Southwestern Energy Co. (SWN): Longer lateral success adds further confidence in Fayetteville upside - Goldman Sachs - 11/02/07
What's changed
As part of its 3Q 2007 earnings update, Southwestern indicated that based on recent success from longer lateral wells at the Fayettevile Shale, it sees 2.0-2.5 Bcfe in estimated unbooked recovery from wells drilled with 3,000' laterals with a well cost of $3.3 million. This compares to standard well expectations of 1.3-1.5 Bcfe for $2.1 million.
Implications
Recent positive well results were not a complete surprise due to public data, as highlighted in our October 28, 2007 note on the Fayetteville. However, the combination of the consistency of wells drilled in the last month with management's confidence in its revised type curve justifies, in our view, the share price's outperformance. Going forward, we believe that Southwestern shares will continue to trade on the extent of the potential usage of longer laterals throughout Southwestern's acreage block and the ultimate spacing and recovery factor by which the Fayetteville can be developed. While finding and development costs are not improved solely from using longer laterals versus previous guidance, we see greater present value via producing resource more quickly, as well as greater resource potential overall.
Valuation
We believe a dip in Southwestern shares could represent a buying opportunity. We are raising our 12-month DCF-based target price to $61 from $54 previously based on improved Fayetteville well economics, representing 15% upside from current levels. Southwestern trades at 9.5x 2008 EV/debt-adjusted cash flow versus about 9.0-14.0 range for unconventional gas E&Ps. We rate Southwestern Neutral relative to an Attractive coverage view.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
