Southwestern Energy Earnings Preview: Fourth Quarter 2009

Houston based independent energy company, Southwestern Energy Company ($SWN) is scheduled to report quarterly earnings results on Thursday, February 25 after the market close. The street is forecasting the company to report, on average, a profit of 45 cents per share on revenue of $474.75 million for the 4th quarter of 2009.

The highest analyst earnings estimate is 58 cents a share and the low estimate is calling for 36 cents profit per share. The company reported a profit of 30 cents a share for the same quarter in 2008. Earnings for the last two quarters have been in-line with consensus estimates of 35 cents and 34 cents.

Southwestern Energy is primarily focused on natural gas and crude oil exploration, development and production within the United States. The Company operations also include natural gas gathering, transmission, and marketing, as well as natural gas distribution. The company is developing the Fayetteville Shale asset on the Arkansas side of the Arkoma Basin.  It has additional production in Oklahoma, Texas and Pennsylvania. Southwestern Energy is a component of the S&P 500 index.

Looking forward, there are two catalysts for share price growth at Southwestern Energy for 2010.  The first is higher natural gas prices for 2010 compared to 2009. The second is organic production growth at Southwestern Energy.

Higher Natural Gas Prices Forecast for 2010

One of the catalysts for a boost in earnings for the fourth quarter at  the company is that natural gas prices having doubled since late August 2009. The Henry Hub Natural Gas Spot price started the quarter at about $2.50 per Mcf and was about $5.50 by the end of December 2009.

Cold weather picked up a lot of slack in the market. The pace of withdrawal from natural gas storage shows the withdrawal rate was well above five-year averages. Looking beyond the fourth quarter, natural gas injection to storage in 2009 set a new record, providing increased confidence that the supply overhang has the potential to revert to more normal levels.  NYMEX natural gas futures contracts for most of 2010 are projected to rise from just under $5 mmbtu for the April contract to $5.90 mmbtu for December 2010. More optimistic analysts are forecasting an average price of almost US$6 per mmbtu for 2010 at the Henry Hub, compared to just under USS$4 mmbtu during 2009.

2010 is showing a more closely aligned supply and demand picture for natural gas than in 2009. The continued rapid development of shale gas in the U.S. could put a wrinkle in this supply/demand alignment.

Valuation

Morgan Stanley initiated coverage of Southwestern Energy two weeks ago with an Overweight rating and a $60.00 price target based on the perception of a very positive risk to reward ratio. The firm cited a competitive cost structure, sustainable production and reserve growth (more than 20 percent annually over a 3-5 year commodity price cycle), and a long-term strategy to invest through the commodity price cycle.

Southwestern Energy was given a Buy rating by Stifel Nicolaus in December 2009 with a target price of $56, based on guidance of 41 percent production growth. In addition, the new sand plant should lower drilling costs by $100,000-$150,000 per well. The firm gave Southwestern a mildly qualified endorsement based on external risks such as fluctuations in crude oil and natural gas prices. Southwestern Energy has hedged about 12 percent of its estimated 2010 production.

Barclays Capital also revised their target price for Southwestern Energy from $54 to $58 in early December 2009.

Southwestern Energy is a strong growth play in the natural gas industry. The company has been one of the fastest growing companies in the natural gas industry over the past 5 years. Total assets and shareholders equity have growth from about $1 billion in 2005 to almost $4.5 billion and $2.2 billion respectively (see chart below).

Source: http://ycharts.com/companies/SWN/balance_sheet

Share Performance

Southwestern Energy closed yesterday at $42.74 a share. The share price has seen higher-highs and higher-lows over the past year amid rising 50-day and 200-day moving averages.  The share price  has recently fallen just under the 200 day moving average of $42.98, a key support level. However, if the pattern of higher-highs and lower-lows continues, the share price should remain above $40.50. This analysis suggests an entry point for new investors seeking a high probability of a gain based on price patterns would be any price below $41 a share.

