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WIKI ANALYSIS
Southwestern Energy Company is an energy company focused on exploring and producing natural gas in the southwestern region of the United States.[1] It generates revenue through Midstream services that market its own produced gas and gathers fees associated with the transportation of natural gas to market. [1]
When gas prices were extremely high from July to September of 2008, reaching $147 per barrel in July [2], Southwestern Energy Company recorded $431 million in operating revenues for those same months [3]. This increase in the gas sales portion of the operating revenue for the third quarter of 2008 was a 17% increase from the second quarter and a 20% increase from the first quarter [3]. In addition to gas prices, Southwestern Energy Company's revenues are also influenced by natural gas consumption. During 2007, when natural gas consumption jumped from 60 to 64 billion cubic feet per day [4], Southwestern Energy Company increased its total operating revenues by 64% and operating income by 51%; from $763,112,000 to $1,255,131,000 and $237,307,000 to $358,079,000, respectively [5] From 2006-2007,
Company Overview
Southwestern Energy Company is an integrated energy company located in Houston, Texas and it has natural gas and crude oil exploration and production sites in Arkansas, Oklahoma, Texas, New Mexico, and Louisiana. [1] Southwestern Energy Production Company and SEECO, Inc., Southwestern Energy Company's wholly-owned subsidiaries, conduct most of SWN's exploration and production activities. [1] Conventional drilling occurs in the Arkansas part of the Arkoma Basin, and development drilling and exploration occurs in the Oklahoma part of the Akroma Basin. [6]
The company's Midstream Services segment include Southwestern Services Company and DeSoto Gathering Company. Southwestern Energy Services Company, SWN's gas marketing subsidiary Southwestern Energy Company used to distribute natural gas through its utility business, Arkansas Western Gas Company, however, on July 1, 2008 the Arkansas Western Gas Company was sold to SourceGas, LLC. [1] As a result of this sale, Southwestern Energy Company no longer distributes natural gas. [1]
Business and Financial Metrics
The company's revenues and operating income has increased significantly due to the rising price of gas and increase production from its exploration and production segment. [7] Its exploration and production operating revenue increased by 61% from 2006 to 2007, rising from $491,545,000, to $795,944,000.[5] Southwestern Energy Company's exploration and production operating revenue for the first 3 quarters of 2008 were higher than the same operating revenue for the first 3 quarters of 2007. Its E&P operating revenue was $1,147,915,000 for the first 3 quarters of 2008, as opposed to $547,189,000 in the first 3 quarters of 2007, which was an increase of about 110%. [8] Much of this higher revenue can be attributed to a 2008 third quarter net production of 90.4 Bcf(Billions per cubic feet) in the Fayetteville Shale play, an increase of about 57 Bcf from the 2007 third quarter net production (Bcf) from the Fayetteville Shale play [9].
The increase in gathering and production has also resulted in an increase in revenues from midstream services. Southwestern Energy Company's midstream services operating revenues increased from $475,207,000 in 2006 to $961,994,000 in 2007, an increase of about 102%.[8] Its revenue from midstream services increased from $651,283,000 in the first 3 quarters of 2007 to $1,728,254,000 in the first 3 quarters of 2008, an increase of about 165%.[8] Its operating income increased from $237,307,000 in 2006 to $358,079,000 in 2007, an increase of about 51%.[5] Its operating income increased from $244,518,000 in the first 3 quarters of 2007 to $661,403,000 in the first 3 quarters of 2008, an increase of about 170%. [8] The increase in marketing revenues was due to an 81.7 Bcf increase in volumes marketed, mainly from the Fayetteville Shale play, and also a 44% increase in the price for marketed volumes of gas [10].
One of the ways that Southwestern Energy Company reduces its operating costs is by gathering and producing its own gas and oil rather than purchasing it. In fact, of all the volumes that it marketed in the first 3 quarters of 2008, 95% of the gas was from its own wells [10].
Business Segments
Southwestern Energy Company was broken up into three segments: Exploration and Production, Midstream, and Distribution. [1]
Exploration and Production (38% of total revenue and 92% of its total operating income in the first 3 quarters of 2008) [11] Its exploration and production segment includes SEECO, Inc., Southwestern Energy Production Company, or SEPCO, and DeSoto Drilling Company, which are all wholly owned subsidiaries of southwestern Energy Company. [12] All drilling is done in the United States, with drilling being done in the Arkoma Basin, East Texas, the Permian Basin and the onshore Gulf Coast.[12] In the first 9 months of 2008, the exploration and production segment recorded a net revenue of $1,147,915,000 and an operating income of $661,403,000 in the first 3 quarters of 2008, an increase from $547,189,000 and $244,518,000, respectively, in the first 3 quarters of 2007.[11].
