Hillside Advisors
August 10, 2016
Independent research & wealth management in convertible securities.

New Issue Analysis: SM Energy Company (SM) Convertible Senior Notes Due 2021

August 08, 2016

Dennis Dowden, CFA


Introduction:

SM Energy Company announced today it was issuing $100 million principal amount of 2.0% senior unsecured convertible notes due 2021. The notes will be convertible into cash/shares of SM Energy’s common stock or a combination thereof at SM Energy’s election. The proceeds are to be used to pay the cost of some privately negotiated capped call transactions the company expects to enter into with one or more of the underwriters or other respective affiliates. The capped call transactions are expected generally to reduce potential dilution to SM Energy’s common stock upon any conversion of the notes and/or offset any cash payments SM Energy is required to make in excess of the principal amount of converted notes. The remainder of any proceeds will be used to finance a portion of the purchase price of oil and gas assets in the Midland Basin of west Texas from Rock Oil Holding LLC.

In addition SM is offering 15 million share of common stock. The use of proceeds will be to finance a portion of the purchase price of the oil and gas assets the company is acquiring from Rock Oil Holding LLC.


More about the bond….

The initial mid-point of price talk is 2.0% up 32.5%, with a five year maturity. Using those terms, the initial HOCS score is 65 Overall/70 Growth/55 Safety. The low safety score relative to growth, reflects SM’s equity market capitalization being less than 1.0X total debt.


More about the credit….

SM Energy Company is a Denver, Colorado-based onshore producer of oil, natural gas and natural gas liquids. The company operates in South Texas, the Gulf Coast, the Rocky Mountains, the Permian Basin and Mid-Continent regions. SM achieved record production in 2015. The company produced 175,900 barrels of oil equivalent (BOE) per day. Oil production amounted to 52,700 BOE, natural gas production was 547.7 million cubic feet per day and natural gas liquids production was 44,000 BOE per day. SM like all oil and gas companies has been operating in a difficult pricing environment. However, the company is moderately leveraged at about 3.0x LTM EBITDAX.


Summary Financials    
(LTM Pro Forma)     ($MM)
   
Revenues     1,160
Adj. EBITDAX     875
Total Debt     2,703
Net Debt to EBITDAX     3.0X

Sources: Company filings and Hillside Advisors

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