The relative strength index (RSI) is in the mid-range of oversold. Southwestern Energy’s share price could see some further downward movement. But like the previous share price pattern,  the RSI analysis suggests a higher probability of upside share pricing than downside.

Conclusion

Growth investors may want to consider Southwestern Energy as part of their portfolio for 2010.  An earnings beat on Friday could provide a lift to the share price well above $43.

Southwestern Energy is expected by many analysts to continue to outperform peers over the next few years as the Fayetteville shale deposit boosts production and cash flow. The company has been mentioned as a potential buy-out candidate in a recent New York Times piece.

A $55 price handle sometime during 2010 seems like a reasonable price target, especially if natural gas stabilizes in the $6 mmbtu range this year as forecast by some analysts.

Disclosure: No Position

Chevron Provides Disappointing Q4 2009 Earnings Guidance

San Ramon, California-based Chevron Corp. ($CVX) cautioned investors on Monday that earnings for the fourth quarter are expected to be lower than reported in the third quarter, driven by declining profits from its refining and marketing business.

The company also stated in an interim update that earnings at its exploration-and-production segment are expected to be flat, compared with the third quarter, despite higher commodity prices. Chevron cited the absence of gains during the third quarter associated with formal approval of the Gorgon project in Australia.

The company’s international oil equivalent production rose 2.9 percent to 2,014 Million Barrels Oil Equivalent per Day (MBOED) during the first two months of Q4 from 1,957 MBOED for Q3.

Chevron is the second-largest U.S. integrated oil company by market capitalization after Exxon Mobil ($XOM).

Yesterday, Citigroup upgraded shares of Chevron Mobil from Hold to Buy, citing their forecast for higher oil prices in 2010. Citigroup analysts have set a price target of $97 a share as long as production levels and growth remain on track.

Citigroup hiked its long-term outlook for crude oil to from $65 to $80 a barrel.

For 2010, Citigroup analysts expect oil prices to average $76 a barrel, as compared to a prior forecast of $65. Citigroup also upped its ratings to Buy from Hold on BP ($BP) and Petrobras ($PBR).

Consensus earnings per share for the fourth quarter of 2009 are $1.77 per share. The low estimate is $1.64. The high estimate is $1.97. These are likely to change based on yesterday’s guidance by Chevron.

Chevron will hold its quarterly earnings conference call on Friday, January 29, 2010 at 11:00 a.m. EST (8:00 a.m. PST).

On Monday, Chevron closed at $80.88, up $1.41 or 1.77 percent, on volume of 11.9 million shares on the NYSE.

Chevron is trading at $79.54, down $1.34 or 1.66 percent, in the pre-market this morning.

Markets Start 2010 on a Positive Note

The majority of major global equity markets kicked off 2010 on a positive note amid rising hopes for a global economic recovery. U.S. stock futures suggest a strong start for 2010 as the Federal Reserve’s top two officials send a signal that the Fed Funds rate will likely stay at historically low levels for an extended period.

In overseas equity markets this morning, Asian markets finished mixed. Japan’s Nikkei 225 index jumped 1.0 percent or 108 points to 10,655. China’s Shanghai Shenzen index is down 1 percent and Hong Kong’s Hang Seng fell 0.2 percent on inflation concerns.

India’s Sensex index rallied 0.5 percent, Australia’s ASX 200 index edged higher by 0.1 percent, and South Korea’s Kospi index advanced 0.8 percent. The Tel Aviv Stock Exchange (TA-25) gained 0.4 percent on Monday.

European equity markets were higher this morning. The German DAX index is up 0.8 percent. Britain’s Footsie 100 index rose by 0.9 percent.

U.S. stock futures are higher this morning by just over half a percent as the Federal Reserve’s top two officials suggest that interest rates will be kept low for months.

