NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Southwestern Energy Company's (Southwestern; NYSE: SWN) Long-Term Issuer Default Rating to 'BB' from 'B+'. Fitch has also upgraded Southwestern's secured term loan to
'BBB-'/'RR1' from 'BB+'/'RR1' and secured credit facility and unsecured debt to 'BB'/'RR4' from 'B+'/'RR4'. The Rating Outlook has been revised to Stable from Positive.
Approximately $4.7 billion in debt is affected by today's rating action. A full list of ratings follows at the end of this release.
The upgrade reflects the company's improved liquidity position and reduced repayment/refinance risk following the recently completed bank, equity, and debt tender transactions, as well as the pending West Virginia acreage sale. This helps moderate Fitch's previous concern that there was heightened capital structure event risk. Another consideration is the recently increased 2016 capital budget that will help re-establish operational momentum and moderate production declines. Capex is expected to be funded with a combination of operating cash flow and equity proceeds. Further, management's medium-term plan to manage to a near neutral FCF profile limits the potential need for additional gross leverage, while a more proactive hedging strategy should moderate cash flow risk and support development funding.
The 'BB'/'RR4' rating on the $743 million secured credit facility considers that there is currently no availability under the secured debt cap, making the credit facility effectively pari passu with other unsecured debt. The secured debt cap, as defined in the indentures as an incurrence test, is up to 15% of consolidated net tangible assets (Fitch estimates approximately $1 billion for the most recent fiscal quarter, which is below the outstanding $1,191 million secured term loan). Fitch recognizes that availability under the secured debt cap, as well as capacity under the 1.5x minimum collateral coverage provision, may change over time and result in all or a portion of secured credit facility borrowings becoming secured and having priority over the other unsecured debt.
KEY RATING DRIVERS
Southwestern's ratings are supported by its size, favorable Marcellus and Utica acreage positions, solid midstream asset base, and strong operating history. Offsetting factors include the company's heightened credit risk in a weak realized price environment following its leveraged December 2014 acquisition of Southwestern Appalachia acreage, nearly exclusive natural-gas focus that results in lower netbacks per barrel of oil equivalent (boe) relative to liquid peers, and limited geographic diversity.
The company reported net proved (1p) reserves of 6.2 trillion cubic feet equivalent (Tcfe; approximately 95% natural gas) for the year ended 2015, which is down over 40% mainly due to price revisions to undeveloped reserves. 2015 production grew over 27% year-over-year to nearly 2.7 billion cubic feet equivalent per day (Bcf/d). This increase is attributable to the integration of nearly 0.4 Bcf/d of the acquired Southwestern Appalachia production and about an equal amount of organic growth within the Northeastern and Southwestern Appalachia properties offset by production declines in the Fayetteville and other properties. The pending 55,000 net acre Southwestern Appalachia asset sale will have limited impact on 1p reserves and production (11 Bcfe and 14 mcf/d, respectively, as of Dec. 31, 2015). First half 2016 production declined approximately 4% year-over-year to around 2.5 Bcf/d illustrating the production effects of very limited capital spending.
The company increased its 2016 E&P capital budget to approximately $475 million from approximately $125 million to fund the completion of drilled but uncompleted wells and drilling of new wells. 2016 production guidance has also been increased to an average estimated 11% decline (870 Bcfe mid-point) from an initial average estimated 15% decline (825 Bcfe mid-point). This production update is the result of improved performance of existing wells and, to a lesser extent, additional capital spending. Fitch believes that the operating cash flow and equity-funded increase in capital spending will help the company regain some operational momentum and further develop its earlier stage SW Appalachia acreage position. Management also gave an early indication that 2017 E&P capex of approximately $700 million would result in average production being relatively flat year-over-year.
MODERATELY NEGATIVE FCF AND WIDE LEVERAGE METRICS FORECAST
Fitch's base case forecasts Southwestern will be approximately $250 million FCF negative in 2016. Debt/EBITDA is estimated to increase to approximately 8.9x in 2016 from approximately 3.2x in 2015 mainly due to the weaker realized oil & gas market pricing environment and lower production. Debt/proved developed (PD) reserves and debt per flowing barrel metrics are forecast to be approximately $5.20/boe ($0.87/mcf) and $11,870 respectively.
The Fitch base case forecasts debt/EBITDA improves to approximately 3.1x in 2018 mainly due to lower gross debt levels and an improvement in the production profile and Fitch's oil & gas price assumptions. The Fitch base case also assumes that the company maintains a near neutral FCF profile in 2017 and 2018. Fitch's base case projects that net debt levels will be approximately $3.2 billion at yearend 2016, compared to approximately $4.7 billion at yearend 2015, and remain relatively flat through 2018.
