 $1.22 $1.15 $4.58 $1.26 $1.37 $1.77 $1.87 $6.27 Primary Shares Outstanding (000) Diluted Shares Outstanding (000) Source: Company Reports; FBR Capital Markets Proprietary to FBR Capital Markets Page 5

6 02/25/11 Southwestern Energy Company Discretionary Cash Flow & EBITDA Statements ($M) Rehan Rashid Ticker:SWN Saurabh Lele Year 1QA 2QA 3QA 4QA Year 1QE 2QE 3QE 4QE Year Reported Net Income (Loss) (57) Preferred Dividend D.D.& A Deferred Taxes Other (0) Total Discretionary Cash Flow $1,384 $429 $346 $426 $401 $1,554 $440 $480 $618 $653 $2,191 EBITDA A Operating Income (Expense) (57) D.D.& A Interest Expense (14) (6) (5) (6) (6) (28) (5) (5) (5) (4) (58) Income Tax Expense EBITDAX $1,300 $416 $343 $418 $408 $1,566 $450 $491 $638 $675 $2, E Source: Company Reports; FBR Capital Markets Proprietary to FBR Capital Markets Rehan Rashid Southwestern Energy Company Consolidated Balance Sheet ($M) Saurabh Lele A 2011E Year 1QA 2QA 3QA 4QA Year 1QE 2QE 3QE 4QE Year Assets Current Assets ($m) , Property, Plant & Equipment, net ($m) 4,121 4,463 4,475 4,867 5,278 5,278 5,612 5,924 6,214 6,509 6,509 Other Assets ($m) Total Assets 4,752 5,132 6,008 5,993 6,404 6,404 6,738 7,049 7,340 7,634 7,634 Liabilities & Stockholders' Equity Current Liabilities ($m) Long-Term Liabilities ($m) 1,819 1,972 2,720 2,475 2,732 2,732 2,890 3,005 3,015 3,010 3,010 STOCKHOLDERS' EQUITY ($M) 2,371 2,543 2,669 2,871 3,026 3,026 3,202 3,398 3,678 3,978 3,978 Total Liabilities & Stockholders' Equity 4,752 5,132 6,008 5,993 6,404 6,404 6,738 7,049 7,340 7,634 7,634 Net Debt-to-Cap 29% 28% 10% 10% 14% 14% 15% 14% 10% 5% 5% EV / EBITDAX x x 9.67 x 9.31 x 9.01 x 9.13 x 8.85 x 8.11 x 7.14 x 6.21 x 6.59 x EV / DACF 9.08 x 9.14 x 8.30 x 8.00 x 7.29 x 6.36 x 6.49 x 5.92 x 5.39 x 5.11 x 4.77 x Source: Company Reports; FBR Capital Markets Proprietary to FBR Capital Markets Ticker: SWN 02/25/11 Page 6

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9 This publication has been approved by FBR Capital Markets & Co. (FBRC), which accepts responsibility for its contents and its distribution to our clients. Any FBRC client who receives this research and wishes to effect a transaction in the securities or financial instruments discussed should contact and place orders with an FBRC Sales representative or a representative of FBR Capital Markets LT, Inc. for financial instruments that are not securities. Information for Clients of FBRIL: This publication has been approved by FBR Capital Markets International Ltd. (FBRIL), which accepts responsibility for its contents and its distribution to our clients. This publication is not for distribution to retail clients, as defined by the Financial Services Authority (FSA), and no financial instruments discussed herein will be made available to such persons. This investment research is solely for the use of the intended recipient(s) and only for distribution to professional investors and/or institutional investors to whom it is addressed (i.e., persons who are authorised persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the United Kingdom or persons who have been categorised by FBRIL as professional clients or eligible counterparties under the rules of the FSA). Any FBRIL client who receives this research and wishes to effect a transaction in the securities or financial instruments discussed should contact and place orders with an FBRIL Sales Trader or a representative of FBR Capital Markets LT, Inc. for financial instruments that are not securities. Copyright 2011 FBR Capital Markets Corporation Rating and Price Target History for: Southwestern Energy Company (SWN) as of /29/08 OP: /26/08 2:1 split 03/31/08 OP:38 04/25/08 OP:40 05/30/08 MP:40 07/25/08 OP:43 07/31/08 OP:48 10/03/08 OP:40 02/24/09 MP:35 03/09/09 MP:30 04/28/09 MP: Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q /26/09 OP:48 10/22/09 OP:55 10/30/09 OP:60 04/30/10 OP: /31/10 OP:38 12/20/10 OP:40 Created by BlueMatrix Page 9