Southwestern Energy In-line

Southwestern Energy Company (SWN: 42.53 0.00 0.00%) reported its fourth quarter 2009 earnings of 45 cents per share, in line with the Zacks Consensus Estimate but up from the year-earlier earnings of 30 cents. Revenue rose nearly 25% to $624.5 million from $500 million a year earlier.

 

Despite lower natural gas prices and higher operating expenses, Southwestern’s earnings came in line with estimates on the back of increased production volumes.

 

Estimate Revisions Trend

 

We see a mixed response in estimate revisions. For the last 30 days, 2 of the 26 analysts covering the stock raised their estimates for the full fiscal 2010 while 2 other analysts moved in the opposite direction. But no up or downside movements were noticed in the last 7 days.

 

The company’s earnings surprise for the preceding four quarters varies between negative 6.3% and positive 15.6%, with the average being positive 4.7%.

 

Operational Performance

 

Total production was 89 Bcfe (billions of cubic feet equivalent), up nearly 55% over the same period in 2008. Natural gas production was 88.9 Bcf, up the same percentage point.

 

Operating income for the E&P segment was $223.7 million, up 47% from the fourth quarter of 2008. The increase was primarily due to a 55% increase in production volumes, partially offset by increased operating costs and lower natural gas prices. The company’s average realized gas price in the quarter was $5.29 per Mcf (including hedges), down 11% year over year.

 

Operating income for the Midstream Services segment significantly increased from the year-earlier quarter to $42.4 million. The increase was driven by the improvement in revenues from the company’s Fayetteville Shale play.

 

Both lease operating expenses (79 cents vs. 87 cents) as well as general and administrative expenses (37 cents vs. 49 cents) per unit of production were down in the reported quarter from the year-ago quarter.

 

Liquidity

 

Net cash provided by operating activities before changes in operating assets and liabilities was $411.4 million in the reported quarter, up 45% from the year-ago quarter. At the end of the quarter, long-term debt was $997.5 million, representing a debt-to-capitalization ratio of 29.8%.

 

Year-end 2009 Reserves

 

As of December 31, 2009, the company’s proved reserves totaled 3,657 Bcfe, up 67% from the year-end 2008. Of this, almost 100% was natural gas and 54% belongs to proved developed category.

 

Outlook

 

Southwestern anticipates a capex program of approximately $2.1 billion for 2010 (versus $1.8 billion projected for 2009). It includes approximately $1.2 billion of investments in the Fayetteville Shale play in Arkansas.

 

Though Southwestern plans to deploy more funds for Fayetteville Shale, we believe that the company is in its initial phase of unlocking the true value of this play. However, the increased capex program coupled with large drilling inventory broadens the company’s continuous endeavor to focus on return on investment.