S&P Lowers Outlook on Murphy Oil (MUR) to Negative; Ramp Up in Production Needed

Standard & Poor's Ratings Services revised its outlook on El Dorado, Ark.-based Murphy Oil (NYSE: MUR) (Murphy) to negative from stable. We affirmed all of our ratings on the company, including our 'BBB' corporate credit rating and 'BBB' issue ratings on the senior unsecured debt.

"The negative outlook reflects the potential for a downgrade if Murphy Oil does not accelerate the pace of production in 2015," said Standard & Poor's credit analyst Mark Salierno. To do so, the company would need to successfully address operating difficulties in Malaysia and Canada that resulted in weaker-than-expected volumes in the first half of 2014. As a result of these recent difficulties and with the planned asset sale, we estimate pro forma production output will decline to between 190,000 and 200,000 barrels of oil equivalent per day at the end of 2014; this compares to third-quarter 2014 production that is expected to be close to 225,000 boe per day. Despite the lower production forecast, we expect credit measures to remain strong, including total debt to EBITDA close to 1x and funds from operations (FFO) to total debt between 60% and 70%.

We view Murphy's business risk as "satisfactory," which is supported by its solid organic growth prospects, underpinned by its increased emphasis on onshore North American resource plays, most notably in the Eagle Ford shale. In our view, this will continue to allow the company to offset its reliance on higher-risk and more unpredictable offshore exploration, which the company has successfully reduced its exposure to in recent years. Murphy Oil's transformation to a purely exploration and production-focused company is largely complete. In August 2013, the company spun-off its U.S. retail
segment, Murphy USA Inc., and the company is in the final stages of divesting its remaining downstream assets in the U.K.

The negative outlook reflects the potential for a downgrade if Murphy encounters operating difficulties that delay production growth prospects that impedes the company's ability to increase its scale and overall operating efficiency. Such difficulties could also result in weaker than credit measures. We currently are forecasting the company will generate FFO to adjusted debt between 60% and 70% under our current price assumptions.

We could lower the ratings if we believe Murphy's reserves and production output will remain meaningfully below 'BBB' rated peers for the next several years. We would also consider a negative rating action if Murphy were to pursue a more aggressive financial policy and/or if credit measures were to weaken from current levels, including adjusted FFO to total debt falling below 60% for an extended period of time. Such a scenario could materialize from very aggressive capital spending and/or debt-financed acquisitions combined with active share repurchase activity. A sustained period of low crude and natural gas prices could also lead to weaker measures.

We could revise the outlook back to stable if Murphy continues to successfully accelerate the growth of its onshore North American resource plays while addressing recent operating challenges outside of the U.S. Under such a scenario, we believe Murphy should be able to uphold a positive trajectory of production growth and higher reserves, while maintaining a conservative financial policy and managing capital spending and share repurchases at levels that allows the company to preserve its strong credit measures.

You May Also Be Interested In

• Murphy Oil Corp. (MUR) PT Raised to $55 at Mizuho
• Venezuela oil sector braces for loss of US license, Maduro hits back
• Maurel & Prom: Q1 2024 Activity