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TEXT-Fitch assigns Southwestern Energy initial rating of 'BBB-'
February 29, 2012 / 5:44 PM / 6 years ago

TEXT-Fitch assigns Southwestern Energy initial rating of 'BBB-'

Feb 29 - Fitch Ratings has assigned an initial 'BBB-' Issuer Default
Rating (IDR) to Southwestern Energy Company (SWN) and has also assigned
'BBB-' ratings to the company's publicly issued senior unsecured notes and its
$1.5 billion senior unsecured revolving credit facility. The Rating Outlook is
Stable. The 'BBB-' rating also extends to SWN's new issue of senior unsecured
notes that are in the market, around $700 million in size, the proceeds of which
will be used for the repayment of revolver borrowings and for general corporate
purposes.	
	
The ratings are based on SWN's strong record of reserve replacement, its
production growth, and its low leverage. Risk rooted in distressed natural gas
prices is mitigated by best in class production costs among dry gas producers
and the company's significant hedge book in 2012 and 2013.	
	
SWN's reserve growth has been through the drill bit as opposed to the checkbook
and has averaged greater than 400% over the last three years. The focus of the
company has been on its home turf, the Fayetteville Shale play, where it has
operated for more than a decade and which has a calculated reserve life of
approximately 12 years using 2011's production figures. Fayetteville holds
approximately 87% of SWN's total proved reserves.	
	
SWN's full year production from all fields (overwhelmingly natural gas) has
mushroomed over the last three years, some 257% to around 500 billion cubic feet
equivalent (Bcfe) per year. Production in 2012 is expected in the range of
560-570 Bcfe. The vast majority of production comes from Fayetteville, but the
company is diversifying and branching out, moving into the Marcellus Shale play
in Pennsylvania where it has a foothold of some 187,000 net acres. Production
from Marcellus is expected to ramp up quickly from the approximate 23.4 Bcfe
produced in 2011 and is planned to become a significant contributor to gas
production by the close of 2012. Contributions from acreage in the Lower
Smackover Brown Dense formation in southern Arkansas and the Denver Julesburg
Basin in eastern Colorado are being tested and evaluated.	
	
SWN has achieved a position as a low cost provider through best field operating
practices and vertical integration. Operating costs within the E&P segment run
about $1.22/million cubic feet (mmcf), one of the lowest costs of reporting E&P
companies, and which excludes the benefits of vertical integration. The company
owns DeSoto Drilling Inc. which operates 14 drilling rigs in support of SWN's
exploration and production efforts in Fayetteville and Marcellus. DeSoto
Gathering Company, L.L.C., another subsidiary of SWN, has approximately 1,790
miles of pipe in the Fayetteville Shale play which moves around 1.5 Bcf of SWN's
gas. The latter is marketed by Southwestern Energy Services Company, yet another
subsidiary of SWN, to customers in the Midwest and East coast.	
	
Debt outstanding per flowing barrel (barrel of oil equivalent per day's
production) is just under $6,000 and less than half of other E&P companies while
debt/proved reserves is well under $1.50/boe. SWN estimates total proved
reserves of 5.9 trillion cubic feet equivalent (Tcfe) at the end of 2011. SWN's
low debt profile complements the company's high exposure to natural gas which is
currently under severe pricing pressure. Total debt/EBITDA at the end of 2011 is
estimated at around 0.75 times (x) with debt just over $1.3 billion. SWN's
capital budget for 2012 is approximately $2.1 billion, slightly lower than 2011,
and the company will again have a nominally negative free cash flow this year,
($179) million by Fitch's estimates. This is expected to be balanced by future
cash flow from the drilling activities supported by the capital budget, and
debt/EBITDA is not expected to exceed 1.2x over the next several years even with
stressed natural gas prices ($2.50-$3.00/mmcf).	
	
A significant mitigant to negative free cash flow as well as a source of hidden
liquidity is SWN's hedge book. By Fitch's estimates, roughly 47% of gas to be
sold in 2012 and 32% of gas expected to be sold in 2013 are hedged at prices of
$5.00/mmcf and higher, well above spot gas prices and unlikely to be duplicated
this year. Of SWN's $1.5 billion revolver, roughly $829 million was available at
last year-end, and the company was well within the debt limitation of 60% of
total capital and a minimum interest coverage requirement of 3.5x EBITDA. Cash
on hand at the end of 2011 was a nominal $15.6 million, and future debt
maturities are light but for the revolver which is due to mature in 2016.	
	
	
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. 12, 2011);	
--'Rating Oil and Gas Exploration and Production Companies' (Aug. 5, 2011).	
	
Applicable Criteria and Related Research:	
Rating Oil and Gas Exploration and Production Companies	
Corporate Rating Methodology

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