1. Important disclosures appear on the last page of this report.
1
Analysts:
Michael Faraone
michael-faraone@uiowa.edu
Jeffrey Pomykala
jeffrey-pomykala@uiowa.edu
Brock Gilbert
brock-gilbert@uiowa.edu
Company Overview
Southwestern Energy is an independent energy company based
out of Houston, focused on natural gas and oil exploration,
development, and production. While its main business segment
of focus is exploration and development of natural gas and oil,
Southwestern Energy is also engaged in midstream services that
support the exploration and production business segment,
mostly in the Fayetteville Shale play. Southwestern Energy’s
main focus of producing natural gas is conducted in seven
leased locations; six in the United States, and one in New
Brunswick, Canada. Under the terms of these leases,
Southwestern Energy currently produces on 1.5 million acres of
land.
Stock Performance Highlights
52 week High $43.70
52 week Low $25.63
Beta Value 1.34
Average Volume (10 Day) 3.27 m
Share Highlights
Market Capitalization $11.89 b
Shares Outstanding 349.1 m
Book Value per share $10.10
EPS (ttm) $-0.14
P/E Ratio (ttm) N/A
Dividend Yield N/A
Dividend Payout Ratio N/A
Company Performance Highlights
ROA 8.07%
ROE 16.07%
Sales 2.95 b
Financial Ratios
Current Ratio 1.11
Debt to Equity 0.99
Current Price: $35.00
Target Price: $42.00 ‐ $48.00
SWN Continues to Improve
Production: Due to strong Fayetteville and Marcellus
Shale results, 2012 production increased by 13% over year-end
2011 production. We predict these two plays will continue to
provide sufficient production levels.
The Economy: SWN and natural gas prices are closely tied
to the overall economy. We expect natural gas prices will
increase on par with the Henry Hub estimates, reaching
$4.89/Mcf by 2018. With a slow but steady improvement to the
economy, SWN will benefit through increased natural gas
demand and prices.
Positioning and Costs: SWN discovered the Fayetteville
play and has first mover advantage which lowers per acre cost,
as well as, production royalties. Southwestern is also currently
one of the lowest cost operators in the industry, with finding and
development of $1.31/Mcfe and cash operating costs of
$1.14/Mcfe.
Hedging: With the low prices in the natural gas market,
Southwestern’s ability to hedge 47% of its production for 2012
at $5.16 and 29% of 2013 production at $5.06 has secured some
positive cash flow for the company.
Exploration: Currently SWN holds exploration licenses for
2.5 million acres within the Maritimes basin play, with options
on license extensions.
Source: Yahoo! Finance
Krause Fund Research
Fall 2012
Energy
Southwestern Energy Company
NYSE: SWN
Recommendation: BUY November 13, 2012
2. The University of Iowa
Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
2
Through company and industry-specific research, as well
as valuation models, we calculated the intrinsic value of
SWN common stock as $43.51, concluding that the
market price is undervalued. After our research, we placed
a buy rating on this stock. The following analysis and
models contained in this report explain our investment
recommendation.
Key Economic Variables
Real GDP
The United States real GDP was 2% annualized growth
for the third quarter of 2012. The real GDP increased from
the second quarter, which was revised down to 1.3%, but
still fell short of the 2011 year end real GDP of 3%. The
increase between Q2 and Q3 was caused in large part by
the increase in personal consumption. The personal
consumption increase was led by purchases of durable
goods, indicating that consumers are more optimistic to
make these larger purchases, a positive sign for further
economic improvement looking forward. The energy
sector is a key driver of GDP with energy as an input for
all goods produced. We expect that the real GDP will
remain at 2% over the upcoming 6 month period and
slowly increase back to the average 3% within 3 years. Oil
and Gas Exploration and Production is expected to
average annual growth of 6.9%, compared to GDP growth
forecasts of 2.6% through 20151
.
Historical GDP Growth. Source: Trading Economics
Interest Rates
Ben Bernanke recently announced implementation of
QE3, the difference of this round compared to other
attempts is that it is open-ended. Interest rates will remain
depressed at a range of 0 – 0.25% through 2015; a year
longer than first proposed, at a range of 0 - 0.25%. The
depressed FFR will likely keep market interest rates low.
This is beneficial for companies within the energy sector
as it is a capital intensive industry. With an enhanced
ability to borrow at lower costs, we expect many
companies in the energy sector to continue increasing its
capital expenditure programs. Low rates will also allow
companies to refinance current debt at lower costs, in-line
with increased capital expenditure programs. Mid-year
mergers and acquisitions were at 231 compared to 256 at
the same time period in 20112
. With the rates depressed,
we expect that M&A will still play a major role, but its
impact will continue to slow as interest rates in future
years begin to rise.
Historical Interest Rates. Source: Yahoo! Finance
U.S. Dollar Index
As indicated by the graph below, the U.S. dollar index has
an inverse relationship with oil prices, as do all
commodities. For oil being traded in U.S. dollars, this is
not an ideal situation. Other countries are able to purchase
more oil with a weakened dollar, increasing demand, and
therefore, price. Since the U.S. dollar index is positively
correlated with interest rates and the QE3 will keep
interest rates low through 2015, we should see the U.S.
dollar index remain stable in the short term; assuming no
European Union Collapse. The U.S. dollar index is
dependent on the outcome of the Eurozone crisis.
Depending on what becomes of the Eurozone crisis, there
may be an impact on the U.S. dollar index. The European
Central Bank’s recent bailout offers an unlimited amount
of bond buying in those countries still struggling to repay
debt. Spain and Greece remain threats, especially since
Spain has refused bailout help and continues to increase
debt. Another area of concern is the banks that suffered
losses from defaults and have decreased lending, further
hurting the European Economy. The bond buying program
has bought Europe roughly a year to solve its issues3
.
Investment Thesis
Economic Outlook
3. The University of Iowa
Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
3
United States Dollar Index vs. Crude Oil Price. Source: Y-
Charts
Unemployment Rate
The unemployment rate came in at 7.9% for the month of
October, a .1% increase over September’s figure. There
were also 171,000 jobs added to the economy in October.
