What: Shares of Southwestern Energy Company (NYSE:SWN) were down 11% in June. Putting the most pressure on the stock was weak data points in the natural gas market. Those weak data points are putting downward pressure on the natural gas price, which has the potential to weaken Southwestern Energy's cash flow.
So what: Natural gas production in the U.S. continues to surge and is expected to set a new production record this summer, according to the Natural Gas Supply Association. While demand for natural gas is also expected to set a new record, demand still isn't as robust as supply. In fact, there are currently more than 2.5 trillion cubic feet of natural gas in storage, which is 34.6% higher than last year's levels. This oversupply is putting downward pressure on natural gas, which is now below $3 per mcf.
That sub-$3 natural gas price is a blow to Southwestern Energy, as the company was banking on a $3 gas price to drive net cash flow of $1.6 billion this year. In fact, if the current price of around $2.75 persists, it could reduce the company's net cash flow by upwards of $200 million this year. Given that stock valuations are based on cash flow and earnings, this projected reduction in earnings is weighing down Southwestern's stock valuation.
Now what: At the moment, the natural gas market is oversupplied, which is putting pressure on the natural gas price. That pricing pressure is being felt by producers with Southwestern Energy's cash flow now potentially taking a bigger than expected hit this year. Given the current outlook, there's no near-term catalyst on the horizon to send natural gas higher, suggesting Southwestern's stock price could stuck be in neutral for a while.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.