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

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Murphy Oil Corporation's (Murphy; NYSE: MUR) Long-Term Issuer Default Rating (IDR) at 'BB+' and unsecured debt ratings at 'BB+/RR4'. Fitch also expects to rate the company's new unsecured guaranteed credit facility 'BBB-/RR1' and proposed $500 million unsecured note due 2024 'BB+/RR4'. The Rating Outlook is Negative.

The 'BBB-/RR1' expected rating on the $1.2 billion unsecured guaranteed credit facility reflects the guarantees provided by Murphy's material U.S. and Canadian subsidiaries that directly represents approximately 70% of current consolidated EBITDA and indirectly represents the remaining 30%. The credit facility security also includes a springing collateral provision that is triggered if the consolidated leverage ratio is greater than 3.25x, on or after March 31, 2017, and provides the bank syndicate with a first lien security position, subject to the lien limitation. The lien limitation, under the terms of the unsecured indenture, is defined as 10% of net tangible assets, which Fitch estimates at approximately $765 million as of June 30, 2016. Additional secured and pari passu guaranteed debt is prohibited under the terms of the new credit agreement.

The 'BB+'/RR4 expected rating on the proposed $500 million unsecured notes reflects its pari passu priority and security with the existing unsecured nonguaranteed notes. Proceeds from the issuance will be used for general corporate purposes. Management has indicated that it currently intends to use the proceeds to partially repay the $550 million unsecured notes due December 2017. This issuance will also satisfy the new credit agreement's condition to execute a capital markets raise of at least $400 million ($385 million net).

The Negative Outlook continues to reflect a loss of operational momentum and narrower financial flexibility, concerns that could continue to result in reduced size and scale under a lower-for-longer scenario. The Outlook also reflects the prospect that management may return to a growth and exploration orientation in a rising price environment that could lead to less cash flow-linked discipline and, potentially, a higher debt structure. Fitch recognizes, however, that rating implications would be dependent on Fitch's view of hydrocarbon prices; production levels, mix, and costs; and liquidity profile.

Approximately $2.3 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 exposure to liquids (61% of production and 57% of proved reserves [1p] on a proforma basis); 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 the potential for reduced size and scale and narrower financial flexibility in a lower-for-longer scenario. Another concern is the company's ability to regain operational momentum, while maintaining a capital structure that is consistent with the current 'BB+' rating.

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, cancelling two deep water rig contracts and, most recently, reducing its dividend by 29% (over $70 million annually). 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.

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. Proforma net proved reserves, accounting for the recent sale of its Syncrude interest, are estimated at 659 mmboe (57% liquids) at year-end 2015.

First and second quarter 2016 production of nearly 197 and 169 mboepd, an approximately 11% and 16% year-over-year decline, respectively, illustrate the effects of asset sales, lower drilling and completion activity, and recent operational issues/constraints. Production is anticipated to continue to exhibit declining trends throughout the year resulting in an annual average rate of 173-177 mboepd. Fitch expects the recently completed Syncrude asset sale (under 12 mboepd in 2015; 100% synthetic crude oil) to negatively influence production, liquids mix, and Canadian crude realizations near-term, but recognizes these effects will be somewhat offset by the Duvernay and Montney acquisition (approximately 2 mboepd in Q2 2016; 51% liquids).

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. 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.

MEASURED OUTSPEND, WIDER CASH FLOW METRICS FORECAST

Fitch's base case projects that Murphy will be approximately $100 - $200 million FCF negative in 2016. Fitch expects cash-on-hand to be sufficient to cover the forecasted FCF shortfall. The Fitch base case results in 2016 debt/EBITDA of approximately 3.2x. This year-over-year increase mainly reflects forecasted production declines, Fitch's lower oil & gas price assumptions, and $500 million in additional unsecured notes. Debt/1p and debt/flowing barrel metrics are projected to increase to $4.60/boe and $16,825, respectively. The Fitch base case forecasts that debt/EBITDA reaches 1.8x in 2018 due to an improvement in Fitch's oil & gas price assumptions and moderately lower production.

Murphy has entered into swaps for approximately 25 mboepd, or roughly 47%, of U.S. oil production at $50.67/barrel and approximately 99 mcf/d, or around 48%, of Western Canadian natural gas production at C$3.00/mcf for the second half of 2016. The company recently entered into swaps for approximately 7 mboepd of U.S. oil production at $50.10/barrel in 2017 and approximately 59 mcf/d of Western Canadian natural gas production at C$2.81/mcf for 2017 - 2020. Murphy reported a derivative asset value of approximately $1.7 million as of June 30, 2016.

KEY ASSUMPTIONS

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

--WTI oil price that trends up from $42/barrel in 2016 to a long-term price of $65/barrel;

--Henry Hub gas that trends up from $2.35/mcf in 2016 to a long-term price of $3.25/mcf;

--Pro forma production of approximately 175 mboepd in 2016 followed by further declines in 2017 and a measured growth profile thereafter;

--Liquids mix declines to 63% followed by a modestly lower liquids 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 of 29% commencing with the Sept. 1, 2016 quarterly payment.

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 and/or debt/PD around $7.00 - $7.50/boe on a sustained basis.

To resolve the Negative Outlook at 'BB+':

--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 - 2.8x 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 $268 million as of June 30, 2016, with the majority held in Malaysia and Canada. The company also had over $131 million in Canadian government securities with maturities greater than 90 days. Additional liquidity will be provided by the company's new $1.2 billion senior unsecured guaranteed credit facility. Borrowings on the existing credit facility were fully repaid during the second quarter 2016 with asset sale proceeds.

The main covenant on the existing revolver is a 60% debt-to-capitalization ratio (approximately 36% at Dec. 31, 2015). This covenant will be replaced in the new credit facility agreement with a consolidated leverage ratio not to exceed 3.75x (excluding the planned $500 million unsecured debt offering until December 2017), interest coverage ratio greater than 2.5x, and a minimum domestic liquidity provision of at least $500 million. 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) were approximately $746 million as of June 30, 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

Murphy Oil Corporation

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

--Senior Unsecured Notes affirmed at 'BB+/RR4';

--Senior Unsecured Revolver affirmed at 'BB+/RR4'.

--Senior Unsecured Guaranteed Revolver assigned expected rating of 'BBB-/RR1';

--Senior Unsecured Notes due 2024 assigned expected rating of 'BB+'/RR4.

The Rating Outlook is Negative.

Additional information is available on www.fitchratings.com.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

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

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010185

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010185

Endorsement Policy

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

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160810005660/en/

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
Sharon Bonelli
Senior Director
+1-212-908-0581
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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