CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Southwestern Energy Company's (Southwestern; NYSE: SWN) Long-Term Issuer Default Rating at 'B+' and unsecured debt ratings at 'B+/RR4'. Fitch has also assigned a 'BB+/RR1' rating to the company's new secured term loan and a 'B+/RR4' rating to its secured credit facility. The Rating Outlook has been revised to Positive from Negative.
The 'BB+' rating on the $1.191 billion secured term loan reflects its security by substantially all assets of Southwestern Energy Company and all proved oil and gas properties of its subsidiaries located in the Fayetteville Shale. The 'B+' rating on the $743 million secured credit facility considers that there is currently no or very limited 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, is up to 15% of consolidated net tangible assets (Fitch estimates approximately $1.2 billion for the most recent fiscal quarter). Fitch recognizes that availability under the secured debt cap 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.
The Positive Outlook reflects the company's improved liquidity position and reduced repayment/refinance risk following the recently completed bank and announced equity offering/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. While execution risk remains, Fitch believes that the recent transactions will help to alleviate financial and, potentially, operational constraints leading to an improved credit profile. Fitch also recognizes that current natural gas prices provide an opportunity to layer in hedges to further mitigate cash flow risk and support at least a modest level of development funding. Fitch would likely upgrade Southwestern following execution of the equity and debt tender transactions, as well as communication of a clear plan to manage liquidity and re-establish operational momentum.
The current rating continues to reflect the $950 million in 2018 maturities, weak realized prices particularly in the Appalachia region, operational momentum loss, and elevated leverage profile. In order to maintain a neutral free cash flow (FCF) profile, management decided to suspend all drilling activity reducing capex to approximately $350 million in 2016, including capitalized interest and expenses, from approximately $1.8 billion in 2015. While reducing the call on near-term liquidity, this decision is expected to result in a steep 15% average and 27% exit production rate drop for 2016. Fitch continues to recognize that company-owned service equipment allows for cost and operating flexibility but believes that the anticipated operational momentum loss will require a considerable amount of capital and time to reverse production trends.
Approximately $5.8 billion in debt is affected by today's rating action. A full list of ratings actions follows at the end of this release.
KEY RATING DRIVERS
Southwestern's ratings are supported by its size, favourable 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. Production has grown over 27% year-over-year to nearly 2.7 billion cubic feet equivalent per day (Bcf/d) for the year ended 2015. 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. First quarter 2016 production declined approximately 4% quarter-over-quarter to 2.6 Bcf/d illustrating the initial production effects of very limited capital spending.
FORECAST NEUTRAL FCF AND WIDER LEVERAGE METRICS
Fitch's base case forecasts Southwestern will generally be FCF neutral for 2016. Debt/EBITDA is estimated to increase to approximately 11.2x in 2016 from approximately 3.2x mainly due to the weaker realized oil & gas market pricing environment and lower production. Debt/1p reserves and debt per flowing barrel metrics are forecast to be approximately $4.70/boe ($0.78/mcf) and $11,470 respectively. The Fitch base case forecasts debt/EBITDA improves to approximately 3.7x in 2018 mainly due to lower gross debt levels and an improvement in the production profile and Fitch's oil & gas price assumptions.
Fitch expects the majority of the secured term loan and net equity proceeds, after the repayment of approximately $285 million in credit facility borrowings, allocation of $450 million in pending asset sale proceeds to the unsecured term loan, and up to $750 million in debt tender activity, to be held as cash & equivalents. Fitch estimates the company's actions will result in considerably lower net debt levels to approximately $3 billion by yearend 2016 from approximately $4.7 billion at yearend 2015.
As of May 2016, the company had hedges for 112 Bcf, or approximately 15% of estimated production, at an average floor price of $2.44/mcf. Management expects to continue to opportunistically add hedges while allowing for pricing upside. The company's long-term target is to have at least 30% of production hedge in any given year.
Fitch's key assumptions within the rating case for Southwestern include:
--WTI oil price that trends up from $35/barrel in 2016 to $65/barrel long-term;
--Henry Hub gas that trends up from $2.25/mcf in 2016 to $3.25/mcf long-term;
--Average differential over $0.75/mcf in 2016 followed by incremental improvements;
--Production below 2.3Bcf/d, or a 15% year-over-year decline, in 2016 followed by a rig-linked mid-single digit decline in 2017 with a moderately positive growth profile thereafter as oil & gas prices improve;
--Liquids mix, principally natural gas liquids, remains relatively flat near-term with a pause in Southwestern Appalachia acreage development;
--Discretionary capital spending, excluding capitalized interest and expenses, is forecast to be $125 million in 2016, consistent with guidance, followed by a relatively balanced capital spending profile;
--Asset divestitures assumed to be $450 million, consistent with the pending West Virginia acreage sale, in 2016 with proceeds used to pay down the unsecured term loan;
--Receipt of approximately $1.2 billion in equity capital;
--Execution of $750 million debt tender.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Demonstrated commitment to lower gross debt levels; and
--Mid-cycle debt/EBITDA less than 3.5x - 4.0x on a sustained basis;
--Mid-cycle debt/1p reserves below $5.00/boe and/or debt/flowing barrel under $20,000;
--Improving unit cost profile.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to meaningfully address the capital structure in a weak realized pricing environment;
--Mid-cycle debt/EBITDA above 5.0x on a sustained basis;
--Mid-cycle debt/1p reserves nearing $5.50 - $6.00/boe and/or debt/flowing barrel above $22,500;
--Material loss of operational momentum and/or further weakening of the unit cost profile.
LIQUIDITY, COVENANTS, AND MATURITY PROFILE
Fitch estimates pro forma cash & equivalents of approximately $1.3 billion as of March 31, 2016. An additional source of liquidity is the company's new $743 million secured credit facility (approximately $595 million available, considering approximately $148 million in outstanding letters of credit, as of March 31, 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.
The main financial covenant is a minimum interest coverage covenant of greater than 0.75x through Dec. 31, 2016 followed by annual increases. 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. 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. 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 by issued by certain subsidiaries.
Maturities on outstanding debt are manageable before 2018. 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), $950 million (7.5% and 3.3% notes), and $850 million (4.05% notes) mature in 2017, 2018, and 2020, respectively. Fitch believes the recently announced equity and debt tender transactions help alleviate refinance/repayment risks.
Southwestern also has recently amended and restated its $750 million unsecured term loan due December 2020, subject to subject to repayment and springing maturity provisions. The repayment provision requires that at least $375 million of the unsecured term loan is repaid by June 2017. The company's recent equity offering and pending sale of 55,000 net acres in West Virginia for $450 million to Antero Resources Corporation mitigate the repayment provision risk. The terms of the agreement require proceeds from future asset sales, as well as certain debt and equity issuances, be used to reduce unsecured term loan borrowings. The unsecured term loan springing maturity is consistent with the secured term loan and secured credit facility provision.
MANAGEABLE OTHER LIABILITIES
The company's pension obligations were underfunded by approximately $30 million as of Dec. 31, 2015, 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. Nearly $3.4 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 affirmed at 'B+';
--Secured term loan assigned 'BB+'/RR1;
--Secured credit facility assigned 'B+'/RR4;
--Senior unsecured notes affirmed at 'B+'/'RR4';
--Unsecured credit facility affirmed at 'B+'/'RR4';
--Unsecured term loan affirmed at 'B+'/'RR4';
--Short-term IDR affirmed at 'B'
--Commercial paper program affirmed at 'B'.
The Rating Outlook is revised to Positive from Negative.
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.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)
Dodd-Frank Rating Information Disclosure Form