Fitch Ratings has raised SM Energy Company’s Long-Term Issuer Default Rating to BB+ from BB after the company completed its merger with Civitas Resources. The agency removed SM Energy from Rating Watch Positive and set a Stable Outlook in light of the expanded company profile and an expected path to lower leverage.
The transaction, structured as an all-stock deal valued at $12.8 billion and closed recently, substantially increases SM Energy’s scale and proved reserves while diversifying its production footprint. As a direct consequence of the combination, the company’s gross debt has grown to roughly $8 billion from $2.7 billion prior to closing.
Following the merger, the combined company controls about 823,000 net acres and produces approximately 526,000 barrels of oil equivalent per day. Production and reserve composition shifts under the new footprint include the Permian basin representing 48% of production and 46% of estimated proved reserves. The merger also brought new inventory in the DJ basin.
SM Energy is forecasting annual synergies of about $200 million by 2027, which management expects to realize through lower overhead, operational efficiencies, and reduced capital costs. The company has also identified the potential for up to an additional $100 million in savings beyond those baseline synergies.
Fitch acknowledged that the transaction raises near-term execution risk but noted that SM Energy’s projected free cash flow profile provides support for its deleveraging strategy. To accelerate debt reduction, the company is targeting at least $1 billion of asset divestitures within one year after closing.
Management has established a leverage target of 1.0x and intends to allocate the majority of free cash flow toward reducing debt until that target is reached. Concurrently, the company plans to maintain a stable dividend and reserves the option to undertake opportunistic share buybacks.
On a pro forma basis, Fitch estimates SM Energy’s leverage at 1.7x. The agency described that level as toward the higher end relative to peers, but it could improve if the company executes accelerated debt reduction. Fitch listed conditions that could support a future upgrade, including sustained conservative financial policy, successful operations at the enlarged scale, improvement in drilling inventory, and maintenance of midcycle EBITDA leverage below 2.0x.
Contextual note: The information above reflects Fitch’s assessment and SM Energy’s stated targets and plans as reported contemporaneously with the completion of the Civitas merger.