SM Energy Upgraded on Refinancing, Risk Persists

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On December 10, 2020, S&P Global Ratings raised its issuer credit rating on SM Energy Company to CCC+ from SD (selective default) and its 2022 and 2024 issue-level ratings to B- from D. the Company has recently disclosed that since the beginning of 2020 it has repurchased a sizeable portion of its senior unsecured notes due in 2022 and 2024 below par. SM Energy, however, will likely have difficulty addressing its 2024 notes on favourable terms, according to the ratings agency.  Currently, the Company could repay the approximately $300 million remaining of its 2021 and 2022 notes outstanding, but S&P Global believes it could run into difficulty addressing the remaining $315 million on its 2024 notes.

The ratings agency views that the Company's ability to refinance diminishes substantially if it does not achieve its production targets with its current capital expenditure program. SM Energy relies on the execution of both its Midland and Austin Chalk assets to generate positive free cash flow in 2021.

The negative outlook reflects the risk the Company could execute significant additional below-par debt repurchases that S&P would view as distressed, especially if execution of its 2021 production targets fails to meet expectations.

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