The increase was caused in part by an increase in the labor
pool, with over 500,000 workers re-entering the job search
market4
. Though the numbers show improvement, they
remain high with below average growths in GDP. The
impending fiscal cliff plays a large role in determining
expectations for what unemployment will be in the short-
term. The Congressional Budget office warns that
unemployment could reach as high as 9.1% in 2013 if a
solution is not reached5
. We feel that a solution will be
achieved and that unemployment will stay right around the
8% mark for the next six months as the economy improves
slowly but surely. In the long term (2-3 years), we expect
unemployment to decrease to just below 7%. We expect
the energy sector to see benefits from the economic
growth predicted.
Historical Unemployment Rate. Source: Trading Economics
Consumer Confidence Index
The consumer confidence index forecasts how confident
consumers are with the economy and its current financial
situation. It is also an important measure of consumers’
trust in the future state of the economy. Consumer
sentiment measured 84.9 in November 2012; a 5-year
high. This marked the fourth month in a row that
consumers showed increasing confidence in the economy.
After the release of this data, oil futures increased 1.2%.
The increase in confidence means consumers are willing
to spend more money and an increase in spending
stimulates demand and spurs economic growth. This is
unexpected as we come ever closer to the fiscal cliff that
will increase taxes and decrease government spending. It
seems that consumers are confident that the government
will find a solution to avoid this fiscal cliff; at least for the
time being. We expect that consumer confidence will stay
at these high levels, further improving the economy in the
short term. If the fiscal cliff is avoided, we expect to see
consumer confidence levels reach close to 89, the average
prior to entering the recession 6
. We also expect the
economic growth to increase demand amongst firms in the
energy sector.
Consumer Sentiment Index. Source: Advisor Perspectives
The Oil & Gas Exploration and Production industry is
expected to be less volatile than in recent years. With oil
and gas prices likely to rise, industry revenue will grow at
an annualized rate of 2.6% through 2017. Although
alternative sources of energy, like biofuels, will grow in
importance over the coming years, they will not play a
large role in displacing oil as the number one source of
energy7
.
Oil & Gas Exploration and Production
Companies in the Independent Oil & Gas Exploration and
Production industry explore, develop, and work in
offshore or onshore oil and natural gas fields. Primary
activities and services in this industry include crude oil
extraction, liquefied natural gas production (LNG),
liquefied petroleum production (LNP), natural gas
extraction, oil and gas extraction, and oil shale extraction.
Industry Analysis
Crude Oil Price
U.S. Dollar Index
4. The University of Iowa
Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
4
The Independent Oil & Gas Exploration and Production
industry has two main products in natural gas; this
includes natural gas liquids and dry natural gas. Based on
estimates, crude oil is expected to account for 58.4% of
the global output with natural gas at 41.6% in 2012. In
comparison, we expect Southwestern Energy’s output to
consistently remain at approximately 99% natural gas with
the remaining percentile consisting of crude oil8
.
E&P Product Mix. Source: IBISWorld
Exploration and Production Life Cycle
The exploration and production industry is currently
declining, with Industry Value Added expected to grow at
an annualized rate of 4.6% through 2017. Although GDP
is expected to grow at 1.9% annualized over the same
period, inflated revenue in this industry masks the decline
in production. Technology within this industry is well-
established and its products are not new, two factors
indicative of a declining industry. In addition, oil fields
that were discovered years ago are beginning to decline,
limiting future supply and causing output to remain flat.
Although oil supply is somewhat limited, future
exploration activities that are deemed successful could
cause a change to the industry’s life cycle7.
Natural Gas: Brief Overview
Natural Gas is a major source of energy in the United
States, accounting for approximately 25% (24.37 Tcf) of
energy consumption in 2011. The largest consumers of
natural gas consist of the Electric Power (7.6 Tcf),
Industrial (6.8 Tcf), Residential (4.7 Tcf), and
Commercial (3.2 Tcf) sectors9
.
Natural Gas Consumption. Source: SWN Investor Relations
Natural Gas Consumption
Natural gas demand has been lower than expected; mainly
due to the warmer 2011-12 winter season. Compared to
the prior season, there was an 18% decrease in home
heating days. Consumption of natural gas is expected to
increase 4.3% by the end of 2012 and 2.4% throughout
2013, according to the EIA. This growth in consumption
is higher than the 50-year, 25-year, and 10-year CAGR of
1.3%, 1.6%, and 0.9%, respectively. This growth in
consumption is expected to come from an increase in
electric power consumption of natural gas, which will
offset the lower than normal demand in the commercial
and residential sectors10
.
Natural Gas Inventory Levels
Inventory levels in 2012 surpassed the record highs that
were set in the previous two years. The warm 2011-12
winter season led to lower demand for natural gas and
lower withdrawals from storage. A normal withdrawal
season lasts from November 1 to March 30. The 2012
withdrawal season ended on March 9, 2012, three weeks
prior to the normal season ending with post-withdrawal
inventory of 2,369 Bcfe. Although post-withdrawal
inventory is above average, increases in electric power
consumption of natural gas have slowed the increase in
inventory from 61% to 32.6%10. If the 2012-13 winter
season continues with above average temperatures,
storage levels will remain high resulting in a continuation
of low natural gas prices.
5. The University of Iowa
Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
5
Natural Gas in Storage. Source: EIA
Natural Gas: Production and Supply
In recent years, technical innovations have caused a boom
in the supply of natural gas. Horizontal drilling and
hydraulic fracturing allow drillers to reach depths that
were either too difficult or too costly to reach before.
These improvements in technology have triggered the
supply of natural gas to increase, since more natural gas
can be produced from a single well. In 2011, the U.S.
produced 24.169 Tcf of natural gas, setting a new record.
This is an increase of approximately 20% over the year
2000, in which 20.197 Tcf of natural gas was produced9.
We expect this increase in supply to put pressure on
Southwestern Energy, since most of its revenue is
generated through natural gas sales and increased supply
will lead to lower pricing.
Natural Gas Prices
Since 2005, when natural gas hit an all-time high of
$15.40/MMbtu, price has seen a steady decrease. As of
October 2012, Henry Hub natural gas spot prices averaged
$3.31/MMbtu; a decrease of $0.25 from the October 2011
average. According to the EIA, 2013 Henry Hub gas
prices are expected to average approximately
$3.49/MMbtu9.
Henry Hub Natural Gas Price. Source: EIA
The natural gas futures curve can also be used to forecast
natural gas prices. As seen on the graph below, natural gas
prices are expected to steadily rise for the coming years.
