Murphy Oil Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Murphy is an international oil and gas producer, with operations in the United States, Canada and Malaysia. Dollar figures below are in millions unless stated otherwise.
Financial and operating results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales and other operating revenue | $509.6 | $411.2 | $1,054.3 | $840.3 |
| Total revenue | $474.5 | $437.5 | $1,139.1 | $867.8 |
| Net income (loss) | $(17.6) | $2.9 | $40.9 | $(195.9) |
| Diluted EPS | $(0.10) | $0.02 | $0.24 | $(1.14) |
| Operating cash flow from continuing operations | Not stated separately | Not stated separately | $591.5 | $113.4 |
| Capital expenditures, accrual basis | Not stated separately | Not stated separately | $415.0 | $463.6 |
- Q2 E&P earnings were $68.1 million, versus $32.2 million a year earlier. Corporate and other costs rose to $85.5 million from $29.3 million, driving the consolidated quarterly loss.
- First-half E&P earnings were $243.2 million, versus a $124.4 million loss in 2016. The 2017 result included a $132.4 million pretax gain on the Seal field sale; total first-half gain on sale of assets was $130.6 million.
- Q2 total revenue was below sales revenue because interest and other income was a $33.8 million loss. First-half total revenue also included the asset-sale gain and a $45.8 million loss in interest and other income.
- Six-month production averaged 166,021 barrels of oil equivalent per day, down 9.1% year over year; excluding divested Seal and Syncrude assets, production declined 2.8%. Q2 production averaged 162,857 boe/d, down 3.4%. First-half realized oil prices improved to $49.17/bbl from $38.78/bbl.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $1,058.5 million, with another $40.1 million in Canadian government securities. Total assets were $10,136.8 million.
- Current maturities of debt were $559.2 million and long-term debt was $2,367.1 million. The company had $550 million of 2.5% notes due in December 2017. The $1.1 billion credit facility, expiring August 2019, had no borrowings and $178.1 million of letters of credit outstanding; Murphy reported compliance with its covenants.
- Working capital was $182.9 million. Management said it included the $550 million December 2017 bond maturity. Six-month dividends paid were $86.3 million, or $0.50 per share.
- Operating cash flow improved substantially from 2016. Management attributed this primarily to higher realized prices and lower operating and administrative costs; working-capital movements provided $42.6 million in 2017 versus using $86.8 million in 2016. Investing activities used $295.8 million and financing activities used $105.3 million in the first half.
Changes, outlook and risks
- Results improved year over year on higher commodity prices, lower lease operating and depreciation costs, and the Seal sale. Lower production, divestitures, and higher corporate costs, interest expense and tax provisions partly offset those benefits. The 2016 comparison included a $95.1 million impairment charge and substantial divestiture proceeds.
- Management forecast Q3 2017 production of 156,000–158,000 boe/d and full-year capital expenditures of approximately $890 million. The company expected to fund its capital program primarily with operating cash flow, supplementing it with credit-facility borrowings if needed. Management noted that weaker oil or gas prices could reduce cash flow and require spending cuts or additional borrowing.
- In July, oil prices had declined slightly from the Q2 average, as had North American natural gas prices. The company reported oil swaps covering 22,000 bbl/d at $50.41/bbl for July–December 2017, and fixed-price gas sales contracts for specified volumes through 2020.
- Murphy recorded a $60.4 million deferred tax charge in the first half after deciding prospective Canadian and Malaysian subsidiary earnings would not be treated as indefinitely reinvested; it expected additional tax charges as further 2017 foreign earnings arose. Management cited an after-tax foreign-exchange loss on intercompany loans of $31.7 million in Q2 and $42.7 million for the first half.
- The Seal field sale did not eliminate Murphy’s responsibility for remediation of a prior condensate pipeline leak. The remaining accrued liability was $6.7 million; management warned final remediation costs could exceed the recorded amount. The filing also describes a Kakap field interest redetermination, with the remaining settlement expected in Q3 and the final amount subject to change.
- Other disclosed risks include oil and gas price volatility, production and exploration uncertainty, foreign exchange, political and regulatory changes, environmental obligations and litigation. Management said routine legal and environmental matters were not expected to materially affect financial condition or liquidity, while noting estimates and outcomes could change.
Important facts for investors to verify
- Whether operating performance and cash generation can support the $890 million capital program and the December 2017 $550 million debt maturity.
- Production trends, particularly in the Eagle Ford and Malaysia, and the contribution from Canadian Kaybob and Placid assets, excluding the effect of asset divestitures.
- The recurring earnings and cash-flow effects of the Seal sale gain, foreign-exchange losses, and the $60.4 million deferred tax charge and expected additional tax charges.
- Whether Seal remediation costs exceed the $6.7 million accrual, and the final Kakap redetermination settlement amount.
- Commodity-price exposure and the volumes, prices and periods covered by outstanding oil and natural-gas contracts.