While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Southwestern Energy Company (NYSE: SWN ) sank 3% today after Goldman Sachs downgraded the independent energy company from conviction buy to neutral.
So what: Along with the two-notch downgrade, analyst Brian Singer lowered his price target to $51 (from $58), representing about 12% worth of upside to yesterday's close. So while momentum traders might be turned off by Southwestern's pullback in recent weeks, Singer's call could reflect a sense on Wall Street that headwinds from Marcellus pricing will continue to pressure the stock.
Now what: According to Goldman, Southwestern's risk/reward trade-off is pretty balanced at this point. "We anticipate greater near-term volatility in realizations for NE Marcellus producers relative to SW producers which in part drives our decision to diversify into SWPA/Utica with our RRC upgrade," said Singer. "Within NE PA, we prefer [Cabot Oil & Gas (NYSE: COG ) ] over SWN as we believe SWN's Fayetteville Shale assets (55% of resource and 75% of production) are close to fully priced in." When you couple those headwinds with Southwestern's P/E of 20, it's easy to understand Goldman's cautious stance.
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