Southwestern Energy Company (SWN 0.14%) is really bullish on the future of natural gas in America. That's quite evident by the fact that the company recently spent well over $5 billion to acquire additional natural gas properties in the Marcellus Shale. It's even more evident by taking a glance at the company's three-year spending outlook, which will see the company invest another $9.1 billion to drill about 600 new wells each year for those three years. Southwestern Energy sees that capital driving profitable growth for its investors because of the bullish future it sees for natural gas.
One slide says it all
In discussing the company's growth plans, CEO Steve Mueller had a lot to say about why the company is so bullish on its natural gas business. He did note that natural gas supplies in the U.S. have been heading higher for years and that this has been viewed as being a problem because it's keeping prices down. That being said, he wanted investors to look past supply and look at demand. To get his point across, Mueller said, "Supplies are certainly increasing, but as shown on [the slide below], the demand growth has matched supply growth since the demand low in mid-2009."
Source: Southwestern Energy Company Investor Presentation.
Mueller noted that it's not like America is currently oversupplied with natural gas. We still import natural gas from Canada to meet some of our demand, which has continued to increase as utilities are switching from coal to gas because of both its lower cost and better emissions profile. Mueller sees demand continuing to increase in the years ahead:
Almost everyone agrees demand will continue to grow through the end of the decade, mainly driven by new gas power generation and exports, but also including additional industrial growth that takes advantage of the lower energy costs compared to the rest of the world. To that point, most of the major population and industrial centers in the world do not have local, inexpensive energy and are required to import coal, oil and natural gas. The United States is different in having sufficient natural gas to allow exports without increasing the product prices here at home. This creates a permanent advantage for us of at least $5 per [MMBtu] to the nation because we do not need to liquefy and transport the natural gas we use.
He notes that demand in the U.S. is expected to keep growing as new gas power plants come online, along with additional demand for gas from both exports and industrial users. This increase in demand has the potential to fuel strong returns for Southwestern Energy as it supplies low-cost gas to the nation.
How Southwestern Energy benefits from demand growth
Mueller noted that his company is one of the best when it comes to turning natural gas production growth into profitable growth for investors, even at lower natural gas prices. He pointed this out:
The period from 2012 to 2014 has shown us that the industry has a difficult time economically supplying gas to meet the increased demand created by gas prices in the low $3 range, but we have ample production to match demand with long-term prices around $4. That same demand also confirms that Southwestern Energy can generate great returns across the spectrum of those prices. In fact, as shown on [the slide below], Southwestern had the highest return on equity of any of our peers in 2013 when the actual NYMEX price averaged $3.67. The high quality of our recent acquisitions adds to that ability to thrive in similar volatile environments.
Source: Southwestern Energy Company Investor Presentation.
As that slide notes, Southwestern Energy earns some of the best returns in the energy industry. The company expects those returns to actually improve thanks to the addition of the liquids-rich Marcellus Shale and Utica Shale dry gas plays to its portfolio, which it recently acquired. The company sees those additions enhancing its ability to deliver profitable growth, which is why it is confidently investing billions of dollars over the next three years to bring additional gas production online as it seeks a greater share of the growing demand for natural gas.
Investor takeaway
Southwestern Energy sees strong demand for natural gas in the U.S. continuing through the end of the decade. The company plans to be a key supplier of this demand growth by plowing more than $9 billion into new natural gas wells over the next three years. It sees this as money well spent. Its returns on that capital should be exceptional since it can earn a lot of money drilling for natural gas because of its high-returning gas plays.
