Murphy Oil Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The interim financial statements are unaudited. Unless otherwise indicated, dollar amounts below are in millions.
Business context and financial performance
Murphy’s continuing business was primarily oil and gas exploration and production. The U.K. refining and marketing business was classified as discontinued operations and held for sale; Murphy had also spun off Murphy USA in August 2013.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $1,286.4 | $1,290.9 |
| Income from continuing operations | $169.3 | $182.7 |
| Net income, including discontinued operations | $155.3 | $360.6 |
| Diluted EPS | $0.85 | $1.88 |
| Operating cash flow | $735.9 | $921.1 |
| Property additions and dry-hole costs, cash basis | $996.2 | $965.4 |
Continuing-operations income declined 7% year over year; the continuing net income margin, calculated as continuing income divided by revenue, was about 13.2%, versus 14.2%. The net-income comparison is heavily affected by discontinued operations: Q1 2013 included $177.9 million of discontinued-operations income, including gains on U.K. oil and gas asset sales, while Q1 2014 recorded a $14.0 million loss.
Operations and material changes
- Total hydrocarbon production averaged 204,436 barrels of oil equivalent per day, up from 201,876. Crude oil and liquids production increased more than 8%, led by Eagle Ford; natural gas sales volumes declined about 11% to 400 million cubic feet per day.
- Exploration and production income was $210.6 million, down from $231.9 million. U.S. income increased to $103.1 million and Canada improved to $67.6 million; Malaysia declined to $162.3 million. Other international operations reported a $122.4 million loss, including $81.1 million of dry-hole expense, notably from an unsuccessful Cameroon deepwater well.
- Management attributed lower continuing income primarily to exploration costs that were $30 million higher. The U.K. refining and marketing business recorded a $13.8 million discontinued-operations loss, with weaker refining margins.
- Worldwide crude oil and condensate sales prices averaged $96.43 per barrel, slightly above the prior-year $96.00. North American natural gas prices averaged $4.15 per thousand cubic feet, versus $3.11, while Sarawak gas prices fell.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $648.6 million, and Canadian government securities with maturities over 90 days were $372.0 million. Working capital was $316.7 million.
- Long-term debt, including capital leases, was $3,415.6 million, up $479.0 million from year-end; current maturities were $30.6 million. Debt represented 29.1% of capital employed, versus 25.5% at December 31, 2013. The company reported a $2.0 billion committed credit facility expiring in June 2017.
- Investing activities used $1,002.0 million. Financing activities provided $166.4 million, including $479.0 million of long-term borrowings and a $250.0 million accelerated share repurchase; dividends paid were $56.1 million. Cash declined by $101.5 million during the quarter.
- Cash and temporary investments held outside the U.S. included approximately $450.2 million in Canada and $529.0 million in Malaysia. Repatriation may incur withholding or other taxes.
Outlook, risks and contingencies
- Management expected Q2 2014 production to average near 217,000 barrels of oil equivalent per day and forecast full-year 2014 capital expenditures of approximately $3.8 billion. The capital program was expected to be funded primarily from operating cash flow, supplemented by borrowing as needed.
- Murphy planned to exit the U.K. refining and marketing business and was consulting with employees about the subsidiary and Milford Haven refinery. A sale on acceptable terms was not assured; failure to sell could mean higher year-end borrowing, and the exit could result in future accounting losses.
- Management cautioned that weaker oil or gas prices could reduce operating cash flow, increase borrowing needs, or result in impairment of oil-property investments. Other stated risks included exploration outcomes, production and reserve replacement, foreign exchange, political and regulatory conditions, and natural hazards.
- At March 31, WTI swaps covered specified Eagle Ford volumes through year-end; the contracts had a net fair-value liability of $18.8 million. The filing also disclosed Canadian oil and gas forward sales contracts and Malaysian currency hedges.
- Environmental and other legal matters were described as routine or not expected, based on information then available, to materially affect earnings, financial condition, or liquidity. Tax audits in several jurisdictions remain subject to resolution, and actual results may differ from management estimates.
Most important facts for investors to verify
- Whether the U.K. downstream business was ultimately sold or exited, on what terms, and with what impact on debt and reported results.
- Whether the expected production ramp and $3.8 billion capital program were achieved, and how much was funded through borrowing.
- Whether higher exploration costs, including unsuccessful drilling, continued to affect earnings and whether capitalized exploratory well costs of $395.9 million were ultimately supported by proved reserves.
- How commodity prices, production volumes, hedge settlements, foreign exchange and discontinued operations affected subsequent cash flow, liquidity and earnings.