Although prices are forecasted to rise, they will not reach
the pre-natural gas boom levels ($8-$9) until at least
202311
.
Natural Gas Futures Curve. Source: Factset
The Pickens Plan
The re-election of President Obama could be good news
for natural gas. Currently, the United States spends $453
billion importing oil from OPEC; accounting for almost
60% of the country’s oil consumption. With oil demand
exceeding supply, shifts to new types of energy are what
is needed. President Obama supports the Pickens Plan,
which could help increase the use of natural gas as a
transportation fuel. With natural gas supply far
outweighing demand, this could be the alternative source
of fuel the U.S. economy has been searching for. With
approximately 1.5 million miles of pipelines running
through the U.S., natural gas is available to almost every
portion of the country12
.
Markets and Competition
Concentration in the independent oil and gas exploration
and production industry is low, which is reflected in the
6. The University of Iowa
Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
6
industry’s large size and the difficulty for companies to
control a large portion of this industry. The four largest
companies account for approximately 30% of industry
revenue. Exploration and production is a high-risk, high-
return activity, as most exploration efforts do not end with
locating a feasible oil field. If a prolific oil field is found,
all capital expenditures must be covered by the company.
Companies compete essentially on the basis of price;
however, there are many factors which affect the price
such as supply and demand, oil grade, and impurities. For
a producer to be successful, it must be able to locate the
larger oil fields, since they are more economical to
develop. In addition, a producer’s access to resources and
ability to meet environmental regulations are also key
success factors for this industry. Major players within this
industry include Exxon Mobil Corporation, Royal
Dutch/Shell Group, BP PLC, Conoco Phillips, and
Chevron Corporation7.
Major Companies vs. SWN. Source: Yahoo! Finance
Overview
Southwestern Energy is an independent energy company
focused on natural gas and oil exploration, development,
and production that is based in North America.
Southwestern Energy’s main business segment of focus is
exploration and development of natural gas and oil. It’s
also engaged in midstream services that support the
exploration and production business segment mostly in the
Fayetteville Shale play. Southwestern Energy’s main
focus is on producing natural gas with 6 locations in the
United States under lease as well as one in New
Brunswick, Canada. Under these leases Southwestern
Energy currently produces on 1.5 million acres of land8.
SWN Areas of Operation. Source: SWN
At year end in 2011 Southwestern’s estimates for proved
reserves in oil and natural gas was 5,893 Bcfe; a figure
that has been increasing the past two years13
. At current
production level of 500 Bcfe per year, we expect these
proved reserves would be depleted in 11.79 years.
SWN Proved Reserves. Source: SWN Investor Relations
Corporate Strategy
First and foremost, Southwestern Energy’s business
strategy is to continue to develop in the Fayetteville Shale
and Marcellus Shale plays, with a strong focus on the
Fayetteville Shale where it holds 925,842 net acres. The
Fayetteville Shale play accounted for 87% of its oil and
natural gas production, as well as, proved reserves in
2011. It is expected that the Marcellus Shale will play a
bigger role in production in the future8. Another focus is
to increase efficiency with vertical integration and
economies of scale. Economies of scale for Southwestern
Energy are accomplished by the close proximity of its
operations, which allows for lower cost. The focus is also
on the operation of its most profitable wells. Southwestern
Energy is also concentrating on growth by actively
seeking new areas for operations; especially in light of
Southwestern Energy Analysis
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Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
7
recent discoveries of undeveloped lands in New
Brunswick and the Lower Smackover Brown Dense
formation. Increasing the Midstream segment of business
is also part of its strategy. To date, Southwestern has
constructed 1,791 miles of gas lines in the Fayetteville
Shale play alone8.
Financial Summary
Natural gas production accounts for nearly all of the
operating income and this is expected to continue in the
future. In 2011, Southwestern Energy’s net income was
$637.8 million. Southwestern released its second quarter
results on August 2, 2012, which reported a net loss for
the six months ended June 30, 2012 of $380.4 million.
This was primarily caused due to a $578.9 million non-
cash ceiling impairment test of natural gas and oil
products. Production increased 33 Bcfe overall in 2012,
with increases in Fayetteville Shale and Marcellus Shale
accounting for most of it. Southwestern has one of the
lowest operating costs in the industry with finding and
development at $1.31/ Mcfe as well as cash operating
costs of $1.20/ Mcfe8. As the graph below shows
Southwestern energy operates at a much lower cost of
production compared to its peers.
Production Cost Comparison (Mcfe). Source: Company 10-K’s
Fayetteville Shale
This shale is the primary focus of Southwestern Energy’s
exploration and development sector. Production from the
Fayetteville shale was 436.8 Bcf, and roughly 5,104 of its
reserves are located here. The production rate of
Fayetteville was around 1,877 MMcf per day, through
June 30, 20128. Southwestern Energy, as of December 31,
2011, held leases for 925,842 net acres in the Fayetteville
Shale play. Since Southwestern discovered the play in
2004, it has drilled 3,095 wells, with 650 implemented in
2011 alone. The average price to complete the wells was
$2.8 million. As of the second quarters end, Southwestern
had 131 horizontal wells in production, and were utilizing
11 rigs; 7 of which have the ability to drill horizontal
wells8. In April 2012, Southwestern Energy created a
subsidiary, SWN Well Services L.L.C, and began ordering
fracture stimulation equipment which it plans to use for
two spreads that are expected to be functional by fourth
quarter of 2012 in the Fayetteville Shale8.
Fayetteville Shale Production. Source: SWN Investor Relations
Marcellus Shale
Southwestern holds approximately 186,893 net acres in
the play located in northeastern Pennsylvania, which it
began leasing in 2007 to gain a competitive advantage. It
created 70 wells here in 2011 and used 23 of them for
production. This location holds 342Bcf of the proved
reserves. The Marcellus Shale accounted for 23.4 Bcf
production of natural gas in 2011. Southwestern energy is
turning towards Marcellus to remove dependence on the
Fayetteville Play. It is believed that this play will
outperform the Fayetteville play in terms of return on
investment. Southwestern was able to lease the acreage at
an average cost of $1,000 with royalty fees at 13%. This
play is expected to be producing 800MMcfe/day within a
five year timeframe, after which production is expected to
remain level for roughly 8 years14
New Ventures
Southwestern Energy is always scouting new locations
and its search found 2,518,518 net acres, all of which is
undeveloped, in New Brunswick, Canada; the first time
Southwestern would operate outside of the United States8.
