This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
With a natural gas rally appearing to be "inevitable," Mizuho selected Southwestern Energy (SWN) as a top pick in the exploration and production sector.
Mizuho's Timothy Rezvan initiated coverage of SWN with a Buy rating and a $20 price target. Shares were rising by more than 1% during the trading session Thursday afternoon.
Rezvan wrote in a research note Wednesday that there is "no ignoring the fact that management deftly recapitalized the balance sheet this summer." The Mizuho analyst believes that the company is at an inflection point and ready to transition back into production growth in 2017, adding that the West Virginia Utica Shale could be a potential catalyst for that year.
That being said, despite management efforts raising capital during the third quarter, the company "remains over 3x levered (pro forma)."
There are other risks Southwestern faces as well, in particular the risk of another sustained decrease in natural gas prices "could make its drilling program economically unfeasible and result in low/no production growth," Rezvan wrote.
But the Mizuho analyst is bullish on the outlook for natural gas, even through 2018. Rezvan cited the secular demand increases from U.S. industrial/utility consumers, increasing exports to Mexico, visibility on liquefied natural gas (LNG) export growth and the low gas rig count.
The Natural Gas Supply Association (NGSA) projects overall demand will rise to a record average of 92.3 billion cubic feet per day ("Bcf/D"). That's because this winter is forecast to be 12% colder than a year ago, boosting the demand from the residential and commercial sectors. Exports to Mexico and LNG exports will also increase compared to last winter, according to the NGSA.
While the world gets ready for a colder winter, it will likely heat up Southwestern Energy's pocket books -- and could help with the company's high debt load.
