What: Shares of Southwestern Energy (NYSE:SWN) jumped nearly 14% by 10:45 a.m. ET on Thursday. Fueling the rise was the announcement of some significant belt tightening by the company as well as some good news from the natural gas market.
So what: The big news is that Southwestern Energy will lay off 1,100 employees, or nearly 40% of its workforce. It is doing so largely because it is currently not operating any drilling rigs and has yet to finalize its capital budget and its operating plan. This is a dramatic change for a company that had been drilling hundreds of wells per year to drive strong production growth. That said, with a glut of oil and gas in the market, which has pushed commodity prices down, Southwestern Energy could no longer justify such rapid production growth, nor the workforce needed to deliver that growth.
Having said all that, the natural gas industry did get some good news today after the EIA released its latest natural gas inventory report, which showed a 178 Bcf inventory draw, which while slightly below expectations was better than last week's draw and pushed natural gas prices up nearly 3%. That improvement in natural gas prices fueled a rally across the sector, with Range Resources (NYSE:RRC) also jumping double digits. Still, natural gas inventories remain above the five-year historical average, which is why producers like Southwestern Energy and Range Resources will likely cut way back on drilling in 2016 so that the market can begin to work off this excess inventory.
Now what: Too much natural gas supply is finally forcing producers to tighten their belts, with Southwestern Energy shutting down rigs and laying off employees. It's unfortunate that it had to come to this, but with producers pushing growth at all costs in prior years, this was an inevitable outcome given that demand growth hasn't been quite as robust as that of supply. Until those two are in balance, the industry will likely remain under pressure.
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.