This site is being tested, but development has been
postponed until 2013. With such a massive amount of
acreage, if this venture pans out we can expect to see the
value of the stock react in 2013. Southwestern Energy has
also made a move on the Lower Smackover Brown Dense.
As of June 30, 2012, this area located in Southern
Arkansas and Northern Louisiana has 563,000 net acres.
The land was obtained for roughly $375 per acre and
Southwestern is currently testing in the area8.
Range Resources (RRC) $4.57/Mcfe
Ultra Petroleum $4.48/Mcfe
Linn Energy $4.26/Mcfe
Chesapeake Energy (CHK) $3.16/Mcfe
Southwestern Energy (SWN) $2.52/Mcfe
Production Costs ($/ Mcfe)
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8
Midstream Services
Southwestern Energy is involved in gas gathering and is
currently active in Texas, Arkansas, and Pennsylvania
through its subsidiaries. The primary purpose of its
midstream service is to support its exploration and
production segment. The majority of the revenue earned is
from fees associated with delivering its gas and third party
gas to the market. The majority of this segment is located
in Arkansas to complement its E&P segment in the
Fayetteville Shale. Its midstream services accounted for
$142,591 million of Southwestern Energy’s 2011 net
income 8.
Strengths
Reserve Replacement
When an exploration and production company is able to
add new reserves to replace reserves close to depletion,
this is a strong indication of long-term positive
performance. Southwestern Energy’s reserve replacement
ratio, including revisions, has averaged above 400% for
the three year period ending on December 31, 2011. This
reserve replacement ratio is primarily driven by increases
in reserves linked to increased development of the
Marcellus Shale play and Fayetteville Shale play.
Southwestern Energy replaced 299% of production
volumes with an increase of 1,459.4 Bcfe of proved gas
and oil reserves in 2011 and 430% of production volumes
with an increase of 1,431.1 Bcfe in 2010. A majority of
these reserve additions were generated from organic
growth in the Fayetteville and Marcellus Shale plays8. If
Southwestern Energy continues to find additional reserves
in these primary drilling operations, it will continue to see
positive growth.
Production
In 2011, natural gas production averaged 1,370.0 MMcfe,
an increase of 23.56% over 2010 production, which
averaged 1,108.8 MMcfe. This increase mostly results
from an 86.6 Bcf increase and a 22.4 Bcf increase from
the Fayetteville and Marcellus Shale plays, respectively.
Southwestern Energy is also predicting a 13.0% growth
rate over 2011 production; targeting natural gas and crude
oil production of 560 to 570 Bcfe in 20128. We expect
that the Fayetteville and Marcellus Shales will continue to
produce a sufficient amount of natural gas for
Southwestern’s drilling operations.
Weaknesses
Reliance on Fayetteville and Marcellus Shale Plays
At year-end 2011, Southwestern Energy invested
approximately $2.0 billion in its E&P business. $1.3
billion and $322 million was invested in the Fayetteville
and Marcellus Shale plays, respectively. This is 81% of
the total 2011 E&P investment. Southwestern also
invested approximately $933.0 Million and $30.7 Million
in its gas gathering system for the Fayetteville Shale play
and Marcellus Shale play, respectively. If these two
drilling programs fail to produce significant supplies of
natural gas, investments in its gas gathering operation
could be lost, resulting in forced charges for assets not
used8.
Flexibility
By relying on natural gas production from the Fayetteville
and Marcellus Shales, Southwestern does not have the
option to switch to crude oil production like most E&P
companies. As of July 2011, the LSBD formation was
Southwestern’s only oil play. This could prove to be a
weakness for Southwestern, as the volatility of natural gas
prices could play an important role in future operations8.
Opportunities
New Ventures
In July 2011, Southwestern Energy announced that it
would be testing a new unconventional horizontal oil play
targeting the LSBD formation; an upper Jurassic age,
kerogen-rich carbonate source rock found across the Gulf
Coast region from Texas to Florida. As of December
2011, SWN held approximately 520,619 net undeveloped
acres in the area, purchased at an average cost $375/acre8.
If this new drilling program is successful, we expect that
activity in this particular area will increase significantly in
future years.
Capital Investments
Throughout 2012, Southwestern Energy plans on
investing approximately $1.8 Billion in its exploration and
production program. This would lead to the company
drilling between 555 and 565 wells, 501 to 530 of which it
will operate. $1.1 Billion will be invested in the
Fayetteville Shale play, $526 Million associated in
increased Marcellus Shale play activity, $177 Million in
exploration and New Ventures projects, and an $18
Million investment split between East Texas and the
Arkoma Basin. Based on these capital investments,
Southwestern Energy expects 2012 oil production of
approximately 560 to 570 Bcfe, which is an increase of
about 13% over 2011 oil production8. We expect
S.W.O.T Analysis
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Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
9
Southwestern Energy will continue to invest a substantial
amount of capital into the Fayetteville and Marcellus
Shale plays in future years.
Threats
Oil and Gas Price Volatility
Prices of natural gas and oil have, historically, been very
volatile and subject to wide fluctuation. Factors such as
market uncertainty, worldwide economic conditions,
competition from alternative sources of energy, and
actions taken by OPEC could cause oil and gas prices to
change significantly. Natural gas prices ranged from
$13.58/MMBtu in 2008 to $2.32/MMBtu in January 2012.
Price volatility makes it difficult to accurately predict the
return on exploration and development projects involving
oil and natural gas. Volatile prices also lead to disruption
in the oil and gas market, since buyers and sellers often
find it difficult to agree on what is a reasonable price to
pay for properties8. If natural gas prices remain volatile in
future years, Southwestern’s common stock price could
potentially be negatively affected.
Overview
We calculated the intrinsic value of SWN stock using four
valuation models: Discounted Cash Flow (DCF),
Economic Profit (EP), Dividend Discount Model (DDM),
and Relative Valuation. Based on the results we obtained
from these models, we concluded a target price range of
$42.00 - $48.00. Southwestern Energy common stock is
currently trading at $35.00.
Recommendation
We concluded our research and analysis by placing a Buy
rating on Southwestern Energy common stock. Although
natural gas prices have been volatile in recent years, we
expect that natural gas prices will begin to rise slowly in
future years, reaching approximately $4.89/Mcf in 2018.
