Fitch Affirms Murphy Oil at 'BB+'; Outlook Revised to Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Murphy Oil Corporation's (Murphy; NYSE: MUR) Long-Term Issuer Default Rating (IDR) and unsecured debt ratings at 'BB+'. The Rating Outlook is revised to Negative from Stable.

The Negative Outlook reflects Fitch's concerns about longer term liquidity and the possibility that the company may have to accept accommodative bank and capital market terms in order to preserve its financial flexibility. Fitch believes heightened liquidity risks have resulted from the company's revolver going current (as of June 14) and from bank syndicates' reduced willingness to manage their oil & gas exposure in the current downcycle. The Outlook also reflects a loss of operational momentum and potential for further asset sales, concerns that could continue to result in reduced size and scale under a lower-for-longer scenario.

Approximately $3.2 billion in debt, excluding capitalized leases, is affected by today's rating action. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Murphy's ratings are supported by its high exposure to liquids (66% production and 64% of reserves, with a relatively high cut of crude 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 U.S. and an anchor of future ratable production growth for the company. These considerations are offset by near- and longer-term liquidity concerns and the potential for reduced size and scale in a lower-for-longer scenario.

Fitch recognizes that Murphy has taken a range of actions to preserve its credit quality in response to the oil price downturn including cutting capex, increasing hedges when possible, shoring up liquidity through asset sales, and, most recently, cancelling two deep water rig contracts. These actions were moderated by $250 million in share repurchases in 1H 2015 and the recent C$267 million purchase (approximately US$208 million; assuming $0.78 USD/CAD FX rate) of earlier-stage Duvernay and Montney properties in Q2 2016, plus C$219 million (approximately US$171 million) Duvernay carry over four to five years. Fitch believes that the company's options for dealing with a lower-for-longer scenario have narrowed, as additional sales are likely to involve higher quality E&P assets and shrink the company further. Fitch views the company's nearly $250 million in annual dividends as a potential liquidity lever with reductions a distinct possibility.

The company reported an approximately 2% year-over-year increase in net proved reserves of 774 million barrels of oil equivalent (mmboe) at year-end 2015 mainly due to Eagle Ford and U.S. Gulf of Mexico additions offset by Malaysia reductions largely related to the sale of a 10% interest in January 2015. Production, however, decreased approximately 8% year-over-year to nearly 208 thousand boe per day (mboepd; approximately 61% crude oil) for the year-ended 2015 primarily due to lower Malaysia production. This results in a reserve life of about 10 years. First quarter 2016 production of nearly 197 mboepd, an approximately 11% year-over-year decline, illustrates the effects of asset sales and operational momentum loss, albeit higher than management's initial expectations. Production is anticipated to continue declining throughout the year to an annual average rate of 180-185 mboepd due to reduced investment. Annual production will be further impacted by the recently completed Syncrude asset sale (under 12 mboepd in 2015) and Duvernay and Montney transaction (approximately 4 mboepd). Liquids mix dropped to approximately 66% in 2015 from around 67% in 2014.

Fitch-calculated unhedged cash netbacks declined year-over-year to $18.44/boe, or approximately 59%, mainly due to the decline in oil & gas prices. This unhedged cash netback profile is favorably above the average of independent E&P peers largely related to advantaged Malaysia oil & gas prices and manageable cost profile. Fitch believes the company's Malaysia production sharing arrangements (32% of total 2015 production) help mitigate the cash flow impacts of lower prices, while its onshore North America plays provide considerable financial and operational flexibility. Fitch also expects management to step back from offshore exploration activities medium term. However, Fitch recognizes that the Duvernay and Montney's earlier-stage of development and Eagle Ford's operational momentum loss will likely require time and capital to achieve and/or re-establish their growth profiles.

Credit metrics have increased through-the-cycle due a combination of lower oil & gas prices and, during Q1 2016, higher gross debt levels. Debt/EBITDA increased year-over-year to 1.9x for yearend 2015 compared to 0.8x in 2014. The Fitch-calculated debt/LTM EBITDA, debt/1p reserves, debt/proved developed (PD) reserves, and debt/flowing barrel were approximately 2.5x, $4.43/boe, $7.16/boe, and $17,442, respectively, as of March 31, 2016. These credit metrics are generally consistent with or better than similarly rated North American E&P peers.

MEASURED OUTSPEND, WIDER CASH FLOW METRICS FORECAST

Fitch's base case projects that Murphy will be approximately $200-$300 million FCF negative in 2016. Fitch expects cash-on-hand and proceeds from the nearly C$1.5 billion (approximately US$1.2 billion) in completed Canadian asset sales to be used to fund the completed C$267 million (approximately US$208 million) Duvernay and Montney purchase, cover the forecasted FCF shortfall, and repay revolver borrowings.

