Investing.com — Fitch Ratings has upgraded Company’s Long-Term Issuer Default Rating to ’BB+’ from ’BB’ following the completion of its merger with .
The $12.8 billion all-stock transaction, which closed recently, significantly increases SM Energy’s production scale and proved reserves while diversifying its production base. The company’s gross debt has risen to approximately $8 billion from $2.7 billion as a result of the merger.
Fitch removed SM Energy from Rating Watch Positive and assigned a Stable Outlook, reflecting expectations of debt reduction over the next few years and maintenance of production levels.
The merger creates a combined entity with approximately 823,000 net acres and total production of around 526,000 barrels of oil equivalent per day. The Permian basin will account for 48% of production and 46% of estimated proved reserves, while the transaction also adds inventory in the DJ basin.
SM Energy expects to achieve annual synergies of approximately $200 million by 2027 through reduced overhead costs, improved operations, and lower capital costs, with potential for an additional $100 million in savings.
Fitch noted that while the transaction increases near-term execution risk, the company’s free cash flow profile supports its deleveraging plan. SM Energy is targeting at least $1 billion in divestitures within one year of closing to accelerate debt reduction.
The company has set a leverage target of 1.0x and plans to use most of its free cash flow for debt reduction until meeting this goal, while maintaining a stable dividend and potentially conducting opportunistic share repurchases.
Fitch forecasts pro forma leverage of 1.7x, which is on the higher end compared to peers but could improve following accelerated debt reduction efforts.
The rating agency identified several factors that could lead to a future upgrade, including a track record of conservative financial policy, successful operation at current scale, improvement in drilling inventory, and sustained midcycle EBITDA leverage below 2.0x.
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