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Related Issuers
Announcement:

Moody's changes SM Energy outlook to positive

Global Credit Research - 21 May 2012

Approximately $700 million of rated debt affected

New York, May 21, 2012 -- Moody's Investors Service changed SM Energy Company's (SM Energy) rating outlook to positive from stable. Moody's also affirmed the company's Ba3 Corporate Family Rating (CFR) and existing B1 senior notes ratings. The Speculative Grade Liquidity rating remains SGL-3.

RATINGS RATIONALE

"The positive outlook reflects SM Energy's growing reserves and production scale and relatively low financial leverage," commented Pete Speer, Moody's Vice President. "If the company is able to continue its present growth trajectory with good returns on investment then the ratings could be upgraded."

SM Energy's Ba3 Corporate Family Rating (CFR) is supported by its sizable production and proved reserve scale, significant and growing exposure to oil and natural gas liquids production, and leverage metrics that are among the lowest of the Ba3 peer group. The company is achieving strong production growth in the Eagle Ford shale, where it holds sizable operated and non-operated acreage positions. SM Energy also owns acreage in the Bakken shale and Granite Wash where it is also increasing capital spending to boost its oil and natural gas liquids production. The company is able to reduce its capital spending in the Haynesville shale to minimal levels while retaining most of its acreage there if natural gas prices improve.

The CFR could be upgraded to Ba2 in 2013 if SM Energy increases its reserve and production scale, boosts its investment returns and maintains its low financial leverage. Proved developed (PD) reserves approaching 175 million boe, leveraged full-cycle returns above 1.5x with leverage on production and PD reserves under $15,000/boe and $8/boe would be supportive of a Ba2 rating. In contrast, if the production and proved reserve response from the large capital investments is weaker than expected, then leverage could increase significantly and pressure the ratings. Debt/average daily production sustained above $20,000/boe or Debt/PD above $10/boe could result in a ratings downgrade.

The SGL-3 rating is based on our expectation that SM Energy will maintain adequate liquidity through the first quarter of 2013. The company has a $1 billion committed senior secured revolving credit facility with a current borrowing base of $1.5 billion that had approximately $688 million of available borrowing capacity at March 31, 2012, pro forma for the redemption of its convertible notes in April and May 2012. This provides liquidity for the company's planned capital expenditures in excess of cash flows over the remainder of 2012 and into 2013. The company has significant covenant compliance headroom that we expect to continue. Although the company's oil and gas properties are fully encumbered by the credit facility, the substantial excess of the borrowing base above the committed facility provides significant flexibility to execute asset sales to raise cash for its capital investment.

The principal methodology used in rating SM Energy was the Global Independent Exploration and Production Industry Methodology published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

SM Energy Company is an independent exploration and production company based in Denver, Colorado.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Peter Speer
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes SM Energy outlook to positive
No Related Data.

 

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