El Dorado, Ark.-based Murphy had $844 million of balance sheet debt as of Dec. 31, 2006.
"The outlook revision incorporates our view that Murphy's recent production underperformance heightens the company's dependence on the success of the offshore Malaysian oil project Kikeh," said Standard & Poor's credit analyst Ben Tsocanos.
Lower-than-expected volumes from several fields contributed to production declines in 2006, reducing the company's financial flexibility during a period of intense capital spending, and poor exploration drilling results limit the addition of new growth prospects to offset the reliance on Malaysia. Murphy projects that Kikeh will begin producing later this year and will reach 120,000 barrels of oil equivalent (boe) per day at its peak, more than doubling the company's current production levels and allowing significant reserves bookings. Murphy will be challenged to pursue other large planned development projects in West Africa, the Gulf of Mexico, and Malaysia if Kikeh does not meet expectations.
"The ratings on Murphy reflect a satisfactory business risk profile as an integrated oil and gas company with a geographically diverse reserve base of about 388 million boe (77% oil; 18% U.S.; 38% proved developed as of Dec. 31, 2006), a midsize refining and marketing business, and an intermediate financial risk profile," Mr. Tsocanos said. "The ratings also incorporate the competitive, capital-intensive, and highly cyclical nature of the oil and gas industry, participation in deepwater exploration, and large capital requirements associated with long-term international development projects in the context of otherwise moderate financial policies."
The negative outlook on Murphy Oil incorporates our view that recent production declines reduce the company's flexibility and increase dependence on the success of the Kikeh project. Significant delays or underperformance related to the project, or additional deterioration in Murphy's other operations or financial profile would likely result in a downgrade. Conversely, successful completion of Kikeh at expected performance levels in the absence of other operational declines would likely result in stabilization of the outlook.
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