A stock that could get some play in the next day or two is SWN.
The New America
Monday, January 5, 2004
It's What You Make, Not What You Spend
BY ALAN R. ELLIOTT
FOR INVESTOR'S BUSINESS DAILY
Cost control, Harold Korell will tell you, is one nasty word.
"I remember from my days at Tenneco when somebody would say, 'You've got to cut costs 10% this year,' you know: cost control," Korell said. "Then it's like, 'Oh, I'm getting whipped again.'"
Whipped is what Southwestern Energy Co. (SWN) was getting when Korell arrived as chief operating officer in 1997.
Now Southwestern's chairman, president and chief executive, Korell has spent seven years training a team able to innovate its way clear of the weak-kneed earnings and ponderous debt that has plagued the Houston-based natural gas exploration and production (E&P) operation.
As winter season gas prices hoist the entire industry toward what could be a record year, Southwestern appears to be finding its stride.
In February, a company equity offering brought in $103 million in capital. With its gas coffers full, underperforming assets sold off and a lean-times cost structure in place, Southwestern turned to its high return wells in the Overton field in East Texas.
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Image: Gas Play
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The influx of capital boosted the pace from 18 new Overton wells last year to as many as 56 for 2003.
"What the equity did for us was it jump-started us," Korell said. "This year we will produce 12 to 13 BCF (billion cubic feet of gas) of gas just out of Overton. Last year we only produced about 6 BCF."
The 75-year-old company, originally a gas utility in Fayetteville, AR., had struggled through the 1990s with a sporadic show of improvements.
Korell arrived to find a crumbling exploration and production operation, dependent on Southwestern's utility operations for success.
The new hire was a graduate of the Colorado School of Mines, a respected engineering and science university, with 22 years of combined experience at Mobil Oil — now Exxon Mobil Corp. (XOM)— and Tenneco Oil Co. During the early 1990s, Korell helped manage the turnaround of Houston-based American Exploration Co.
Then, just as he set to repair Southwestern's E & P arm, the company was hit with a class action lawsuit. The contract dispute over royalties owed by the utility business to a certain set of shareholders ended when the court ordered Southwestern to pay a $109 million settlement in June of 2000. In spite of the nosebleed spike in gas prices that year, the loss amounted to more than 30% of annual revenue.
Korell bypassed the term cost control, but kept his eye on the prize, hiring 100 fresh E & P recruits - geologists, engineers and geophysicists - and drilling them to innovate according to one simple rule: every dollar invested should earn a minimum $1.30 return.
Every project and penny spent ran through the precept. The company sold its Oklahoma holdings in last year, cutting gas production by 2.5 BCF but freeing capital for projects that would earn their keep. At auctions for holdings that would add new reserves, Southwestern would walk away the minute bids rose too high to appease the rule.
"Somebody might be in love with that project because they've worked to develop that idea for the last two months," Korell said. "But if it doesn't meet the hurdle rate, we are not going to invest in it."
Finding costs fell from $2.50 per thousand cubic feet to $1.08. E & P analyst David Heikkinen with Hibernia Southwest, says that places Southwest among the most efficient operators in the business.
"They are in the top five overall of the 21 companies we follow," Heikkinen said.
But the class-action settlement had jacked-up Southwestern's debt to unsustainable levels. The company inched-ahead, using its gradually improving cash flow to fund development. The equity sale in February helped pay down debt from $343.4 million to $225 million, and finally freed Korell to bring his company's resources to bear.
The pay down lowered Southwestern's debt-to-capital ratio from a harrowing 66% at the end of 2002 to 45% at the end of the third quarter. Capital expenditures jumped from $92 million to $174 million. Korell said the company intends to keep its debt at 40% to 50% of total capital, while cash flow from increased production should be sufficient to maintain the current level of spending in 2004.
In the third quarter, earnings were 25 cents per share, compared to 5 cents a year ago. Revenue was $71.1 million, up 39%.
What happens when gas rates drop next spring? Friedman Billings Ramsey analyst Amir Arif said the company has more than half its production hedged at roughly $4 BCF. It is also growing production ahead of the industry average, Arif said, projecting 20% more production next year and 17% in 2005.
"The rest of industry has been rallying on back of the commodity price alone, not on their production growth outlook," Arif said.
About 7% of capital spending goes to developing projects beyond the current 2 to 3 year scenario. That is the make or break horizon that will determine whether Korell's company can maintain the momentum that brought it out of the hole.
"The challenge for us each year is to have the people of this company continue to generate the kind of opportunities we have in the past four or five years," he said. "So that we can reinvest our cash flow wisely, back to our equation."
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From a technical point of view, I can't say that the indicators are very encouraging. However, the 10 day exponential moving average has served as a strong level of support throughout this recent runup. If the trend is to continue, the price would need to move up in the next day or two.
This stock has been a leader performance wise and you like to see the leaders bounce off support levels. When the leaders drop below support, it's a major clue that the sector is turning weak and profits should be taken.
stockcharts.com[h,a]daclyiay[pc10!b50!f][vc60][iut!Lh14,3!La12,26,9]&pref=G
We'll see how she goes.
dabum |
