CHICAGO–(BUSINESS WIRE)–Fitch Ratings has downgraded the Issuer Default Rating (IDR) for Murphy Oil Corporation (NYSE: MUR) to ‘BB+’ from ‘BBB-‘, and the company’s senior unsecured rating from ‘BBB-‘ to ‘BB+’. In addition, Fitch has assigned an RR4 recovery rating to the unsecured rating. The Rating Outlook remains Stable. A full list of rating actions is included at the end of this release.
Approximately $3.34 billion in balance sheet debt including capitalized leases is affected by today’s rating action.
KEY RATING DRIVERS
The main driver of the downgrade is growing concerns about reduced financial flexibility in light of the company’s recent actions, especially if a lower oil price environment persists. With its planned 2016 capex budget of $825 million (excluding spending associated with its Duvernay acquisition), Murphy’s production is set to decline to the 180,000 – 185,000 boepd level, down substantially from the 226,000 boepd level seen in 2014 and below Fitch’s previous expectations. Under a lower-for-longer scenario, further production declines are likely in 2017, bringing production at or below 175,000 boepd, resulting in further loss of operational momentum.
Decreasing asset concentration is also a concern. The just-announced Duvernay shale joint venture(jv), while having a number of favorable long-term characteristics, is a mostly-acreage deal that will commit future cash flows to a new early stage play, at a time when Murphy’s other core plays are experiencing declines. While Fitch recognizes there is significant flexibility in the five-year drilling obligations, the jv will limit the company’s financial flexibility in a lower for longer environment.
Fitch would also note that the company’s $2 billion revolver, due June 2017, matures less than 1.5 years from today. Given the challenging macro environment across the energy industry, Fitch believes such renegotiation may require more accommodative terms to the banks to ensure completion.
MUR’s ratings are supported by its high exposure to liquids (67% production and 62% of reserves, with a relatively high cut of black 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. 2015 all-in reserve replacement was 123%, which compares favorably with peers.
MUR has taken a range of actions to preserve its credit quality in response to the oil price downturn — including cutting capex while funding its best projects, increasing its hedges when possible, shoring up liquidity through asset sales, and most recently, cancelling two deep water rig contracts. However, following these moves, Fitch believes that the company’s options for dealing with a lower-for-longer price scenario have narrowed, which is reflected in the downgrade to ‘BB+’ as sales are like to shrink the company further, although reductions in the dividend remain a distinct possibility. The company also used up $250 million in liquidity earlier in 2015 on share repurchases.
Good Financial Metrics
MUR’s recent historical credit metrics were reasonable. As calculated by Fitch, total debt rose to $3.34 billion at September 30 from $3 billion at YE 2014, while latest-12-months (LTM) EBITDA dropped to $2.03 billion from $3.73 billion, resulting in debt/EBITDA leverage of 1.65x and EBITDA/gross interest expense of 15.96x. The company was significantly FCF negative at June 30, 2015 (-$1.35 billion), comprising cash flow from operations of $1.73 billion (including cash from discontinued ops), minus capex of $2.85 billion and dividends of $247 million. Fitch expects MUR’s FCF deficit will close significantly in 2016 to -$240 million under a $45/bbl oil price (Base Case) and -$408 million under a $35/bbl oil price (Stress Case).
Given the current oversupply in the oil market, Fitch has placed increasing weight on the $35 Stress Case for 2016, but believes prices are likely to recover in the out years as large capex cuts made across the industry to date should begin to result in meaningful supply reductions.
Good Operational Performance
MUR’s 2014 upstream operational metrics were solid, and, as calculated by Fitch, included a 1-year organic reserve replacement ratio of 237%, 1-year all-in reserve replacement ratio of 151% (2015: 123%), and a 3-year average all-in reserve replacement ratio of 173%. The company’s reserve life was 9.2 years (2015: 10.2 years), its one and three year FD&A were $18.46/boe and $23.38/boe, and its 2014 full-cycle netbacks remained strong at $21.42/boe.
