Current swn Stock Info

On March 16, 2015, Southwestern Energy (ticker: SWN) announced a quarterly dividend payment on the company’s 6.25% Series B Mandatory Convertible Preferred Stock. Southwestern has elected to make this payment in common shares as opposed to cash, or a “payment-in-kind” (PIK) dividend.

Southwestern’s quarterly dividend amounts to $27.3 million that will be paid using up to 3.35 million shares of common stock, with any discrepancy between the value of the shares and the dividend payment being accounted for with cash. The prospectus filed by Southwestern gives the company flexibility to meet the dividend with any combination of stock and cash they choose, subject to limitations.

Also in the prospectus, the company outlines the limitations of the stock issuance. Southwestern can issue shares equivalent to the dividend payment divided by $8.05, which means a maximum of 3.35 million shares can be issued per quarter. The company currently has 382 million fully diluted shares outstanding. If the full amount of 3.35 million shares are issued per quarter, it would result in a 0.9% dilution on a quarterly basis.

Assuming the dividend is fully paid in stock, this would mean a $108 million cash savings for SWN on an annual basis.

Sandridge Energy previously utilized a PIK dividend payment, but chose to end the policy after the share price fell to the point where PIK presented a dilution issue. Southwestern shares closed trading on March 17, 2016, at $8.10 per share with a market cap of $3.16 billion.

Generating Cash Flow

Year to date 2016, oil and gas companies have offered over $10 billion in equity through follow on share offerings. A large portion of that money has been used to pay for 2016 capital expenditures and pay down existing debt. While this is not a direct offering by Southwestern, it is a use of the equity market to conserve capital and maintain liquidity. The company’s capex budget for 2016 is $400 million, the cash conserved through the dividend payment would cover over a quarter of that plan.

The use of equity dilution to fund capital programs presents an immediate issue to the shareholder of dilution, but what if the company makes good use of the capital to generate more cash flow, what effect would that have?

Analyst estimates for 2016 project Southwestern to generate $661.4 million in EBITDA based on 396 MBoe/d production, according to Bloomberg. Based on projected capital expenditures of $400 million, that would equate to $1.63 in EBITDA for every $1.00 in capex during 2016. Relative to the $108 million in savings that could be used towards capex, that would equate to $176.0 million in EBITDA for the company.

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