DBRS Releases Updated Report on Murphy Oil

DBRS has today updated its report on Murphy Oil Corporation (“Murphy” or “the Company”), reflecting operating performance and corporate developments for the six months ended June 30, 2012.

Murphy’s credit quality is largely supported by its conservative financial profile and strong liquidity, which provide flexibility. This was evidenced during 2009, when energy prices declined significantly but had minimal impact on Murphy’s key credit metrics. The Company’s debt-to-capital of 7.8% and debt-to-cash flow of 0.26 times (x) for the 12 months ended June 30, 2012, are among the lowest of its peers, and DBRS anticipates the Company will continue to manage its balance sheet in a prudent manner.

The Company also currently benefits from the integrated nature of its operations, which provide earnings and cash flow stability during periods of lower pricing, acting as a natural hedge. However, the Company intends to divest its U.K. refining and marketing assets, and is evaluating the divestiture of its U.S. retail operations. This potential loss of integration would increase Murphy’s exposure to commodity price volatility. DBRS does not anticipate rating action as a result of any potential divestiture, assuming proceeds will be used to fund further growth projects or to maintain a conservative financial profile.

The rating is limited by Murphy’s focus on high-cost, long lead time projects, which could result in balance sheet pressure, as significant cash flow contributions take time to be realized. In addition, the Company has recently increased its capital spending (capex) budget for 2012, likely resulting in a sizable free cash flow deficit. As capex levels are expected to remain elevated to fund sizable growth plans through 2015, DBRS anticipates free cash flow deficits during this period. Although the Company maintains financial flexibility and has indicated the proceeds from the sale of its downstream operations are to be used to help fund this growth, DBRS may consider rating action if deficits are larger than anticipated ($1 billion or more) and significantly weaken credit metrics. DBRS estimates that incremental debt of $1 billion each year through 2015 would result in debt-to-capital approaching 30%, which could prompt rating action.

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

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