While at the American Economic Association in Atlanta, Georgia, Federal Reserve Chairman Ben Bernanke said in a speech on Sunday that lax regulatory and supervisory policies, rather than monetary policy, were to blame for the housing bubble.  Citing comparisons with other large industrialized economies, he showed that countries with relatively higher interest rates had housing bubbles even larger than in the U.S.  He said the largest cause of the bubble was exotic mortgages and the decline in underwriting standards. Greater global capital flows explained about 30 percent of the rise in housing prices and low interest rates about 5 percent according to the Fed Chief. Bernanke concluded, “The magnitude of house-price gains seems too large to be readily explainable by the stance of monetary policy alone.”

Looking forward, Fed Vice Chairman Donald Kohn said that a tighter Fed Funds policy to head off perceived threats from asset price increases “could be expensive.”  Kohn said the economy is likely to grow more slowly than its potential for an extended period. He also indicated inflation is likely to be lower than the Fed’s target of 2 percent.

Traders see the comments by these Fed officials as strong hints that short-term interest rates will remain low for some time.

Crude oil prices moved higher this morning by $1.60 a barrel or 1.9 percent with the front month contract trading just under $81 a barrel.

The price of gold jumped overnight by $18 an ounce or 1.6 percent. Spot gold was selling for $1,115 an ounce this morning.

Treasury bonds continue their sell-off into the new year, with the 10-year note yield rising 2 basis points to 3.86 percent – the highest level since June 2009.

In foreign exchange markets, the dollar is under pressure as investors gain a stronger risk appetite. The DXY index is 77.54, off 0.4 percent or 0.33 from the previous close of 77.87.

On the economic front for the week, the Institute for Supply Management’s manufacturing index will be released this morning at 10 AM. The index is projected to rise from 53.6 to 54.8 percent. A rising index value is a positive sign. Any value above 50 signals growth in manufacturing activity. The November report dropped 2.1 points. Most economists believe that the slowdown in November was temporary.

On Wednesday, the Federal Open Market Committee will issue minutes of its meeting from three weeks ago. Traders will be looking for clues about Fed sentiment going into the new year.

The most anticipated economic report for the week will come on Friday morning with the Labor Department’s estimate of December’s employment situation report. Economists expect the nonfarm payrolls forecast to be flat in comparison to the previous month. They also are forecasting the unemployment rate, which was 10 percent in November, will remain the same.

In company news, the second-largest U.S. energy producer, Chevron Corporation ($CVX) may rise as much as 20 percent over the next 12 months according to a Barron’s report. Analysts expect crude oil prices to climb in 2010 and the company has several global exploration projects in the pipeline.

Wealth management firm Baird boosted Intel ($INTC) to outperform from a neutral rating based on higher computer procurement forecasts for companies during the first half of 2010.  The company is expected to outperform peers in the semiconductor industry for 2010.

Wal-Mart Stores ($WMT) said it plans to cut costs by combining purchasing for several countries, according to a Financial Times report. The company estimates that shifting to direct purchasing could reduce costs from 5 percent to 15 percent across the supply chain over the next five years. Potential savings are targeted in the range of $4 billion to $12 billion.

On the earnings front, fast food company Sonic Corp. ($SONC) will report earnings per share on Tuesday with analysts expecting 14 cents per share.

Also on Tuesday, fertilizer manufacturer The Mosaic Company ($MOS) will release earnings.  The consensus estimate is a 35 cent profit per share.

Agriculture operator Monsanto ($MON) will report earnings on Wednesday with expectations of breaking even for the most recent quarter.

Other companies expected to report earnings this week include:  AngioDynamics ($ANGO), Synnex Corp. ($SNX), Bed Bath & Beyond ($BBBY), Family Dollar ($FDO), Ruby Tuesday ($RT), Shaw Group ($SHAW), Apollo Group ($APOL), Constellation Brands ($STZ), HIS ($IHS), AZZ Corp. ($AZZ), Penford ($PENX), and the Greenbriar Companies ($GBX).

Disclosure: None

Why Did Oil Surge Higher This Week?

Crude oil futures prices surged higher this week on supply concerns due to rising tensions in the Middle East, colder weather forecasts, and improved global economic growth prospects. A stronger U.S. dollar acted to temper the gains.

