Southwestern’s shares slump as 2016 capital budget slashed by 80%

Shares in Southwestern Energy declined more than 9% in trading Monday following the company’s disappointing fourth quarter and yearly earnings results last week and a decision by the company’s new executive team to cut 2016 capital spending by a whopping 80%.

The dramatic companywide downsizing follows Southwestern’s decision in late January to lay off around 1,100 workers, including 600 workers in the company’s Fayetteville Shale play in Arkansas. That workforce reduction will create annual savings of $150 million to $175 million, company officials said.

The 2016 capital budget will slash spending in the Fayetteville Shale to only $140 million, down 75% from $565 million a year ago and well off recent years when the Houston driller’s annual budget in the Arkansas shale play easily exceeded $1 billion.

At the close of business on Monday, Southwestern shares (NYSE: SWN) were down 9.4%, or 60 cents at $5.78 as nearly 25 million shares traded hands. Over the past 52 weeks, the company’s stock has traded in the range of $5 and $29.61 per share.

FLEXIBLE RESPONSE
In 2015, Southwestern invested $565 million in the Fayetteville Shale, which included $481 million to spud 155 wells, all of which were company operated. In late December, the company shut down two drilling rigs in the Fayetteville Shale as the price of natural gas fell that week to its lowest level in more than 15 years.

Overall, Southwestern plans to cut its 2016 capital budget to between $350 million and $400 million, down 80.8% from $1.82 billion a year ago. Included in the 2016 capital spending program is a plan to cut the number of wells drilled in 2015 from 380 to zero this year, company officials said.

In a news release and conference call with Wall Street analysts, Southwestern executives said the plan is flexible and designed to be responsive to any strengthening in commodity prices. For example, a natural gas price spike of $0.25 per Mcf (thousand cubic feet) or an oil price increase of $5 per barrel would increase cash flow by approximately $185 million and $15 million, respectively.

“We will capitalize on our premier quality assets, significant hydrocarbon resource and strong liquidity position to proactively address the challenges presented by the current commodity price environment. Our strategic plan will enable us to optimize the business in today’s constrained environment while positioning us to outperform when commodity prices improve,” said Bill Way, Southwestern’s newly appointed CEO. “Looking ahead, we are dedicated to operational excellence and remaining flexible as we continue to pursue our objective of keeping our investing levels within cash flow.”

WALL STREET DOWNGRADES
Despite Way’s assurances, Southwestern received several downgrades by Wall Street research firms late last week and Monday as details of the company’s new cost-cutting initiatives emerged and caught some analysts off guard.

At the beginning of trading on Monday, RBC Capital Research and Raymond James both downgraded the Houston-based natural driller shares and yearly target prices, causing the company’s stock to drop more than 10% in the week opening session on the New York Stock Exchange. In a research report on Monday titled “Idling for Now,” RBC lowered Southwestern’s yearly price target from $10 to $9 a share after the Houston-based oil and gas company slashed its capital budget plan last week beyond expectations.

“Cash flow management dramatically reduces our production expectations. While a prudent decision, we think the declining asset base keeps a lid on SWN shares,” wrote RBC oil and gas analysts Scott Hanold and Kyle Rhodes. “The 2016 CAPEX budget of $350–450 million is down 80% from last year’s $1.8 billion. The size of the reduction was a bit of a surprise.”

In addition to RBC’s downgrade, Florida investment firm Raymond James cut its stock rating of the Houston oil and gas company to “underperform” from “market perform” on Monday. And following the company’s fourth quarter earnings report on Thursday, The Jeffries Group cut Southwestern’s yearly stock price target by four dollars to only $7 a share.

The New York City-based investment research house also downgraded the company’s shares from a “buy” rating to “underperform,” saying Southwestern’s much weaker-than-expected operational outlook causes “great concern” about the company’s financial condition, and that it had been “too optimistic about the (driller’s) ability to navigate weak macro conditions.”

Several other investment research firms that follow Southwestern have made changes or are expected to revise their current rating or equity positions in the former Arkansas-based oil and gas giant. Most of the revisions followed the company’s fourth quarter earnings report on Thursday when Southwestern reported an adjusted net loss attributable to common stock of $6 million, or two cents per share. Those earnings excluded a non-cash ceiling test charge on the company’s oil and natural gas assets of natural gas and oil properties of $2.6 billion. Including these items, the net loss attributable to common stock for the fourth quarter of 2015 was $2.1 billion, or $5.58 per share.

In explaining its strategic plan for 2016 following the earnings release, Southwestern officials said the dramatic cost-cutting initiatives would position the company for “long-term value creation.” Way said the company will pursue an operating plan that aligns its capital investment program with cash flows generated from operations.