Fitch Affirms Southwestern Energy Company's L-T IDR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed Southwestern Energy Company's (NYSE:SWN) Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BBB-' following the announcement of its pending $5.4 billion acquisition. The Rating Outlook is Stable. A full list of rating actions is included at the end of this release.

Approximately $1.8 billion of outstanding debt is affected by today's rating action.

The Stable Outlook reflects Fitch's expectation that management will secure permanent financing within 90 days of closing that will result in mid-cycle debt/EBITDA at or below 2.0x within the rating horizon, as well as maintenance of other financial and operational measures consistent with the rating. Fitch believes that, subject to execution of the transaction, leverage metrics are likely to exceed the negative rating sensitivities over the near term as the company develops the acquired acreage position.

$5.4 BILLION ACQUISITION ANNOUNCED

Southwestern has announced the pending $5.4 billion acquisition of a majority interest in 413,000 net acres of liquids and natural gas assets within the Marcellus, Utica, and Devonian plays. Transaction execution is subject to the consent and preferential right of the principal co-owner, which has 30 days to exercise their rights. The asset purchase is expected to close by year-end and be funded with a combination of debt and equity with additional funds possibly derived from the disposition of non-strategic assets. Southwestern has secured a commitment for a $5 billion 364-day senior unsecured bridge term loan to finance the transaction on an interim basis.

The company anticipates its Fayetteville, northeast Marcellus, and the pending West Virginia and Pennsylvania position will each comprise one-third of the reserve mix by the end of 2017. However, given the relatively early stage of development, the assets will only provide an incremental 15%, or about 55 thousand barrels of oil equivalent per day (mboepd). Management estimates the transaction will provide 20-plus years of drilling inventory based on its preliminary plans to deploy 4-6 rigs in 2015 and increase the rig count to 11 by 2017.

While Fitch recognizes that this is an uncharacteristic transaction for Southwestern, it reflects the size of the company and suggests there are increasingly limited opportunities to acquire substantial U. S. onshore positions. Fitch believes that the acreage complements the company's other assets in the Marcellus Basin and provides management with an opportunity to apply its operating expertise to maximize development and production efficiencies in an attractive, lower risk position. Fitch believes that the acquisition makes strategic sense from an asset profile, operational, and growth prospective.

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.

RATING LINKED TO INVESTMENT-GRADE PROFILE EXPECTATION

Fitch believes management continues to place a premium on the maintenance of its investment-grade rating and will establish a capital structure that results in a mid-cycle debt/EBITDA at or below 2.0x within the rating horizon. Pro forma leverage metrics are anticipated to be considerably higher than the latest 12 months (LTM) debt/EBITDA, debt per flowing barrel, and debt/proved (1p) reserves metrics of 0.8x, $5,301, and $1.58 as of June 30, 2014. This will reduce financial flexibility and heightening 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 free cash flow.

LIQUIDITY AND MATURITY PROFILE

Southwestern has historically maintained a nominal cash balance and had approximately $20 million as of June 30, 2014. The company's primary source of liquidity is its $2 billion unsecured credit facility ($1,829 million in available capacity based on the outstanding credit facility balance as of June 30, 2014) maturing in December 2018. The main financial covenant is a maximum debt-to-capital ratio of 60% (29% as of Dec. 31, 2013), 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. Additionally, the company has access to its recently established commercial paper program, consistent with the size of the credit facility, which does not currently have an outstanding balance.

Near-term maturities 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. The $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 June 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 is 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 given the announced transaction and anticipated use of leverage to fund a portion of the purchase price.

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 final capital structure and forecasted leverage profile over the rating horizon.

Fitch has affirmed the following long-term ratings:

Southwestern Energy Company

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Bank revolver at 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage (May 28, 2014);

--Updating Fitch's Oil & Natural Gas Price Deck (Aug. 8, 2014);

--Full Cycle Costs for North America E&P (Production Costs Moderate in 2013) (July 30, 2014);

--North American Energy Outlook and LNG (July 16, 2014);

--North American Exploration and Production Handbook (July 16, 2014);

--North America E&P Ratings and Market Spreads (Aug. 15, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Updating Fitch's Oil & Gas Price Deck

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754047

Full Cycle Costs for North America E&P (Production Costs Moderate in 2013)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753198

North American Energy Outlook and LNG

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751784

North American Exploration and Production Handbook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=900434

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