The Fitch base case results in 2016 debt/EBITDA of approximately 2.7x. This year-over-year increase mainly reflects the declining production profile and Fitch's lower oil & gas price assumptions. Upstream credit metrics are expected to be improve incrementally under Fitch's assumption that the company will fully repay the credit facility with asset sale proceeds. The Fitch base case forecasts that debt/EBITDA improves to 1.8x in 2018 with an improvement in Fitch's oil & gas price assumptions and moderately lower production.

Murphy has entered into 2016 swaps for approximately 22.5 mboepd, or roughly 47%, of U.S. oil production and approximately 59 mcf/d, or around 28%, of Western Canadian natural gas production. The company reported a derivative asset value of nearly $66 million as of March 31, 2016, which excludes the addition of 5 mboepd of WTI swaps for the second half of 2016 at an average price of $45.30/bbl.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Murphy include:

--WTI oil price that trends up from $35/barrel in 2016 to a long-term price of $65/barrel;

--Henry Hub gas that trends up from $2.25/mcf in 2016 to a long-term price of $3.25/mcf;

--Pro forma production of approximately 178 mboepd in 2016 followed by a further decline in 2017 and a measured growth profile thereafter;

--Liquids mix declines to 62% followed by a relatively unchanged profile thereafter;

--Capital spending of $620 million in 2016, consistent with management guidance, followed by a relatively balanced capital spending profile;

--Net asset sale proceeds of approximately C$1.2 billion from completed transactions in 2016 and no additional sales over the forecast period;

--Dividend reduction during 2016;

--Repayment of existing borrowings under and successful renegotiation of credit facility;

--$550 million unsecured note due 2017 refinanced.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

For an upgrade to 'BBB-':

--Enhanced long-term liquidity profile, and;

--Increased size and scale, as well as operational momentum improvement and capital allocation focus;

--Mid-cycle debt/EBITDA under 2.0x on a sustained basis;

--Debt/flowing barrel under $17,500-$20,000, debt/1p below $5.00-$5.50/boe, and/or debt/PD around $7.00-$7.50/boe on a sustained basis.

To resolve the Negative Outlook at 'BB+':

--Execution of credit facility renewal and demonstrated ability to manage liquidity profile that alleviates longer-term concerns;

--Establishment of a credit-conscious plan to address production declines and loss of operational momentum.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

For a downgrade to 'BB':

--Material deterioration in longer-term liquidity profile;

--Additional material loss of size, scale, and operational momentum that requires considerable capital and time to remedy;

--Debt/EBITDA above 2.5x-2.75x on a sustained basis;

--Debt/flowing barrel over $22,500-$25,000, debt/1p below $6.00-$6.50/boe, and/or debt/PD around $8.00-$8.50/boe on a sustained basis.

LIQUIDITY, COVENANTS, AND MATURITY PROFILE

Cash and equivalents were approximately $423 million as of March 31, 2016, with the majority held in Malaysia ($289 million) and Canada ($98 million). The company also had over $146 million in Canadian government securities with maturities greater than 90 days. Net proceeds from the completed Canadian asset sales will improve cash by approximately C$1.2 billion (nearly US$950 million). Additional liquidity is provided by the company's $2 billion senior unsecured credit facility (under $1 billion available, including letters of credit, as of March 31, 2016) due June 2017.

The main covenant on the revolver is a 60% debt-to-capitalization ratio (approximately 36% at Dec. 31, 2015). Other covenant restrictions include limitation on liens, limits on asset sales and disposals, and limitations on mergers.

Murphy's maturity profile is manageable with the $550 million notes due December 2017. There are no additional maturities until June 2022.

OTHER LIABILITIES

Murphy's defined pension benefit plan was underfunded by approximately $273 million as of Dec. 31, 2015. Fitch believes that the expected size of service costs and contributions is manageable relative to mid-cycle fund flows from operations. Fitch also recognizes that changes made to the U.S. plan in conjunction with the 2013 spin-off of Murphy's retail marketing operation and the U.K. benefits freeze upon disposal of the U.K. downstream assets should help moderate future benefit obligations.

Asset retirement obligations (AROs) increased modestly year-over-year to approximately $823 million as of March 31, 2016. Other contingent obligations, as of Dec. 31, 2015, include operating leases (over $83 million in expected 2016 payments; majority linked to Malaysian offshore facilities), drilling rigs and associated equipment (nearly $61 million in expected payments through 2017 expiration; a portion will be paid working interest partners), and U.S. and Canadian transportation and operating service agreements (over $30 million in minimum monthly payments in 2016). The company was required to pay over $32 million in 2015 under the terms of its minimum volume transportation and operating service agreements.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Murphy's ratings as follows:

Murphy Oil Corporation

--Long-Term IDR at 'BB+';

--Senior unsecured notes at 'BB+/RR4';

--Senior unsecured revolver at 'BB+/RR4'.

The Rating Outlook is revised to Negative from Stable.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1007964

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007964

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Dino Kritikos
Director
+1-312-368-3150
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Committee Chairperson
Eric Ause
Senior Director
+1-312-606-2302
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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