SWN drills for rebound

Ditching Fayetteville utility could help

Slammed with a royalty lawsuit for more than $100 million, Southwestern Energy Co. administrators agreed to ultimately change the direction of the business.

A casualty of the lawsuit, Southwestern subsidiary Arkansas Western Gas Co., still sits on the market. Analysts believe the sale of the distributor could launch a major rebound for the company.

Frost Securities Inc.’s research department said the utility should fetch $150 million for Southwestern Energy, bringing the company’s total net asset value to $13 per share or $334 million total, said Scott Burk, a Frost Securities E&P analyst.

“The sale of the utility is hampering the stock value,” Burk said. “[After the sale] I’d expect to see an upward move of five bucks immediately.” Recent stock prices for Southwestern Energy have ranged between $7.31 and $8, compared with market prices from the early 90’s that rarely dropped below $16 per share, and rising at one point as high as $48 per share.

Before 4,000 plaintiffs sued, angered because they thought Southwestern Energy underpaid for royalties, the publicly held firm was comprised of an E&P venue and natural gas distributors. However, the market indicates that won’t cut it anymore.

Three months have passed, and there’s still no mention of a buyer.

Company president and CEO Harold Korell waits patiently and tight-lipped for the next big step.

“We’re in a period of such transition,” Korell said. “The name of the game is uncertainty.”

Although Korell had no comment on perspective buyers or Fayetteville-based Arkansas Western Gas’ price tag, analysts lean toward Southwestern Energy’s success.

E&P analyst Kenneth Beers of Johnson Rice & Co. in New Orleans agrees that success seems probable for Southwestern Energy.

“They’ll be able to fill the hole,” Beers said, “to come out of it as a pretty strong E&P company.”

Korell passes go

Utilities probably wouldn’t fit into Korell’s strategy during a game of Monopoly. Just as it is in the real world, the game’s utilities offer fairly stable cash flow but minimal opportunity for expansion. Locating around Park Place and Boardwalk, however, offers exponential development opportunity.

Houston is the Boardwalk of the oil and gas industry. Burk estimated 30 mid to large-capital E&P companies headquarter in Houston, and Southwestern Energy could settle into the networked community easily.

Southwestern Energy’s corporate offices will “probably” head for Houston after the sale of the utility, Korell said. E&P offices for the company have been licensed for business in the city since 1978.

Now, the company wavers on potentially explosive success in the E&P business.

Since January of 1999, when Korell stepped up as CEO of the company, Southwestern Energy’s E&P structure has taken the spotlight. Former CEO Charles Scharlau’s interest in the company balanced Southwestern Energy between E&P and the natural gas distribution, but Korell’s focus lay mainly toward E&P.

After taking Scharlau’s position, Korell instigated a major overhaul within the company, replacing almost everyone in exploration and half the staff for the entire E&P division.

Proving his confidence in the company’s growth, Korell spent more than $37,000 on 6,454 shares of stock in January of this year.

“The growth opportunities on the E&P side are definitely more attractive,” Burk said.

In May Southwestern Energy sold their Missouri utility, Associated Natural Gas Co., to Dallas-based Atmos Energy Corp. for $32 million. A division of Arkansas Western Gas, the utility supplied natural gas to 48,000 customers.

Profit from the sale hardly alleviated the $66.7 million owed after taxes from the royalty lawsuit, and Southwestern Energy reported a net loss of $64.2 million for the second quarter of 2000.

The lawsuit over royalties claims only speeded up Korell’s ultimate plan of action, Burk said. “They would probably have sold [the utilities] later, sometime down the road,” he said.

Southwestern Energy expected to win the Arkansas Supreme Court appeal, and the denial prompted immediate action from the company. Less than a week after the judgment came down, the “for sale” sign popped up for Arkansas Western Gas. The company also indefinitely suspended payment of any quarterly dividends on its common stock.

Now, the budding company faces another class action lawsuit from the same court that convicted it in the $109 million case. Nine people filed suit in late August against Southwestern Energy and its subsidiaries in Sebastian County Circuit Court in another dispute over royalties.

Southwestern Energy refuted the charges concerning the Stockton Gas Storage Unit in Franklin County.

Burk said a small suit shouldn’t harm the company, adding that utilities get sued all the time. Focusing effort on the E&P division is a good move for the company, he said.

Holding the Bag

When the sale of Arkansas Western Gas is final, only Northwest Arkansas stands to lose in the deal. Forfeiting a big company like Southwestern Energy hurt’s the local business community.

“We will still have a presence in Arkansas for sure, but nothing like we have now,” Korell said.

In 1999 Southwestern Energy employed five of the 75 highest paid executives in Arkansas, and Korell’s compensation ranked No. 19 at $636,811. Chief operating officer Alan Stevens followed Korell at No. 32 with $429,585 in total compensation.

Southwestern Energy employs more than 650 people in the area. Korell has said that some jobs will be lost with a move to Houston, but no definite numbers have been declared.

If Southwestern Energy heads for Texas, corporate positions would most likely move with it.

However, a large utility company could purchase Arkansas Western Gas and move the whole gas operation out of state.

Currently, the E&P division of Southwestern Energy operates mainly from three drilling ventures, with drilling in the Permian Basin program proving most successful. One of the wells on site in New Mexico produces about 190 barrels of oil per day and 180,000 cubic feet of gas per day, according to company records.

Other sites for Southwestern Energy’s E&P include the Arkoma Basin and the Gulf Coast.

While investors wait to see where the sale of the utility will lead the company, analysts such as Burk believe in the business’ potential.

“We think they’re a nice little company,” Burk said.