Midstream Services (58% of total revenue and 6% of operating income in the first 3 quartes of 2008)[11] The Midstream services segment creates revenue by natural gas transportation fees and by marketing its own gas production and occasionally some third party gas natural gas as well.[12] DeSoto Gathering company, a subsidiary of Southwestern Energy Company, engages in gas gathering activities dealing mainly with the Fayetteville Shale play.[12] Southwestern Energy Services Company(SES), Southwestern Energy Company's gas marketing subsidiary, captures downstream opportunities that come up due to marketing and transportation activity.[12]. The midstream services segment of Southwestern Energy Company recorded a net revenue of $1,728,254,000 and an operating revenue of $43,417,000 in the first 3 quarters of 2008, and increase from $651,283,000 and $6,399,000, respectively, in the first 3 quarters of 2007 [11].
Distribution (4% of total revenue and 2% of operating revenue in the first 3 quarters of 2008) Southwestern Energy Company sold its gas distribution subsidiary, Arkansas Western Gas Company, to SourceGas LLC for $224 million in 2008 and is no longer involved in gas distribution.[1].
Trends & Drivers
Fluctuating Oil and Gas prices Affect prices
The company is highly dependent on favorable market prices for gas, which tend to fluctuate significantly over time.[13] Gas prices are always rising and falling, as was demonstrated in 2008 when gasoline prices reached $147 a barrel and and then fell to $35 a barrel less than 6 months later. [14] Gas and oil extraction prices depend on factors such as market uncertainty, worldwide economic conditions, weather conditions, political conditions in major oil producing regions, especially the Middle East, and actions taken by OPEC. [15] Price fluctuations are bad because they can disrupt the market for natural gas and oil properties, as buyers and sellers have more difficulty agreeing on the purchase price of properties [15].
Despite Seasonal Consumption Decreases, Revenue Stays the Same
Although natural gas consumption is highest during the winter months and lower during the summer months, revenues for Southwestern Energy Company have increased steadily throughout the four quarters of the year, without rising excessively in one specific quarter. In 2008, SWN recorded a first quarter revenue of $524,106,000 [16], a second quarter revenue of $601,370,000 [17], a third quarter revenue of $682,999,000 [18], and a fourth quarter revenue of
Governmental Regulations Could Lead to Higher Costs of Operation
Since Southwestern Energy Company needs to drill underground for gas, it must abide by the Government's regulations.[19] It costs Southwestern Energy Company to comply with the regulations, and if the regulations change, the costs of abiding by them increase. [19] Also, since Southwestern Energy Company is the owner and operator of natural gas and oil properties, and an owner of gas gathering and transmission systems, they have to follow several federal, state, and local regulations relating to the discharge of materials and protection of the environment. [19] Such regulations could make Southwestern Energy Company liable for the cost of pollution clean-up, and could even result in cessation of operation in polluted areas, which could lead to increased costs of operation. [19] The government also has abandonment regulations, which Southwestern Energy Company could incur in the future. [19]
Competition
The natural gas and oil market is very competitive, and there is plenty of competition for reserve acquisitions, exploration leases, licenses, concessions, marketing agreements, equipment and labor. [20]
Below is a table comparing several metrics from some of the main players in the oil & gas industry.[21]
| ' | "Fiscal Year 2008" | ' | |||||||
| Market Cap (Billions)' | Quarterly Revenue Growth | Revenue (Billions) | Gross Margin | EBITDA (Billions) | Operating Margin | Net Income (Millions) | P/E | ||
| Southwestern Energy Company (SWN) | $9.24 | 129.50% | $2.21 | 61.32% | $1.23 | 38.03% | $535.38 | 17.54 | |
| CenterPoint Energy, Inc (Holding Co) (CNP) | $4.28 | 33.60% | $11.15 | 21% | $1.97 | 11.42% | $468 | 9.09 | |
| Newfield Exploration Company (NFX) | $2.35 | 62.30% | $2.29 | 81.54% | $1.71 | 46.54% | $391 | 3.22 | |
| Williams Companies (WMB) | $7.48 | 14.20% | $12.73 | 26.61% | $3.93 | 21.08% | $1,410 | 5.04 |
Footnotes
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Southwestern Energy Company "about SWN"
- ↑ Treehugger.com
- ↑ 3.0 3.1 2008 10Q Part 1 Page 4
- ↑ U.S. Total Natural Gas Consumption Chart
- ↑ 5.0 5.1 5.2 >2007 10K Item 7 page 39
- ↑ Yahoo! Finance
- ↑ Morningstar report Page 2
- ↑ 8.0 8.1 8.2 8.3 2008 9 30 10Q Item 2 page 32
- ↑ 2008 10Q Item 2 Page 32
- ↑ 10.0 10.1 2008 10Q Item 2 Page 37
- ↑ 11.0 11.1 11.2 11.3 September 2008 10Q Section 9 page 22
- ↑ 12.0 12.1 12.2 12.3 12.4 2007 10K Item 1 page 3
- ↑ SWN 2006 10-K "Risk Factors" pg 23
- ↑ Financial Times.com
- ↑ 15.0 15.1 2007 10k item1A page 22
- ↑ 2008 March 10Q Part 1 Page 4
- ↑ 2008 June 10Q Part 1 Page 4
- ↑ 2008 September 10Q Part 1 Page 4
- ↑ 19.0 19.1 19.2 19.3 19.4 2007 10k item1A page 27
- ↑ 2007 10k Item 1A page29
- ↑ Yahoo! Finance
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