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SM Energy Company -- Moody's upgrades SM Energy's CFR to B3; outlook is positive

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Rating Action: Moody's upgrades SM Energy's CFR to B3; outlook is positiveGlobal Credit Research - 22 Mar 2021New York, March 22, 2021 -- Moody's Investors Service, ("Moody's") upgraded SM Energy Company's (SM) Corporate Family Rating (CFR) to B3 from Caa1 and Probability of Default Rating (PDR) to B3-PD from Caa1-PD. At the same time, Moody's also upgraded SM's senior secured rating to B2 from B3, its senior unsecured rating to Caa1 from Caa2 and its senior unsecured shelf to (P)Caa1 from (P)Caa2. The Speculative Grade Liquidity rating was upgraded to SGL-2 from SGL-3. The outlook is positive."The upgrade of SM's ratings reflects the company's improving debt leverage, substantially lower probability of default and a manageable debt maturity profile." commented John Thieroff, Moody's Senior Credit Officer. "SM's competitive cost structure and considerable inventory of highly economic drilling locations in the Midland basin will support modest production growth while allowing for debt reduction."Upgrades:..Issuer: SM Energy Company.... Probability of Default Rating, Upgraded to B3-PD from Caa1-PD.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3.... Corporate Family Rating, Upgraded to B3 from Caa1....Senior Secured Second Lien Notes, Upgraded to B2 (LGD3) from B3 (LGD3)....Senior Unsecured Notes, Upgraded to Caa1 (LGD5) from Caa2 (LGD5)....Senior Unsecured Shelf, Upgraded to (P)Caa1 from (P)Caa2Outlook Actions:..Issuer: SM Energy Company....Outlook, Changed To Positive From StableRATINGS RATIONALESM's B3 CFR reflects its substantial acreage position in the Midland Basin and competitive cost structure, offset by reduced but still high leverage. SM benefits from a production base (average daily production was 127 mboe/d in 2020) that is similar in size to many Ba-rated oil producers and some basin diversification. The company's good inventory of Permian drilling locations, capable of generating positive returns in an oil price environment below $40/bbl, provides SM the ability to generate mid-single digit percentage production growth and free cash flow for debt reduction. As the mix of production continues to shift toward the Midland Basin from South Texas, SM's cost structure and cash margins will continue to improve cost structure and realize higher cash margins. The company faces debt maturities in 2021 and 2022, but the amount of these maturities was significantly reduced through a debt exchange in 2020.SM's senior unsecured notes are rated Caa1, one notch below the B3 CFR, reflecting their subordinated claim to SM Energy's assets behind the senior secured credit facility and the size of the facility. The B2 rating on SM's senior secured second lien notes, one notch above the CFR, reflects their advantaged position to the unsecured notes in the company's capital structure and the small size of the second lien notes issuance relative to SM's unsecured debt.SM's SGL-2 rating reflects Moody's expectation that SM will maintain good liquidity through early 2022, primarily due to ample borrowing capacity under its revolving credit facility. The company had negligible cash and $93 million drawn as of December 31, 2020 under its $1.1 billion committed revolving credit facility, which expires in September 2023. The revolver is governed by two financial covenants -- total debt to EBITDAX of not greater than 4x and a minimum current ratio requirement of 1x.Cash flow has downside protection, with more than 75% of its forecasted 2021 oil production hedged at a minimum average price of $41.37 per barrel and about 85% of forecasted natural gas production hedged at $2.44 per mmbtu at Henry Hub and $1.81 per mmbtu at Waha (63 and 37% of hedged natural gas volumes, respectively.) SM's next debt maturity is for its $65 million of senior convertible notes due July 1, 2021, followed by $212 million of senior unsecured notes coming due in November 2022.The positive outlook reflects the potential SM will be able to reduce debt through cash flow sufficient to warrant an upgrade within the next twelve months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if the company is able to repay its 2021 and 2022 maturities substantially through cash from operations while maintaining retained cash flow (RCF) to debt ratio consistently above 25% and a Leveraged Full-Cycle Ratio (LFCR) above 1.25x. Ratings could be downgraded if LFCR approaches 1x or EBITDAX to interest coverage falls below 2x.SM Energy Company is a Denver, Colorado based publicly traded E&P company with primary production operations in the Eagle Ford Shale (Webb County) and the Midland Basin (Howard, Upton, Midland and Martin Counties) of Texas.The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. John Thieroff VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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