New York, May 01, 2020 -- Moody's Investors Service, (Moody's) downgraded SM Energy Company's
(SM) Corporate Family Rating (CFR) to Caa1 from B3, Probability
of Default Rating (PDR) to Ca-PD from B3-PD, senior
unsecured rating to Ca from Caa1, and senior unsecured shelf to
(P)Ca from (P)Caa1. The rating outlook is negative.
The downgrade reflects the company's intention to issue new secured debt
to exchange for up to $1,681 million of its senior unsecured
notes at a 35% to 50% discount to par, a transaction
Moody's views as a distressed exchange and thus, a default.
Upon successful completion of the exchange, an "--/LD"
(limited default) signifier will be appended to SM's PDR for a period
of three days to acknowledge the default.
Downgrades:
..Issuer: SM Energy Company
.... Probability of Default Rating,
Downgraded to Ca-PD from B3-PD
.... Corporate Family Rating, Downgraded
to Caa1 from B3
....Senior Unsecured Notes, Downgraded
to Ca (LGD5) from Caa1 (LGD4)
....Senior Unsecured Shelf, Downgraded
to (P)Ca from (P)Caa1
Outlook Actions:
..Issuer: SM Energy Company
....Outlook, Remains Negative
RATINGS RATIONALE
SM's Ca PDR reflects its intention to undertake a debt exchange on almost
$1.7 billion of its unsecured notes at prices Moody's
would deem to be a distressed exchange, which Moody's considers
a default. If the exchange is successful, leverage will improve;
however, very weak oil prices into 2021 when SM's hedge position
weakens will continue to pressure cash flow-based metrics which
is incorporated into the Caa1 CFR. The high capital intensity and
steep initial decline rates of the company's shale assets limits
the company's ability to make deep capital spending cuts without a rapid
fall in production volume. SM benefits from a production base (136
mboe/d in the first quarter of 2020) that is similar to most Ba-rated
producers and decent basin diversification. The company's good
inventory of Midland Basin drilling locations, capable of generating
positive returns in an oil price environment below $40/bbl should
allow the company to limit production declines while generating modest
free cash flow. Post-exchange, the company's
debt maturity profile will be considerably improved, easing the
potential for liquidity concerns.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The E&P sector has
been one of the sectors most significantly affected by the shock given
its sensitivity to demand and oil prices. More specifically,
the weaknesses in SM's credit profile have left it vulnerable to shifts
in market sentiment in these unprecedented operating conditions and SM
remains vulnerable to the outbreak continuing to spread and oil prices
remaining weak. We regard the coronavirus outbreak as a social
risk under our ESG framework, given the substantial implications
for public health and safety. Today's action reflects the impact
on SM of the breadth and severity of the oil demand and supply shocks,
and the broad deterioration in credit quality it has triggered.
SM's SGL-3 rating is based on our expectation that the company
will maintain adequate liquidity through early 2021, primarily due
to its large borrowing capacity under its revolving credit facility.
The company had negligible cash and $72 million drawn under the
$1.2 billion senior secured revolving credit facility as
of March 31, 2020. The borrowing base was set at $1.1
billion in the April 2020 redetermination, providing more than $1
billion of availability.
Cash flow is buttressed by the company's commodity hedging program,
with about 80% of expected oil production for the second,
third and fourth quarters of 2020 locked in at or above $55/bbl.
Under SM's current debt load and given Moody's expectations for
very weak oil prices into 2021, the company could breach its leverage
covenant in 2021 if the debt exchange is not completed. SM's next
bond maturity is for its $172.5 million of senior convertible
notes due July 1, 2021, followed by $477 million of
senior unsecured notes coming due in November 2022. Although SM's
revolver does not mature until September 2023, it has a springing
feature that accelerates the maturity to August 16, 2022 if more
than $100 million of the 2022 notes remain outstanding at that
date. In the event the exchange is successfully executed,
the company's maturity profile will be markedly improved.
The Ca senior unsecured rating reflects an expected loss of 35%
to 50% on SM's senior unsecured notes resulting from the
planned debt exchange under the proposed terms.
The negative outlook reflects the challenging commodity price environment
and potential the exchange is not completed at proposed terms and ultimate
recovery weakens.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded if the exchange isn't completed,
or the terms of the exchange weaken such that expected recovery declines
significantly. A deterioration in liquidity could also lead to
a downgrade. Successful completion of the planned debt exchange
and improved liquidity could result in a ratings upgrade. .
The principal methodology used in these ratings was Independent Exploration
and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
SM Energy Company is a Denver, Colorado based publicly traded E&P
company with primary production operations in the Eagle Ford Shale (Webb
County) and the Midland Basin (Howard, Upton, Midland and
Martin Counties) of Texas.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
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am Main 60322, Germany, in accordance with Art.4 paragraph
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John Thieroff
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Client Service: 1 212 553 1653
Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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