Southwestern Energy Stock: The Natural Gas Party Isn’t Over (NYSE:SWN)

Funding Thesis

Southwestern Power (NYSE:SWN) has seen its share worth take successful, along with its friends, in the previous couple of days.

Right here I describe why traders are overreacting to the Freeport LNG fireplace and its implications for the pure gasoline market.

That being mentioned, by my estimates, Southwestern’s pure gasoline manufacturing for 2023 is roughly 62% hedged at barely over $3. This low worth for its pure gasoline manufacturing leaves little room for shareholders to completely profit from excessive pure gasoline costs.

In sum, it is nonetheless going to take a while till Southwestern can roll out its capital allocation program.

Consequently, altogether, I charge Southwestern a tepid purchase, on the again of its 6x free money circulation a number of.

Southwestern Power’s Close to-Time period Prospects

Southwest is among the largest pure gasoline and pure gasoline liquids producers within the US. Southwest is concentrated on the manufacturing and transport of pure gasoline, and pure gasoline liquids. As such, it’s a beneficiary of excessive pure gasoline costs.

That being mentioned, as extensively reported, the principle pure gasoline export facility within the US, the Freeport LNG had a hearth. This led to pure gasoline costs dropping sharply previously week.

Nevertheless, let’s put this sell-off into context. Within the first occasion, the Freeport facility expects a resumption of partial operations inside roughly 90 days. With a full restoration by the tip of 2022, which is 6 months.

So there’s going to be some skill to get exports out by the tip of Q3, and a ramp-up from that time.

Within the second occasion, it is essential to understand the Freeport LNG facility solely accounts for 20% of U.S. LNG exports.

Accordingly, I imagine that this main overreaction within the futures market will quickly appropriate itself when market members begin to discover that the dynamics that acquired us right here within the first place have not considerably modified.

But, markets have been so shaky of late with traders operating out and in of commodities corporations, as they attempt to greatest place themselves on this very unsure market. Altogether this culminated with a spark that led pure gasoline corporations to unload en masse, and are actually down greater than 20% in a number of days.

Nevertheless, I imagine that amidst this worry and uncertainty, there is a compelling alternative for traders to think about Southwestern Power.

Capital Return Coverage?

The one cause that drives me to solely charge Southwestern with a tepid purchase is that it has no clear rapid capital return coverage. And the explanation for why that is so is twofold. Leverage and hedges.

Southwestern carries very roughly $5 billion of internet debt. And for Southwestern to achieve its focused leverage vary goes to take some time longer.

As you may see above, traders are getting near year-end earlier than Southwestern’s steadiness sheet will get inside its lower than 1.5x internet leverage vary.

The second consideration to bear in mind is that Southwestern carries a meaningfully leveraged ebook.

Southwestern’s pure gasoline manufacturing in Q1 2022 was 376 bcf, whereas its steering for Q2 is equally pointing to a really related vary.

Accordingly, if we estimate that for 2023, Southwestern’s complete manufacturing reaches 1520 bcf, as you may see above within the purple field, that places its complete manufacturing at roughly 62% hedged at a worth simply increased than $3.

If traders have a bullish outlook on pure gasoline costs, getting concerned with an organization that has practically two-thirds of its manufacturing hedged at considerably decrease pure gasoline costs, does not make lots of sense.

Alongside these strains, throughout its earnings name, Southwestern said,

As we obtain our goal leverage ratio and have a transparent line of sight to our complete goal debt vary, we’d anticipate to be ready to provoke a sustainable capital return program.

So traders should wait round for some time to get some additional visibility into 2023 earlier than Southwestern can announce its sustainable capital return program.

SWN Inventory Valuation – Priced at 6x Free Money Movement

For Q1 2022, Southwestern’s free money circulation was $317 million. This determine consists of its unsettled hedges of $3.2 billion being added again.

If we roughly estimate an analogous run charge for the rest of 2022, this may put Southwestern heading in the right direction to report someplace near $1.Three billion of free money circulation for 2022.

This leaves Southwestern priced at very roughly 6x this 12 months’s free money circulation.

This a number of is basically consistent with its friends. Whereas lots of its friends searching to 2023 are materially much less hedged.

The Backside Line

The rationale why I’ve a tepid purchase ranking on this inventory is that the worth investor in me won’t ever flip away from an organization that is priced at mid-single-digits to free money circulation.

However, provided that its pure gasoline ebook is so considerably hedged, by my estimates at roughly 62%, this leaves little or no room to completely profit from the excessive pure gasoline costs.

The best way I’d describe that is one thing like being at “the pure gasoline celebration” and everyone seems to be on champagne and you might be on orange juice. That is cool and all, nevertheless it’s removed from the total expertise.