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Southwestern Energy pops as BMO sees the driller outperforming peers

Natural gas pipe and worker with fire silhouetted
Patti McConville | Image Bank | Getty Images

Shares of Southwestern Energy rose after BMO Capital Markets said it sees the natural gas driller outperforming its peers.

The stock was up nearly 4 percent to around $12 in midmorning trading Monday. It later pared those gains and ended the session up nearly 1.5 percent.

BMO based its upgrade on Southwestern's stock valuation compared with other natural gas-focused drillers, as well as the fundamental strength of its near-term business prospects. Its $18 price target represents 57 percent rise from Friday's closing price.

"We see SWN as affording relatively inexpensively priced exposure to natural gas, backed by what is a strong balance sheet today thanks in part to proceeds from asset sales and equity raises," BMO said in a note.

While shares of Southwestern have lagged the broader nat gas group since October, BMO sees the stock trading at a discount to peers. The firm sees Southwestern stock trading at 6.6 times estimated 2017 earnings before certain expenses, versus a group median of 8.3 times earnings.

Southwestern is aiming to operate within cash flow in 2017, which BMO believes will not generate much production growth based on that level of spending. However, BMO sees Southwestern generating some of the best debt-adjusted production and cash flow growth in the group. That in turn contributes to improved corporate-level returns and a stronger balance sheet, in BMO's view.

Natural gas prices remain low compared with recent years, but have been on the rise. Expectations for colder weather after last year's mild winter are forecast to further boost commodity prices.

"Gas storage sits at record levels, but demand pull on normal weather could right-size storage and potentially eliminate the overhang. We see SWN as affording some of the greatest torque to that potential change," BMO wrote.