Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Murphy
Oil Corporation (NYSE: MUR) at 'BBB-'. The Rating Outlook remains
Stable. Fitch affirms the following ratings:
Murphy Oil Corporation:
--Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Senior unsecured revolver at 'BBB-'.
Approximately $3.28 billion in balance sheet debt including capitalized
leases is affected by today's rating action.
KEY RATING DRIVERS
MUR's ratings are supported by its high exposure to liquids (67% of 2014
production and 62% of reserves, with a relatively high cut of black
oil); historically strong full cycle netbacks; good operational metrics,
including robust reserve replacement and three-year finding,
development, and acquisition (FD&A) costs; operator status on a majority
of its properties which supports further capex flexibility; and its
position in the Eagle Ford, one of the premier onshore shale plays in
the US and an anchor of future ratable production growth for the company.
Ratings issues include the company's reduced size and diversification
following asset sales and spin offs, including the recent sale of its
30% stake in Malaysia; history of shareholder-friendly initiatives,
including a $250 million Accelerated Share Repurchase in Q2; and uneven
results around the exploration program, although it has taken steps to
scale back the risk in this area.
MUR has generally done the right things to preserve its credit quality
in response to the oil price downturn -- including cutting capex while
funding its best projects, increasing its hedges when possible, and
shoring up liquidity through asset sales. However, following recent
moves, Fitch believes that the company's options for dealing with a
lower-for-longer price scenario have narrowed somewhat, leaving less
headroom at the 'BBB-' level. Outside of a potential midstream
monetiztion, further asset sales are likely to shrink reserve and
Reasonable Financial Metrics
MUR's recent historical credit metrics were reasonable. As calculated by
Fitch, total debt rose to $3.28 billion at June 30 from $3.0 billion at
YE 2014, while latest 12 months (LTM) EBITDA dropped to $2.68 billion
from $3.73 billion, resulting in debt/EBITDA leverage of 1.22x and
EBITDA/gross interest expense of 20.7x. The company was significantly
free-cash-flow (FCF) negative at June 30, 2015 (-$1.34 billion),
comprising cash flow from operations of $2.21 billion, minus capex of
$3.27 billion and dividends of $247 million. Under Fitch's base case
assumptions, the agency expects MUR's FCF deficit will drop
significantly in 2016 as additional cost deflation and moderately higher
prices allow for recovery in $/boe margins. Using year-end reserve data
and debt and production data from June 30, 2015, Murphy had pro forma
debt/boe 1p reserves of $4.34/boe, debt/boe proven developed reserves of
$6.88/boe, and debt/flowing barrel of approximately $16,241 on a 6:1
Good Operational Performance
MUR's 2014 upstream operational metrics were solid, and, as calculated
by Fitch, included a 1-year organic reserve replacement ratio of 237%,
1-year all-in reserve replacement ratio of 151%, and a 3-year average
all-in reserve replacement ratio of 173%. The company's reserve life was
9.2 years; its 1 and three-year FD&A were $18.46/boe and $23.38/boe; and
its 2014 full-cycle netbacks remained strong at $21.42/boe. While full
cycle netbacks have dropped to -$4.34/boe in Q2 following the oil price
collapse, Fitch expects Murphy will see improvement over the next few
quarters as efficiency gains and additional cost deflation in the
onshore (and to a lesser degree the offshore) further lower the
company's cost structure.
Murphy's core operations are in the U.S. (Eagle Ford shale, Gulf of
Mexico); Canada (Syncrude, offshore East Coast, Seal and Montney) and
Malaysia (majority interest in six production sharing contracts).
Following the sale of its 30% stake in Malaysian PSCs and lower capex,
Murphy's Q2 production declined to 202,000 boepd, versus full year 2014
production of 226,100 boepd. Full year guidance for the company is
200,000-208,000 boepd. Fitch believes that the current year is likely to
be the bottom in terms of MUR's production, and foresee modest increases
in production in the agency's base case in line with gradually rising
prices. However, in a lower-for-longer price scenario, Fitch anticipates
that production would drop further as a result of additional capex cuts.
Fitch's key assumptions within its rating case for the issuer include:
--Base case WTI oil prices of $50/bbl in 2015, $60/bbl in 2016, and
$70/bbl in 2017;
--Average production growth of approximately 0.5% from 2015 -2018 (which
includes the impact of recent asset sales); 3.5% from 2016 - 2018;
--Capex of $2.38 billion in 2015 which gradually increases in line with
a rising price deck;
--Assumed asset sale proceeds of approximately $500 million in 2015 and
midstream asset sale of $225 million in 2016. Note that the 2015 figure
includes $417.2 million already received in Q1 for the sale of a
remaining stake in Malaysia;
--Modest dividend growth.
Positive: Future developments that may, individually or collectively,
lead to positive rating action include:
--Increased size, scale and diversification of its upstream portfolio;
--Demonstrated managerial commitment to maintaining low debt levels
relative to reserves and production.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Higher gross debt levels resulting from increased capex, leveraging
acquisitions, or shareholder-friendly activity
--Unanticipated reduction in financial or operational flexibility;
--Breaching some combination of the following debt metrics on a
--Debt/EBITDA above the 2.0x - 2.25x range;
--Debt/boe 1P above $5.50/boe;
--Debt/flowing barrel above the $20,000 - $22,000/barrel range.
LIQUIDITY AND DEBT STRUCTURE
Murphy's liquidity was adequate at June 30, 2015, and included cash and
equivalents of $909.3 million, short-term marketable securities of $395
million, and availability on its $2 billion unsecured revolver of
approximately $1.18 billion after short-term borrowings of $823 million
for total committed liquidity of approximately $2.48 billion. The
revolver expires in June 2017. The main covenant on the revolver is a
60% debt-to-capitalization ratio, which the company had ample headroom
at June 30, 2015. Other covenant restrictions include limitation on
liens, limits on asset sales and disposals, and limitations on mergers.
MUR's maturity schedule is light, with no major maturities until the
company's $550 million in 2017s are due.
Murphy's other obligations are manageable. The deficit on pension
benefit plans at year-end 2014 rose to $264.6 million versus the $174.1
million the year prior. The main drivers of the increased deficit were
actuarial losses, lower curtailments, and lower returns on plan assets.
When scaled to Funds from Operations, expected pension outflows are
manageable. The company contributed $30.1 million to fund pensions in 1H
2015 and expects to contribute an additional $6.1 million by year end.
MUR's Asset Retirement Obligation (ARO) declined to $844.5 million at
June 30, 2015, down from $905 million seen the year prior. The ARO is
linked to the remediation of wells and other upstream facilities. 2014
rental expense was $145 million and was linked to floating production,
storage, and offloading facilities (FPSOs) used in Malaysia, leases for
production facilities in the Gulf of Mexico, and other items. Commodity
derivatives exposure at the company is typically limited, although MUR
put on incremental hedges for approximately 15,000 bpd of Eagle Ford
production earlier this year at levels in the $62 - $63 range.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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