Southwestern Energy will continue to increase production,
and with natural gas price set to increase in future years,
we believe this company will remain profitable for many
years.
Key Assumptions
Revenue
We forecasted our revenue based on a variety of different
factors. First, we applied a growth rate of 4.63% to natural
gas prices. This growth rate was created by taking the
average growth in Henry Hub Spot Price estimates
through 2018. The growth rate we applied to crude oil
price was 4.50%, which was obtained through industry
estimates and economic outlook. We also applied a
growth rate of 3.00% to Southwestern’s total production.
In order to find the natural gas and crude oil production
estimates, we made natural gas production equal to 99%
of total production and applied the remaining percentile to
oil production. In addition, we estimated that
Southwestern Energy would only sell 88% of natural gas
production. Since crude oil and natural gas are scaled
differently, we made sure to account for the fact that 1
MBbl equals 6 MMcf and 1 MMBbl equals 6 Bcf. We
also grew gas gathering and gas marketing revenues by
ten and 8 percent, respectively.
Expenses
We forecasted Southwestern Energy’s operating expenses
by multiplying its lease operating cost of $0.79 and its
natural gas sales volume. We calculated future cost of oil
and gas purchases assuming a constant percent of revenue
of 25%. We forecasted Southwestern’s general and
administrative, depreciation, and tax expenses, using a 10-
year historical average as a percentage of sales.
WACC Estimation
First, we used the CAPM model to calculate our cost of
equity. With the growth rate of the economy staying low,
we used the 30-year Treasury Bond yield of 2.92% as our
risk-free rate. For our equity risk premium, we used
Damodaran’s implied risk premium of 5.92%. We then
found the raw beta using an average from the Bloomberg
terminal, which came out as 1.34. We plugged these
values into the CAPM to achieve a cost of equity of
10.85%.Using FINRA, we found the yield on
Southwestern’s longest maturity bond as the pre-tax cost
of debt of 8.62%. After applying the marginal tax rate to
the cost of debt, we calculated an after-tax cost of debt of
5.27%. Finally, we calculated WACC to be 10.03%, using
the figures above and the weights of equity and debt. Our
WACC estimation was then used in our DCF and EP
models.
Valuation Analysis
10. The University of Iowa
Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
10
DCF and EP Models
We used the Discounted Cash Flow and Economic Profit
models to obtain a target price for Southwestern Energy
common stock. These models produced a target price of
$42.61 as of November 13, 2012. In the DCF model, we
used our WACC estimation to discount future cash flows.
For the EP model, we calculated economic profit by
subtracting the WACC multiplied by the beginning
invested capital from NOPLAT. When calculating the
continuing value for these models, we applied a CV
growth rate of 3.50% to account for inflation. After
obtaining the value of operating assets from these models,
we added back non-operating assets and subtracted the
value of debt and other claims to arrive at the value of
equity.
Dividend Discount Model
For this model, we used the EPS for the CV period, CV
growth rate, CV ROE, and cost of equity to calculate the
P/E multiple. This P/E multiple was then discounted by
the cost of equity to give us future cash flows. Since we
do not expect Southwestern Energy to pay dividends in
the future, our intrinsic value of $12.89 was much lower
than our other models. However, we do not believe this
target price accurately predicts the value of Southwestern
common stock and therefore was not included when
making our final investment recommendation.
Relative Valuation
We also valued the price of SWN stock using relative
valuation and computing a P/E ratio. Using this model, we
calculated an intrinsic value of $40.45. To find the
intrinsic value, we calculated P/E ratios of firms with
comparable market caps to Southwestern Energy, and then
removed any outliers we thought were negatively
affecting the model.
We used a variety of variables that we felt were important
to the target price when constructing our sensitivity
analysis. These tests allowed us to see how small changes
in key variables affect the target price of SWN stock. We
concluded that our target price has a valid range after
running the sensitivity analysis.
CV Growth vs. WACC
Our first test was the CV growth rate against the WACC.
The CV growth rate is an important factor in our model
because it causes our value of equity to change, which
affects the DCF target price. Since WACC is also
incorporated into the DCF target price, we were interested
in seeing how changes in both of the variables would
affect the outcome of SWN stock price.
CV Growth vs. Beta
We also tested CV growth against beta, since both of these
variables are included in calculating the DCF target price.
This analysis had a much smaller effect on the target price
than testing CV growth against WACC.
MRP vs. Risk-Free Rate
We then tested our risk premium against our risk-free rate.
Since both of these variables are incorporated into
calculating the cost of equity, which is used to calculate
DDM price, we felt it was an important test to run.
Gas Price Growth vs. Total Production Growth
We applied a constant growth rate of 4.63% and 3.00% to
natural gas prices and total production, respectively.
Running this analysis allowed us to view how changes in
gas price and production would change the target price of
SWN stock. This analysis showed that changes in gas
price growth had a larger effect on the target price than
production growth.
G&A Expense vs. Total Production Growth
Our final test was comparing changes in general and
administrative expense growth to total production growth.
This analysis showed that an increase in production and a
decrease in general and administrative expense lead to a
higher target price. Since our general and administrative
expense was calculated using revenue, we were interested
to see how these two variables would change the target
price.
Sensitivity Analysis
11. The University of Iowa
Henry B. Tippie College of BusinessKrause Fund Research
Important disclosures appear on the last page of this report.
11
Important Disclaimer
This report was created by students enrolled in the
Security Analysis (6F:112) class at the University of Iowa.
The report was originally created to offer an internal
investment recommendation for the University of Iowa
Krause Fund and its advisory board. The report also
provides potential employers and other interested parties
an example of the students’ skills, knowledge and
abilities. Members of the Krause Fund are not registered
investment advisors, brokers or officially licensed
financial professionals. The investment advice contained
in this report does not represent an offer or solicitation to
buy or sell any of the securities mentioned. Unless
otherwise noted, facts and figures included in this report
are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Krause Fund may hold a
financial interest in the companies mentioned in this
report.
