Southwestern Energy Is The LNG Export Play For Late 2024 (NYSE:SWN)

Southwestern Energy (NYSE:SWN) reported a relatively lackluster quarter for q3’23 as a result of the challenging natural gas pricing backdrop. As discussed in previous earnings calls, management is proactively curtailing production through the soft natural gas market in anticipation of an upswing in gas prices. I believe through their capital discipline, management of their production volumes, and resource development in the Haynesville/Bossier Basin in anticipation of growing export capacity in the US Gulf of Mexico, Southwestern will have the bandwidth to react to the additional export capacity with the opening of Golden Pass at the end of 2024. Given the current state of the gas market, I provide SWN a HOLD recommendation with a near-term price target of $6.32/share.

Operations

I’m long-term bullish on Southwestern Energy given their asset exposure in the Haynesville/Bossier Basin. Despite the higher D&C costs associated with the basin when compared to the Appalachia region, I believe Southwestern should be able to capture cost savings in midstream and transportation fees as the basin is further developed to be utilized to fill export capacity in the Gulf of Mexico as LNG demand remains robust. Management also anticipates their drilling efficiencies to cut costs by 5% in the Appalachia region and 15% in the Haynesville Basin. Accordingly, the total rig count in the Haynesville/Bossier basin has fallen by 40% YTD as a result of the challenging natural gas market.

Beyond reduced activity and the slowdown in supply growth that suggests LNG exports are up over 2 Bcf per day year-over-year, recently exceeding 14 Bcf per day, while weather-adjusted power demand is up 2 Bcf a day, and exports to Mexico are up almost 1 Bcf a day. These factors have helped to significantly dampen the end-of-season storage surplus with new LNG in service dates beginning next year. By the end of ’24, we expect LNG exports to grow to 16 Bcf per day, over 90% of which is located along the Texas and Louisiana Gulf Coast.

Bill Way

According to the EIA, there are currently 5 LNG export projects that are currently under construction with a combined export capacity of 9.7Bcf/d of LNG. These facilities include Golden Pass, Plaquemines, Corpus Christi Stage III, Rio Grande, and Port Arthur. Both Golden Pass LNG and Plaquemines LNG are anticipated to commence operations in 2024.

As a result of the softer gas market, management has shifted operations to more liquids-rich assets to derisk cash flows. Looking ahead to 2024, management discerned that they will be cutting back on production in the first half of the year with an upswing in production in the latter half.

This goes along with the macro narrative for new LNG capacity coming online in the back half of 2024. Management expects to make $2-2.3b in capital investments throughout 2024 with the first half of the year being more heavily weighted in anticipation of the upswing.

Overall, I anticipate a soft q4’23 as the gas market continues to remain suppressed. Despite Southwestern’s robust 40-60% gas hedging outlay, the stock tends to move directionally with natural gas prices.

Debt Reduction

Given the challenging gas market, management made the decision to increase their debt load and draw from their revolver, ending the quarter with a total debt load of $4.1b for a leverage ratio of 1.6x TTM EBITDA. As the firm curtails production given the soft strip pricing, management remains focused on generating free cash flow and reducing debt towards the top end of their range to $3.5b, reducing leverage to their target range of 1-1.5x trailing EBITDA.

Shareholder Value

Southwestern is currently trading at 3.40x trailing EV/EBITDA, slightly higher than its peer cohort of gas producers. I provide SWN shares a HOLD recommendation based on the peer average 3.30x EV/EBITDA for a price target of $6.32/share.

It’s worth noting that management hasn’t yet articulated any M&A activity but has hinted that strategic consolidation is in the cards. I had previously discerned my thoughts in an article covering the Reuters report hinting at a Chesapeake Energy (CHK) and Southwestern merger. Though names are not yet named, there still remains the possibility of a merger between the two firms or other firms in the sector. My expectation for a merger or acquisition would be with a firm that will bolster Southwestern’s Haynesville/Bossier assets, like Comstock (CRK) or a private producer.

Management discerned some additional shareholder benefits to bolster their equity value, whether in the form of reinstating the buyback program or initiating a base dividend.

I think as we said all along, we’d probably continue, reinitiate, if you will, share buyback, given what we believe our value is relative to our intrinsic value or at least our share prices to that… If we can sustainably generate free cash flow and we believe we’ll be able to, particularly with lower debt, the way you kind of prove that, put in some sort of base dividend. So that would be something that we certainly would consider.

Carl Giesler