CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and related unsecured ratings of Murphy Oil Corporation (NYSE: MUR) at 'BBB-'. The Rating Outlook remains Stable.
Murphy Oil's ratings being affirmed are as follows:
--IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Senior unsecured revolver at 'BBB-'.
Approximately $3.06 billion in balance sheet debt including capitalized leases is affected by today's rating action.
Key Ratings Drivers
MUR's ratings are supported by its relatively high exposure to liquids (58% of 2012 production and 69% of reserves); high gas realizations linked to international gas sales; strong full cycle netbacks; historically solid operational metrics, including robust reserve replacement and three-year finding, development, and acquisition (FD&A) costs; the company's operator status on a majority (85%) of its properties which supports capex flexibility; and its onshore position in the Eagle Ford, which is expected to be a major growth engine of Murphy's portfolio over the next several years.
Ratings issues include the company's negative free cash flow (FCF) over the past several quarters; small size relative to peers (just 604 million boe of 1p reserves and production of 194,200 barrels of oil equivalent per day in 2012); recent shareholder-friendly initiatives including a $500 million special dividend and an up to $1 billion share buyback program; uncertainty around the timing and size of proceeds linked to future asset sales, which will be needed to help plug the company's existing funding gap; and the loss of diversification from the retail spin-off. The company also has meaningful exposure to the Deepwater Gulf of Mexico despite its small size.
Reasonable Financial Metrics
MUR's recent historical credit metrics were reasonable. As calculated by Fitch, total debt with equity credit rose to $3.06 billion at June 30 from $2.25 billion at YE 2012, while latest 12 months (LTM) EBITDA edged up to $3.92 billion from $3.69 billion, resulting in debt/EBITDA leverage of just 0.78x and EBITDA/gross interest expense of 44.8x, both of which are strong for the category. Given its aggressive investment plan, the company was significantly FCF negative at /June 30, 2013 (-$1.67 billion), comprising cash flow from operations of $3.3 billion minus capex of $4.32 billion and dividends (which includes the special $500 million dividend at YE 2012) of $727 million. Looking forward Fitch expects the company will continue to be FCF negative for the remainder of 2013 and 2014.
Using year-end reserve data and the most recent debt and production data, Murphy had pro forma debt/boe 1p reserves of $5.07/boe, debt/boe proven developed reserves of $7.95/boe, and debt/flowing barrel of approximately $14,770 on a 6:1 basis at June 30, 2013. While the company's debt/boe metrics are currently somewhat weak for the rating category, Fitch anticipates that these metrics will begin to improve over the next several quarters as recent high capex spending begins to pay off in terms of new production and reserves.
MUR's 2012 upstream operational metrics came in better than expected, and, as calculated by Fitch, included a 1-year organic reserve replacement ratio of 179%, 1-year all-in reserve replacement ratio of 199%, and a 3-year average all-in reserve replacement ratio of 181%, pushing the company's reserve life up to 8.5 years from 8.2 years and affecting a number of other key metrics favorably. Although 1-year FD&A rose to $30/boe from approximately $19/boe the year prior, the company's full-cycle netbacks remained strong at $21.78/boe. Murphy's high exposure to liquids in both reserves and production has resulted in better cash flow than gas-heavy peers over the last several years. 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's liquidity was adequate at June 30, 2013, and included cash and equivalents of $974.4 million, short-term marketable securities of $129.9 million, and availability on its $2 billion unsecured revolver of approximately $1.54 billion after short-term borrowings of $461.98 million for total committed liquidity of approximately $2.64 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 on at June 30, 2013. 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 2012 rose to $257.9 million versus the $225.2 million the year prior but when scaled to Funds from Operations, expected pension outflows are manageable. The company's Asset Retirement Obligation (ARO) rose to $819.9 million at June 30, 2013 versus, $724.3 million seen at YE 2012. Commodity derivatives exposure at the company is limited as the company has historically focused its use on downstream operations, which it has exited with the spin-off of downstream arm Murphy USA earlier this year.
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'.
Applicable Criteria and Relevant Research:
--Fitch Assigns Initial Rating of 'BBB-' to Murphy Oil Corporation; Outlook Stable (Nov 16, 2012);
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis (Dec. 13, 2012);
--'Full Cycle Cost Survey for E&P Producers-2012 Numbers Up, but Adjustments Tell a Different Story' (May 28, 2013);
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (Aug 12, 2013);
--Updating Fitch's Oil & Gas Price Deck (July 29, 2013);
--Energy Handbook--Upstream Oil & Gas (June 28, 2013).
Applicable Criteria and Related Research:
Energy Handbook--Upstream Oil & Gas
Updating Fitch's Oil and Gas Price Deck
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors
Full Cycle Cost Survey for E&P Companies (2012 Numbers Up, but Adjustments Tell a Different Story)