Stressed Out: 'Too Optimistic' Jefferies Downgrades Southwestern Energy

 | Feb 26, 2016 | 10:15 AM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Despite its "bullish" gas view, an analyst team at Jefferies led by Jonathan Wolff has downgraded Houston-based Southwestern Energy (SWN) to Underperform from Buy and lowered the price target to $4 from $11.

"Clearly we were too optimistic about SWN's ability to navigate weak macro conditions," Wolff wrote in a note released on Friday.

Southwestern released fourth-quarter earnings and a 2016 outlook after the close Thursday. Losses were $5.58 per share, or $0.02 per share when excluding a $2.6 billion impairment of natural gas and oil properties.

"We will continue to optimize our performance by focusing on our core assets and operating efficiently, while we take appropriate actions to position Southwestern to outperform when the pricing environment improves," CEO Bill Way said in the earnings statement.

In a separate release on Thursday, Southwestern reiterated its plans halt its drilling activities. The company acknowledged that the layoffs it announced earlier this year will save it $150 million to $175 million annually and that it is continuing to evaluate other savings opportunities, which could include reviewing current agreements.

For 2016, Southwestern is projecting natural gas and oil prices of $2.35 and $35.00, respectively, which is down from $2.66 and $48.80 in 2015. The company projects capital investment in the range of $350 million to $400 million, down from $1.83 billion in 2015.

"With the Company's focus on balance sheet strength and capital discipline, activity levels in 2016 will be driven by the commodity price environment," Southwestern said in statement, reiterating that it is not currently running any rigs through its portfolio.

Despite measures Southwestern has taken to improve its financial position, Wolff wrote some may have come too late. Of the company's announced plans to lay off 45% of its workforce, Wolff wrote:

"The restructuring effort may have come too late given the now urgent need to address lofty debt levels rather than focus on maintaining the asset base."

By Wolff's measure, Southwestern is levered nearly 10x, based on the company's $4.7 billion net debt load and the company guiding EBITDA of $450 million to $500 million in 2016.

Shares of Southwestern Energy plunged 18% in early trading Friday.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Chesapeake Energy Earnings Herald Rough 2016

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