S&P Cuts Southwestern Energy (SWN) Ratings to 'BBB-' Following Marcellus Shale Deal

Standard & Poor's Ratings Services said today it lowered its ratings on Houston-based oil and gas exploration and production company Southwestern Energy (NYSE: SWN) to 'BBB-' from 'BBB' and removed them from CreditWatch, where we placed them with negative implications on Oct. 16, 2014. The outlook is stable.

The downgrade follows Southwestern's completion of its $4.9 billion acquisition of properties in the Marcellus shale in West Virginia from Chesapeake Energy and its announcement of permanent financing for the transaction. The company initially funded the deal with a 364-day bridge facility and two-year term loan, but plans to transition to permanent financing constituting around 50% debt, 35% equity (both common shares and mandatorily convertible securities), and 15% proceeds from asset sales. Based on the planned financing, we expect Southwestern's leverage to increase meaningfully. As a result, we are lowering our ratings on the company, including the corporate credit and senior unsecured debt ratings, to 'BBB-' from 'BBB' and removing them from CreditWatch with negative implications.

"The stable outlook reflects our assumption that Southwestern will complete its proposed debt and equity financings in a timely manner and that funds from operations (FFO) to debt will remain about 30%," said Standard & Poor's credit analyst Carin Dehne-Kiley.

We could lower the rating if credit measures weakened such that Southwestern's FFO to debt declined to less than 20% on a sustained basis. We believe this could occur if the company pursued a more aggressive capital spending program than we currently forecast, if production fell short of our current projections, or if natural gas prices weakened meaningfully with no associated reduction in capital spending.

We could raise the rating if Southwestern meaningfully improved leverage, bringing FFO to debt back above 45% for a sustained period.

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