Today, I'm going to talk about (and recommend), frankly, a bad natural gas company: Southwestern Energy (SWN). Stick with me here before throwing this idea out.
Concentrating as we have on oil and the ongoing recovery in certain oily exploration and production names (E&Ps), we have ignored natural gas for the most part -- mostly for good reason. Still, natural gas has staged a heck of a rally, albeit from insanely low numbers, and with it there have been some terrific potential gains in certain Marcellus and Utica players, provided we could have timed the entry right.
Sometimes, it's not about the quality of the stocks we buy (although it should be), it's about the underlying commodity that we're betting on. Nowhere is that more evident than in natural gas, where the price has ballooned from near $1.50/mcf to closer to $3 and now hovers around $2.75 -- taking even some of the worst, most badly leveraged natural gas producers with it.
But we have spent enough time in natural gas purgatory to begin picking at names. There is an ongoing upward pressure on price, reflecting summer heat, reduced injections and the current slow pace of pipeline building, best personified by the failed Williams Companies' (WMB) Constitution pipeline and Kinder Morgan's (KMI) Northeast Energy Direct pipes.
Moreover, the coming demand pressure on liquefied natural gas from Cheniere Energy's (LNG) two export plants and Dominion Resources' (D) planned Cove Point plant increases the likelihood for natural gas's price turnaround to be permanent, if not particularly fast.
So, where do we go?
Speaking of Cheniere, which I have already recommended and has nothing really to gain from natural gas prices going up, it still has benefited, for some crazy reason, from the natural gas move -- proving that the commodity can be more important than the company.
Among the true natural gas plays, I've always tended to recommend EQT Corp. (EQT), certainly the most solid of the natural gas frackers, but far from the sexiest. But for a trade, I believe recent circumstances make Southwestern Energy a worthwhile punt for another leg up in natural gas prices above $3 caused by a hot August.
Don't get me wrong, if there were a company that had more missteps than Southwestern, I'd be hard pressed to find it (except, perhaps, Chesapeake Energy (CHK)). The company expanded well beyond the time when natural gas prices, indeed when all energy prices, were in the process of collapsing. The worst buy in energy, not counting the Encana's (ECA) acquisition of Athlon Energy, might be the Southwestern's purchase of Chesapeake's Pennsylvania and West Virginia acreage in 2014 for $5.38 billion.
Without the cash or market to develop that gargantuan purchase, Southwestern was forced into a massive secondary offering in January 2015 at $23, well below the shares historical price but far above where they ultimately bottomed at near $5 earlier this year.
But it finally seems that Southwestern has shored up its balance sheet enough to weather the next two years of debt pressure no matter what happens to natural gas. The latest secondary offering of 86 million shares at $13 should finally provide the cash it needs to stop worrying about debt for a while, and worry more about delivering natural gas.
The chart, above, looks solid, at least to support of $11 -- relative strength index (RSI) numbers are about to turn as is the accumulation -- all good signs for a short-term move up.
I would have liked to buy SWN nearer to $5, but with natural gas suffering below $2/mcf, it was unclear how quickly the commodity would recover and therefore how long Southwestern and others had to live.
For quite a while, I wasn't sure how many of the Marcellus producers would have to go bankrupt to stabilize the production in Pennsylvania, and although I'm not entirely convinced that Southwestern will be the best survivor, this is a reasonable bet to make solely on the thought that natural gas is done going down for the near term.
I'm recommending SWN at $12.00.