This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
Despite a particularly ugly start to the new year, a member of Real Money's "Stressed Out" index managed to be the top performer on the S&P 500 in the first month of the year.
Shares of Texas-based Southwestern Energy (SWN) climbed 25% in January while the S&P 500 fell 5% over the same period. There are many reasons for Southwestern's rally, though it is too soon to say if the company is ready to be moved off of the "Stressed Out" index.
On Jan. 6, the company appointed Bill Way as CEO, succeeding Steve Mueller, who plans to retire in May 2016. Previously, Way served as president and COO of the company. The stock closed down on that day and experienced other down days as oil prices continued to fall. (Southwestern Energy is primarily a natural gas producer but in recent months, anything that has touches oil has fallen.)
"I recognize these are difficult times for our industry and for SWN," Way said in a statement announcing his promotion. "We are committed to investing within our cash flow, stabilizing our debt, reducing our cost structure, and addressing our balance sheet as we move forward."
Soon thereafter, on Jan. 21, Southwestern Energy announced plans to lay off approximately 1,100 workers, or 44% of its workforce due to lower anticipated drilling activity. So far the company has no rigs in operation and it has not yet finalized its capital budget and operating plan for the year.
While the company said it expected to realize one-time costs ranging between $60 million and $70 million due to severance arrangements, it expects to save $150 million to $175 million on an annual basis. The stock experienced a "bad news is good news" rally due to the layoff news, as well as the recent rally in oil prices.
Indeed, the long-term prospects for Southwestern Energy could be favorable. Drew Venker, an analyst at Morgan Stanley, characterized the layoffs as "the right move" but "the start of a very painful path" in a note released last week.
Similarly, Real Money's resident chartist, Bruce Kammich, noted that the recent trading activity in Southwestern Energy suggest that stronger hands are buying shares from weaker hands.
That said, debt remains a problem for Southwestern Energy, the company's expected leverage ratio for 2016 is 6.3x according to Morgan Stanley's analysis, which is higher than it's levered gas-weighted peers, which are levered 4.9x.
Additionally, Southwestern Energy is rated D by TheStreet's Quant Ratings service due to its deteriorating net income, high debt management risk, and weak operating cash flow.
While Southwestern Energy's recent rally has not gone unnoticed, Real Money will be keeping an eye out for its 2016 capital plan -- and how well its able to stick to it.
For more on Real Money's 20 distressed companies to watch:
- Stressed Out: Introducing Real Money's Distressed Index
- Stressed Out: Lending Club Shows That Main Street Fears High Yield Debt Too