References:
1 Bloomberg Economic Calendar
http://www.bloomberg.com/markets/economic-calendar
2 Deloitte Oil & Gas Pricing Outlook
http://www.deloitte.com/assets/Dcom-
UnitedStates/Local%20Assets/Documents/Energy_us_er
/us_er_MAReport_Midyear2012_0812.PDF
3 Europe Turns Corner
http://www.oregonlive.com/newsflash/index.ssf/story/after-3-
bumpy-years-europe-turns-
corner/4a468ac330664326a44f36de609236b4
4 U.S. Unemployment Rate Rises
http://articles.nydailynews.com/2012-11-
02/news/34881947_1_unemployment-rate-jobs-report-jobless-
rate
5 Fiscal Cliff Effect on Unemployment
http://www.examiner.com/article/cbo-warns-unemployment-
will-rise-to-9-1-if-deal-on-fiscal-cliff-is-not-reached-1
6 Oil Rises as Consumer Sentiment Gains
http://www.businessweek.com/news/2012-11-09/oil-is-steady-
as-politicians-squabble-while-gasoline
7 Oil & Gas Exploration and Production Report
http://clients1.ibisworld.com/reports/us/industry/default.aspx?en
tid=103
8 Southwestern Energy Co. 10‐K
http://sec.gov/Archives/edgar/data/7332/000000733212000003/
swn123111form10k.htm
9 EIA Natural Gas
http://www.eia.gov/naturalgas/
10 NetAdvantage Natural Gas Report
http://www.netadvantage.standardandpoors.com/NASApp/NetA
dvantage/showIndustrySurvey.do?code=ngd
11 Henry Fund Report – Venu Gadde
http://tippie.uiowa.edu/henry/reports12/apa_sp12.pdf
12 The Pickens Plan
http://www.pickensplan.com/theplan
13 Southwestern Energy Investor Presentation
http://www.swn.com/investors/LIP/latestinvestorpresentation.pdf
14
Marcellus Shale
http://seekingalpha.com/article/857921-southwestern-energy-
marcellus-production-to-exceed-500-mmcf-per-day-in-18-
months
12. Southwestern Energy
Key Assumptions of Valuation Model
Ticker Symbol SWN
Current Share Price 34.71
Fiscal Year End Dec. 31
Pre‐Tax Cost of Debt 8.62%
Beta 1.34
Risk‐Free Rate 2.92%
Equity Risk‐Premium 5.92%
CV Growth 3.50%
CV of NOPLAT 1,939.67
CV ROIC 15.04%
Marginal Tax 38.82%
DCF/EP Target Price 42.87
For Fiscal Years Ending Dec. 31 2012E 2013E 2014E 2015E 2016E 2017E 2018E(CV)
Operating Revenues 2,812.93$ 3,036.84$ 3,278.65$ 3,539.81$ 3,821.86$ 4,126.50$ 4,455.53$
Operating Costs and Expenses 1,961.89 2,098.43 2,245.28 2,403.27 2,573.28 2,756.25 2,953.20
Operating Income 851.04 938.41 1,033.37 1,136.53 1,248.58 1,370.25 1,502.33
Income (Loss) Before Income Taxes 817.14 896.77 987.88 1,086.99 1,194.10 1,310.89 1,437.49
Provision for Income Taxes 317.21 348.12 383.50 421.97 463.55 508.89 558.03
Net Income Attributable to SWN 499.93$ 548.64$ 604.39$ 665.02$ 730.55$ 802.00$ 879.46$
Common Stock Statistics:
Earnings per Share 1.42$ 1.56$ 1.71$ 1.88$ 2.07$ 2.26$ 2.48$
Year End Shares Outstanding 352.02 352.82 353.07 353.32 353.69 354.22 354.74
Expected Cash Dividends -$ -$ -$ -$ -$ -$ -$
Capitalization:
Total Debt 1,665.57$ 1,824.83$ 1,993.02$ 2,197.85$ 2,400.44$ 2,628.36$ 2,861.58$
Total Equity 4,505.92 5,074.54 5,686.57 6,359.93 7,102.92 7,923.40 8,823.00
Total Capitalization 6,171.49$ 6,899.36$ 7,679.59$ 8,557.78$ 9,503.36$ 10,551.76$ 11,684.57$
Total Assets 8,833.19$ 9,703.93$ 10,634.23$ 11,668.41$ 12,780.49$ 14,007.12$ 15,329.54$
Capitalization Ratios:
Debt 26.99% 26.45% 25.95% 25.68% 25.26% 24.91% 24.49%
Equity 73.01% 73.55% 74.05% 74.32% 74.74% 75.09% 75.51%
Capital Expenditures 1,500.00$ 1,500.00$ 1,600.00$ 1,850.00$ 1,900.00$ 2,100.00$ 2,200.00$
Exploration & Production:
Natural Gas:
Production (Bcf) 569.37 586.45 604.05 622.17 640.83 660.06 679.86
Average Price per $Mcf Excluding Hedges 3.72$ 3.90$ 4.08$ 4.27$ 4.46$ 4.67$ 4.89$
Natural Gas Price Growth Rate 4.63%
Natural Gas Production Sales Volume 88.00% 501.05 516.08 531.56 547.51 563.93 580.85 598.28
Oil:
Production (MBbl) 104.50 107.63 110.86 114.19 117.62 121.14 124.78
Average Price per $Bbl Exluding Hedges 89.87$ 93.91$ 98.14$ 102.56$ 107.17$ 111.99$ 117.03$
Oil Price Growth Rate 4.50%
Total Natural Gas and Oil Production (Bcfe) 570.00 587.10 604.71 622.85 641.54 660.79 680.61
Total Natural Gas and Oil Production Growth Rate 3.00%
Midstream Services:
Gas Volumes Marketed (Bcf) 638.91 667.66 697.71 729.11 761.92 796.20 832.03
Gas Volumes Gathered (Bcf) 768.07 791.11 814.85 839.29 864.47 890.40 917.12
13. Southwestern Energy
Revenue Decomposition
In Millions
Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E(CV)
Exploration & Production:
Natural Gas Production (Bcfe) 299.70 403.60 499.40 569.37 586.45 604.05 622.17 640.83 660.06 679.86
Oil Production (MBbl) 124.00 171.00 97.00 104.50 107.63 110.86 114.19 117.62 121.14 124.78
Total Production (Bcfe) 300.40 404.70 500.00 570.00 587.10 604.71 622.85 641.54 660.79 680.61
Natural Gas Sales Volume (Bcfe) ‐ ‐ ‐ 501.05 516.08 531.56 547.51 563.93 580.85 598.28
