The stock of Southwestern Energy (SWN) - Get Report rose almost 5% to $13.03 per share on Tuesday after the company announced a newly created secured credit facility that analysts say buys it some time but also increases its financing costs, reduces its available liquidity and limits its flexibility.
The Houston oil and gas explorer said it entered into agreements with almost all of its bank group to extend maturities and modify other terms and conditions of its $2 billion revolving line of credit and its $750 million term loan.
Specifically, Southwestern restructured its $2 billion credit facility into a $1.191 billion secured term loan and a $743 million revolving credit facility due Dec. 14, 2020 and extended its $750 million term loan from Dec. 14, 2018 to Dec. 14, 2020 provided that at least $375 million is paid by June 30, 2017.
Southwestern CEO and president Bill Way said in a statement that the company has extended liquidity availability and a major portion of its debt by two years with only modest additional cost and covenants. "These actions deliver on the plan we discussed previously to strengthen the balance sheet, which is a key component of setting the company up for value adding growth," he said.
Jefferies LLC analyst Jonathan Wolff is still concerned about the company, saying the move will increase its annual interest expense by $35 million and give it only $800 million of available liquidity less a bank requirement to always have $300 million to $500 million on its balance sheet. He has an underperform rating on the stock with a price target of $5 per share.
"Clearly, today's move with the banks was an 'emergency' first step," he said. "SWN's assets are in severe decline and we think significant equity issuances/asset sales remain an urgent need."
Analysts at Tudor, Pickering, Holt & Co., which has a hold rating on the stock, noted that proceeds from any future asset sales and certain debt/equity issuances will have to repay the $750 million term loan first and that selling more undeveloped acreage may not be enough to recapitalize the business "given the treadmill of declining production." However, they noted, announcing another asset sale could further improve the market's perception of financial health "and thus the cost of equity, opening the window for a capital infusion."
Kashy Harrison, an analyst at Piper Jaffray unit Simmons & Co. International, which is neutral on the stock, said that while the move is not a deleveraging event, the renegotiation buys the company time to pursue balance sheet de-levering transactions and ultimately increases option value associated with improving commodity prices.
Seaport Global Securities analyst Mike Kelly agrees that Southwestern still has more work to do to clean up the balance sheet, including another $976 million in notes due 2018, and he thinks shareholder dilution through a significant equity raise or selling core acreage "is a likely outcome." He has a sell rating on the stock with a price target of $6 per share.
Southwestern has been making moves to conserve cash and pay down its debt through the industry downturn. In March it said it would pay its $27 million quarterly preferred dividend with common shares in lieu of cash, which would dilute the value of existing stockholders' stock but help the company bridge the gap between its cash flow and its expenditures.
Earlier this month the company agreed to sell some of its Marcellus natural gas assets in West Virginia to Denver oil and gas explorer Antero Resources Corp. (AR) - Get Report for $450 million, using the proceeds to reduce the principal balance of its term loan due in November 2018.
Southwestern appears on the "Stressed Out" list compiled by Real Money.