Southwestern Energy's (SWN) Ratings Affirmed by Fitch; Outlook Stable

Fitch Ratings has affirmed Southwestern Energy Company's (NYSE: SWN) (Southwestern) Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BBB-'. Additionally, Fitch expects to assign a 'BBB-' rating to Southwestern's proposed issuance of senior unsecured notes. The Rating Outlook is Stable.

Approximately $1.8 billion of outstanding debt is affected by today's rating action. A full list of rating actions is included at the end of this release.

The Stable Outlook, consistent with Fitch's October 2014 review, reflects management's actions to secure a permanent financing structure within 90 days of closing that results in expected long-term mid-cycle debt/EBITDA metrics at or below 2.0x.

$5.7 BILLION IN ACQUISITIONS
Southwestern closed on 413,000 net acres of liquids and natural gas assets within the Marcellus, Utica, and Devonian plays in West Virginia and southeastern Pennsylvania for $4.975 billion from Chesapeake Energy Corporation on Dec. 22, 2014. The acquisition price was reduced from approximately $5.4 billion to settle various items (e.g., title defects and environmental liabilities). The company subsequently signed an agreement to purchase (anticipated first quarter of 2015 [1Q'15] close) 30,000 undivided net acres from, the principal co-owner, Statoil ASA for $365 million.

These transactions will result in effectively the same purchase price, but increase Southwestern's net acreage position and overall working interest to about 73% from 67.5%. The combined acquisitions will contribute about 61 thousand barrels of oil equivalent per day (mboepd; 365 million cubic feet per day [mmcfpd]) of liquids and natural gas production (roughly 10%/35%/55% oil/NGLs/gas).

While Fitch recognizes that the aggregate scale of these transactions is uncharacteristic of Southwestern, it reflects the size and growth targets of the company and suggests there are increasingly limited opportunities to acquire substantial U.S. onshore positions in attractive plays. Fitch views the transactions as complementary to the company's other assets in the Marcellus Basin and recognizes it provides management with an opportunity to apply its operating expertise to maximize development and production efficiencies in an attractive, lower risk position. Fitch believes the acquisitions make strategic sense from an asset, production, operational, and growth prospective.

The $4.975 billion transaction is being temporarily financed with a 364-day bridge and two-year term loan, which will be repaid with the proposed senior unsecured debt and approximately $2.34 billion in mandatory preferred and common equity (expected Jan. 21, 2015 close) issuances, as well as planned asset sales. The additional Statoil acreage is expected to be financed with the revolving credit facility.

Southwestern also signed an agreement to purchase (anticipated 1Q'15 close) 46,700 net acres in northeast Pennsylvania for approximately $300 million from WPX Energy, Inc. (WPX). The acquisition will contribute about 8 mboepd (50 mmcfpd) of natural gas production and provide nearly 45 mboepd (260 mmcfpd) of firm natural gas transportation capacity. While the acreage complements the company's existing Marcellus position, Fitch recognizes that the value proposition primarily consists of the additional transportation capacity that will immediately alleviate near-term infrastructure constraints and support production growth. The transaction is expected to be financed with the revolving credit facility.

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 FD&A cost profiles. Offsetting factors include SWN'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 1,163 million boe (mmboe; proforma ex-WPX of approximately 1,575) for the year-ended 2013 and production of 356 mboepd (proforma ex-WPX of over 415 mboepd) as of Sept. 30, 2014. This results in a reserve life of about nine years (pro forma of 10.4 years). The Fitch-calculated three-year average organic reserve replacement rate is 229% for the year-ended 2013. The company's robust production growth profile (five-year compound annual growth rate (CAGR) of 28% as of Sept. 30, 2014) and competitive full-cycle netbacks (Fitch-calculated $3.39/boe as of Sept. 30, 2014) despite natural gas price volatility is reflective of its ability to consistently improve days to drill, reduce well costs, and manage finding and development costs.

LEVERAGED ACQUISITION HEIGHTENS EXECUTION RISK
Fitch believes that the proposed financing structure (management range of $2.5 billion-$2.8 billion in long-term acquisition debt) will reduce financial flexibility and heighten execution risk over the near term as the acquired assets are being developed. These concerns are moderated by the company's strong track record of realizing cost and production efficiencies in similar assets and within the region, while managing its free cash flow profile.

