Southwestern Energy Downgraded To Sell-Equivalent By Stephens: Here's Why

Stephens' Will Green downgraded the rating on Southwestern Energy Company SWN from Equal-Weight to Underweight. Against the backdrop of commodity weakness, the company announced several strategic initiatives during its 4Q15 update. Management said that activity would be halted in 2016, while the company focuses on cost restructuring, as well as restructuring of its asset base and transportation agreements. Green believes that although Southwestern Energy would be able to generate cash flow worth $450-$500 million in this scenario, the company would exit 2016 with year on year production declines of 27 percent in 4Q16. "While we believe a restructuring likely leads to a leaner Company when macro conditions improve, the restructuring ultimately leaves a lot of long-term uncertainty with the asset base and outlook," the analyst pointed out. Southwestern Energy also announced that it would undertake a workforce cut, targeting annual savings worth $150-$175 million. In addition, the company intends to defer investment in 3.7 million acres for exploration. "The Company noted that it has been in the process of negotiating certain existing gathering and transportation agreements that could potentially save it ~$35 million in 2016. Additionally, these agreements could save additional capital if volumes increase," the Stephens report added. The EPS estimates for FY16 and FY17 have been reduced from $0.10 to $(0.57) and from $0.47 to $(0.03), respectively.