Corporate Bond AnalysisGroup IV

Daniel Perkes, Preston Lyon, Yuting Feng, Guangchen Zhang11/9/2014

Presentation Outline•Executive Overview/ Issuer Profile

•Credit Analysis

•Bond Profile / Current Bond Price

•Valuation / Yields and relation to other comparable bonds

•Corporate News

•Recommendation

Executive OverviewCurrent market price at risk due to falling oil prices increasing chance of default

Company News

● Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

● SM Energy Stock Getting Very Oversold● SM Energy Forms Bearish “Megaphone Top” chart pattern ● SM Energy declares semi-annual cash dividend $0.05● SM Energy Has Changed Elliott Wave Count● SM Energy Upgraded From Hold to Buy● SM: Improving Eagle Ford Asset Drives Estimates & PT Higher; Reaffirm Buy

Volatile prices lead to vulnerabilityStrengths

● Leading market position● Relatively good financial ratios

Opportunities● Growing U.S. economy● Economies of scale

Weaknesses● Massive decline in price of oil and gas● High expenses

Threats● Intense competition● Heavily regulated

Oil YTD:

Energy companies facing various risks Industry Statistics

● 6 recent major oil & natural gas production regions

● Rapid increase in oil and natural gas production from shale and other tight resources in U.S.

Industry Risks

● Access to reserves: political constraints and competition for proven reserves

● Uncertain energy policy

● Cost containment

● Health, safety and environmental risks

● New operational challenges, including unfamiliar environments

● Competition from new technologies

● Price volatility

Analyst: either HOLD or BUYSome Takeaway

● Buy (58.3%) vs. Hold (41.7%) Could either hold or buy

● From 2012 to 2013, stock price increases, showing the investors have more confidence in SM

● In 2014, stock price starts to decrease

Fundamentals● Strong revenue growth year over year

○ However this strong growth is blemished by SM’s recent profitability. In 2012, SM operated at a Net Loss. This could happen again and affect SM’s ability to make interest payments.

● Interest expense has been increasing recently, indicating that SM is issuing more and more debt each year to pursue new business and grow its core business.

○ This is both good and bad. SM management has been taking advantage of the low interest rates within the marketplace currently to finance their company. When interest rates rise they may not be able to pursue these opportunities with the same ease from their Free Cash Flow which has been unreliable recently.

● SM boasts a strong balance sheet. Assets have consistently grown over the years, but accompanied by increased liabilities, proving the assumption that SM is issuing debt in order to expand its business.

○ Stockholders Equity should grow with the expanding assets and business ahead of the increase of debt.● SM has recently had a volatile cash flow. However they were able to maintain and even increase dividend

payments year over year.○ This is an extremely strong indicator that the interest payments are coverable and SM is able to service all

of its Liabilities.

High leverage affects capital structure

● Highly Leveraged

● Newly Issued Debt

● New Debt is roughly a third of outstanding debt which is a high portion for a single maturity date.

Interest payments are evenly spaced

● Interest and debt payments spaced out evenly. Allows for smooth payments on debt and lowers risk of default.

● This trend continues until ⅓ of SM debt matures in 2024.

Default risk is rising due to declining oil prices● Default risk has risen

recently due to changing circumstances for SM and the general marketplace.

● Oil prices also significantly declined in the last few weeks, which has hurt the general prospects for SM.

Bond price has been decliningPrice as of 10/8/2014.Bond price has been declining over the past month.

Bond Profile

● Low investment or speculative grade.

● Bond matures on in 10 years, and was issued this year.

Yield AnalysisYield analysis based on BVAL.

● SM’s yield is middle of the road for its BB rating.

● Being a lower grade investment bond, when yields rise the bond will be adversely affected and the bond price will fall more quickly than a higher-rated bond.

● An outflow like this has occurred already in Junk Bonds early this year.

Comparable Bonds

This bond lies in the middle of the range of comparable securities in terms of yield and spread. Most of the yields show a short term strong increasing trend.

Recommendation: Hold

● Stable outlook and robust financial management● Speculative grade (S&P)● Investment grade (Bloomberg)● Equity is looked on neutrally by some analysts and favorably

by others.● Bond price has been declining.● Yields show short term increasing trend.● Current price is less than BVAL.● Interest rates are currently at historic lows.

Appendix

● Financial Statements○ Income Statements○ Balance Sheet○ Cash Flow Statement○ Bond Profile○ Financial Highlights and Competitor Data

Appendix 1.1 Income Statement

Appendix 1.2 Assets

Appendix 1.3 Liabilities

Appendix 1.4 Cash Flows

Appendix 1.5 Bond ProfileIssue type

● Senior unsecuredCovenants

● Negative pledge● Change of control at 101.00● Limit of indebtedness● Cross default● Negative covenant● Certain sales of assets● Restriction on activities● Restrictive covenant● Merger restrictions● Limitation on subsidiary debt● Restricted payments

Appendix 1.6 Issuer ProfileOverview of key issue specific information and industry information.