Fitch's base case forecasts debt/EBITDA of 2.1x and 2.0x in 2015 and 2016, respectively, assuming an acquisition debt midpoint and natural gas price of $4/thousand cubic feet (mcf). This results in debt per flowing barrel and debt/1p reserves, on a boe basis, of approximately $11,700 and $2.50, respectively, in 2015. Fitch estimates that a $100 million change in long-term acquisition debt results in a less than 0.05x move in forecasted base case debt/EBITDA leverage.

CONTINUED VARIABLE MARKET PRICING
Henry Hub spot prices have recently come under pressure dropping below $3/mcf for short periods given the better than expected supply response in 2014 following the polar vortex and relatively mild start to winter. The company experienced this type of price volatility in 2012 when prices averaged $2.75/mcf and illustrated an ability to develop and achieve efficiencies in its then early-stage northeast Pennsylvania acreage. Fitch anticipates that the company has the capability of realizing similar results and will prudently manage cash flow in a weak pricing environment. Management has indicated that it could scale back its near-term capital plan to approach free cash flow neutrality by reducing/eliminating its exploration efforts, rationalizing Fayetteville drilling activity, and, if necessary, moderating southeast Appalachia development efforts.

Fitch forecasts debt/EBITDA of 2.5x in 2015, assuming an acquisition debt midpoint and natural gas price of $3.25/mcf. Management maintains fixed-price hedges with an average price of $4.40/mcf equivalent to 26% (240 Bcf) of planned production for 2015 that help mitigate the near-term impact of market prices on cash flow and support production. Fitch recognizes that a prolonged period of weak natural gas prices, in conjunction with the absence of hedges, could challenge development plans and pressure leverage metrics in 2016.

LIQUIDITY AND MATURITY PROFILE
Southwestern has historically maintained a nominal cash balance and had approximately $20 million as of Sept. 30, 2014. The company's primary source of liquidity is its $2 billion unsecured credit facility ($1.861 billion in available capacity based on the outstanding credit facility balance as of Sept. 30, 2014; Fitch estimates $1.3 billion of available capacity for pro forma year-ended 2014) maturing in December 2018. The main financial covenant is a maximum debt-to-capital ratio of 60% (management estimates pro forma 43% as of Sept. 30, 2014), 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.

Near-term maturities on outstanding debt are minimal with $1.2 million due annually on the 7.15% notes through 2017 with the remaining principal balance of $23.4 million due in 2018. An additional $40 million (7.35% and 7.125% notes) and $628 million (7.15% and 7.5% notes) mature in 2017 and 2018, respectively. $1 billion in 4.1% senior notes mature in 2022.

MANAGEABLE OTHER LIABILITIES
The company's pension obligations were underfunded by approximately $17 million as of Sept. 30, 2014, which Fitch considers to be manageable when scaled to funds from operations (FFO). SWN's asset retirement obligation (ARO) was about $134 million, as of Dec. 31, 2013, which is up $33 million year-over-year mainly due to $22 million in additional obligations and $7 million in estimate revisions. Other obligations totalled approximately $4.4 billion on a multi-year, undiscounted basis as of Dec. 31, 2013. The obligations include: $3.5 billion in pipeline demand transportation charges, $229 million in operating leases for equipment, office space, etc., and $94 million in compression services. Approximately $644 million of this was payable in 2014.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Increased size, scale, and diversification of the company's reserve base that yields favorable netbacks;
--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 under $8,000.

Positive rating actions are unlikely over the near term as the company integrates and develops $5.7 billion in recent and pending transactions that are anticipated to be approximately 50% debt-funded.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Mid-cycle debt/EBITDA above 2.0x on a sustained basis;
--Mid-cycle debt/1p reserves nearing $4.00/boe and/or debt/flowing barrel around $15,000;
--A sustained weak natural gas pricing environment without a corresponding reduction in capex;
--Commencement of a dividend or share repurchases inconsistent with the expected cash flow and leverage profile.

Negative rating actions will be closely linked to management's ability to effectively execute its post-acquisition operational strategy, while managing its financial prolife consistent with an investment-grade rating.

Fitch has affirmed the following ratings with a Stable Outlook:

Southwestern Energy Company
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank revolver at 'BBB-'.

Fitch has assigned the following rating with a Stable Outlook:

--Proposed senior unsecured notes 'BBB-' (EXP).

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