DBRS Confirms Murphy Oil and Subsidiary at A (low) and R-1 (low), Trends Remain Negative

DBRS has today confirmed the Senior Unsecured Notes of Murphy Oil Corporation (Murphy or the Company) at A (low) and the Commercial Paper of Murphy Oil Company Ltd. at R-1 (low), which is based on the guarantee of Murphy. The trends for both ratings remain Negative.

The confirmations reflect the following:

(1) DBRS’s expectation that Murphy will maintain its conservative financial profile and strong liquidity position, despite the recent sharp drop in crude oil prices, by limiting its capex program to cash flow generation in 2009. Murphy maintains a strong balance sheet, with cash exceeding debt and substantial liquidity under its credit facilities at September 30, 2008.

(2) Murphy has made progress in increasing its production levels in recent quarters, largely due to ramp-up of the Kikeh project in Malaysia.

(3) Murphy has made progress in recent years with respect to reserve replacement and production growth based largely on the development at Kikeh.

However, DBRS has maintained the Negative trends (implemented on February 7, 2007, and maintained on November 29, 2007) on the Company’s ratings as progress is tracked with respect to the following factors:

(1) Realization of expected proved reserve and production growth over the course of 2009 with a full year of Kikeh production at peak capacity and the pending start-up of several other development projects.

(2) The potential impact of the current low energy price environment on the Company’s current and expected medium-term reserve replacement metrics.

(3) The potential impact of the current depressed economic environment on energy demand and political risk, particularly in Malaysia, where the Company’s production is expected to exceed 50% of total volumes in 2009.

Murphy is well positioned to manage the combined challenges of the ongoing credit crisis and the recent sharp decline in crude oil prices. The Company’s conservative balance sheet provides significant flexibility, including $1.4 billion of cash and equivalents (compared with $1.1 billion of debt) and $1.5 billion of availability on committed bank facilities as of September 30, 2008. Long-term debt maturities are immaterial until 2012. In addition, Murphy has consistently maintained good credit metrics, with its total debt-to-capital and total debt-to-cash flow ratios of 14% and 0.35 times, respectively, for the 12 months ending September 30, 2008, comparing well with those of its peers.

These ratios are expected to remain relatively strong in 2009 (although weaker than recent levels due to the current pricing environment) given recent debt reduction, rising production and the Company’s target to be at least free cash flow neutral for the year. DBRS does not expect a significant change in the Company’s conservative financial strategy as a result of its transition to a new CEO at year-end 2008.

DBRS expects the Company to mitigate its operational challenges over time, including high reserve replacement costs and short conventional reserve life relative to its peer group (although the latter measure improved significantly in 2006–2007), increasing concentration of production and reserves in Malaysia and significant exposure to volatile crude oil prices as a result of its heavily oil-weighted production profile (92% for the nine months ending September 30, 2008 (9M/08)). The Company has publicly stated that, given its strong balance sheet, it will also consider upstream acquisition opportunities, noting that North American natural gas assets would help balance the Company’s oil-weighted international portfolio. DBRS notes that absent the December 2007 Milford Haven refinery transaction in the United Kingdom, the Company has had minimal acquisition activity over the past ten years.

Murphy has strong production growth potential, with Malaysia as the primary contributor, principally through the Kikeh field, the largest discovery in the Company’s history. Kikeh commenced oil production in August 2007 and continues to ramp up to a target exit rate for 2008 of 120,000 barrels per day (b/d), approximately 84,000 b/d net to Murphy during the cost-recovery phase and 72,000 b/d thereafter (expected in early 2009). While Murphy is the operator in all of its projects in Malaysia, the Company is subject to eight production-sharing contracts with the government, including Kikeh, under which Murphy’s share of production will decrease by approximately 12,000 b/d to 72,000 b/d (as noted above) after the Company achieves recovery of its initial capital costs. DBRS notes that Malaysia is a stable country entailing moderate political risk levels.

The Company has several other notable development projects with start-up anticipated in coming quarters, including Kikeh natural gas (Q4 2008), Tupper, British Columbia, tight gas (Q4 2008), Sarawak gas offshore Malaysia (Q2 2009), Thunder Hawk in the U.S. Gulf of Mexico (Q2 2009) and Azurite offshore Congo (Q2 2009). Murphy has given recent total production guidance of 128,000 barrels of oil equivalent per day (boe/d) for 2008 (124,000 boe/d in 9M/08) and 190,000 boe/d to 195,000 boe/d for 2009 (48% to 52% higher than the 2008 guidance).

While recognizing the lumpy nature of reserves additions for the Company’s major development projects, Murphy’s three-year average reserve replacement costs ($27.89/boe from 2005 to 2007) have been high relative to those of its peer group as reserve replacement has been inconsistent. The Company’s focus on a few large, long-lead-time projects entails greater risk and reward, frequently with substantial upfront capital and minimal or no corresponding production for several years. While below-average upstream operational performance is an ongoing challenge, DBRS expects Murphy to show improvements over the medium term given its pipeline of development projects.

As an integrated oil and gas company, Murphy’s modest refining and marketing operations have provided approximately 17% of its earnings before corporate overhead on average over the past five years (32% in 2007). The operations are relatively balanced between refining and marketing given its three wholly owned refineries and sizable retail footprint in the United States and the United Kingdom, adding further diversity to the Company’s cash flows.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The rating for Murphy Oil Company Ltd. is based on the guarantee of Murphy Oil Corporation.

The applicable methodology is Rating Oil and Gas Companies: DBRS Rating Approach, which can be found on our website under Methodologies.

This is a Corporate rating.