SM Energy may call bonds, revamp revolver; debt ratio to fall to 2.5x

By Devika Patel

Knoxville, Tenn., June 6 – SM Energy Co. is prioritizing debt reduction and forecasts that its leverage ratio will be about 2.5x by the end of 2019.

The company also has plans to renegotiate its revolver that comes due in early 2019 and is looking at using its “significant” cash to call some of its bonds.

“We are also focused of course now on significantly reducing that debt,” president and chief executive officer Jay Ottoson said at the Bank of America Merrill Lynch 2018 Energy Credit Conference in New York on Wednesday.

“As we sold off assets, we reduced our cash flow, which increased our leverage.

“So, at one time, we peaked out at about 4x leverage.

“By year-end this year, we should be at about 3x levered.

“By year-end 2019, [we should be] about 2.5x [levered],” he said.

The company wants its leverage to fall even further than 2.5x long-term.

“We want to get below 2x [levered],” Ottoson said.

“In my ideal world, we’d be 1.5x levered.

“That’s my goal.

“It is very hard to get there very quick but I think our initial objective is to get below 2x levered.

“We’ll be about 2.5x based on our forecast by the end of 2019, but we’re going to drive it to where we get under 2x.

“Being below 2x levered is an important thing in our business and certainly it makes investors uncomfortable when you’re running here at this 3x, 3.5x level, where we have been,” Ottoson said.

The company has a lot of debt, but some of that debt is currently callable and the company is weighing its options on how to tackle the debt load now that it has “a significant amount” of cash.

“We have a nice stack of debt and when you look at the debt, it looks like a lot of debt and it is,” Ottoson said.

“But a lot of this debt, actually four of those tranches are going to be callable this year.

“Every one of those bonds is callable.

“We will always have a stack of debt that’s callable as we move forward.

“The 2021s, which is the first maturity there, have been callable, are callable today and there’s other tranches that are callable.

“So, we’re sitting in a position right now where we have a significant amount of cash [and] we have callable bonds.

“Certainly, we’re looking at that, trying to decide what’s the best way to work our way here both on leverage and maturities as we move forward,” Ottoson said.

The company has plenty of liquidity and also plans to renegotiate its revolver that comes due in 2019.

“We’ll be operating within our own cash flow in the second half of 2019,” Ottoson said.

“We just completed in the last few months about another almost $800 million in non-core asset sales.

“We have a substantial amount of liquidity, a $1.2 billion revolver that is entirely undrawn.

“We had $600 million in cash at the end of the last quarter and we just collected another $250 million in cash in proceeds.

“That revolver, will come due next year, so we will start to have to renegotiate toward this year-end,” he said.

SM Energy is a Denver-based independent energy company.

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