Middle East Tensions

Late Friday, Iraq said there was an Iranian incursion into an Iraqi oil field 280 miles south of Baghdad, elevating geo-political tensions and driving spot crude prices just above $74 a barrel. Iraq’s National Security Council asked Iran to withdraw its forces from the region.

Earlier in the week, Iran also successfully tested a long-range missile, receiving rebukes from the U.S. and and the United Kingdom. U.K. Prime Minister Gordon Brown also threatened sanctions.

Iraq is the third largest oil producer in the Middle East and Iran is the second largest.

Colder Weather Forecast

Between January and March, below-normal temperatures are expected from the U.S. Gulf Coast to the mid-Atlantic region, the National Oceanic and Atmospheric Administration said Thursday. Meteorologists are also anticipating colder weather in the eastern U.S. until the end of December.

Signals of a Stronger U.S. and Global Economy

On Wednesday, Federal Reserve officials declared that financial markets were healthy enough to remove emergency monetary supports. This was interpreted by oil traders that the U.S. economy may have turned the corner and be able to continue with positive growth, another bullish signal for increased oil consumption.

The Energy Department also said on Wednesday of this week that U.S. crude oil inventories declined to the lowest level since Jan. 9. Distillates inventories also fell 2.95 million barrels to 164.4 million barrels.

On Tuesday, OPEC also bumped its 2010 forecast for global oil demand slightly higher. OPEC said in its December Monthly Oil Market Report that demand for OPEC crude was expected to increase 100,000 barrels per day, or 30,000 barrels a day more than its previous month’s forecast on a baseline of 26,610,000 barrels per day in November..

A Stronger Dollar Tempers the Price of Oil

Oil prices backed off at the end of the day as the greenback advanced for a fourth straight day against a basket of six major currencies. Light, sweet crude January future price climbed $3.34 from last Friday’s closing price of $69.62 to close today at $72.96 per barrel.

The U.S. Dollar Index strengthened 1.7 percent for the week rising to 77.35 at 2:30 p.m. in New York, compared with 76.38 on Monday. Earlier, the greenback touched 78.14, the highest level since early September.

The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of currencies including the Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc, and Swedish Krona. Initiated at a 100 value, it was created in March 1973 soon after the Bretton Woods system was dismantled. It has traded as high as the mid-160s and as low as 70.70 on March 16, 2008.

Rising geo-political tensions in the Middle East combined with ongoing worries about sovereign debt problems in Greece potentially impacting the Euro caught the attention of currency traders . As a result, traders were quick to reverse short trades betting that the greenback would fall further in value. A stronger dollar is generally associated with falling commodity prices, including oil.

Gasoline prices

For the tenth consecutive day, prices at the pump declined. The national average price of unleaded gasoline dropped slightly to $2.589 per gallon from Thursday’s $2.59 per gallon according to motorist advocate AAA.

ETF Market Action

The United States Oil Fund, an exchange traded fund (ETF) designed to track the movements of light, sweet crude oil ($USO) rose from $35.62 on the Monday morning open to close at $36.66 on Friday. In Friday trading, the price of the ProShares Ultra Crude Oil ETF ($UCO)  jumped higher by 1.7 percent from $10.96 to $11.15.

Valero Declares Dividend, Yields 3 Percent

Valero Energy Corp. (VLO) announced last week that its Board of Directors declared a quarterly common stock cash dividend of 15 cents. The annualized dividend yield for Valero shares is 3.0 percent. Valero has steadily increased its dividend since 1997.

The dividend is payable on December 9, 2009, to stockholders of record at the close of business November 11, 2009. The ex-dividend date is November 9, 2009.

Since the beginning of 2009, Valero shares have lost ground with a negative 8.5 percent change in share price. In contrast, the S&P 500 index is up 22.5 percent. Valero’s share price is in a downward consolidation triangle converging near the 50-day and 200-day moving average.

