Fitch Affirms Southwestern Energy Co. at 'BBB-'; Outlook Revised to Negative
Fitch Ratings has affirmed Southwestern Energy Company's (Southwestern;
NYSE: SWN) long-term Issuer Default Rating (IDR) at 'BBB-'. The Rating
Outlook has been revised to Negative from Stable.
The Negative Outlook considers the effect that persistently low oil &
gas prices will have on the forecasted leverage profile following the
December 2014 leveraged acquisition of the Southwestern Appalachia
assets. Fitch's previous base case scenario assumed a more supportive
pricing environment that helped to fund initial development spending of
the earlier stage Southwestern Appalachia assets, resulting in
production and cash flow growth over a three-year period. Since capital
available for development and production is expected to be curtailed,
Southwestern's leverage profile may remain above our through-the-cycle
levels for a 'BBB-' credit over the rating horizon without supportive
signals for a price recovery and/or credit-friendly transactions that
reduce gross debt in the next 12-18 months.
Approximately $4.7 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 credit-conscious financial
policy and strong operating history that has resulted in the achievement
of drilling efficiencies and competitive production and finding and
development (F&D) cost profiles. Offsetting factors include the
company's 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 10.7 trillion cubic
feet equivalent (Tcfe; approximately 91% natural gas), or 1,791 million
boe (mmboe), for the year ended 2014. Following the approximately 40%
drop in Henry Hub prices, Southwestern's 1p reserves are likely to
experience downward price revisions that generally mirror prices with
some offset by net additions from extensions and discoveries. This
estimation is based on the 2012 price-driven reserve revision of
approximately 35% due to the over 30% year-over-year drop in Henry Hub
prices. Fitch recognizes, however, that 1p reserves exceeded
pre-revision levels in 2013 due to a combination of a Henry Hub price
rebound and operational and cost profile improvements.
Production has grown considerably through the first nine months of 2015
to nearly 2.7 billion cubic feet equivalent per day (Bcf/d), or
approximately 444 thousand boe per day (mboepd), from over 2.1 Bcf/d, or
approximately 351 mboepd, for the year ended 2014. This increase is
attributable to the integration of nearly 0.4 Bcf/d, or approximately 61
mboepd, 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.
Lower benchmark Henry Hub and realized prices have contributed to
negative unhedged full-cycle netback of $1.30/thousand cubic feet (mcf)
for third quarter 2015 (3Q15) compared to a positive $0.61/mcf for the
year ended Dec. 31, 2014. Weaker Henry Hub differentials of $0.98/ mcf
in 3Q15 are expected to improve as additional takeaway capacity becomes
available over the medium term. Cash netbacks remained positive at
$0.27/mcf in 3Q15 benefiting from a $0.16/mcf improvement in production
expenses, or an 11% reduction, since year-end 2014 mainly due to better
Marcellus unit costs.
FORECAST CASH FLOW METRICS WIDEN, UPSTREAM METRICS REMAIN SOLID
Fitch forecasts Southwestern will be approximately $400 million free
cash flow (FCF) negative for 2015. Debt/EBITDA is estimated to be under
3.3x in 2015 mainly due to the weaker oil & gas market pricing
environment. Debt/1p reserves and debt per flowing barrel metrics are
forecast to remain solid at over $2.50/boe, subject to any year-end
price revisions, and approximately $10,725, respectively. Fitch
estimates that a price-driven reserve revision consistent with the drop
in Henry Hub prices would result in debt/1p reserves of approximately
Fitch's rating case, assuming a West Texas Intermediate (WTI) and Henry
Hub price of $45 and $2.50, respectively, projects that Southwestern
will be FCF neutral in 2016. This assumes that the company will spend
within operating cash flow, consistent with guidance from management.
Fitch believes that capital is likely to be weighted toward its
highest-return Northeastern Appalachian acreage followed by Southwestern
Appalachia and, to a lesser extent, Fayetteville.
The Fitch rating case results in debt/EBITDA of over 4.1x in 2016 mainly
due to the weaker oil & gas market pricing environment. Fitch estimates
that a $0.25/mcf increase/decrease in the assumed natural gas price
results in a 0.75x-1.0x change in debt/EBITDA metrics. The rating case
considers the production profile benefits from capital allocation and
efficiency gains and incorporates the potential for asset sales. Fitch
assumes potential asset sales of $750 million in its rating case
consistent with the size of the recently issued term loan. This is an
increase in Fitch's previously assumed $500 million in asset sales given
the weaker pricing environment.
Debt/1p reserves and debt per flowing barrel metrics in 2016 are
forecast to remain solid at over $2.15/boe, subject to any year-end
price revisions, and under $9,600, respectively. Fitch estimates that a
price-driven reserve revision consistent with the drop in 2015 Henry Hub
prices would result in 2016 debt/1p reserves of approximately $3.60/boe.