Average Gas Price per Mcf (excluding hedges) 3.34 3.93 3.56 3.72 3.90 4.08 4.27 4.46 4.67 4.89
Average Oil Price per Bbl (excluding hedges) 54.99 76.84 94.08 89.87 93.91 98.14 102.56 107.17 111.99 117.03
Gas Revenue 1,578.26 1,856.24 2,080.24 1,866.32 2,011.31 2,167.57 2,335.96 2,517.44 2,713.02 2,923.79
Oil Revenue 6.84 13.11 9.09 9.39 10.11 10.88 11.71 12.61 13.57 14.60
E&P Revenues 1,585.10 1,869.35 2,089.33 1,875.71 2,021.42 2,178.45 2,347.67 2,530.05 2,726.59 2,938.40
Midstream Services:
Gas Marketing Revenue 488.66 615.91 714.12 771.25 832.95 899.59 971.56 1,049.28 1,133.22 1,223.88
Gas Gathering Revenue 74.28 122.91 149.97 164.97 181.47 199.61 219.58 241.53 265.69 292.25
Gas Volumes Marketed (Bcf) 382.50 495.80 611.40 638.91 667.66 697.71 729.11 761.92 796.20 832.03
Gas Volumes Gathered (Bcf) 387.10 588.30 745.70 768.07 791.11 814.85 839.29 864.47 890.40 917.12
Midstream Services Revenues 562.94 738.83 864.10 936.22 1,014.42 1,099.20 1,191.13 1,290.81 1,398.91 1,516.14
Other Segments
Total Other Revenues (2.26) 2.49 (0.52) 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Total Revenue (in Millions) 2,145.78 2,610.66 2,952.91 2,812.93 3,036.84 3,278.65 3,539.81 3,821.86 4,126.50 4,455.53
14. Southwestern Energy
Income Statement
In Millions
Fiscal Years Ending Dec. 31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E(CV)
Gas sales 1,578.26 1,856.24 2,080.24 1,866.32 2,011.31 2,167.57 2,335.96 2,517.44 2,713.02 2,923.79
Gas marketing 488.66 615.91 714.12 771.25 832.95 899.59 971.56 1,049.28 1,133.22 1,223.88
Oil sales 6.84 13.11 9.09 9.39 10.11 10.88 11.71 12.61 13.57 14.60
Gas gathering 74.28 122.91 149.97 164.97 181.47 199.61 219.58 241.53 265.69 292.25
Other operating revenue -2.26 2.49 -0.52 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Total operating revenues 2,145.78 2,610.66 2,952.91 2,812.93 3,036.84 3,278.65 3,539.81 3,821.86 4,126.50 4,455.53
Gas purchases - midstream services 482.84 611.16 709.09 703.23 759.21 819.66 884.95 955.47 1,031.62 1,113.88
Operating expenses 136.54 191.77 240.94 395.83 407.70 419.93 432.53 445.51 458.87 472.64
General & administrative expenses 122.62 145.56 158.04 156.12 168.54 181.97 196.46 212.11 229.02 247.28
Depreciation, depletion & amortization 493.66 590.33 704.51 651.44 703.30 759.30 819.78 885.10 955.65 1,031.85
Taxes, other than income taxes 37.28 50.61 65.52 55.27 59.67 64.42 69.55 75.09 81.08 87.55
Total operating costs & expenses 2,180.75 1,589.44 1,878.11 1,961.89 2,098.43 2,245.28 2,403.27 2,573.28 2,756.25 2,953.20
Operating income (loss) -34.97 1,021.23 1,074.80 851.04 938.41 1,033.37 1,136.53 1,248.58 1,370.25 1,502.33
Interest on debt 55.58 57.14 65.42 80.53 99.86 109.42 119.51 131.80 143.95 157.63
Other interest charges 3.27 1.94 4.31 1.95 1.97 1.99 2.01 2.03 2.05 2.07
Interest capitalized 40.21 32.92 45.65 48.32 59.92 65.65 71.71 79.08 86.37 94.58
Total interest expense 18.64 26.16 24.08 34.16 41.92 45.76 49.82 54.75 59.64 65.13
Other income (expense), net 1.45 0.43 0.26 0.27 0.27 0.27 0.27 0.28 0.28 0.28
Income (loss) before income taxes -52.16 995.49 1,050.99 817.14 896.77 987.88 1,086.99 1,194.10 1,310.89 1,437.49
Current Income Taxes 0.34 23.88 8.40 8.82 9.26 9.72 10.21 10.72 11.25 11.81
Deferred Income Taxes 97.21 759.44 818.05 842.59 867.87 893.90 920.72 948.34 976.79 1,006.09
Provision (benefit) for income taxes -16.36 391.66 413.22 317.21 348.12 383.50 421.97 463.55 508.89 558.03
Net income (loss) -35.79 603.83 637.77 499.93 548.64 604.39 665.02 730.55 802.00 879.46
Less: net income (loss) attributable to noncontrolling interest 0.14 0.29 -
Net income (loss) attributable to Southwestern Energy -35.65 604.12 637.77 499.93 548.64 604.39 665.02 730.55 802.00 879.46
Year end shares outstanding 345.88 347.58 348.96 352.02 352.82 353.07 353.32 353.69 354.22 354.74
Net earnings (loss) per share-basic -0.10 1.75 1.84 1.42 1.56 1.71 1.88 2.07 2.26 2.48
Dividends/Share 0 0 0 0 0 0 0 0 0 0
20. Southwestern Energy
Weighted Average Cost of Capital (WACC) Estimation
Risk‐Free Rate 2.92%
Risk Premium 5.92%
Beta 1.34
Cost of Equity 10.85%
Debt Rating BBB‐
Pre‐Tax Cost of Debt 8.62%
Tax Rate 38.82%
After‐Tax Cost of Debt 5.27%
Shares Outstanding 350.35
Current Stock Price 34.71
Market Value of Equity 12,160.76
Short‐Term Debt 1.20
Long‐Term Debt 1,895.55
Value of Debt 1,896.75
PV of Operating Leases 215.53
Market Value of Debt 2,112.28
Market Value of Firm 14,273.04
Weight of Debt 14.80%
Weight of Equity 85.20%
Weighted Average Cost of Capital (WACC) 10.03%
21. Southwestern Energy
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 3.50%
CV ROIC 15.04%
WACC 10.03%