On July 28, Valero reported second-quarter losses of $254 million or 48 cents loss per share compared to second quarter 2008 net income of $734 million, or $1.37 per share. The decline in operating income was primarily due to lower diesel and jet fuel margins and lower sour crude oil differentials versus the same quarter last year.

Valero Energy Corporation is a Fortune 500 company based in San Antonio and owns/operates 16 refineries in the United States, Canada and the Caribbean with a combined throughput capacity of approximately three million barrels per day, making it the largest refiner in North America. Valero is also a leading ethanol producer with seven ethanol plants in the Midwest with a combined capacity of 780 million gallons per year, and is one of the nation’s largest retail operators with approximately 5,800 retail outlets in the United States, Canada and the Caribbean.

Valero is a tough play right now with the U.S. economy likely bottoming out and consumer spending is unlikely to rise for at least several months. Refining has historically been one of the most cyclical areas of the energy industry. Currently, the industry is in the midst of a multi-year down cycle. Moreover, global refinery capacity is on the rise. As a result, overcapacity in the industry is likely to continue for several years. Pending carbon trading legislation in the U.S. Congress creates further economic uncertainty for refiners going forward.

There are dividend paying stocks within and outside the energy sector with much better reward to risk ratios than Valero Energy.

ConocoPhillips Boosts Dividend and Plans to Sell Assets

ConocoPhillips (COP) announced last week that its Board of Directors declared a 6.4 percent increase in the company’s quarterly common stock cash dividend. The new quarterly dividend on the company’s common stock is 50 cents per share, up from 47 cents per share previously.

The annualized dividend yield for ConocoPhillips shares is 3.9 percent. ConocoPhillips has increased its dividend every year since the year 2002.

The dividend is payable on December 1, 2009, to stockholders of record at the close of business October 30, 2009. The ex-dividend date is October 28, 2009.

Since the beginning of 2009, Conoco shares have lost ground with a -2.3 percent change in share price for 2009. In contrast, the S&P 500 index is up 19.5 percent.

On July 29, ConocoPhillips reported second-quarter earnings of $1.3 billion or 87 cents per share, slightly better than the consensus estimate of 83 cents per share. Earnings per share for the quarter were well below the same quarter of the previous year of $3.50, due mainly to significantly lower petroleum prices in 2009.

ConocoPhillips intends to sell $10 billion of E&P and refining assets over the next two years to improve its financial position and strengthen its balance sheet. Proceeds will be used to reduce debt and are intended to increase the company’s return on capital.

ConocoPhillips is engaged in the exploration and production of oil and natural gas, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses. The company has six operating units including exploration and production representing 69 percent of earnings, refining and marketing (15%), LUKOIL Investment (11%), midstream (3%), chemicals (1%) and emerging businesses (1%).  As of December 31, 2008, the company had 8.08 billion barrels of oil equivalent proved reserves.

ConocoPhillips is a stable, globally integrated oil company paying a moderate yield. It is priced well below competitor valuations because of high-cost assets in the U.S. and Europe, and the company’s natural gas and refining businesses are low margin operations.

The company has scheduled its third-quarter earnings report for October 28, 2009.

Oil in Trading Range Despite Today’s Price Weakness

Light, sweet crude futures for October delivery fell for a third day, settling in at just under $70 a barrel this morning. Oil prices dropped due to a stronger U.S. dollar and weaker equity markets, reducing investor demand for crude. A stronger U.S. currency reduces the appeal of dollar-priced commodities like oil and gold that are used to hedge against inflation.

Analysts suggest there is a potential for the price of crude oil to test $69 or even $66 if the dollar strengthens further.

The market is a price discovery mechanism. Markets seek what price will be accepted and what price will be rejected by traders based on the fundamentals and market sentiment. Given the trading range that crude oil has fallen into since June 2009, it appears that traders have settled on roughly $70 a barrel as the price for oil given current supply and demand, inventories, and geo-political winds. Also bearing on the price of crude oil, is the perception of increased scarcity as the world economy recovers and demand increases.

