Stressed Out: Southwestern Energy Has Only One Option to Save Itself

 | Mar 10, 2016 | 12:23 PM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

How long will it be until Southwestern Energy (SWN) issues equity to save itself?

On Tuesday, Fitch lowered its rating on the Texas-based oil and gas producer to non-investment grade B+ from BBB- and said that weak natural gas prices put pressure on the company's ability to generate liquidity.

"Fitch believes there is heightened event risk that the company may look to address its capital structure to alleviate these constraints," the ratings agency said in a statement announcing the ratings action. "This could include the issuance of equity or equity-like securities, secured debt, or, possibly, an unsecured-for-secured exchange."

So far in 2016, North American-based oil and gas companies have issued $10.5 billion in equity to cover capital spending and rebuild balance sheets, according to data provided by Bloomberg. On Tuesday, Oklahoma-based Gulfport Energy (GPOR), which has large operations in the Utica shale region, announced an upsized offering of 14.7 million shares priced at $25.25 to fund capital development. Last month, Devon Energy (DVN) issued $1.3 billion in equity amid a review by Moody's ratings agency.

Could Southwestern Energy be the next?

In February, Barclay's released a report in which it looked at the measures the exploration and production companies in its coverage universe could take to address leverage concerns. Among the options listed were: spending cuts, dividend reductions, asset sales, and equity issuance. Of six companies Barclay's listed that could issue equity this year, two have already done so: Marathon Oil (MRO) and Newfield Exploration (NFX).

To date, Southwestern Energy has announced plans to lay off 44% of its workforce, it has not issued a dividend and CEO Bill Way said during an earnings call with analysts that the company was exploring asset sales but that market conditions will affect the choices it makes. Under Barclay's framework, an equity offering could be the Southwestern Energy's only remaining option under prolonged low energy prices.

While oil appears to be making a comeback, natural gas prices are still hitting lows and are priced around $1.75 per MMbtu, down from $2.75 MMBtu a year ago. There has been a lot of attention given to oil and gas companies due to the fall in the price of oil; however, Southwestern Energy is primarily a natural gas company. In fact, due to pricing pressure, as of its fourth-quarter earnings release, it has no oil rigs in operation.

To counter low prices, companies such as Southwestern Energy have had to get creative.

"Producers continue to adjust to reduced capex budgets and low prices by shifting their drilling focus to high-yield drilling sites and otherwise improving efficiencies and lowering costs in order to produce more volume with fewer dollars," Sheetal Nasta of RBN Energy wrote in a report on Wednesday.

Indeed, Southwestern Energy said it is focusing more on its Marcellus and Utica properties. It is worth noting that the assets may be high producing but they came at a cost: Southwestern Energy paid Chesapeake Energy (CHK) $5.4 billion -- through a mix of debt and equity -- in 2014 to acquire them. While Fitch characterized Southwestern Energy's Marcellus and Utica acreage positions as "favorable," it noted that the leveraged acquisition added to the company's "heightened credit risk."

While the economics of production in the Marcellus and Utica regions may be more favorable, Southwestern Energy is still operating in a constrained climate while having liquidity concerns. An equity offering may be something it is forced to consider. 

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Weatherford Latest to Join Equity Issuance Club

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