S&P Global Ratings has upgraded SM Energy Co. to a 'BB' credit rating from its previous level and removed the company from CreditWatch Positive, while assigning a stable outlook, following the closing of its merger with Civitas. The rating action reflects S&P's assessment that the combined company is now materially larger and more geographically diversified than SM was on a stand-alone basis.
On a pro forma basis at the end of the third quarter of 2025, SM operated roughly 823,000 net acres across multiple producing regions. Those areas include the Permian Basin spanning Texas and New Mexico, the Denver-Julesburg Basin in Colorado, the Eagle Ford and Austin Chalk plays in Texas, and the Uinta Basin in Utah. The expanded footprint and multi-basin presence are central to S&P's view that the company occupies a stronger competitive position compared with similarly rated peers such as Murphy Oil Corp. and Chord Energy Corp.
S&P's pro forma production metrics show a significant step-up versus SM's pre-transaction scale. During the third quarter, pro forma daily volumes averaged about 550,000 barrels of oil equivalent (boe) per day, with oil representing roughly half of that total. By comparison, SM's stand-alone production was 213,800 boe per day. The combined company's pro forma proved reserves totaled 1.48 billion boe as of year-end 2024.
Despite the improved size, S&P emphasized operational and managerial considerations tied to the transaction. The company has entered two new operating areas and has undergone leadership transitions, developments that S&P says introduce greater operational complexity and elevate integration and execution risks. Those factors weighed on the agency's assessment even as it recognized the benefits of scale and diversification.
Financially, SM assumed approximately $5.0 billion of Civitas' debt as part of the merger. As of September 30, 2025, Civitas had about $4.85 billion of unsecured debt consisting of various senior notes with maturities that range between 2026 and 2033. At closing, SM fully repaid roughly $180 million of Civitas' outstanding borrowings under its reserve-based lending facility.
The transaction also altered the company's liquidity profile. SM increased its borrowing base to $5.0 billion and elected $2.5 billion of commitments under that facility, which mature in January 2031. S&P indicated that it expects SM to make debt reduction a priority over the next two years as part of its financial strategy.
In S&P's forecast, SM's funds from operations (FFO) to debt ratio is expected to decline to about 45% in the current year from an estimated 70% in 2025, before improving to roughly 60% by year-end 2027. To address leverage, SM has targeted at least $1.0 billion of asset divestitures within the first 12 months after closing, with the majority of proceeds intended for debt reduction.
Operational plans for 2026 are due to be announced this month, and S&P expects management will likely scale back pro forma activity and moderate production relative to the combined-company run-rate in order to optimize free operating cash flow. Beyond an existing fixed $0.80-per-share annual dividend, S&P expects that SM will direct substantially all free operating cash flow toward debt paydown this year, with the potential for limited share repurchases to begin early next year if leverage approaches the company's target.
Overall, S&P's upgrade reflects a trade-off between the clear scale and diversification benefits produced by the Civitas merger and the added operational complexity and debt burden that the combined company must manage during integration and deleveraging.