Why Wells Fargo Is Turning Bearish On Southwestern Energy

It may take time for investors to appreciate the benefits of Southwestern Energy Company’s SWN initiatives over the past year, as the current focus is on debt reduction, according to Wells Fargo.

The Southwestern Energy Analyst: Nitin Kumar downgraded the rating for Southwestern Energy from Equal Weight to Underweight, while raising the price target from $8 to $10.

The Southwestern Energy Thesis: The company made a “strategic entry into the Haynesville” in 2021 with two large acquisitions amid improving natural gas fundamentals, Kumar said in the downgrade note.

“The basin also provides SWN with optionality in terms of marketing compared to pure Appalachia peers and gives them closer proximity to LNG markets,” he added.

“Management has indicated that it could begin returning cash to shareholders at the former target, but we think SWN will lag SMID-cap E&P peers in terms of cash yields until the latter goal is achieved (YE23 based on WFS estimates),” the analyst wrote.

“Furthermore, given ~92% of gas volumes and ~55% of NGL volumes are hedged in 2022 well below current strip prices, we see limited upside to cash flow estimates,” Kumar mentioned.

“SWN is also likely to face headwinds from potential liquidations of stock held by private equity sellers of Indigo and GeoSouthern assets in 1H22, while we expect more strength in oil-focused names given the current geo-political situation,” he added.

SWN Price Action: Shares of Southwestern Energy had declined by 6.32% to $5.19 at the time of publication Monday.

Photo: Courtesy of Ken Lund on Flickr