DBRS Comments on Murphy Oil’s Announced Sell Down of Malaysian Assets

DBRS today notes that Murphy Oil Corporation (Murphy or the Company; rated BBB with a Stable trend) has announced that it has entered into an agreement with PT Pertamina Malaysia Eksplorasi Produksi (Pertamina) to sell 30% of its Malaysian oil and gas assets for $2.0 billion cash (the Transaction). DBRS views that the Transaction is not expected to have a material impact on Murphy’s credit profile. Pro forma the Transaction, Murphy’s business risk profile is expected to remain in line with the BBB rating, as the Company’s size and portfolio diversification is expected to remain reasonable for the rating category despite a reduction in its current production profile. In addition, DBRS expects Murphy to use the proceeds from the Transaction prudently in order to keep its key credit metrics within the BBB rating category. Although Murphy has a recent history of material shareholder-friendly transactions, DBRS notes that the Company remains committed to maintaining an investment-grade credit risk profile. The closing of the Transaction is expected to take place in two phases, with the first phase expected in the fourth quarter of 2014 and second phase in the first quarter of 2015. The Transaction is also subject to, among other things, the approval of Petroliam Nasional Berhad (Petronas). Murphy is expected to remain as the operator of the assets.

The impact of the Transaction on Murphy’s business risk profile is viewed as modestly negative. For the first six months ended June 30, 2014, the Malaysian assets accounted for approximately 41% of the Company’s net production. Pro forma the Transaction, the asset sell down reduces the Company’s production size by approximately 12%, which has a modest, negative impact on the Company’s economies of scale. Relative to its size, the Malaysian assets also account for a greater proportion of the Company’s earnings and operating cash flows as it have relatively high netbacks and one of the lowest cost bases among the Company’s producing regions. However, the Company is expected to partially offset these negative factors by using a portion of the proceeds to increase drilling capital in the relatively lower risk, high netback, onshore Eagle Ford Shale assets.

The expected $2.0 billion cash proceeds from the Transaction will provide the Company with significantly greater financial flexibility to increase its drilling activities in the Eagle Ford Shale, seek acquisition opportunities to grow its production profile, reduce debt and/or repurchase shares. Although the specific use of proceeds remains uncertain at this time, going forward, DBRS expects the Company to maintain its key credit metrics in line with the BBB rating range by prudently redeploying the proceeds from the Transaction. However, should the use of the proceeds from the Transaction weaken the Company’s key credit metrics beyond the current rating category, this could result in a negative rating action.

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

The applicable methodologies are Rating Companies in the Oil and Gas Industry (July 2013), DBRS Criteria: Guarantees and Other Forms of Explicit Support (July 2013) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2014), which can be found on our website under Methodologies.

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