Murphy Oil Corporation — Q3 2014 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2014; unaudited results cover the three and nine months ended that date. Murphy’s continuing business was principally exploration and production. Results classify U.K. refining and marketing as discontinued operations; 2013 also includes the former U.S. retail business and U.K. oil and gas operations, so reported year-over-year net income is not directly comparable.
Financial performance and position
- Revenue: Q3 sales and operating revenue was $1.431 billion, up from $1.366 billion; nine-month revenue was $4.070 billion, up from $3.981 billion. Total revenue, including other items, was $1.433 billion and $4.068 billion, respectively.
- Profit: Q3 continuing-operations income was $271.1 million ($1.51 diluted EPS), versus $265.1 million; net income was $245.7 million ($1.37 diluted EPS), versus $284.8 million. Nine-month continuing income was $583.0 million ($3.23 diluted EPS), versus $707.7 million; net income was $530.4 million ($2.94 diluted EPS), versus $1.048 billion.
- Cash flow and investment: Nine-month operating cash flow was $2.354 billion, down from $2.679 billion; continuing-operations operating cash flow rose to $2.334 billion from $2.218 billion. Property additions and dry-hole costs used $2.807 billion. Accrual-basis capital expenditures were $2.834 billion, versus $2.953 billion.
- Liquidity and debt: September 30 cash was $674.0 million and Canadian government securities were $460.2 million. Working capital was $666.9 million. Long-term debt was $3.986 billion, plus $39.6 million of current maturities; long-term debt had increased $1.05 billion since year-end 2013.
- Production and costs: Q3 production averaged 229,759 barrels of oil equivalent per day, up 11% year over year; nine-month production averaged 214,888, up more than 4%. Q3 realized crude and condensate price averaged $89.36 per barrel, versus $98.54. Depreciation, depletion and amortization was $499.2 million for Q3 and $1.354 billion for nine months, increasing year over year. The filing does not provide a clear consolidated profit-margin measure.
Material changes versus comparable periods
- Q3 continuing income increased modestly, with stronger U.S. production and lower exploration costs and a $34.3 million Kurdistan-related U.S. tax benefit; lower oil prices and higher extraction costs were offsets. Nine-month continuing income fell, primarily due to higher exploration and extraction costs and lower realized oil prices.
- Malaysia nine-month earnings declined to $482.6 million from $602.5 million, reflecting lower volumes at certain fields, weaker Sarawak gas prices, increased government revenue sharing and higher extraction costs. U.S. nine-month earnings declined to $335.3 million from $368.0 million, including higher exploration expense, particularly unsuccessful Titan prospect drilling.
- Discontinued operations were a $25.4 million Q3 loss and a $52.6 million nine-month loss, compared with profits of $19.7 million and $340.4 million. The 2013 nine-month comparison included a $216.2 million after-tax gain from U.K. upstream asset sales and earnings from businesses subsequently spun off or sold.
- Other comprehensive income included a $195.4 million nine-month foreign-currency translation loss, moving accumulated other comprehensive income from $172.1 million at year-end 2013 to a $17.8 million loss.
Outlook, commentary and risks
- Management expected Q4 2014 production to average 250,000 barrels of oil equivalent per day and full-year capital expenditures of approximately $3.8 billion. These are forward-looking estimates, not guarantees.
- Oil prices fell significantly in October and early November; management warned that sustained lower prices would reduce Q4 income and cash flow and could lead to higher borrowing, capital-spending reductions or property impairments.
- Murphy agreed to sell 30% of working interests in most Malaysian oil and gas properties for $2.0 billion, subject to closing adjustments. The expected closings were 20% in December 2014 and 10% in Q1 2015. Management said proceeds could fund acquisitions, debt reduction, repurchases and/or capital expenditures.
- The U.K. retail marketing sale closed September 30, with $232.7 million net proceeds received October 1. The Milford Haven refinery sale did not close by the October 31 deadline; the refinery was shut down and was to be decommissioned and operated as a storage and distribution terminal while Murphy sought a buyer. Further exit-related losses were possible, and failure to complete the sale could leave year-end borrowings higher.
- Risks include oil and gas price volatility, exploration outcomes, production and reserve replacement, foreign exchange, political and regulatory instability, environmental liabilities and hydraulic-fracturing regulation, water availability and contamination exposure. Management said known environmental and routine legal matters were not expected to have a material adverse financial effect.
- The company used derivatives for risk management, not speculation. Q3 included a $43.1 million unrealized benefit from changes in the fair value of open Eagle Ford oil contracts; Q3 results also included a $34.3 million tax benefit related to exiting Kurdistan. A $500 million share-repurchase authorization was announced, but no purchases under that program had occurred by the filing date; separate repurchases during the first nine months totaled $375 million.
Important facts for investors to verify
- Whether and when both phases of the Malaysian asset sale closed, final proceeds and use of funds.
- Progress, costs, liabilities and eventual sale proceeds or losses related to Milford Haven and the remaining U.K. downstream assets.
- Subsequent oil and gas prices, production versus the Q4 target, and the impact on cash flow, borrowing and capital spending.
- Exploration results and the treatment of $406.6 million of capitalized exploratory well costs pending proved-reserve determinations.
- How discontinued-operation classifications and the 2013 spin-off and disposal gains affect comparisons of ongoing earnings and cash flow.