Fitch Affirms Murphy Oil's IDR at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Murphy Oil Corporation (NYSE: MUR) at 'BBB-'. The Rating Outlook remains Stable. Murphy Oil's ratings are affirmed as follows:

--Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured notes at 'BBB-';

--Senior unsecured revolver at 'BBB-'.

Approximately $3.82 billion in balance sheet debt including capitalized leases is affected by today's rating action.

KEY RATING DRIVERS

MUR's ratings are supported by its relatively high exposure to liquids (66% of 2013 production and 72% of reserves); strong full cycle netbacks; historically good operational metrics, including robust reserve replacement and three-year finding, development, and acquisition (FD&A) costs; the company's operator status on a majority of its properties which supports capex flexibility; and its onshore position in the Eagle Ford, which is expected to be a major growth engine of Murphy's portfolio over the next few years.

Ratings issues include the company's negative free cash flow (FCF) over the past several quarters; small size relative to peers (just 688 million boe of 1p reserves and production of 204,600 barrels of oil equivalent per day in 2013); recent production target miss; ongoing shareholder-friendly initiatives, including significant share buybacks ($624 million for the latest 12 months [LTM] period ending June 30, 2014); uncertainty around the timing and size of proceeds linked to future asset sales; and the loss of diversification from the company's exit from the downstream. The company also has a sizable exploration program.

REASONABLE FINANCIAL METRICS

MUR's recent credit metrics were reasonable for the rating category. As calculated by Fitch, total debt with equity credit rose to $3.82 billion at June 30, 2014 versus $2.96 billion at June 30, 2013, while LTM EBITDA edged down to $3.43 billion from $3.59 billion at year-end (YE) 2013, resulting in debt/EBITDA leverage of 1.12x, EBITDA/gross interest expense of 27.8x, and funds from operations (FFO)/interest coverage of 22.1x. EBITDA has been negatively impacted by a production shortfall, primarily due to issues in Malaysia linked to rig mobilization and unplanned facility downtime. Second quarter (2Q) production was 210,191 boepd versus guidance of 217,000. However, the company's FCF position has improved, as ramped-up production at the Eagle Ford has begun to offset higher capex spending. FCF was -$797 million for the LTM period ending June 30, 2014, a significant improvement from levels seen in 2012 levels (-$1,346 million). The company has stated that the Eagle Ford is expected to turn FCF positive by YE as production ramps up further. Looking forward, Fitch expects the company will continue to be FCF negative for the remainder of 2014 and 2015 under Fitch's base case assumptions.

GOOD OPERATIONAL METRICS

As calculated by Fitch, Murphy's 2013 upstream operational metrics were robust, and included a one-year organic reserve replacement ratio of 243%, one-year all-in reserve replacement ratio of 185%, and a three-year average all-in reserve replacement ratio of 199%, pushing the company's reserve life up to 9.2 years from 8.5 years and impacting a number of other key metrics favorably. One-year FD&A declined sharply from $30/boe to $23.70/boe, and the company's full-cycle netbacks remained strong at $22.58/boe. Murphy's exposure to liquids in both reserves and production remains high (72% of reserves, 66% of production) and has resulted in better cash flow than gassier peers over the last several years. 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).

As calculated by Fitch on a pro forma basis using year-end reserve data and debt and production data from June 30, 2014, Murphy had debt/boe 1p reserves of $5.56/boe, debt/boe proven developed reserves of $8.78/boe, and debt/flowing barrel of approximately $18,182/barrel on a 6:1 basis. While these debt/boe metrics are somewhat weak for the rating category, Fitch expects them to strengthen as new projects come up and further progress is made in growing Eagle Ford volumes. Management has guided to a strong reserve replacement year for 2014 (150+%), which should help strengthen debt/boe ratios.

EAGLE FORD GROWTH

Despite the missed production guidance, it is important to note that investments in the Eagle Ford shale are progressing as planned. Production at the Eagle Ford in 2Q was a record 52,814 boepd, up +33% from year-ago levels. The company expects to bring a total of 200 wells on line in by year-end, and has a 10+ years of drilling inventory. Further uplift in volumes beyond planned levels is possible from downspacing, enhanced well completion techniques, and access to new pipelines in the region which should raise realizations.

LIQUIDITY

Murphy's liquidity was adequate at June 30, 2014, and included cash and equivalents of $661.1 million, short-term marketable securities of $427.4 million, and availability on its $2 billion unsecured revolver of $800 million, (or 40% for total) for total liquidity of approximately $1.889 billion. Liquidity should increase over the second half of the year as proceeds for the refinery asset sale and retail filling station sales are received. Maturities are manageable and include nothing major due over the next three years until the company's $550 million 2017s are due. Total debt includes a 25 year capital lease for production equipment associated with the Kakap offshore fields in Malaysia. This was recorded on Murphy's balance sheet at $342 million at June 30, 2014. Financial covenants are also light. The main financial covenant on the revolver is a 60% debt to cap ratio, which the company had ample headroom on at June 30, 2014. Other covenant restrictions include limitation on liens, limits on asset sales and disposals, and limitations on mergers.

OTHER LIABILITIES

Murphy's other obligations are manageable. The deficit on pension benefit plans at year-end 2013 declined to $174.1 million, an improvement from the -$257.9 million seen the year prior. The main sources of improvements included benefits curtailments associated with the spin-off of MUSA, actuarial gains, and higher returns on plan assets. The pension deficit is modest when scaled to underlying FFO. The company's Asset Retirement Obligation (ARO) rose to $905.5 million at June 30, 2014, up from the $819.9 million level seen at June 30, 2013. Derivatives exposure is limited and is used to protect against FX and interest rate exposure, as well as hedge a modest portion of upstream output. The company had a net derivative liability of $36.9 million at June 30, 2014.

RATING SENSITIVITIES

Positive: No upgrades are expected for the company in the near term. However, future developments that could lead to positive rating actions include:

--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 approximately $7.50/boe;

--Debt/boe P1 above approximately $5.50/boe;

--Debt/Flowing Barrel above $20,000.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Full Cycle Costs for North American E&P (Production Costs Moderate in 2013)' (July 30, 2014);

--'North American Energy Outlook and LNG' (July 16, 2014);

--'North American Exploration and Production Handbook' (July 16, 2014);

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Global Impact of US Shale Oil - Rising Production Tempers World Prices' (Feb. 10, 2014);

--'Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an Impact' (Feb. 4, 2014);

--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014).

Applicable Criteria and Related Research:

Full Cycle Costs for North America E&P (Production Costs Moderate in 2013)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753198

North American Energy Outlook and LNG

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751784

North American Exploration and Production Handbook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735415

Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556

Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=886914

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