Murphy Oil and Aethon Energy seized a Federal Reserve windfall, announcing plans the morning of Sept. 19 to issue new debt at a base rate suddenly on sale at 9% off.

The Federal Open Market Committee announced mid-day Sept. 18 that it was cutting the Federal funds rate from a top end of 5.5% down to 5%; the low end of its target range is now 4.75%.

Aethon did not reply before press time as to whether its new-debt offering’s timing after the Fed announcement was coincidental.

Megan Larson, Murphy senior investor relations adviser, told Hart Energy, though, “While we can’t control the macro-environment, we certainly were watching and would not have launched the transactions if we felt the timing wasn’t appropriate.”

Haynesville-focused Aethon’s fund and joint venture, Aethon United BR, plans to sell $1 billion of senior unsecured notes due 2029, using the proceeds to redeem $750 million of five-year 8.25% senior unsecured notes due 2026. The balance will be used to reduce bank debt.

The 2026 notes were issued in January of 2021 while the Fed rate was between 0% and 0.25%.

Separately, Houston-based U.S. and international operator Murphy Oil reported Sept. 19 that it is offering $600 million of senior notes due 2032.

Proceeds will be used to redeem up to $600 million of its $945 million of senior notes due 2027, 2028 and 2029 that carry interest rates of between 5.875% and 7.05%.

Joint book-running managers of the Murphy offering are J.P. Morgan Securities, BofA Securities and MUFG Securities Americas.

Aethon economics

Fitch Ratings put a B+ rating, which is at the high end of its “highly speculative” category, on the Aethon offering, the credit analysis firm reported shortly after Aethon’s news.

“Aethon's ratings reflect its vertically integrated unit economics, contiguous positions in the Haynesville [Shale play] and moderate leverage at 2.2x,” Fitch reported.

“The rating also considers [Aethon’s] reversion to negative free cash flow (FCF) in 2023 and 2024 and the expected return to positive FCF thereafter.”

Aethon’s 2023 cash flow “was more negative than anticipated” due to lower natural gas prices and higher capex, Fitch reported. It added that it expects higher natural gas prices, lower capex and hedging to result in FCF after this year.

The operator’s roughly $1 billion bank revolver was 74% drawn in June, up from 54% in 2023. The $250 million balance, minus issuance fees, of the new notes offering should result in reducing this debt, bringing it back to roughly 50% drawn, Fitch expects.

Aethon has 66% of its 2024 production hedged at $3.10/Mcf, 58% of 2025 output at $3.04, 37% of 2026 at $2.77, 17% of 2027 at $3.08 and 9% of 2028 at $2.75.

Aethon produces 900 MMcf/d from 200,000 largely contiguous net Haynesville acres in northeastern Texas and northwestern Louisiana. It also produces 110 MMcf/d from five wells in a Haynesville extension north of Houston.

Its gas-gathering portfolio consists of 800 miles of pipe; its gas-treating property has more than 1.75 Bcf/d of capacity.

Fitch reported, “Established infrastructure in the Haynesville and the proximity to Henry Hub and rising LNG demand destinations help support strong realized prices for [Aethon’s] gas as well as reduces basis risk.”

Murphy economics

Fitch rated Eagle Ford Shale, Gulf of Mexico and Canada operator Murphy’s new notes BB+ at the high end of its “speculative” range, after the Murphy news.

The grade considers Murphy’s FCF and that the operator has reduced its debt by $1.7 billion since year-end 2020, bringing it to $1 billion, in addition to “its strong credit metrics, abundant liquidity and solid maturity profile.”

Larson at Murphy told Hart Energy that, since launching a capital-allocation framework in August of 2022, the E&P has repurchased $300 million of its shares and increased its dividend by 70%.

“When you look back further to year-end 2020, we've utilized more than $2 billion of adjusted [FCF] to repurchase shares and reduced debt by $1.75 billion, giving us one of the top balance sheets in all of E&P,” Larson said.

“The bond issuance and tender offer announced today provides us with further de-risking of our balance sheet, as it will extend our maturity profile.”

With current production of 188,000 boe/d, Murphy’s history dates to 1905 and an interest in the Smackover Field discovery in south-central Arkansas in 1921.

In addition to production from the Gulf, Eagle Ford and western Canada, it has exploration prospects outside North America. Its proved reserves were 724 MMboe at year-end 2023.

On the other hand, Fitch reported, its BB+ grade considers the “significant environmental remediation costs of operating in the Gulf of Mexico compared with U.S. onshore [shale] peers.”

Murphy's asset-retirement obligations total $949 million, which Fitch described as “significant and larger than comparable onshore peers, given [Murphy’s] offshore exposure.”

But Murphy’s obligations are lower than Occidental Petroleum’s $3.85 billion, APA Corp.’s $2.52 billion and Hess Corp.’s $1.25 billion, it added.

Meanwhile, Ovintiv Inc.’s is $261 million and Marathon Oil’s is $336 million.

Murphy’s profile also includes “execution risk in new developments, dependence on Gulf output for the majority of revenue, a minimal hedge book and the need to grow and develop core U.S. onshore and offshore assets,” Fitch reported.

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