Moody's Lifts Outlook on SM Energy (SM) to Stable; Corp. Rating Affirmed

Moody's Investors Service (Moody's) changed SM Energy Company's (NYSE: SM)(SM Energy) rating outlook to stable from negative. At the same time Moody's affirmed the company's B2 Corporate Family Rating, B3 senior unsecured note rating and SGL-3 Speculative Grade Liquidity (SGL) Rating.

"The outlook change reflects SM Energy's reduced covenant violation risks through 2017 following amendments to its credit agreement in April 2016," commented Sajjad Alam, Moody's AVP-Analyst. "The amended financial covenants will ensure continued access to a substantial source of external liquidity even in a low energy price environment. The significant reduction in the borrowing base during spring redetermination also reduces the risk of another major cut in the fall."

Issuer: SM Energy Company

Outlook:

....Changed to Stable from Negative

Ratings Affirmed:

.... Corporate Family Rating, Affirmed B2

.... Probability of Default Rating, Affirmed B2-PD

.... Senior Unsecured Notes, Affirmed B3 (LGD4)

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

RATINGS RATIONALE

The B2 CFR reflects SM Energy's high financial leverage through 2017 as well as its declining production and cash flow trends. Low commodity prices have pressured management to sharply scale back capital expenditures and drilling activities resulting in steep volume declines in its unconventional shale properties. SM has historically maintained low leverage and entered this downturn with a healthier balance sheet than many of its peers. However, given the severity and the prolonged nature of the price downturn, leverage will jump in 2017 as hedges expire and production falls. The company plans to run fewer rigs and manage its capital budget within operating cash flow for as long as commodity prices remain depressed. The company also intends to use a significant portion of its 2016 capital budget on completing previously drilled but uncompleted wells that should slow production decline going forward. The B2 CFR is supported by SM Energy's significant production platform in the Eagle Ford, balanced product mix, track record of low-cost and efficient operations and significant near-term hedge book.

SM Energy should have adequate liquidity through 2017, which is captured in the SGL-3 rating. The company has taken numerous measures to lower its cost structure and shore up liquidity and should be able to minimize negative free cash flow given management's primary goal to live within operating cash flow. The company has hedged roughly 55% of its remaining 2016 production and 35% of its 2017 production, which should provide near term cash flow support. As of April 27, 2016, $955 million was available under SM Energy's recently amended and restated $1.25 billion revolving credit facility, which could be used to fund any potential negative free cash flow. The revolver has three financial covenants: a maximum senior secured debt to EBITDAX ratio of 2.75x, a minimum interest coverage ratio of 2x and a minimum current ratio of 1x. The company should have ample cushion under these covenants through 2017. There is limited refinancing risk given the revolver expires in December 2019 and the nearest bond maturity is in November 2021. Substantially all of SM Energy's assets are pledged as security under the credit facility; however, some of its acreage could be sold at distressed prices, if needed.

The stable outlook reflects SM Energy's adequate liquidity and minimal projected outspending. The rating could be upgraded if the company can stabilize its production profile, show an improving trend in its leverage and sustain a RCF/debt ratio above 20%. A downgrade is likely if the RCF/Debt ratio falls below 10% or if liquidity becomes weak.

The principal methodology used in these ratings was the Global Independent Exploration and Production Industry published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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