Murphy Oil Corporation — Q3 2016 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Murphy is an international oil and gas producer operating in the United States, Canada, and Malaysia. It sold its Syncrude interest in June 2016 and acquired interests in the Kaybob Duvernay and Placid Montney properties in Canada.
Key financial results
- Revenue: Q3 total revenue was $500.5 million, down from $714.9 million; sales and other operating revenue was $486.3 million versus $665.6 million. Nine-month total revenue was $1.368 billion versus $2.375 billion.
- Profit/loss: Q3 net loss was $16.2 million, or $0.09 per diluted share, compared with a $1.595 billion loss, or $9.26 per share, in Q3 2015. Nine-month net loss was $212.0 million, or $1.24 per diluted share, compared with $1.684 billion, or $9.62 per share. The much larger 2015 losses included $2.301 billion of impairments; 2016 included $95.1 million of impairments for the first nine months and none in Q3.
- Costs and margins: Nine-month depreciation, depletion and amortization was $797.3 million, down from $1.318 billion. Lease operating expenses were $435.3 million versus $643.7 million. The filing does not provide a clear consolidated operating-margin figure.
- Cash flow and investment: Nine-month cash from continuing operating activities was $280.4 million, down from $1.097 billion. Accrual-basis capital expenditures were $635.3 million versus $1.669 billion, including $206 million for the Canadian acquisitions. Property-sale proceeds were $1.155 billion, primarily from Syncrude and Canadian midstream asset sales.
- Liquidity: September 30 cash and cash equivalents were $753.1 million; Canadian government securities with maturities over 90 days were $117.9 million. Working capital was $690.9 million. The company reported no borrowings under its credit facilities, with about $88 million of letters of credit under the new facility.
- Debt: Long-term debt was $2.974 billion, plus $20.4 million of current maturities, versus $3.041 billion and $18.9 million, respectively, at year-end 2015. Murphy issued $550 million of 6.875% notes due 2024 and repaid $600 million of debt during the nine-month period.
- Production and prices: Q3 production averaged 169,844 barrels of oil equivalent per day, down 18.2% year over year. Average crude oil and condensate price was $44.64 per barrel versus $46.20; North American natural gas averaged $1.96 per thousand cubic feet versus $2.42. Nine-month production averaged 178,319 boe/d versus 210,313 boe/d, and crude oil and condensate averaged $40.67 per barrel versus $49.58.
Material changes versus prior period
- Lower commodity prices and lower volumes reduced revenue and operating cash generation. Management said benchmark oil and natural gas prices in 2016 were about 20% below comparable 2015 averages.
- Q3 and nine-month losses improved substantially from 2015, principally because the prior year included large property impairments. Lower operating costs, depreciation, and exploration expenses also helped; weaker sales, lower volumes, and less favorable commodity-derivative results offset some improvement.
- Asset divestitures generated significant cash: Murphy received $739.1 million net for its Syncrude interest and $414.1 million for Canadian midstream assets. The Syncrude sale produced a $71.7 million after-tax gain; part of the midstream gain is deferred and recognized over 20 years.
- The quarterly dividend was reduced from $0.35 to $0.25 per share beginning in Q3, a 29% cut.
Outlook, risks, and unusual items
- Management expected Q4 2016 production of 162,000–164,000 boe/d and full-year capital expenditures of approximately $620 million, excluding the Kaybob Duvernay and Placid Montney acquisition cost. It expected no revolver borrowings in Q4, but warned weaker prices could reduce cash flow and require unanticipated borrowing.
- Management reported improved oil and North American natural gas prices in October 2016. Price and production forecasts remain subject to market conditions and operating performance.
- Further price deterioration could lead to lower reserves, additional impairments, more cost reductions, higher debt, and reconsideration of dividends. Lower investment could also reduce future production.
- The August 2016 credit facilities include financial covenants, including a $500 million minimum-liquidity requirement and leverage and interest-coverage tests. Murphy reported compliance at September 30. Beginning March 31, 2017, the new facility may become secured if leverage exceeds the stated threshold.
- A 2015 condensate pipeline leak at the Seal field in Alberta remains under investigation and remediation. Murphy had recorded $43.9 million of expense in 2015 and spent $32.8 million to date; the ultimate net cost is uncertain and could exceed the amount recorded. Potential regulatory fines and insurance recoveries remain unresolved.
- Commodity prices, foreign exchange, political and regulatory developments, environmental obligations, and natural hazards are identified risks. The filing reports no newly identified risk factors beyond those in the 2015 Form 10-K.
- The company implemented a new global ERP system in 2016 and modified related controls. Management considered disclosure controls effective, but said it would continue evaluating and testing controls for year-end certification.
Important facts for investors to verify
- Whether production, realized prices, operating cash flow, and the stated Q4 production outlook track management’s expectations.
- Liquidity, covenant headroom, and the effect of the 6.875% notes and credit-facility terms on interest expense and refinancing risk.
- The Seal pipeline remediation estimate, potential fines, and likely insurance recoveries.
- The assumptions supporting property valuations and any further impairment exposure if commodity prices weaken.
- How the $620 million full-year capital-spending outlook, excluding acquisitions, reconciles to $635.3 million of nine-month accrual-basis capital expenditures, which included acquisition spending.