Nov 27 - Fitch Ratings has assigned a 'BBB-' rating to Murphy Oil
Corporation (NYSE: MUR)'s issuance of unsecured notes. The Rating
Outlook remains Stable.
Murphy Oil's ratings are as follows:
--Issuer Default Rating (IDR) 'BBB-';
--Senior unsecured notes 'BBB-';
--Senior unsecured revolver 'BBB-'.
The new notes will rank equally with existing unsecured senior debt. Net
proceeds from the offering will be used for a special dividend of $2.50 per
share (approximately $500 million) and to fund share repurchases of up to $1
billion, with any remainder to be used for general corporate purposes.
MUR's ratings are supported by its relatively high exposure to liquids (58% of
2011 production and 66% of reserves); good netbacks; solid operational metrics,
including robust reserve replacement and three-year finding, development, and
acquisition (FD&A) costs of just over $20 per barrel of oil equivalent (boe);
and the company's operator status on a majority (85%) of its properties.
Ratings issues include the company's small size relative to peers (just 534
million boe of 1p reserves and 181,558 boe per day (boepd) of production as of
the third quarter); elevated near-term capex spending which is expected to lead
to a significant funding gap in 2013; the launch of recent shareholder-friendly
initiatives including a $500 million special dividend and an up to $1 billion
share buyback program which will be primarily debt-funded; uncertainty about the
potential for additional shareholder-friendly activity in the future; the loss
of diversification from the pending retail spin-off; and uncertainty around
potential asset sales.
Solid Financial Metrics
MUR's recent historical credit metrics are strong. As calculated by Fitch, total
debt with equity credit was just $1.19 billion at Sept. 30, 2012, while latest
12 months (LTM) EBITDA edged up to $3.53 billion, resulting in debt/EBITDA
leverage of 0.34x and EBITDA/gross interest expense coverage of approximately
70x. Using year-end reserve data and the company's most recent quarterly
production data, Murphy had debt/boe 1p reserves of $2.22/boe, debt/boe proven
developed reserves of $3.05/boe, and debt/flowing barrel of approximately $6,500
on a 6:1 basis. Fitch anticipates that these metrics will rise materially after
shareholder-friendly initiatives are funded with debt but will not exceed levels
appropriate for the rating category. Fitch also anticipates there will be
relatively little headroom in the rating over the next several quarters, but
that metrics will improve thereafter.
MUR's latest upstream operational metrics were good. 2011 reserve additions have
been consistently strong, with one year organic reserve replacement of 221%
(167% on an all-in three-year basis) at year-end (YE) 2011. One year FD&A costs
were reasonable at $19.19 ($20.12/boe on a three-year basis). Reserve life is
8.2 years, which is somewhat low. 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 also has much smaller producing properties in the
Congo, and the UK as well as global exploration activity.
Murphy recently announced that its board had authorized the sale of its
exploration and production operations in the United Kingdom.
Murphy's liquidity was adequate at Sept. 30, 2012, and included cash and
equivalents of $816.7 million, short-term marketable securities of $491.5
million, and availability on its $1.5 billion unsecured revolver of
approximately $1.1 billion after short-term borrowings. The revolver expires in
June 2016. The main covenant on the revolver is a 60% debt to capitalization
ratio, which the company had ample headroom on at Sept. 30, 2012. 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 bond
maturities until 2022.
Murphy Corporation's other obligations are manageable. The deficit on pension
benefit plans at year-end 2011 rose to $225.2 million versus the $159 million
seen the year prior. The main drivers of the increase included higher actuarial
losses and interest costs. However, when scaled to the company's underlying
Funds from Operations, expected pension outflows are manageable. The company's
Asset Retirement Obligation (ARO) was more sizable at $615.5 million. While most
of this is linked to the upstream a small portion ($13 million) is linked to
environmental remediation at retail fuel sites and should migrate to retailco
following the spin. Commodity derivatives exposure at the company is limited as
the company has historically focused its use on downstream operations, which are
it is in the process of exiting.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that could lead to positive rating actions
--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.