Moody's turns 'positive' on Kinder Morgan and Murphy Oil

US midstream energy company Kinder Morgan (NYSE: KMI) and independent exploration and production company Murphy Oil (NYSE: MUR) have had their respective outlooks upped to 'positive' from 'stable', by Moody’s Investor Service.

In a recent note to clients, Moody’s said it has revised its outlook to positive for Kinder Morgan and affirmed its Baa3 senior unsecured and Prime-3 commercial paper ratings. "The positive outlook reflects Moody's expectation that Kinder Morgan remains committed to deleveraging below 5x, including use of its proceeds from the sale of Trans Mountain to repay debt," said Terry Marshall, Senior Vice President at Moody’s.

The rating agency added that the company's Baa3 rating is supported by significant scale and high quality natural gas pipelines and important ancillary assets; stable fee-based, demand-pull cash flows; significant internal funding of capex and dividends; very good dividend coverage; and elimination of the significant execution risk associated with the Trans Mountain Pipeline system and expansion project (Trans Mountain) after its announced sale to the Government of Canada by Kinder Morgan Canada Ltd.

Moody’s also noted that Kinder Morgan has good liquidity through 30 June 2019. At 30 June 2018 the company had about $300 million in cash and $4.4 billion available on its committed $5 billion revolver maturing in November 2019.

In the twelve months through 30 June 2019, Kinder Morgan will have roughly breakeven free cash flow. It has $1.3 billion in notes maturities in the next twelve months to June 2019. “We expect KMI to remain in compliance with its sole financial covenant (consolidated total debt to consolidated EBITDA not greater than 6.25x),” Moody's added.

Separately, the rating agency also changed its outlook on independent oil explorer Murphy Oil to positive and affirmed its Ba3 corporate family rating (CFR), Ba3-PD probability of default and Ba3 ratings assigned to its senior unsecured notes.

"The positive rating outlook reflects our expectation that the company will continue to strengthen its leverage profile as it shifted its focus to self-funded growth and short-cycle capital projects," commented Elena Nadtotchi, Vice President Senior Credit Officer at Moody's.

Murphy's Ba3 CFR is underpinned by its "disciplined reinvestment of operating cash flow" to deliver a steady growth in production, even as higher rates of decline in its mature offshore fields offset rapidly rising onshore production in the US and Canada.

The company generates relatively high cash margins, backed by strong price realisations in its Asian operations, as well as oil bias in production, competitive cost structure and supported by hedging. Moody's expects that Murphy will continue to generate strong operating cash flow and will turn free cash flow positive in 2018, after covering its capital and exploration spending of $1.1-1.2 billion, as well as its dividend.