Southwestern Energy Company (SWN)

My current focus with respect to investment for at least the next year is in companies that explore for and produce natural gas. My basis for this is not only that these companies have some transparency through hedging, but in my opinion natural gas is undervalued with respect to oil. I think that natural gas is less tied to the dollar and hence, when the dollar recovers, the price of natural gas will be less affected. The Fed statement was the key. They didn’t raise rates, as many on Wall Street were screaming for (probably would have been a good idea), proving that the housing and mortgage crisis still has a ways to go. This leaves us with a few ideas with respect to investing. You can get into commodities and stocks that benefit from higher pricing or you can short companies with large lending exposure (Capital One could get crushed, but still can be long MasterCard and Visa).





SWN is another natural gas company that seems well positioned due to pricing. Looking at their first quarter of 2008, we see production up 71%. Net income was up 114%. Discretionary cash flow increased by 99%. Capital investments also saw a rise of 25%. SWN has a proven track record as they have increased production from 33Bcfe in 1999, to 113 Bcfe in 2007. The estimates for this year with respect to production are 168-172 Bcfe. Reserve replacement has positioned them well going forward. Since 1999, reserve replacement has been in the triple digits with respect to percentages every year. In 1999, they had the lowest percentage of replacement of 148% and last year was the highest at 474%. They are also moving towards low risk drilling as the price of gas gets higher, this makes this segment and this company in particular a good investment.





Outlook going forward is compelling. Although pricing in oil and gas may see some movement downward, the trend should remain bullish for years to come. The only problem with increased demand is pricing. 2007 realized pricing for SWN was $6.86 for gas and $69.72 for oil. These prices equaled an EPS of $.64 and net cash flow of $651.2 MM. Management estimates that in 2008, pricing will be higher and that a gas price of $8 and oil at $80 will create and EPS of $1.24 to $1.26 and net cash flow will be an estimated $1,160-$1,170 MM. Respectively, gas at $9 and oil at $90 will have $1.36-$1.38 and $1,225-$1,235 MM. Lastly, gas at $10 and oil at $100 will create $1.46-$1.48 and $1,280-$1,290 MM. Looking at current pricing they could very easily be much higher than the last estimate. From what they said in their last earnings conference, this company wants to increase their production growth and cash flows. They plan that this year regardless of the price of gas and oil they will have reduced debt by 7%-12%. Even with all of the increases they managed to reduce their finding cost from $2.72 to $2.55 Mcfe. They also have a consistent hedging program that should give some transparency to their balance sheet. From 2002 to 2007 they have been between 80% and 70% hedged with last year at 72%.





Lastly, we see quite a bit of anger with respect to these rising prices. Much of this anger is focused at the likes of Exxon who have seen revenues skyrocket. Governments control 95% of oil companies with only 5% left to international companies. These governments are to blame for the high costs associated with driving your auto or heating your home. This socialized form of energy control has led to these high prices at the expense of our countries well fair. It is better to support our own companies to give them the ability to expand production as we are the only ones who can help the United States.