SM Energy improves balance sheet with debt, equity offerings

By Paul Deckelman

New York, Sept. 28 – SM Energy Co. has been active in the capital markets in recent weeks, selling equity, convertible notes and junk bonds in order to finance a nearly $1 billion acquisition and to give the Denver-based independent oil and natural gas exploration and production company more financial flexibility.

“There’s been a lot of work here,” its executive vice president and chief financial officer, A. Wade Pursell, told participants at the 24th annual Deutsche Bank Leveraged Finance Conference on Wednesday in Scottsdale, Ariz., referring to SM’s balance sheet.

On Aug. 8, the company announced that it had agreed to acquire nearly 25,000 net acres in Howard County, Texas, expanding the company’s footprint in that state’s Midland Basin energy field formation to approximately 46,750 net acres.

In quick succession, the company then announced that it would sell 15 million shares of common stock, with an additional 2.25 million shares allotted to the underwriters, which was eventually upsized to 16 million shares and a 2.4 million-share greenshoe. That raised net proceeds of $531 million.

“We were extremely pleased with the reception to the equity offering,” the CFO declared. “We haven’t sold equities since the ’90s. I am told there are certainly now more than 80 upstream equity offerings since the beginning of 2015, and there’s only one where the stock price was higher at the pricing than on the announcement, and that was this equity offering. So clearly, this offering was very well received and we’re very happy about that.”

On Aug. 9, the same day as the equity pricing, SM sold $150 million 1.5% five-year senior convertible notes at par with an initial conversion premium of 35% and a $22.5 million greenshoe, producing net proceeds of $166 million.

Pursell said that combined with another $195 million that the company realized from previously announced, completed and pending non-core asset sales. “You get about $900 million – you get about 90% of the [$980 million Howard County] acquisition funded right there.”

The company further augmented its war chest with the sale of $500 million of new 6¾% senior notes due 2026, which priced at par in a quick-to-market offering on Sept. 7.

“We were pleased” with the reception from the bond market, he said.

“If you think back to early August, and look how bonds were trading then and how our bonds were trading then, post-this transaction announcement, and over the coming month, the bonds really tightened,” so much so that the company felt the time was right for its bond deal, which “just created a lot of liquidity for us.”

He said that the company would use the proceeds to pay down its revolving credit line, “so that after this transaction, the revolver will be pretty much undrawn, and that will give us a lot of flexibility moving into next year.”

He said that the company would continue asset sales, trying to monetize an asset in Texas’ Eagle Ford energy field in which it is not the main operator.

“That’s an Anadarko [Petroleum]-operated asset, a great asset, a lot of production, over 27,000 BOE [barrels of oil equivalent] per day. We also own 12½% of the midstream asset associated, so we expect a pretty good price on this asset. So that will be probably early next year closing.”

Repayment of the revolver borrowings would bring its availability up to $1.25 billion from $920 million at the end of the second quarter on June 30.

Pursell also told the conference goers that “we’re going though fall [borrowing-base] redetermination, and I can tell you, based on discussions with the banks, that I’m pretty confident that post-closing the [Howard County] transaction, hopefully on Oct. 4, the borrowing base will actually increase to $1.35 billion, so that’s good news as well.”

He said the company has “plenty of cushion” on meeting its interest coverage and secured leverage ratio covenants on the credit facility.

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