Fitch Affirms Southwestern Energy Company's Ratings at 'BBB-'; Outlook
CHICAGO -- February 27, 2013
Fitch Ratings has affirmed Southwestern Energy Company's (SWN) Issuer Default
Rating (IDR) and senior unsecured debt ratings at 'BBB-'. The Rating Outlook
KEY RATINGS DRIVERS
The ratings are based on SWN's strong operating record in reserve replacement,
in production growth, and in managing its capital spending.
SWN added 919.5 billion cubic feet equivalent (Bcfe) in reserves in 2012,
having produced 565 Bcfe. The production in 2012 represents a 13% increase
over 2011. Reserve replacement was 163% of production at a cost $2.08/mcfe.
SWN performed remarkably well in a challenging environment for natural gas
producers in 2012. E&P revenue including the effect of hedges fell $377
million from 2011 due to the slide in natural gas prices, but increased
production at lower costs/mcfe added back $180 million in EBITDA. EBITDA from
midstream gas processing and transportation increased 19%. The company earned
$1.65 billion in cash flow from E&P and midstream gas processing. It spent
$2.11 billion in development, exploration and midstream capital. The deficit,
$453 million, was half recaptured through the sale of some small declining
conventional properties, the balance with the addition of $318 million in debt
that raised leverage to 1.02x EBITDA from 0.76x at the end of 2011. Debt
totaled $1.67 billion at the end of 2012.
SWN's operating leverage metrics still compare favorably to its peers. Debt
per proved reserves at the end of 2012 was a modest $2.49 per barrel of oil
equivalent (boe). Debt per flowing barrel of daily production was $6,489, half
of some of its peers, and debt per proved developed reserves was $3.13 per
Fitch believes that natural gas prices are working their way through a trough.
The winter season has not been cold enough to spur a serious increase in the
demand for natural gas, and stockpiles although 9.7% below year-earlier
inventories are still 16% above the five-year average. Supply is expected to
increase also as recently drilled wells in West Virginia and Pennsylvania
become operational. On balance, Fitch believes fiscal 2013 will best what the
industry reported in 2012, with higher prices relieving some of last year's
SWN has approximately 30% of estimated 2013 production hedged at prices
averaging $5.06 per thousand cubic feet equivalent (mcfe) before
transportation and fuel charges but still well above spot natural gas prices.
The company expects production will increase 11% to 13% in 2013. Including the
hedges, Fitch estimates that SWN will be nominally free cash flow (FCF)
negative next year, likely not to exceed $300 million, based on the company's
current capital guidance of $2 billion. This will elevate total debt/EBITDA,
but probably not beyond 1.1x.
SWN keeps a $1.5 billion unsecured revolving credit facility which matures in
February 2016. At last year-end the facility was undrawn. SWN had issued $1
billion of 10-year notes in March 2012 with a coupon of 4.10%, the proceeds of
which were used to repay and free up revolver capacity. The revolver limits
the company from incurring debt above 60% of total capital (before ceiling
test impairments) and requires SWN to maintain a minimum EBITDA/interest
coverage ratio of 3.5x.
Upcoming debt maturities are light, totaling $1.2 million per year through
2016. SWN's 7.125% senior unsecured notes and 7.350% senior unsecured notes
totaling $40 million mature in 2017.
Cash on hand at the end of 2012 was $54 million.
Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:
--Positive FCF with continued production and reserve growth;
--Diversification of the company's reserve base, 74% of which is currently the
Fayetteville shale play;
--Meaningful increase in oil/wet gas reserves.
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--Debt/EBITDA approaching 3.0x in concert with a weak gas pricing environment
and negative FCF;
--Inability to replace reserves over a consecutive three-year period;
--Event driven activity leading to substantially higher leverage.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'2013 Outlook: North American Oil & Gas' (Dec. 13, 2012)
--'Statistical Review of U.S. E&P Companies' (May 10, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
2013 Outlook: North American Oil & Gas
Statistical Review of U.S. E&P Companies
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Dennis Ruggles, +1-312-606-2318
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Dan Harris, +1-312-368-3217
Sean T. Sexton, CFA, +1-312-368-3130
Brian Bertsch, +1-212-908-0549
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