The Quad7Capital Bad Beat Investing portfolio has purchased Southwestern Energy at $4.05, $3.60 and $3.50. We are monitoring the situation very closely as we hold a position. In this column, we take a dive into the company and check on recent performance and valuation metrics. This natural gas and oil stock has been beaten into submission:
Source: Yahoo Finance
The valuation metrics of the company are impressive. It is simply being held back by natural gas prices which have suffered greatly:
|Price-to-book value multiple||0.8|
|Price-to-earnings 2018 multiple||4.2|
|Interest coverage ratio||2.8|
|Next significant debt||$1B in 2022|
|Cash as a percentage of market cap||49%|
|Current assets as a percentage of market cap||67%|
The above key metrics clearly demonstrate that Southwestern Energy is deeply undervalued and it is hard not to get excited about the significant upside potential of this company.
Note debt due for years, and an incredibly attractively valued name. But is it performing?
Southwestern Energy in Fourth Quarter 2017
Segment operations were strong. In the E&P Segment, operating income for the segment improved to $114 million for the fourth quarter of 2017, compared to operating income of $82 million during the fourth quarter of 2016. The increase in operating income was primarily due to higher production and liquids pricing, partially offset by higher operating costs. In the midstream segment,operating income for the segment, comprised of gathering and marketing activities, was $54 million for the fourth quarter of 2017, compared to $40 million for the same period in 2016. The increase in operating income was primarily a result of $14 million minimum volume commitment shortfall payment from a third-party customer to the Company’s gathering segment and increase in the Company’s marketing margin. The increase was offset by a decrease in volumes gathered resulting from lower production volumes in the Fayetteville Shale.
Southwestern Energy-What about the year 2017?
For the year there was also a major improvement. Operating income for the segment improved to $549 million for 2017, compared to an operating loss of approximately $2.4 billion for 2016, which was primarily due to the $2.3 billion impairment of natural gas and oil properties and $75 million in restructuring charges during this period last year. The increase in operating income in 2017 was primarily due to the absence of impairments and restructuring charges and higher realized natural gas and liquids pricing.
As for segments, the E&P operating income was $183 million for 2017, which included a $6 million gain on sale of equipment, compared to $209 million for the same period in 2016, which included $3 million in restructuring charges. The decrease in operating income was largely due to a decrease in volumes gathered resulting from lower production volumes in the Fayetteville Shale.
Southwestern Energy Debt?
Company has total debt of approximately $4.4 billion and cash and cash equivalents of $916 million, resulting in net debt of $3.5 billion. Net debt to adjusted EBITDA ratio improved 38% to 2.8 times, compared to 4.5 times at December 31, 2016. During 2017, the Company took steps to improve its maturity schedule and now has only $92 million in bonds due prior to 2022.
Southwestern Energy Investments
During 2017, Southwestern invested a total of $1.3 billion in capital. This included approximately $1.25 billion invested in its E&P business, $32 million invested in its Midstream segment and $13 million invested for corporate and other purposes. Of the $1.3 billion, approximately $113 million was associated with capitalized interest and $104 million was associated with capitalized expenses.
Our take on Southwestern Energy
This stock is great for value investors. Based on everything we are seeing, and the moves operationally, we think Southwestern Energy presents an attractive opportunity. It is a solid company, but deeply undervalued based on the valuation, and on performance. It has already tuned its operations to be profitable in a low price commodity environment, and we expect that continue. While nat gas prices will remain pressured, we think you need to accumulate.
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