Cost of Equity 10.85%
Fiscal Years Ending Dec. 31 2012E 2013E 2014E 2015E 2016E 2017E 2018E(CV)
DCF Model
Free Cash Flow 394.26 595.49 624.28 609.96 634.95 625.62
Continuing Value 22,799.71
Discount Factor 1.10 1.21 1.33 1.47 1.61 1.77
PV of FCF Discounted by WACC 358.33 491.89 468.68 416.20 393.77 352.63 12,850.80
Value of Operating Assets 15,332.30
Plus: Hedging Assets 514.47
Less: Debt
Short‐Term Debt 1.20
Long‐Term Debt 1,896.75
Value of Debt 1,897.95
Less: Other Claims
ESOP 94.04
Underfunded Pension/Postretirement Liabilities 20.51
PV of Operating Leases 215.53
Hedging Liabilities 12.51
Value of Other Claims 342.59
Value of Equity 13,606.23
Shares Outstanding 348.96
Value per Share 38.99
Value per Share (Adjusted for Partial Year) 42.87
Fiscal Years Ending Dec. 31 2012E 2013E 2014E 2015E 2016E 2017E 2018E(CV)
EP Model
Economic Profit 684.29 666.10 665.42 664.96 660.40 655.29
Continuing Value 9,899.79
Discount Factor 1.10 1.21 1.33 1.47 1.61 1.77
PV of EP Discounted by WACC 621.93 550.23 499.57 453.73 409.55 369.34 5,579.90
PV of EP and Continuing Value 8,484.26
Invested Capital 2011 6,848.05
Value of Operating Assets 15,332.30
Plus: Hedging Assets 514.47
Less: Debt
Short‐Term Debt 1.20
Long‐Term Debt 1,896.75
Value of Debt 1,897.95
Less: Other Claims
ESOP 94.04
Underfunded Pension/Postretirement Liabilities 20.51
PV of Operating Leases 215.53
Hedging Liabilities 12.51
Value of Other Claims 342.59
Value of Equity 13,606.23
Shares Outstanding 348.96
Value per Share 38.99
Value per Share( Adjusted for Partial Year) 42.87
22. Southwestern Energy
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2012E 2013E 2014E 2015E 2016E 2017E 2018E(CV)
EPS 1.42$ 1.56$ 1.71$ 1.88$ 2.07$ 2.26$ 2.48$
Key Assumptions
CV growth 3.50%
CV ROE 9.97%
Cost of Equity 10.85%
Future Cash Flows
P/E Multiple 8.82
EPS(next period) 2.48$
Future Stock Price 21.88$
Dividends Per Share ‐$ ‐$ ‐$ ‐$ ‐$ ‐$
Future Cash Flows ‐$ ‐$ ‐$ ‐$ ‐$ 21.88$
Discount Factor 1.11 1.23 1.36 1.51 1.67 1.86
Discounted Cash Flows ‐$ ‐$ ‐$ ‐$ ‐$ 11.79$
Intrinsic Value 11.79$
Intrinsic Value (Adjusted for Partial Year) 12.96$
23. Southwestern Energy
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
EPS EPS Est.
Ticker Company Price 2012E 2013E P/E 12 P/E 13 5yr Gr. PEG 12 PEG 13
CHK Chesapeake Energy Corp 17.03 0.48 1.32 35.48 12.90 7.25 4.89 1.78
TLM Talisman Energy Inc. 11.22 0.38 0.54 29.53 20.78 24.70 1.20 0.84
CLR Continental Resources Inc. 68.70 3.25 4.54 21.14 15.13 28.90 0.73 0.52
WMB Williams Companies 32.84 1.16 1.28 28.31 25.66 15.80 1.79 1.62
PXD Pioneer Natural Resources Co. 107.00 3.98 5.46 26.88 19.60 13.50 1.99 1.45
Average 28.27 18.81 2.12 1.24
SWN Southwestern Energy Co 107.00 1.42 1.56 75.34 68.81 5.79 13.01 11.88
Implied Value:
Relative P/E (EPS12) $ 40.15
Relative P/E (EPS13) 29.25$
PEG Ratio (EPS12) 17.44$
PEG Ratio (EPS13) 11.20$
27. Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 4,741,732
Average Time to Maturity (years): 3.48
Expected Annual Number of Options Exercised: 1,363,208
Current Average Strike Price: 21.24$
Cost of Equity: 9.00%
Current Stock Price: 34.71$
2012E 2013E 2014E 2015E 2016E 2017E 2018E(CV)
Increase in Shares Outstanding: 1,727,398 862,650 303,067 303,067 414,846 565,353 565,353
Average Strike Price: 21.24$ 23.15$ 25.24$ 27.51$ 29.98$ 32.68$ 35.62$
Increase in Common Stock Account: 36,692,266 19,972,997 7,648,443 8,336,803 12,438,701 18,477,105 20,140,045
Change in Treasury Stock 2,228,000 2,228,000 2,228,000 2,228,000 2,228,000 2,228,000 2,228,000
Expected Price of Repurchased Shares: 34.71$ 37.83$ 41.24$ 44.95$ 49.00$ 53.41$ 58.21$
Number of Shares Repurchased: 64,189 58,889 54,027 49,566 45,473 41,718 38,274
Shares Outstanding (beginning of the year) 350,353,300 352,016,509 352,820,270 353,069,310 353,322,811 353,692,184 354,215,818
Plus: Shares Issued Through ESOP 1,727,398 862,650 303,067 303,067 414,846 565,353 565,353
Less: Shares Repurchased in Treasury 64,189 58,889 54,027 49,566 45,473 41,718 38,274
Shares Outstanding (end of the year) 352,016,509 352,820,270 353,069,310 353,322,811 353,692,184 354,215,818 354,742,896
28. VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol SWN
Current Stock Price 34.71
Risk Free Rate 0.90%
Current Dividend Yield 0.00%
Annualized St. Dev. of Stock Returns 36.44%
Average Average B‐S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 1,727,398 2.10 1.50 32.64$ 56,379,091$
Range 2 862,650 22.19 2.10 14.41$ 12,428,577$
Range 3 606,133 31.54 4.40 12.02$ 7,284,763$
Range 4 1,130,705 36.77 6.50 12.42$ 14,048,750$
Range 5 414,846 41.60 5.00 9.40$ 3,900,562$
Total 4,741,732 21.24$ 3.48 16.35$ 94,041,742$
