DBRS Downgrades Murphy Oil Corporation to BBB (high) from A (low), Trend Negative

DBRS has today downgraded the ratings of Murphy Oil Corporation (Murphy or the Company) and the Commercial Paper rating of Murphy Oil Company Ltd. to BBB (high) from A (low) and R-2 (high) from R-1 (low), respectively. The trends for all ratings have been changed to Negative.

On October 16, 2012, DBRS placed the ratings of Murphy Under Review with Negative Implications, reflecting DBRS’s concern over the potential impact on the Company’s credit risk profile as a result of the announcement that the board of directors had approved (1) a special dividend of $500 million, (2) share repurchases of up to $1 billion and (3) a spinoff of the Company’s U.S. downstream retail operations (Murphy Oil USA, Inc., which includes 1,156 Company-owned and operated service stations). Murphy also reaffirmed the plan to divest the U.K. downstream operations and stated that it is continuing to review possible options with respect to other assets. DBRS expected these changes to have a negative impact on the Company’s credit risk profile.

DBRS was concerned over the intention to fund the dividend and share repurchase with incremental debt. As a result of the expected increased leverage (DBRS estimates 25%, pro forma, compared to 11% as at September 30, 2012) to fund the announced transactions, DBRS views this as a shift from Murphy’s historically very conservative financial management, which DBRS has indicated was the key driving factor behind Murphy’s rating. As a result, Murphy’s financial risk profile is no longer consistent with the A (low) rating category.

The change in trend to Negative reflects DBRS’s concern over the considerable uncertainty surrounding the announced spinoff, potential for significant capex leading to free cash flow deficits and the potential for additional shareholder-friendly transactions, all of which could lead to continuing deterioration of its credit metrics. The final impact on the Company’s financial risk profile remains uncertain, as few details have emerged. DBRS does note that the loss of retail operations will negatively impact the Company’s business risk profile, as the loss of integration of operations is expected to increase Murphy’s exposure to the volatility in commodity pricing, potentially impacting both earnings and cash flow. In addition, the Company does not intend to transfer any current debt to the spun-off entity, which will result in a further increase in leverage for Murphy through the loss of a significant portion of its asset base. However, the retail spinoff company will raise its own financing pre-spin and a portion of the proceeds may be remitted to Murphy in the form of a dividend. DBRS will continue to monitor this transaction for further details. However, should leverage continue to increase as a result of the spin, free cash flow deficits and/or additional shareholder-friendly transactions, further negative rating action would be likely.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The Commercial Paper rating of Murphy Oil Company Ltd. is guaranteed by Murphy Oil Corporation.

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