Fitch Ratings has assigned a 'BBB-' to the Issuer Default Rating (IDR) and senior unsecured ratings of Murphy Oil Corporation (NYSE: MUR). The Rating Outlook is Stable.
Murphy Oil's ratings are as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured notes 'BBB-';
--Senior unsecured revolver 'BBB-'.
Approximately $1.19 billion in balance sheet debt is affected by this rating action.
MUR's ratings are supported by its relatively high exposure to liquids (58% of 2011 production and 66% of reserves); good netbacks; solid operational metrics, including robust reserve replacement and three-year finding, development, and acquisition (FD&A) costs of just over $20 per barrel of oil equivalent(boe); and the company's operator status on a majority (85%) of its properties.
Ratings issues include the company's small size relative to peers (just 534 million boe of 1p reserves and 181,558 boe per day (boepd) of production as of the third quarter); elevated near-term capex spending which is expected to lead to a significant funding gap in 2013; the launch of recent shareholder-friendly initiatives including a $500 million special dividend and an up to $1 billion share buyback program which will be primarily debt-funded; uncertainty about the potential for additional shareholder-friendly activity in the future; the loss of diversification from the pending retail spin-off; and uncertainty around potential asset sales.
Solid Financial Metrics
MUR's recent historical credit metrics are strong. As calculated by Fitch, total debt with equity credit was just $1.19 billion at Sept. 30, 2012, while latest 12 months (LTM) EBITDA edged up to $3.53 billion, resulting in debt/EBITDA leverage of 0.34x and EBITDA/gross interest expense coverage of approximately 70x. Using year-end reserve data and the company's most recent quarterly production data, Murphy had debt/boe 1p reserves of $2.22/boe, debt/boe proven developed reserves of $3.05/boe, and debt/flowing barrel of approximately $6,500 on a 6:1 basis. Fitch anticipates that these metrics will rise materially after shareholder-friendly initiatives are funded with debt but will not exceed levels appropriate for the rating category. Fitch also anticipates there will be relatively little headroom in the rating over the next several quarters, but that metrics will improve thereafter.
MUR's latest upstream operational metrics were good. 2011 reserve additions have been consistently strong, with one year organic reserve replacement of 221% (167% on an all-in three-year basis) at year-end (YE) 2011. One year FD&A costs were reasonable at $19.19 ($20.12/boe on a three-year basis). Reserve life is 8.2 years, which is somewhat low. The company'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). Collectively, these three regions were responsible for 94% of the company's E&P capex. Murphy also has much smaller producing properties in the Congo, and the UK as well as global exploration activity.
Murphy's liquidity was adequate at Sept. 30, 2012, and included cash and equivalents of $816.7 million, short-term marketable securities of $491.5 million, and availability on its $1.5 billion unsecured revolver of approximately $1.1 billion after short-term borrowings. The revolver expires in June 2016. The main covenant on the revolver is a 60% debt to capitalization ratio, which the company had ample headroom on at Sept. 30, 2012. 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 bond maturities until 2022.
Murphy Corporation's other obligations are manageable. The deficit on pension benefit plans at year-end 2011 rose to $225.2 million versus the $159 million seen the year prior. The main drivers of the increase included higher actuarial losses and interest costs. However, when scaled to the company's underlying Funds from Operations, expected pension outflows are manageable. The company's Asset Retirement Obligation (ARO) was more sizable at $615.5 million. While most of this is linked to the upstream a small portion ($13 million) is linked to environmental remediation at retail fuel sites and should migrate to retailco following the spin. Commodity derivatives exposure at the company is limited as the company has historically focused its use on downstream operations, which are it is in the process of exiting.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that could lead to positive rating actions 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 could lead to negative rating action include:
--Higher gross debt levels resulting from increased capex spending; acquisitions; or the initiation of additional leveraging shareholder-friendly activity by management.
--A sustained collapse in oil prices without offsetting adjustments to capex.
--Breaching some combination of the following debt metrics on a sustained basis:
--Debt/boe PD above $7.00-$7.50/boe range;
--Debt/boe P1 above $5.00-$5.50/boe range;
--Debt/Flowing Barrel above $20,000.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Updating Fitch's Oil & Gas Price Deck' (Aug 15, 2012);
--'Statistical Review of U.S. E&P Companies' (May 10, 2012)
--'Dividend Policy in the Energy Sector--Low Oil Prices Could Create Cash Flow Stress (Feb. 29, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Updating Fitch -- Oil & Gas Price Deck -- Midyear Update
Statistical Review of U.S. E&P Companies
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress