Murphy Oil Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter report. Comparisons below are primarily with fiscal 2012.
Business context
Murphy was transitioning from an integrated oil company to an exploration-and-production-focused company. It spun off its U.S. retail and downstream business, Murphy USA Inc. (MUSA), on August 30, 2013; sold its U.K. oil and gas assets during the first half of the year; and had its U.K. refining and marketing business classified as discontinued operations and held for sale at year-end. Production and reserves figures below principally describe continuing upstream operations unless noted.
Financial and operating performance
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Sales and other operating revenues | $5.313 billion | $4.609 billion | Up 15%, mainly from increased oil volumes. |
| Income from continuing operations | $888.1 million | $806.5 million | Up 10%. |
| Income from discontinued operations | $235.3 million | $164.4 million | Included the after-tax gain on sale of U.K. oil and gas assets. |
| Net income | $1.123 billion | $970.9 million | Up 16%; diluted EPS was $5.94 versus $4.99. |
| Cash provided by continuing operations | $3.211 billion | $2.911 billion | Consolidated operating cash flow, including discontinued operations, was $3.638 billion. |
| Capital expenditures, continuing operations | $3.966 billion | $4.193 billion | High upstream investment; expenditures exceeded continuing-operations operating cash flow. |
| Cash and cash equivalents | $750.2 million | $947.3 million | Also held $374.8 million in Canadian government securities with maturities over 90 days. |
| Working capital / current ratio | $284.6 million / 1.09 | $699.5 million / 1.21 | Year-end 2013 current assets and liabilities include material held-for-sale balances. |
| Long-term debt | $2.937 billion | $2.245 billion | Debt including current maturities was $2.963 billion; debt was 25.5% of capital employed. |
The filing does not provide a single directly comparable consolidated operating-margin measure for the post-separation business. The U.K. refinery’s composite unit margin was negative $0.75 per barrel in 2013, versus positive $1.94 in 2012; that business is discontinued and held for sale.
- Production: Record worldwide output of 205,719 barrels of oil equivalent per day (BOE/d), up 6%; oil, condensate and natural gas liquids averaged 135,078 barrels per day, up 20%. Natural gas sales averaged 423.8 million cubic feet per day, down 14%.
- Key growth engine: U.S. oil production rose 85% to 48,387 barrels per day, primarily from Eagle Ford development. Worldwide realized oil price declined 2% to $93.60 per barrel; North American realized natural-gas prices improved.
- Reserves: Year-end proved reserves totaled 495.6 million barrels of oil and synthetic oil and 1,153.6 billion cubic feet of natural gas. The company reported organic reserve replacement of 243% of production. Proved undeveloped reserves were 252.7 MMBOE, about 37% of total proved reserves.
Material changes and unusual items
- Continuing E&P income increased to $1.029 billion from $905.0 million. U.S. segment income rose to $435.4 million from $168.0 million; Malaysia income declined to $786.4 million from $894.2 million.
- Higher oil production and lower property impairment expense supported earnings. Offsets included increased production, exploration and administrative costs, higher depreciation and interest expense, and lower average realized oil prices.
- Discontinued-operations income included a $216.1 million after-tax gain on the U.K. oil and gas asset sales. The U.K. downstream business recorded a $73.0 million impairment and weak refining results; its 2013 discontinued-operations loss was $119.2 million.
- The Republic of the Congo’s Azurite field ceased production in October 2013. Murphy recorded $82.5 million of abandonment and exit charges in 2013, after a $200 million impairment in 2012.
- The company recognized $133.5 million of U.S. tax benefits in 2013 associated with investments in upstream operations in countries where it was exiting, principally the Republic of the Congo and Kurdistan.
- Share repurchases totaled $500 million in 2013. The company paid $1.25 per share in regular dividends; the prior-year total of $3.675 per share included a $2.50 special dividend.
Outlook, liquidity, and risks
- Management expected 2014 production of 235,000–240,000 BOE/d, up 14%–17%, including 23%–26% growth in oil and liquids. Forecast depended on Eagle Ford growth and timely start-ups or ramp-ups at Dalmatian, Kakap-Gumusut and Siakap North-Petai, as well as reliability at existing fields.
- 2014 capital expenditures were projected at approximately $3.8 billion, about 5% below 2013 continuing-operations spending. Management expected to use operating cash flow and borrowings; it anticipated borrowing under the credit facility during 2014. The budget also assumed further share repurchases.
- At year-end, Murphy had a $2.0 billion committed credit facility, with $350 million drawn and $1.65 billion available, expiring June 2017; it also had approximately $345 million of uncommitted lines with no outstanding borrowings. The company cautioned that losing downstream cash flows could affect credit ratings and reduce resources available to service debt.
- Major risks include commodity-price volatility, reserve replacement and estimation uncertainty, exploration failures, production declines and project delays, cost inflation, hydraulic-fracturing regulation, political and tax risks in foreign jurisdictions, severe weather and operational hazards, environmental obligations, and foreign-exchange exposure. Approximately 27% of proved reserves were at fields operated by others.
- Environmental compliance capital spending was about $79 million in 2013 and projected at $104 million in 2014. Murphy reported routine litigation not expected by management to have a material adverse effect. It was a potential responsible party at one Superfund site but stated it believed it had no responsibility. Separately, an arbitration concerning Ecuador operations included a claim of approximately $118 million.
- The filing identifies no clear numerical company-wide earnings or price guidance for 2014. The U.K. downstream sale was expected during 2014 but remained subject to approvals, market conditions and acceptable sale terms.
Important facts for investors to verify
- Whether the U.K. downstream business was sold, on what terms, and how proceeds and any remaining obligations affected debt and liquidity.
- Whether 2014 production guidance was achieved, especially Eagle Ford growth and Malaysian project start-ups, and how natural-gas declines in Western Canada developed.
- Whether capital spending, operating cash flow, borrowing and share repurchases remained consistent with the company’s liquidity and leverage outlook.
- How much of the 2013 earnings improvement depended on asset-sale gains and tax benefits, and the sustainability of recurring continuing-operations earnings.
- Progress converting the substantial proved undeveloped reserve base into producing reserves, including the timing and cost of major projects.
- Resolution and financial exposure, if any, from the Ecuador arbitration, environmental matters and Azurite abandonment.