Murphy Oil Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The interim financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and results
Murphy’s continuing operations comprised exploration and production (E&P) and refining and marketing. The company had sold its Superior and Meraux U.S. refineries in 2011; their prior-period results are presented as discontinued operations. The U.K. downstream business remained in continuing operations while marketed for sale.
- Total revenue was $6.995 billion, up from $6.272 billion in Q1 2011. Sales and other operating revenue was $6.991 billion.
- Income from continuing operations was $290.1 million, compared with $238.4 million. Net income was also $290.1 million, versus $268.9 million, which included $30.5 million from discontinued operations.
- Diluted EPS was $1.49, compared with $1.38; continuing-operations diluted EPS was $1.49, versus $1.22.
- E&P income rose to $321.6 million from $260.4 million. Refining and marketing recorded a $4.2 million loss, versus $0.3 million income; corporate costs increased to $27.3 million from $22.3 million.
- Worldwide hydrocarbon production averaged 195,096 barrels of oil equivalent per day (boe/d), up from 182,152. Crude oil and liquids production declined to 107,490 barrels per day from 113,313, while natural gas sales averaged a record 525.6 million cubic feet per day, up from 413.0 million.
- Average worldwide crude oil, condensate and liquids sales price was $97.78 per barrel, up from $86.73. North American natural gas prices weakened: the company cited an average of $2.56 per thousand cubic feet versus $4.35 a year earlier.
Cash flow, balance sheet and liquidity
- Cash provided by operating activities was $991.0 million, compared with $522.9 million. Working-capital changes provided $298.3 million, versus using $140.4 million in Q1 2011.
- Cash property additions and dry-hole costs were $567.3 million. Accrual-basis capital expenditures were $739.7 million, including $715.1 million for E&P. Cash dividends were $53.4 million.
- Cash and cash equivalents were $936.6 million at quarter-end; Canadian government securities with maturities over 90 days were $494.4 million. Working capital was $558.7 million, down $64.0 million from year-end.
- Debt included $350.0 million of current maturities and $249.6 million of long-term debt. The $350 million notes matured May 1, 2012 and were repaid with borrowings under existing credit facilities. The company had a $1.5 billion committed facility expiring in June 2016.
- Stockholders’ equity was $9.119 billion. Management reported a 21.7-to-1 ratio of earnings to fixed charges for the quarter.
Material changes and management commentary
- Higher crude oil prices and lower exploration expense drove the improvement in continuing income. E&P gains were led by Malaysia and the U.S.; Canadian earnings declined, including from lower gas prices and Syncrude maintenance. Natural gas prices in North America were materially weaker.
- U.S. downstream results weakened as retail fuel margins fell to $0.071 per gallon from $0.091, and per-store fuel volumes declined about 6%. U.K. downstream results improved, with a refining and marketing margin of $0.79 per barrel versus negative $0.61.
- The 2011 comparison included a $5.4 million pretax benefit from the Terra Nova working-interest settlement; the 2012 period did not. The 2011 quarter also included $30.5 million of after-tax discontinued-operation income.
- At March 31, $563.5 million of exploratory well costs remained capitalized pending proved-reserve determinations; $453.6 million had been capitalized for more than one year. Management described planned appraisal, drilling or development work in the relevant areas.
Outlook, risks and contingencies
- Management expected Q2 2012 production to average about 185,000 boe/d and full-year capital expenditures to be approximately $3.7 billion. April crude prices were described as about level with Q1; North American gas prices had fallen further.
- The company anticipated selling approximately $500 million of ten-year notes in Q2, subject to successful completion, to repay the May facility borrowings and for general corporate purposes. Forward-starting interest-rate swaps settled May 1 at a net cost of $29.6 million.
- Management was evaluating a possible separation of the U.S. downstream business but gave no decision or timing. The U.K. refinery and related downstream assets continued to be offered for sale; timing and terms were uncertain. A future loss on a U.K. asset sale was possible.
- Management warned that persistently weak or further-declining North American gas prices could cause impairment of certain gas-property investments. Other stated risks include commodity prices, exploration results, production and reserve replacement, demand, political and regulatory conditions, and natural hazards.
- Outstanding letters of credit were $324.3 million; no liability was accrued because management considered a draw remote. The company disclosed a U.K. environmental-agency civil penalty notice of approximately $1.7 million and said it was pursuing available options. It considered routine legal matters and identified environmental-site costs not expected to be material, while noting future remediation exposure cannot be ruled out.
- Cash and temporary investments held outside the U.S. included approximately $577 million in Canada, $242 million in the U.K. and $398 million in Malaysia. Repatriation could incur withholding or other taxes.
Key facts for investors to verify
- Whether the planned $500 million note issuance was completed, its final terms, and the resulting debt and interest costs following the May 1 refinancing.
- Whether North American gas prices, production and potential property impairments developed in line with management’s outlook.
- How the $3.7 billion capital-expenditure plan progressed and whether exploratory costs pending reserve determinations were resolved or impaired.
- Any decision or material progress on the U.S. downstream separation or U.K. asset sale, including potential financial effects.
- Developments in environmental and legal matters, letters of credit, and tax or other costs associated with repatriating foreign-held cash.