Goldman Sachs Ratings A Pair Trade?

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Goldman Sachs provided commentary on the natural gas industry by upgrading Range Resources RRC to Buy and downgrading Southwestern Energy SWN to Neutral.

With similar market caps, this rating combination has the potential for a pair trade. In addition, Southwestern Energy has significantly outperformed the benchmark EPX this year while Range Resources has slightly underperformed.

Range Resources is up 1.02 percent on the Goldman Sachs upgrade. Goldman Sachs likes the company because it feels the market is too generally discounting natural gas. The note states, “we believe select producers can realize much lower differentials due to better geographical positioning or because they were early is signing beneficial contracts.” The note further explains that upstream investors are likely to enter positions because Range’s contracts will allow for relatively cheap growth.

Goldman Sachs’ $110 price target (23.2 percent upside) assumes brent is worth $100/bbl, $4.5/MMBtu Henry Hub gas and a 15 percent probability of a $125 take out.

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When analysts put Neutral ratings on stocks it can be hard to tell exactly what they mean. Because the banks do not want to risk potential investment banking revenue by damaging relations with a Sell rating, Neutral very well may mean Sell.

The Goldman Sachs note says, “Marcellus prices may be a greater headwind than tailwind. Going forward we see potential headwinds from greater volatility for SWN’s Marcellus price realizations relative to peers. We anticipate greater near-term volatility in realizations for NE Marcellus producers relative to SW producers.”

Along with lowering the company to Neutral, the analysts reduced the price target from $58 to $51. This is 8.6 times 2015 earnings and 8.1 times EV/EBITDA. Shares of Southwestern Energy are down 1.06 percent on the downgrade.

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Posted In: Analyst RatingsTrading IdeasGoldman Sachs
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