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

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), the latter based on the guarantee of Murphy. The trends for both ratings have been changed to Stable from Negative, reflecting DBRS’s expectation that Murphy will realize its expected oil and gas production growth over the course of 2010 (see below) and improve its reserve replacement record over the medium term while continuing to limit its capex program to cash flow generation in order to maintain its conservative financial profile and strong liquidity position. Murphy has benefited from its enhanced ability to control both costs and the pace of field development as it was the operator for 75% of its production in 2009 compared with 56% in 2007. Given these factors and Murphy’s significant cash balances, DBRS expects the Company to maintain very strong credit metrics in order to retain the current ratings.

The rating confirmations and trend changes reflect the improvement in Murphy’s production profile in recent quarters largely due to the ramp-up of a number of field developments in Q3 2009 (including natural gas volumes from Sarawak (Malaysia) and crude oil volumes from Thunder Hawk (Gulf of Mexico (GOM)) and Azurite (Republic of the Congo (Congo)). Following 28% growth in 2009, the Company has provided upstream production guidance of slightly more than 200,000 boe/d for 2010 (up 23% from 2009 volumes and almost double 2007 volumes), primarily due to full-year production at the new fields started up during Q3 2009, partly offset by expected field declines at other North American fields in the GOM, Hibernia and Terra Nova. In addition, Murphy has made progress in improving its reserve replacement metrics while maintaining a conservative financial profile and strong credit metrics in a lower energy price environment in 2009.

Over the past two years, the Company has reduced debt and increased cash balances, largely by limiting capex to generated cash flow. Consequently, Murphy’s adjusted net debt-to-capital ratio of 14% and adjusted net debt-to-cash flow ratio of 0.54 times in 2009 improved from peak 2007 levels of 22% and 0.90 times, respectively. Included in these adjusted net leverage metrics are operating lease obligations associated with the floating, production, storage and offloading (FPSO) vessels for the Kikeh (Malaysia) and Azurite (Congo) crude oil fields, and other off-balance sheet obligations, partly offset by significant cash balances.

DBRS expects the Company’s $2.4 billion capital program for 2010 to be funded by cash flow, supported by higher oil and gas production and higher energy prices than in 2009. The Company’s conservative balance sheet provides significant flexibility, including $1.1 billion of cash (compared with $1.35 billion of balance sheet debt) and $1.3 billion of availability under committed bank facilities, as of December 31, 2009. While three-quarters of Murphy’s debt maturities occur in 2012, nearly two-thirds of these are comprised of borrowings on its credit facilities ($672 million). DBRS views these maturities as manageable and expects that the Company will begin to address the re-financing risk well in advance of the maturity dates.

On December 19, 2008, DBRS maintained the previous Negative trends while tracking progress on 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 then-low energy price environment on the Company’s then-current and expected medium-term reserve replacement metrics; (3) The potential impact of the then-current depressed economic environment on energy demand and political risk, particularly in Malaysia, where the Company’s production was expected to exceed 50% of total volumes in 2009.

As noted above, Murphy has achieved the previously expected 2009 production growth profile, although at a somewhat slower pace than previously projected. Additionally, crude oil prices have increased substantially over the past year (WTI crude oil price averaged $78.68 per barrel in Q1 2010 compared with $43.31 per barrel in Q1 2009), enhancing the Company’s business environment.

With respect to operating performance, Murphy’s annual conventional reserve replacement costs ($18.93/boe in 2009 and $43.69/boe in 2008) suggest recent improvement. However, while recognizing the lumpy nature of reserve additions for the Company’s major development projects, Murphy’s three-year average conventional reserve replacement costs of $29.68/boe from 2007 to 2009 compares poorly with those of its peer group, in part due to the nature of its long lead-time projects with heavy upfront capital requirements and subsequent time lag prior to recognition of proved reserve additions. The Company’s inconsistent reserve replacement results will remain a key challenge due to its large project growth strategy, although potentially mitigated in the future with shorter-cycle projects such as Tupper, Tupper West and Eagle Ford Shale.

The Company’s proved conventional reserve life index (RLI) of 5.6 years and its proved developed conventional RLI of 4.0 years in 2009 are both well below industry averages and significantly below the levels achieved in 2007 (8.4 years and 4.5 years, respectively), although comparable to 2004-2005 levels. Murphy’s total proved RLI of 7.4 years at the end of 2009, which includes reserves associated with its oil sands investment through its 5% ownership interest in Syncrude, is more reasonable, although still below peer group averages. Recent performance largely reflects results in Malaysia, where significant reserve additions were more than offset by substantial production increases. DBRS views Malaysia as a reasonably stable country that coped relatively well with the recent global downturn, although Murphy’s political and economic risk exposures have increased moderately from its historically North-American focused operations.

Production is expected to become less weighted to liquids in 2010 (expected to drop to 70%, from 81% in 2009) mainly due to higher natural gas production at Sarawak and Tupper. However, the proportion of production from Malaysia (54% of total in 2009) is expected to remain near 2009 levels this year.

DBRS expects the Company to mitigate its challenges over time, including relatively high reserve replacement costs and short conventional reserve life relative to its peer group, concentration of production and reserves in Malaysia and significant (although declining) exposure to volatile crude oil prices as a result of its crude oil weighted production profile. The Company made some progress on these issues during 2009. In addition, DBRS expects Murphy to maintain very strong credit metrics in order to retain the current ratings.

As an integrated oil and gas company, Murphy’s modest refining and marketing (R&M) operations provided approximately 20% of its earnings before corporate overhead on average over the past six years (a low of 8% in 2009 from a high of 33% in 2007). The R&M operations are weighted towards the United States, with the balance in the United Kingdom, adding further diversity to the Company’s earnings and 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, which can be found on the DBRS website under Methodologies.

This is a Corporate (Oil and Gas) rating.