Moody’s upgrades SM Energy to Ba2 on rapid post-merger deleveraging

Moody’s Ratings agency has upgraded SM Energy Co to a Ba2 credit rating from Ba3, citing rapid improvements in the company’s balance sheet following several strategic acquisitions and strong commodity trends. This move also saw an upgrade of the company’s senior unsecured notes from B1 to Ba3. The agency has set a stable outlook for SM Energy, while keeping its top tier liquidity assessment at SGL-1.

The upgrade reflects the successful integration of SM Energy’s major transactions conducted in 2024 and 2026. Notably, SM Energy completed the acquisition of Civitas Resources in 2026 and acquired an 80% stake in XCL Resources in 2024. These deals transformed SM Energy into a significant player in the Permian Basin and multi-basin energy sector, raising total production to 433,000 barrels of oil equivalent per day in Q3 2026, up from 170,000 boe/d in 2024.

Deleveraging efforts have been a key driver behind the rating upgrade. Over the ten months since the Civitas Resources acquisition closed, SM Energy has completed its $1.0 billion non-core asset disposal program and realized $400 million in run-rate synergies. This has led to a reduction in gross adjusted debt from $8.1 billion in Q1 2026 to $6.8 billion by Q3 2026. The company’s retained cash flow-to-debt ratio has risen to 49%, up from a low of 26% earlier in the year.

Moody’s attributes this balance-sheet recovery to the company’s consistent free cash flow generation, supported by favorable crude oil prices throughout 2026. This financial health has enabled SM Energy to restore its credit metrics at a rapid pace while managing a larger operational footprint. The agency also noted that continued liquidity support is crucial, with $442 million in cash reserves and a $2.5 billion committed revolving credit facility in place.

For the rating to potentially improve further, Moody’s suggests that SM Energy must maintain effective cost management in exploration and production, further reduce its debt levels, and avoid any heavy acquisitions that could increase leverage. A significant increase in leverage or a decrease in debt-to-undrawn credit facility ratio below 30% could potentially put downward pressure on the rating.