JPMorgan Downgrades Southwestern Energy, Catalysts Have Run Out

• Southwestern Energy Company SWN have appreciated 11.67 percent over the past month, following a decline of 69.41 percent over the past year.
• JPMorgan’s Arun Jayaram has downgraded the rating on the company from Overweight to Neutral, with a price target of $8.
• Although the key catalyst for the stock has already played out, Jayaram believes that in the event that gas prices recover, the shares could see meaningful upside.

Analyst Aru Jayaram mentioned that the stock has “benefitted from aggressive cost reduction efforts unveiled by the new CEO in January that are set to shave $150 to $175 MM in annualized G&A, but these cost cuts appear appropriately discounted in the stock.”

Jayaram believes that the risk-reward is now balances, compared to peers, given expectations of the voluntarily lowered production, combined with material DUC inventory, would keep a check on increases in natural gas prices in 2016, with a potential recovery being pushed out to 2017 or 2018.

The analyst expects Southwestern Energy to guide to capex of $820 million for 2016, including $200 million in capitalized interest and G&A worth another $200 million.

“Given this limited capex program, we expect SWN to leverage its DUC inventory of 50 wells in Northeast Appalachia, 20 wells in Southwest Appalachia, and 45 wells in the Fayetteville Shale,” Jayaram added.

The 4Q15 and 2015 EPS and CFPS estimates have been revised to reflect the revised futures strop and reduced G&A costs.