What To Expect From Southwestern Energy's (SWN) Q2 Earnings?

Independent natural gas operator Southwestern Energy Co. (NYSE:SWN) is set to release its second-quarter 2016 results after the closing bell on Thursday, July 21.

In the preceding three-month period, the Spring, TX-based upstream player delivered a positive earnings surprise of 60.00% on better-than-expected production, improved margins and cost savings initiatives.

As far as the earnings surprise history is concerned, the company has a good record: its beaten estimates in 3 of the last four quarters with an average beat of 25.83%.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Unlike the previous few quarters, second-quarter 2016 turned out to be a rather good one with natural gas advancing more than 49% sequentially – the best quarterly percentage gain in 11 years. Natural gas futures during the Apr–Jun 2016 period hovered mostly between $2 and $3 per million Btu (MMBtu). With the commodity comprising around 90% of Southwestern’s total production, the price improvement bodes well for the company.

However, notwithstanding previous quarter’s robust production, Southwestern is struggling with base declines in some of its producing assets. Moreover, the company’s newly created secured credit facility, despite augmenting balance sheet cash, comes at the price of rising financing costs. Finally, Southwestern’s recent equity sale of 98.9 million shares has led to substantial equity dilution – by as much as 25% – and will also reduce the stock’s EPS.

Earnings Whispers

Our proven model does not conclusively show that Southwestern Energy will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at a loss of 11 cents.

Zacks Rank: Southwestern Energy has a Zacks Rank #2. Though a Zacks Rank #2 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Southwestern Energy, here are some domestic oil and gas finders you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Anadarko Petroleum Corp. (NYSE:APC) has an Earnings ESP of +13.75% and a Zacks Rank #2. The company is expected to release earnings results on July 26.

Cabot Oil & Gas Corp. (NYSE:COG) has an Earnings ESP of +22.22% and a Zacks Rank #2. The company is anticipated to release earnings on July 29.

Murphy Oil Corp. (NYSE:MUR) has an Earnings ESP of +13.51% and a Zacks Rank #2. The company is likely to release earnings on July 27.