Kaybob Duvernay and Montney Acquisition
At the end of January, Murphy announced it was entering a jv in the Kaybob Duvernay shale play in Canada. Under terms of the deal, Murphy would acquire 70% of Athabasca Oil Corporation’s interest in the Kaybob Duvernay play and a 30% stake in the liquids rich Montney play. Murphy would also sponsor a capital carry, which is expected to cover 75% of its jv partner’s expected capital contribution. The carry is for C$225 million over a five-year period and the operator (MUR) has flexibility in determining the pace of spend. There are no mandatory drilling requirements, and there are no significant infrastructure investments to get the condensate to market.
Current production is 6,900 boepd in the Kaybob and 900 boepd in the Montney. The stake includes 230,000 acres and 60,000 acres in each play, respectively. The total acquisition cost (including carry) is C$475 million. The acquisition was paid for using proceeds from the Montney asset sale. While the acquisition is likely to provide value to MUR shareholders over the longer term, Fitch believes this early stage acquisition may limit financial flexibility if the downturn is prolonged.
Fitch’s key assumptions for the issuer include:
–Base Case WTI oil prices of $45/bbl in 2016, $55/bbl in 2017, and $60/bbl in 2018;
–Base Case Henry Hub natural gas prices of $2.50/mcf in 2016, $2.75/mcf in 2017, and $3.00/mcf in 2018;
–Base Case capex of $859 million in 2016, $1.09 billion in 2017 and $1.39 billion in 2018;
–Base Case cumulative production growth of -4.8% from 2015 to 2019;
–Dividends held flat across the Base Case forecast;
–Stress Case WTI oil prices of $35/bbl in 2016, $40/bbl in 2017 and $42 in 2018;
–Stress Case Henry Hub natural gas prices of $2.25/mcf in 2016, $2.50/mcf in 2017 and $2.75/mcf in 2018;
–Stress Case capex of $859 million in 2016 growing by 2.5% per year over the life of the forecast;
–Stress Case cumulative production growth of -16.5% from 2015 to 2019
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
For an upgrade to ‘BBB-‘:
–Enhanced long-term liquidity, and;
–Increased size, scale, and operational momentum;
–Sustained debt/EBITDA at or below 1.75x.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
For a downgrade to ‘BB’:
–Additional deterioration in long-term liquidity;
–Additional material declines in size and scale;
–Sustained debt/EBITDA at or above 3.00x – 3.25x.
LIQUIDITY AND DEBT STRUCTURE
Murphy’s liquidity was adequate at Dec. 31, 2015, and included cash and equivalents of approximately $456 million, and availability on its $2 billion unsecured revolver of approximately $1.4 billion after short-term borrowings of $600 million for total committed liquidity of approximately $1.86 billion. The revolver expires in June 2017. The main covenant on the revolver is a 60% debt-to-capitalization ratio. 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.
While Murphy’s liquidity is currently very strong, the company has sold off a significant number of assets as part of earlier restructurings which may limit its ability to liquidate additional assets under a lower-for-longer scenario without unfavorably impacting core credit metrics.
Murphy’s other obligations are manageable. The deficit on pension benefit plans at year-end 2014 rose to $264.6 million versus the $174.1 million the year prior. The main drivers of the increased deficit were actuarial losses, lower curtailments, and lower returns on plan assets. When scaled to Funds from Operations, expected pension outflows are manageable.
MUR’s Asset Retirement Obligation (ARO) stood at $885.9 million at September 30, 2015, versus $905 million seen the year prior. The ARO is linked to the remediation of wells and other upstream facilities. 2014 rental expense was $145 million and was linked to floating production, storage, and offloading facilities (FPSOs) used in Malaysia, leases for production facilities in the Gulf of Mexico, and other items. Commodity derivatives exposure at the company is typically limited, although MUR put on incremental hedges for approximately 15,000 bpd of Eagle Ford production earlier in 2015 at levels in the $62 – $63 range
FULL LIST OF RATING ACTIONS
Fitch downgrades the following:
Murphy Oil Corporation
–Long Term IDR to ‘BB+’ from ‘BBB-‘;
–Senior Unsecured Notes to ‘BB+/RR4’ from ‘BBB-‘;
–Senior Unsecured Revolver to ‘BB+/RR4’ from ‘BBB-‘.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)
Dodd-Frank Rating Information Disclosure Form