The trading range for front month crude oil has been running at between $65 to $75 a barrel since June. Economic stabilization has put a price floor under crude oil. The U.S. unemployment rate appears to have bottomed, while inventories and production of oil remain far above normal.

The trading range for crude oil prices will likely persist at least to the end of the year. Forecasters believe crude prices could remain range bound until the end of 2010, as refiners work through surplus inventories.

Goldman Sachs (GS) has indicated excess inventories could be transitory, with supplies in the industrialized world reaching normal levels by the end of the year. This would push oil prices up to $85 a barrel according to Goldman Sachs.

Absent geo-political strife in the Middle East, the oil price looks to stay in a trading range around $70 a barrel for the next few months.

Natural Gas Price Soars, What Does it Mean for E&Ps?

Natural gas rallied to a two and a half week high on Thursday, the biggest one-day price gain in almost five years. The rally was sparked by an Energy Information Administration (EIA) report that showed lower than forecast increases in inventories and on speculation recovery in the U.S. economy is on the way. A stronger economy which would increase demand for natural gas industrial use.

The EIA reported inventories were higher by 69 billion cubic feet (bcf) to 3.39 trillion cubic feet against a consensus estimate of a 79 bcf rise. October natural gas futures rose 42.7 cents, or 13 percent, ending the day at $3.256 per million British thermal units or BTU. Prices moved as high as $3.32 earlier in the day.

The Standard & Poor’s 500 index of oil and gas exploration and production companies was also higher by 3.3 percent, the highest level since Oct. 1, 2008.

Natural gas prices are as low as they have been in about seven years (see chart below).

The wild card for natural gas prices is how quickly the economy turns around. As the chart above shows, during the 2001-2002 recession, it took about 12-18 months for natural gas prices to rise from the bottom to stabilize in the $6 to $7 bcf range. If the current recession has a similar effect, prices could move around the $7 bcf level by early 2011.

Despite this one day spike in the price of natural gas, fundamentals are likely to keep price stable at least through the end of the year. Just last night, Randy Eresman, the President and CEO of North America’s largest natural gas producer EnCana Corp. (ECA), announced that the company is considering shutting in about 400 million cubic feet per day.  Half of the proposed shut-in natural gas production would be in the United States and half  in Canada. Eresman stated:

“At these (gas prices), on a full cycle basis, they’re below what is economic for any producer. We are shutting in some of our gas and have shut in some of our gas. In some cases, we’ve chosen not to bring on new wells that we’ve completed and, in other cases where we’re getting below the lifting costs, you more or less have to. It doesn’t make sense to lose money.”

Eresman also suggested that wells are unlikely to be put back into production until they can be done so economically.

Part of the problem is the industry is still seeing strong domestic production from a number of unconventional sources. Industrial consumption is likely to stay at current levels absent a sustained resurgence in manufacturing. Supplies could do an about face by the beginning of 2010 resulting from a lagged drop in domestic drilling. Though, any meaningful reduction in supply could arrive just in time to be short circuited by the Spring shoulder season. LNG imports are also expected to increase.

Many natural gas weighted explorers & producers (E&Ps) enjoyed a nice lift in price yesterday on the spike in natural gas prices. Despite this, natural gas prices will likely remain weak in the short-term for the reasons listed above, perhaps getting some lift at the beginning of 2010 if the economy begins to show more strength. Despite yesterday’s sharp rise in the price of natural gas, share prices of natural gas E&Ps like Chesapeake Energy (CHK), Devon (DVN), EOG Resources (EOG), EnCana Corp. (ECA), Petrohawk Energy (HK), Southwestern Energy (SWN) , Ultra Petroleum (UPL), and XTO Energy (XTO) are unlikely to show sustainable strength until the front month price of natural gas rises and stays above $4.50 bcf for a few weeks. The 12-month futures strip currently shows $4.793 bcf according to yesterday’s EIA report.

Related: Financial Post, Bloomberg