Murphy Oil's outlook revised to stable by Fitch; ratings affirmed at 'BB+'

Investing.com -- Fitch Ratings has revised the outlook for Murphy Oil Corporation (NYSE:MUR) from Positive to Stable and affirmed its Long-Term Issuer Default Rating (IDR) at 'BB+'. The ratings agency also confirmed Murphy's senior unsecured guaranteed revolver and senior unsecured notes at 'BB+' with a Recovery Rating of 'RR4'.

The new outlook reflects Murphy's robust credit metrics, which include a leverage below 1.0x, ample liquidity, a diversified production mix between onshore and offshore prospects, and a strong maturity profile. However, these benefits are offset by the high costs of environmental remediation associated with operating in the Gulf of Mexico, the risk of new developments, reliance on Gulf production for most of its revenue, a minimal hedge book, and the need to grow and develop core U.S. onshore and offshore assets.

The Stable Outlook mirrors the company's accelerated shift in capital allocation priorities towards shareholder returns, with less emphasis on debt repayment, and slower-than-expected development expectations.

Fitch anticipates that Murphy will focus more on share repurchases, exploration spending, and increased dividends rather than debt repayment in 2025. The company accelerated its capital allocation strategy in 2024, allowing it to allocate at least 50% of its free cash flow (FCF) after dividends to share repurchases and potential dividend increases, before reaching its gross debt target.

Murphy increased its quarterly dividend by 8% to $1.30 per share annually and repurchased approximately $95 million of stock as of February 2025. Despite the current allocation strategy prioritizing shareholder returns, significant debt reduction since 2020 has improved credit metrics, resulting in a stronger capital structure. Fitch forecasts that leverage will remain below 1.0x.

Murphy's production levels are currently at the lower end of Fitch's investment-grade oil and gas portfolio, which is a key credit rating driver. Increased production visibility, in line with the company's capital allocation strategy, could positively impact the rating. Opportunities for long-term production growth exist through offshore development and exploration projects in Vietnam and Cote d'Ivoire, with net oil production expected to begin in Vietnam by the fourth quarter of 2026.

Fitch expects the Gulf's offshore operations to continue to be a central part of Murphy's portfolio, driving future earnings due to its significant production share and strong liquids mix. In 2025, approximately 34% of capital spending will target Gulf development drilling and field development projects.

Onshore, the company has over 50 years of low breakeven inventory in the Eagle Ford, Kaybob Duvernay, and Tupper Montney. These assets provide flexibility and the option to increase onshore production across various price environments. Fitch forecasts stable production in the Eagle Ford at 30 to 35mboepd and gross production in the Tupper Montney to remain near the 500mmcfd plant capacity.

Murphy's remediation obligations remain high due to its Gulf exposure, with asset retirement obligations (AROs) totaling $961 million as of December 31, 2024. Other regulatory risks include downtime risk from storms and related environmental activity.

In comparison to its peers, Murphy's gross production of 184mboe/d for 2024 is at the lower end of the range of most investment-grade issuers and high 'BB' issuers. Murphy's leverage metrics are stronger than its investment-grade and high 'BB' peers at 0.8x for 2024.

Fitch's key assumptions include West Texas Intermediate oil prices of $65 per barrel in 2025, $60 per barrel in 2026 and 2027, and $57 per barrel thereafter. The agency assumes a gradual contribution from Vietnam production in later years of the rating case, with capex of $1.2 billion through the forecast. Dividends are expected to increase to $1.30 per share annually or approximately $190 million in 2025 and thereafter.

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