DBRS Releases Updated Report on Murphy Oil

DBRS has today updated its report on Murphy Oil Corporation (Murphy or the Company), reflecting financial and operating results for the year ended December 31, 2012.

On November 26, 2012, DBRS downgraded the ratings of Murphy Oil Corporation (Murphy or the Company) to BBB (high) from A (low). The rating of Murphy Oil Company Ltd.’s Commercial Paper was also downgraded, to R-2 (high) from R-1 (low). The trends for all ratings were changed to Negative. The action reflected DBRS’s concern over the impact on the Company’s credit risk profile resulting from the October 16, 2012, announcement (the Transaction) of the board of directors’ approving (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 1,165 Company-owned and -operated service stations). DBRS notes that at year-end 2012, the incremental debt incurred to fund cash flow shortfalls of $1 billion, along with the special dividend and share repurchases, significantly affected the Company’s credit metrics (adjusted debt-to-capital and debt-to-cash flow increased to 28.7% and 0.66 times (x) from 15.2% and 0.22x, respectively, in 2011). This reinforced DBRS’s view of the Transaction 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.

Concern remains over the uncertainty surrounding the announced spinoff, the 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 Murphy’s credit metrics. Should leverage continue to increase to a level not commensurate with the BBB (high) rating category as a result of the spin, free cash flow deficits and/or additional shareholder-friendly transactions, DBRS would anticipate further negative rating action.

DBRS would consider removing the negative trend if Murphy is successful in completion of the Transaction, while maintaining credit metrics at reasonable levels for the current rating category. This would likely require the use of proceeds of asset sales and/or a potential dividend from the spun-off entity to ensure that minimal further debt financing is required to fund expected cash flow shortfalls for the year. DBRS will continue to closely monitor Murphy for further developments.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.