OREANDA-NEWS. Fitch Ratings has assigned Southwestern Energy Company (NYSE: SWN; Southwestern) an 'F3' Short-term Issuer Default Rating (IDR). In addition, Fitch rates Southwestern's \$2 billion commercial paper program 'F3'.

The short-term ratings are based on the long-term IDR of 'BBB-' and liquidity back-up adequacy.

A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Southwestern's ratings are supported by its credit-conscious financial policy and strong operating history that has resulted in the achievement of drilling efficiencies and competitive production and FD&A cost profiles. Offsetting factors include SWN's nearly-exclusive natural-gas focus that results in lower netbacks per barrel of oil equivalent (boe) relative to liquid peers and its limited geographic diversity.

The company reported net proved (1p) reserves of 1,791 million boe (mmboe) and production of 351 thousand boe per day (mboepd) for the year ended 2014. This results in a reserve life of about 14 years. The Fitch-calculated three-year average organic reserve replacement rate is 235% (296% excluding revisions) for the year ended 2014. The company's robust production growth profile (five-year compound annual growth rate [CAGR] of 21% as of Dec. 31, 2014) and competitive full-cycle netbacks (Fitch-calculated \$3.68/boe as of Dec. 31, 2014) despite natural gas price volatility reflects its ability to consistently improve days to drill, reduce well costs, and manage finding and development costs.

LEVERAGED ACQUISITION HEIGHTENS EXECUTION RISK
Credit metrics increased year-over-year following the \$4.975 billion acquisition of 413,000 net acres of liquids and natural gas assets within the Marcellus, Utica, and Devonian plays in West Virginia and southeastern Pennsylvania (Southwestern Appalachia) on Dec. 22, 2014. The transaction was temporarily financed with a \$4.5 billion 364-day bridge loan that was repaid with over \$2.3 billion of common and mandatory convertible preferred equity and nearly \$2.2 billion in senior unsecured notes, as well as a \$500 million term loan to be repaid with asset sale proceeds. The Fitch-calculated debt/EBITDA, debt/1p reserves, and debt/flowing barrel were approximately 3x, \$3.90/boe, and \$19,870, respectively, for 2014. These metrics improve on a pro forma basis when considering the final \$4.975 billion acquisition financing structure to approximately 1.8x, \$2.35/boe, and \$11,885.

Fitch believes that the final Southwestern Appalachia financing structure (\$2.2 billion vs. management's initial range of \$2.5 billion-\$2.8 billion in long-term acquisition debt) is further evidence of the company's credit-conscious financial policy. However, the series of recent leveraging transactions will reduce financial flexibility and heighten execution risk over the near term, since the acquired assets are being developed in a weak oil & gas pricing environment. These concerns are moderated by the company's strong track record of realizing cost and production efficiencies in similar assets and within the region, while managing its free cash flow profile.

FORECAST CASH FLOW METRICS WIDEN, WHILE UPSTREAM METRICS REMAIN SOLID
Fitch's base case, assuming a West Texas Intermediate (WTI) and Henry Hub price of \$50 and \$3.00, respectively, projects that Southwestern will be approximately \$400 million free cash flow (FCF) negative in 2015. The Fitch base case results in debt/EBITDA of 2.8x in 2015 mainly due to the weaker oil & gas market pricing environment. Debt/1p reserves and debt per flowing barrel metrics are forecast to remain solid at approximately \$2.55/boe, subject to any revisions, and \$11,425, respectively. Fitch's base case WTI and Henry Hub price forecast assumptions of \$60 and \$3.25, respectively, suggest that Southwestern will continue to take a measured approach to capital spending in 2016, while continuing to invest in higher return production growth. The Fitch base case considers that the company will outspend operating cash flow generally consistent with historical levels, resulting in debt/EBITDA of 2.6x in 2016. Fitch's market price forecast assumptions lead to debt/EBITDA returning to below 2x in 2017.

Management maintains fixed-price hedges with an average price of \$4.40/mcf equivalent to 25% (240 Bcf) of planned production for 2015 that help mitigate the near-term impact of market prices on cash flow and support production. Fitch recognizes that a prolonged period of weak natural gas prices, in conjunction with the absence of hedges, could challenge development plans and pressure leverage metrics.

