Last Friday, I alerted investors that I was buying $50K of Southwestern Energy Company (NYSE:SWN) at $5.42. Southwestern has been on my radar screen for a few weeks now, looking for the right entry point to put capital to work. My other pick is Chesapeake Energy (CHK), which is up 20% since I recommended it in a December 13th article titled Buy The Shakeout.
Super majors in rally mode
While I love the big majors like BP (BP) and Royal Dutch Shell (NYSE:RDS.A), they both have been in rally mode since August. BP is up over 30% since I pounded the table to buy under $34 in an article you can view here.
I still love the BP story, but the stock will likely consolidate some gains and may trade flat to down near term as investors digest what should be a fantastic earnings report. On a technical level, it looks a little stretched, but I love the BP story with its 7 new major projects that came online in 2017.
Why do I share the article on buying oil stocks in capitulation? Because I want investors to see what my views were on particular stocks at crucial buy points and where they currently trade so they can make their own decisions on whether to give credence to anything I have to say.
I see the oil rally continuing on global strength and high demand for the coming year. WTI is in a new trading range in the $60s with crude breaking out to late December 2014 levels. If WTI hits $70 in the coming weeks, then oil and gas stocks will continue to rocket higher.
Investors that sold nat gas last week in the $2.70 level are regretting that decision as nat gas rallied nearly 20% in a few days to close the week at $3.20.
Southwestern Energy is a Bargain at this level
SWN is an energy company engaged in natural gas and oil exploration, development, and production. The Company operates through two segments: Exploration and Production (E&P) and Midstream Services.
Its operations in northeast Pennsylvania are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. Through its affiliated midstream subsidiaries, it is engaged in natural gas gathering activities in Arkansas and Louisiana.
With a forecasted PE of 7.4, SWN is undervalued, in my opinion. The company has nearly $1B cash and a revolving credit line of $800M, giving the company plenty of financial flexibility for 2018 and beyond.
Last year"s losers, this year"s winners?
Southwestern Energy and Chesapeake were both horrible performers in 2017, with SWN down 44% over the last year. Chesapeake had similar dismal performance, down 48% last year. However, both stocks have rallied over the last month with CHK up 21% and SWN up 7%.
I want to show these graphs for comparison as I believe that Southwestern is poised to rally 10% to 40% over the coming weeks and months.
S: Schwab
Here is the same clip from CHK.
Source: Schwab
One thing I want to point out to interested investors is this: One week ago, the CHK clip was nearly identical for SWN with Chesapeake down 48% yoy. The shakeout in Southwestern Energy was just that; a shakeout, I believe that anyone buying at this level will participate in a strong reversion trade that will take the stock back to the $7 level in the next 90 days.
This chart above compares nat gas with CHK and SWN. One can see the divergence with CHK up 12% nat gas up 9% and SWN -2%. There are times in the market when a stock makes that final shakeout coming off a multi-year low that screams BUY. In my opinion, Mr market presented this opportunity in Southwestern Energy last Friday when the Dow was up 220 points.
The bottom is in for SWN
Here is another technical chart showing the multi-year bottom that I now believe is firmly in place. Here is a 3-year chart for your viewing.
It"s easy to see why investors would be scared away and disgusted with Southwestern"s stock performance over the last three years. One can see the drop in late 2015 and 2016, followed by a sharp rally back to $16 and a prolonged sell-off that wiped out anyone long the stock in 2017.
The past is history, the future is a mystery, and the present is a gift, which is why they call it the present. In my view, the time to buy SWN is NOW!
The time to buy Chesapeake was last week at $3.92, or December 15th at 3.51. The stock is now in breakout mode after several false starts with another 20% rally in the cards near term.
Nat gas broke out last week with a Friday close of $3.20 up from $2.76. Southwestern did not participate in the rally as option expiration Friday took January 12 $5.50 call options to ZERO.
Positive catalyst to move stock back to $7
Southwestern is actually making a positive cash flow while Chesapeake is still striving to be cash flow positive. I am long both stocks but have doubled up on SWN as I feel it is in a better position with $1B in cash as of the latest earnings report. I encourage investors to click here for the investor conference to gain more insight into company operations.
The company is doing very well in the Appalachia region with resource potential of 45 Tcfe over 4,200 locations.
Here is another clip from the November investor conference showing great improvement in EBITDA which I expect to continue for the foreseeable future.
By clicking on the chart above, investors can see that the turn in profits and revenues is in the works. This is the time, in my opinion, to steal shares of SWN. One can see the revenues are up $642M from $1.752B to $2.394B. Earnings are growing at a strong rate with adjusted EBITDA up nearly 100% to $902M from $407M in the year-ago period.
Earnings are moving in the right direction, why the disconnect in share price?
The disconnect is just that, many times the market will wait while a company is making the turn back to positive earnings. A stock will make a good move up on positive earnings results, sucking in investor dollars only to sell off; testing the mental will of those weak-handed players long the stock.
One more 6-month chart to help you understand why I believe this is the ultimate buy point in SWN.
Here is the story told through the charts of behavioral finance. It is clear to see this triple-bottom that has occurred over the last six months. Remember, the bottoming process takes time. Multi-year bottoms like this are excruciating for shareholders, the market rallies 100s or thousands of points while the stock you are stuck in goes nowhere.
In this case, the stock bottomed at $4.90 in late October, then came a pretty good earnings call, which took the stock to the mid $6.70 level where it pierced the 186 and 200 DMA. Investors then experienced tax loss selling that took the stock back to the low $5s where it traded for 5 days before rallying to $6. Last week"s little capitulation to $5.37 was in my strong opinion, the shakeout before breakout.
Conclusion
Southwestern Energy and Chesapeake Energy offer a fantastic entry point for a substantial rally. Higher oil and nat gas prices should bode very well for both companies bottom line. Southwestern Energy has the better entry point right now, Chesapeake had the best entry point a few weeks back at $3.52.
Both companies are greatly improving profit margins, and it"s only a matter of time before the market takes notice. I believe the bottom is in for both of these beaten down stocks, and the past is not the future.
I see a strong 25% to 50% rally coming in these two 2nd tier stocks that have under-performed the market over the last 12 months.
I continue to like BP and Royal Dutch Shell. They have already rallied 30% and are a hold, in my view. I am a buyer of BP on weakness or a violent sell-off in the markets.
As always do your own research and always have an exit strategy in place before making any trade.
Disclosure: I am/we are long SWN, GE, CHK, LYG, BP, HABT, MDXG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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