Management had fixed-price hedges with an average price of $4.40/mcf
equivalent to 27% (240 Bcf) of planned production for 2015 that helped
mitigate the near-term impact of market prices on cash flow and support
production. As of Sept. 30, 2015, the company did not have any hedge
positions for 2016.
Fitch's key assumptions within the rating case for Southwestern include:
--WTI oil price that trends up from $45/barrel in 2016 to $60/barrel in
--Henry Hub gas that trends up from $2.50/mcf in 2016 to $3.00/mcf in
--Production growth of about 27% in 2015, generally consistent with
guidance, followed by 6% decline in 2016 with a moderate positive growth
profile as oil & gas prices improve;
--Liquids mix, principally natural gas liquids, increases to over 7% in
2015 with incremental improvements thereafter as the Southwestern
Appalachia acreage continues to develop;
--Capital spending is forecast to be $1.875 billion in 2015, consistent
with guidance, followed by a balanced capital spending profile until
prices support a measured level of outspending;
--Asset divestitures of approximately $700 million in 2015 followed by
an assumed $750 million in potential sales in 2016;
--Asset sale proceeds are used to repay debt.
Positive: No positive ratings are currently contemplated over the near
term given the weak oil & gas price outlook and Fitch's forecasted
leverage profile that exceeds the positive rating sensitivities. Future
developments that may, individually or collectively, lead to a positive
rating action include:
For an upgrade to 'BBB':
--Increased size, scale, and diversification of the company's reserve
base that yields favorable netbacks; and
--Mid-cycle debt/EBITDA below 1.5x on a sustained basis;
--Mid-cycle debt/1p reserves below $2.00/boe and/or debt/flowing barrel
To remove the Negative Outlook at 'BBB-':
--Improved gas price outlook supported by production declines or
--Reduction in gross debt that results in a mid-cycle debt/EBITDA of
less than 2x over the rating horizon.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Failure to execute credit-friendly transactions that help reduce gross
debt over the next 12-18 months. However, if gas prices remain severely
depressed, our timeline for a negative rating action is likely to come
in at the shorter end of this range;
--Capital spending in excess of cash flow from operations that
meaningfully lessens the proceeds available for gross debt reduction
from potential asset sales and/or other credit-friendly transactions;
--Mid-cycle debt/EBITDA above 2x on a sustained basis;
--Mid-cycle debt/1p reserves nearing $4.00/boe and/or debt/flowing
barrel around $15,000.
Fitch recognizes that Southwestern's increased size and improving unit
economics provide considerable financial flexibility that allows the
company to better manage cyclical changes to its leverage profile.
However, current natural gas prices curtail cash flows available for
Southwestern Appalachia development and result in elevated leverage
metrics over the rating horizon. Fitch could downgrade the credit to the
'BB+' level absent gross debt reductions and/or evidence of meaningful
production declines or inventory drawdowns that support a price recovery
within 12-18 months.
LIQUIDITY AND MATURITY PROFILE
Southwestern has historically maintained a nominal cash balance and had
approximately $15 million as of Sept. 30, 2015. The company's primary
source of liquidity is its $2 billion unsecured credit facility (Fitch
estimates pro forma available capacity to be $1.95 billion) maturing in
December 2018 and recently established commercial paper (CP) program
sized to the revolving credit facility. The main financial covenant is a
maximum debt-to-capital ratio of 60% (management estimate of 36% as of
Sept. 30, 2015), excluding non-cash asset impairments and certain other
items, as defined in the credit facility agreement. Other covenants
consist of additional lien limitations, transaction restrictions, and
change in control provisions. The revolver contains two one-year
extensions and may be increased to $2.5 billion upon lender consent.
Maturities on outstanding debt over the next five years are manageable.
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. Southwestern also recently issued a three-year, $750
million term loan to refinance nearly all outstanding credit facility/CP
MANAGEABLE OTHER LIABILITIES
The company's pension obligations were underfunded by approximately $26
million as of Dec. 31, 2014, which Fitch considers to be manageable when
scaled to funds from operations. Southwestern's asset retirement
obligation (ARO) was about $207 million as of Dec. 31, 2014, which is up
$73 million year-over-year mainly due to $42 million in additional
obligations incurred related to the Southwestern Appalachia acquisition.
Other obligations totalled approximately $6.1 billion on a multi-year,
undiscounted basis as of Dec. 31, 2014. The obligations include: $5.3
billion in pipeline demand transportation charges, $272 million in
operating leases for equipment, office space, etc., and $102 million in
compression services. The company updated its contractual obligations
for firm transportation and gathering agreements to approximately $8.8
billion, as of Sept. 30, 2015. This includes nearly $3.2 billion of
obligations that still require regulatory approvals and additional
construction efforts. The updated net figure of around $5.6 billion is
generally consistent with the year-end 2014 obligations.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Southwestern Energy Company
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank revolver at 'BBB-';
--Term loan at 'BBB-';
--Short-term IDR at 'F3'
--Commercial paper program at 'F3'.
The Rating Outlook has been revised to Negative from Stable.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug
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