Fitch Affirms Murphy Oil's IDR at 'BBB-'; Outlook Remains Stable
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 production.
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 basis.
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).
Smaller Company
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.
KEY ASSUMPTIONS
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.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Increased size, scale and diversification of its upstream portfolio; and
--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 sustained basis:
--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.
Other Liabilities
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.
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