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Global Credit Research - 25 Jan 2011
Proposed offering of $250 million of senior unsecured notes
New York, January 25, 2011 -- Moody's Investors Service assigned a B1 rating to SM Energy Company's
(SM Energy) offering of $250 million senior unsecured notes due
2019. Moody's also assigned a Ba3 Corporate Family Rating
(CFR) and a Speculative Grade Liquidity rating of SGL-3.
The outlook is stable. The proceeds of the offering will be used
to repay revolver borrowings and fund planned capital expenditures.
"SM Energy has a sizable production base and assembled a strong
acreage position in several oil and natural gas liquid plays,"
commented Pete Speer, Moody's Vice President. "The
company is significantly ramping up capital expenditures in excess of
operating cash flow to develop these plays which will require good capital
productivity and the execution of significant asset sales to maintain
SM Energy's low financial leverage metrics."
SM Energy is a long established independent exploration and production
company (formerly known as St. Mary's Land & Exploration)
that has transitioned its asset portfolio from conventional properties
assembled by its legacy acquire and exploit strategy to an unconventional
resource play orientation with positions including the Haynesville,
Bakken, Eagle Ford and Granite Wash. The Ba3 CFR is supported
by its sizable production and proved reserve scale, significant
and growing exposure to oil and natural gas liquid production, and
a historical track record of conservative financial policies. Although
the company's production volumes and proved developed reserves are
smaller than many Ba3 rated peers, SM Energy's leverage metrics
are among the lowest of the peer group.
The company's capital spending budget for 2011 of $1.04
billion is an increase of around 20% from 2010 spending and will
exceed forecasted cash flow by approximately $400 to $450
million, depending on commodity prices. This creates both
execution and financing risks. SM Energy plans to ultimately fill
this funding gap with proceeds from asset sales, with approximately
$41 million of sales closed so far this year. The company
is marketing its Marcellus properties and pursuing the sale or joint venture
of a portion of its Eagle Ford properties. Given the inherent uncertainty
regarding the timing and amount of these asset sales, this bond
issuance will position the company with a fully undrawn $678 million
credit facility and a pro forma cash balance of nearly $250 million
as it pursues its aggressive production growth plans.
While SM Energy will initially have strong liquidity following the bond
offering, the SGL-3 liquidity rating incorporates the uncertainty
regarding the timing and amount of additional asset sales and the significant
capital spending exposure on the non-operated portion of its Eagle
Ford shale acreage. In addition, the holders of the company's
$287.5 million senior convertible notes could require the
company to repurchase the notes on April 1, 2012, although
SM Energy can settle the notes in common stock or cash or some combination
thereof. The company should have adequate liquidity for the remainder
of 2011 and entering 2012 to manage these potential requirements.
SM Energy's significant outspending of cash flows in 2011 and our
expectation for that to continue in 2012 makes a positive rating action
unlikely this year. If the production and proved reserve response
from this large capital investment falls short of the company's
expectations and/or the proceeds from asset sales are not achieved then
leverage on production volumes and proved developed (PD) reserves could
increase substantially from current pro forma levels of around $10,000/boepd
and $5/boe. Debt/production above $15,000 or
debt/PD above $7 could result in a negative outlook or ratings
The B1 rating on the proposed $250 million senior notes due 2019
reflects both the overall probability of default of SM Energy, to
which Moody's assigns a PDR of Ba3, and a loss given default
of LGD 5 (73%). The company has a committed $678
million senior secured revolving credit facility and $287.5
million of senior convertible notes due 2027. Both the new senior
notes and existing senior convertible notes are unsecured and have no
subsidiary guarantees. Therefore both notes are subordinate to
the senior secured credit facility's potential priority claim to
the company's assets and any liabilities, including trade
claims, at the subsidiaries. The size of the potential senior
secured and other structurally superior claims relative to the unsecured
notes outstanding results in the new senior notes being notched one rating
beneath the Ba3 CFR. However, we note that if the convertible
notes were retired with senior secured borrowings in the future or if
there are other changes that materially increase the proportion of senior
secured to senior unsecured debt, the senior notes rating could
be double notched under Moody's Loss Given Default Methodology.
The principal methodologies used in this rating were Independent Exploration
and Production (E&P) Industry published in December 2008, and
Loss Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
SM Energy Company is an independent exploration and production company
based in Denver, Colorado.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates new SM Energy senior notes B1
250 Greenwich Street
New York, NY 10007
No Related Data.
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