Monday, January 23, 2012

Southwestern Energy (NYSE:SWN): Peak Negativity; Upgrading to OUTPERFORM - BMO

BMO Capital is upgrading Southwestern Energy (NYSE:SWN) to Outperform from Mkt Perform with a $40 price target calling for Peak in negativity.

- BMO says the change in rating reflects a potential larger value creation event beginning to unfold and which itself is not grounded in natural gas. Their recommendation also hints of the contrarian.

The former speaks to Southwestern’s exploration efforts targeting the Lower Smackover Brown Dense oil formation. Leasehold totals ~500k net acres today. Big footprint. Completion operations commenced on the first horizontal test, with flow rates expected at time of 4Q11/2011 earnings. Two other wells are expected to have been drilled by that time. Talking late February on news flow. Talking potential catalysts on the horizon. The latter speaks to natural gas for which Southwestern Energy is somewhat synonymous. No hiding it. By no means do they imply a change in their less-than-bullish stance on natural gas with this change in recommendation, they say. The firm is simply pointing out the torque SWN affords to any tightening of the supply/demand balance before winter’s end, however temporary the resulting higher commodity price. They do take some comfort that Southwestern has proven to be one of the lowest-cost, highest-margin producers among independents. (Firm puts it in the “survivor” camp among natural gas producers.) They expect to see the same approach to developing the Brown Dense oil resource play. BMO believes a favorable risk/reward now exists for investors to gain exposure to potential near-term catalysts for the shares that could come from successful exploration results, plus torque to any potential, albeit temporary, recovery in domestic natural gas prices. The shares are down ~30% since the start of the winter heating season(November 1) and the multiple has contracted to a 12-month low of ~5.5x.

BMO's estimates are unchanged from those last published January.

Notablecalls: Today is natty day. This comes after Chesapeake (CHK) vowed to curtail Marcellus drilling, sending natural gas prices way higher in minutes. One glimpse at US Natural Gas Fund (UNG) and you see it's a coiled spring.

So, BMO gives you a reason to buy SWN today - says there's a potentially big catalyst waiting in Feb. Calls it best-of-breed, leveraged to natty.

The whole space will be on fire in the n-t. I see SWN trading $31+ today.

Another trader's favorite is Range Resources (NYSE:RRC)

1 comment:

jimmy jam said...

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