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

DBRS has today confirmed the ratings on the Senior Unsecured Notes of Murphy Oil Corporation (Murphy or the Company) at A (low) and the Commercial Paper (CP) of Murphy Oil Company Ltd. at R-1 (low); the CP rating is based on the guarantee of Murphy. The trends for both ratings are Stable. DBRS expects the Company to maintain its very strong credit metrics in order to retain the current ratings.

The rating confirmations reflect DBRS’s expectation that Murphy will realize its expected oil and gas production growth over the course of 2011 (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. In addition, DBRS expects that Murphy’s planned sale of its U.S. refineries and U.K. refining and marketing operations during 2011, with proceeds to be reinvested over time in its higher return exploration and production and U.S. marketing segments, would be modestly positive from a business risk perspective.

Following 14% growth in 2010, the Company has provided upstream production guidance of between 200,000 barrels of oil equivalent per day (boe/d) and 210,000 boe/d for 2011 (up 10% at the guidance midpoint from 2010 volumes), growing to 300,000 boe/d in 2015.

The projected 2011 increase is primarily due to new natural gas production at Tupper West (Montney Shale in western Canada), which commenced in February 2011, partly offset by expected field declines in the Gulf of Mexico (GOM) and downtime for maintenance at Kikeh (Malaysia) and Terra Nova (offshore Canada’s east coast). Future growth is expected in Malaysia through further development at Kikeh and Sarawak, as well as first production at Kakap in 2013, at Tupper West and in the Eagle Ford Shale (South Texas). During 2011, Murphy expects to drill exploration wells in Indonesia, Suriname, Republic of the Congo, Brunei, Kurdistan and, pending permit approval, the GOM.

Murphy’s financial profile remains conservative relative to its peers, as demonstrated by its strong credit metrics in a lower energy price environment in 2009 and improved credit metrics in 2010. Murphy’s adjusted net debt-to-capital ratio of 9% and adjusted net debt-to-cash-flow ratio of 0.30 times in 2010 improved from peak 2007 levels of 22% and 0.90 times, respectively, largely by limiting capital expenditures and dividends to generated cash flow. Included in these adjusted net leverage metrics are future operating lease obligations, partly offset by significant cash balances.

DBRS expects the Company’s capital program for 2011 to be funded by cash flow, supported by higher oil and gas production and higher energy prices than in 2010. Murphy’s conservative balance sheet provides significant flexibility, including $1.152 billion of cash and short-term investments (compared with $939 million of balance sheet debt) and $1.565 billion of availability on committed bank facilities, as of December 31, 2010. While three-quarters of Murphy’s maturities ($690 million) occur in 2012, approximately one-half ($340 million) are borrowings on its credit facilities. DBRS views these maturities as manageable and expects the Company will begin to address the refinancing risk well in advance of the maturity dates.

With respect to operating performance, Murphy’s three-year average conventional reserve replacement costs of $26.61/boe from 2008 to 2010 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. Its reserve replacement results remain a key challenge due to its large-project growth strategy, although this could be mitigated in future with shorter-cycle projects, such as Tupper, Tupper West and Eagle Ford Shale, in which Murphy is the operator.

The Company’s proved conventional reserve life index (RLI) of 5.2 years and its proved developed conventional RLI of 3.6 years in 2010 are both well below industry averages and significantly below the levels achieved in 2007 (8.4 years and 4.5 years, respectively), although comparable with 2005 levels (5.7 years and 3.3 years, respectively), as production growth has outpaced reserve growth. Murphy’s total proved RLI of 6.7 years at the end of 2010, which includes reserves associated with its oil sands investment through its 5% ownership interest in Syncrude Canada Ltd., is also well below peer group averages and significantly lower than in prior years (10.8 years at year-end 2007). 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 has coped relatively well with the sluggish global economic recovery.

Production is expected to become less weighted to liquids in 2011 (dropping to 61% from 68% in 2010), mainly due to higher natural gas production at Sarawak and new gas production at Tupper West. Production in Malaysia (55% of total in 2010) is forecast to decline by 2% to 100,500 boe/d (49% of total) in 2011 as higher natural gas production from Sarawak only partly offsets lower crude production at Kikeh. However, future growth is expected in Malaysia through further development at Kikeh and Sarawak, as well as first production at Kakap, expected in 2013.

DBRS expects the Company to mitigate its challenges over time, including relatively high reserve replacement costs and short 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. In addition, DBRS expects Murphy to maintain very strong credit metrics in order to retain the current ratings.

Notes:
The rating of Murphy Oil Company Ltd. is based on Murphy Oil Corporation guarantee. The CP program is currently inactive.

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.