As of August 2016, the company had natural gas hedges for 149 Bcf (average floor price of $2.52/mcf) and 228 Bcf (average floor price of $3.01/mcf) in 2016 and 2017, respectively. This represents approximately 17% and 26% of 2016 production (mid-point) for 2016 and 2017, respectively. Management has made recent public commentary that it has taken steps to establish a rolling three-year hedging program that, subject to market prices, will hedge 50% - 80% of current production.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Southwestern include:
--WTI oil price that trends up from $42/barrel in 2016 to $65/barrel long term;
--Henry Hub gas that trends up from $2.35/mcf in 2016 to $3.25/mcf long term;
--Average differential around $0.80/mcf in 2016 followed by incremental improvements;
--Production below 2.4Bcf/d, or an approximately 11% year-over-year decline, in 2016 followed by relatively flat production and mid-single digit production growth in 2017 and 2018, respectively, as Fitch's oil & gas price assumptions improve;
--Liquids mix, principally natural gas liquids, exhibits annual increases as production in the SW Appalachia region grows proportionally;
--Discretionary capital spending, excluding capitalized interest and expenses, is forecast to be approximately $505 million in 2016, consistent with guidance, followed by a relatively balanced capital spending profile;
--Asset divestitures assumed to be approximately $450 million consistent with the pending West Virginia acreage sale.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Demonstrated commitment to lower gross debt levels and execution of a credit conscious plan to re-establish operational momentum;
--Mid-cycle debt/EBITDA around 2.5x on a sustained basis;
--Mid-cycle debt/PD reserves below $5.00 - $5.50/boe and/or debt/flowing barrel under $15,000;
--Improving differential trends and unit cost profile.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to manage liquidity and re-establish operational momentum;
--Mid-cycle debt/EBITDA in the 3.5x range on a sustained basis;
--Mid-cycle debt/PD reserves nearing $6.00 - $6.50/boe and/or debt/flowing barrel above $17,500 - $20,000;
--Further weakening in differential trends and the unit cost profile.
ENHANCED LIQUIDITY PROFILE
Fitch estimates pro forma cash & equivalents of approximately $1.6 billion as of June 30, 2016. This considers recent debt repayments, the equity issuance, and pending West Virginia asset sale expected to close in the third quarter of 2016. An additional source of liquidity is the company's $743 million secured credit facility (approximately $574 million available, considering approximately $169 million in outstanding letters of credit, as of June 30, 2016) maturing in December 2020, subject to a springing maturity provision. The credit facility is subject to a springing maturity of October 2019 if the company has not amended, redeemed, or refinanced at least $765 million of the $850 million notes due January 2020 by October 2019. Under the terms of the agreements, any amendments to the 2020 notes or refinance debt must extend to at least March 2021. Southwestern will also have access to $66 million under the existing unsecured credit facility through December 2018.
MODIFIED COVENANT PACKAGE
The main financial covenant is a minimum interest coverage covenant of greater than 0.75x through Dec. 31, 2016 followed by annual increases of 0.25x to 1.5x in 2019. The company also has a minimum liquidity covenant of $300 million, subject to an increase of up to $500 million if out of compliance with certain EBITDAX or leverage metrics. An anti-hoarding provision also requires the company to pay down any credit facility borrowings with unrestricted cash in excess of $100 million. The secured term loan and credit facility have a minimum collateral coverage ratio covenant of 1.5x based on an adjusted PV9 that includes only 35% of total proved non-producing and proved undeveloped oil and gas properties. The existing unsecured 2013 revolving credit facility includes a maximum debt-to-capital ratio of 60%, excluding non-cash asset impairments and certain other items. Other covenants consist of customary additional lien and debt limitations, transaction restrictions, and change in control provisions. The additional debt covenant allows for up to $1.1 billion of secured debt to be issued by certain subsidiaries. Fitch believes that the company currently has adequate financial covenant headroom.
IMPROVED MEDIUM-TERM MATURITY PROFILE
Southwestern has proactively taken steps to improve its medium-term maturity profile through a combination of debt tendering activity and the unsecured term loan repayment and amendment. The 7.15% notes have annual payments of $1.2 million through 2017 with the remaining principal balance of $24.6 million due in 2018. An additional $40 million (7.35% and 7.125% notes), $250 million (7.5% and 3.3% notes; reduced approximately $1,735 million inclusive and $1,450 million exclusive of the credit facility), and approximately $2.4 billion (4.05% notes, secured term loan, and unsecured term loan; increased approximately $1.6 billion) mature in 2017, 2018, and 2020, respectively. Fitch believes that recent actions taken by the company help alleviate medium-term refinance/repayment risks.
MANAGEABLE OTHER LIABILITIES
The company's pension obligations were underfunded by approximately $40 million as of June 30, 2016, which Fitch considers to be manageable when scaled to mid-cycle funds from operations. Southwestern's asset retirement obligation (ARO) was about $201 million as of Dec. 31, 2015, which is generally consistent with the previous year's reported obligations.
Other obligations totalled approximately $9.2 billion on a multi-year, undiscounted basis as of Dec. 31, 2015. The obligations include: $8.9 billion in pipeline demand transportation charges, $278 million in operating leases for equipment, office space, etc., and $49 million in compression services. As of June 30, 2016, pipeline demand transportation charges declined to approximately $8.6 billion. Approximately $3.3 billion of the reported pipeline obligations still require regulatory approvals and additional construction efforts.
FULL LIST OF RATING ACTIONS
Southwestern Energy Company
--Long-Term IDR upgraded to 'BB' from 'B+';
--Secured term loan upgraded to 'BBB-'/'RR1' from 'BB+'/'RR1';
--Secured credit facility upgraded to 'BB'/'RR4' from 'B+'/'RR4';
--Senior unsecured notes upgraded to 'BB'/'RR4' from 'B+'/'RR4';
--Unsecured credit facility upgraded to 'BB'/'RR4' from 'B+'/'RR4';
--Unsecured term loan upgraded to 'BB'/'RR4' from 'B+'/'RR4;
--Short-Term IDR affirmed at 'B';
--Commercial Paper program affirmed at 'B'.
The Rating Outlook has been revised to Stable from Positive.
Additional information is available on www.fitchratings.com.
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Fitch has made no material adjustments that are not disclosed within the company's public filings.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/site/re/879564
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)
https://www.fitchratings.com/site/re/869259
Additional Disclosures
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011578
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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