LIQUIDITY AND MATURITY PROFILE
Southwestern has historically maintained a nominal cash balance and had approximately \$53 million as of Dec. 31, 2014. The company's primary source of liquidity is its \$2 billion unsecured credit facility (Fitch estimates pro forma available capacity to be \$1.3 billion, as of Dec. 31, 2014, considering the Statoil and WPX Energy acquisitions) maturing in December 2018 and recently established commercial paper program sized to the revolving credit facility. The main financial covenant is a maximum debt-to-capital ratio of 60% (management estimate of 40%, on a pro forma basis, as of Dec. 31, 2014), excluding non-cash asset impairments and certain other items, as defined in the credit facility agreement. Other covenants consist of additional lien limitations, transaction restrictions, and change in control provisions. The revolver contains two one-year extensions and may be increased to \$2.5 billion upon lender consent.

Maturities on outstanding debt over the next five years are manageable. The 7.15% notes have annual payments of \$1.2 million through 2017 with the remaining principal balance of \$23.4 million due in 2018. An additional \$40 million (7.35% and 7.125% notes), \$950 million (7.5% and 3.3% notes), and \$850 million (4.05% notes) mature in 2017, 2018, and 2020, respectively.

MANAGEABLE OTHER LIABILITIES
The company's pension obligations were underfunded by approximately \$26 million as of Dec. 31, 2014, which Fitch considers to be manageable when scaled to funds from operations. SWN's asset retirement obligation (ARO) was about \$207 million as of Dec. 31, 2014, which is up \$73 million year-over-year mainly due to \$42 million in additional obligations incurred related to the Southwestern Appalachia acquisition. Other obligations totalled approximately \$6.1 billion on a multi-year, undiscounted basis as of Dec. 31, 2014. The obligations include: \$5.3 billion in pipeline demand transportation charges, \$272 million in operating leases for equipment, office space, etc., and \$102 million in compression services. Approximately \$644 million of this was payable in 2014.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:

--WTI oil price that trends up from \$50/barrel in 2015 to \$60/barrel in 2016 and a long-term price of \$75/barrel;
--Henry Hub gas that trends up from \$3.00/mcf in 2015 to \$3.25/mcf in 2016 and a long-term price of \$4.50/mcf;
--Production growth of about 24% in 2015, generally consistent with guidance, followed by an increasing production profile, albeit at lower growth rates, thereafter;
--Liquids mix, principally natural gas liquids, increases to 7% in 2015 with the heightened production growth in Southwestern Appalachia and a continued focus on improving the liquids profile thereafter;
--Capital spending is forecast to be \$2 billion in 2015, consistent with guidance, followed by an operating cash flow outspend generally consistent with historical levels;
--Completion of targeted asset divestitures - East Texas and Arkoma E&P operations and the Northeast Pennsylvania gathering system - during 2015 above the midpoint of management's range of \$600 million-\$800 million.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Increased size, scale, and diversification of the company's reserve base that yields favorable netbacks;
--Mid-cycle debt/EBITDA below 1.5x on a sustained basis;
--Mid-cycle debt/1p reserves below \$2.00/boe and/or debt/flowing barrel under \$8,000.

Positive rating actions are unlikely over the near term as the company integrates and develops \$5.7 billion in recent transactions that will be approximately 50% debt-funded following the \$500 million term loan repayment.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Mid-cycle debt/EBITDA above 2x on a sustained basis;
--Mid-cycle debt/1p reserves nearing \$4.00/boe and/or debt/flowing barrel around \$15,000;
--A sustained weak natural gas pricing environment without a corresponding reduction in capex;
--Commencement of dividend or share repurchases inconsistent with the expected cash flow and leverage profile.

Negative rating actions will be closely linked to management's ability to effectively execute its post-acquisition operational strategy while managing its financial prolife consistent with an investment-grade rating.

Fitch rates Southwestern Energy Company as follows:

--Long-term IDR 'BBB-';
--Senior unsecured notes 'BBB-';
--Bank revolver 'BBB-'.

Fitch has assigned the following short-term ratings:

--Short-term IDR at 'F3';
--Commercial paper program at 'F3'.

The Outlook is Stable.