Murphy Oil Corporation — 2010 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2010. Murphy Oil operated internationally in exploration and production (E&P), with refining and marketing (R&M) businesses in the United States and United Kingdom. The company announced plans to sell its U.S. refineries and U.K. refining and marketing operations during 2011; these businesses remained in 2010 results.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Sales and other operating revenues | $23.40 billion | $18.92 billion |
| Income from continuing operations | $798.1 million | $740.5 million |
| Net income | $798.1 million | $837.6 million |
| Diluted EPS | $4.13 | $4.35 |
| Cash from operating activities | $3.13 billion | $1.86 billion |
| Capital expenditures | $2.45 billion | $2.21 billion |
| Cash and cash equivalents at year-end | $535.8 million | $301.1 million |
| Working capital at year-end | $619.8 million | $1.19 billion |
| Long-term debt at year-end | $939.4 million | $1.35 billion |
| Current ratio | 1.21 | 1.55 |
Net income declined despite higher continuing-operations income because 2009 included $97.1 million of income from discontinued Ecuador operations, principally a disposal gain. Total revenue rose largely with higher fuel prices and higher E&P prices and sales volumes. No consolidated gross or operating margin percentage is reported in the supplied filing text.
- E&P: Segment income was $806.9 million, up from $691.8 million. Average realized oil price increased 19% to $67.11 per barrel; oil and liquids sales volumes rose 2%, while natural gas sales volumes rose 91% to 356.8 million cubic feet per day. Worldwide production averaged 186,394 barrels of oil equivalent per day, up 14%.
- R&M: Segment income was $149.1 million, versus $71.7 million. U.S. retail marketing improved on stronger fuel and merchandise margins; U.K. operations remained loss-making. U.S. refinery unit margins fell to $0.23 per barrel from $0.75, and U.K. unit margins were negative $1.47 per barrel.
- Profitability drivers and unusual items: 2010 continuing income benefited from higher commodity prices and volumes and better U.S. retail margins. It was offset in part by higher operating, exploration and depreciation expenses, and higher corporate costs. Corporate activities recorded $58.1 million of after-tax foreign-exchange losses, compared with $33.3 million of gains in 2009. The prior year included a $158.3 million after-tax federal royalty recovery benefit and a $58.4 million after-tax Terra Nova working-interest charge; 2010 included $18.6 million of Terra Nova redetermination expense.
- Cash, debt and liquidity: Operating cash flow increased substantially, aided by working-capital release and higher continuing income; it included collection of $286.4 million related to the prior-year royalty recovery. The company repaid $414 million of debt during 2010. Year-end borrowings included $340 million under a $1.905 billion committed credit facility, with no borrowings under approximately $430 million of uncommitted lines. The committed facility expires in 2012; $350 million of notes mature in April 2012. LIFO inventory was $735.1 million below FIFO value, which management noted affects interpretation of working capital.
Changes, outlook and principal risks
- Compared with 2009, oil prices and natural gas volumes improved, and E&P and R&M segment income increased. However, net income and diluted EPS were lower because 2009 included the Ecuador disposal gain.
- Management projected 2011 production of 200,000–210,000 barrels of oil equivalent per day, a 7%–13% increase, largely dependent on Tupper West gas production starting in February 2011. Expected offsets include natural field declines, Kikeh and Terra Nova maintenance downtime, and Gulf of Mexico permitting constraints.
- Projected 2011 capital expenditures were approximately $2.25 billion, including about $2.0 billion for E&P. Management expected to fund the program primarily with operating cash flow and anticipated a partial debt paydown, assuming downstream asset sales and planned cash generation. Weaker commodity prices or delayed sales could instead require additional borrowing.
- Management expected the 2011 sale of U.S. refineries and U.K. refining and marketing assets, but completion, proceeds and effects on earnings and cash flow were uncertain. January 2011 oil and gas prices and refining conditions were described as variable; no earnings guidance was provided.
- Important exposures include volatile oil, gas and refining margins; limited commodity hedging; exploration and reserve-replacement uncertainty; concentrated production and development projects; political, tax, currency and regulatory risks; severe weather and uninsured operational incidents. Gulf of Mexico permitting delays after the 2010 Macondo incident could raise costs and reduce production into 2011 and potentially 2012.
- Proved reserves at year-end were 178.8 million barrels of oil, 129.2 million barrels of synthetic oil and 883.1 billion cubic feet of natural gas. Proved undeveloped reserves were 24% of total proved reserves on an oil-equivalent basis; development timing and capital needs remain significant.
- Environmental compliance capital spending was $139.3 million in 2010 and forecast at $117.2 million for 2011. The company disclosed a federal refinery consent decree requiring a $1.25 million fine and about $142 million of capital improvements over eight years. Management did not expect disclosed legal and environmental matters to materially affect results, but estimates and future obligations may change.
- The company reported effective disclosure controls and internal control over financial reporting, and KPMG issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Track whether the announced downstream asset sales closed, their net proceeds, and the resulting changes in reported segments and cash flows.
- Compare 2011 production with the 200,000–210,000 BOE/day outlook, particularly Tupper West ramp-up and Gulf of Mexico, Kikeh and Terra Nova downtime.
- Reconcile operating cash flow with working-capital movements, including the nonrecurring royalty-recovery collection, and assess liquidity after capital spending and debt maturities.
- Monitor E&P unit costs, realized oil and gas prices, refining/retail margins, and foreign-exchange effects against the drivers of 2010 earnings.
- Review proved-reserve revisions, conversion of undeveloped reserves, and delivery of the planned development spending—especially in Malaysia, Canada and the Gulf of Mexico.
- Check outcomes and updated estimates for the Terra Nova settlement, Ecuador arbitration claim of approximately $118 million, environmental obligations, and the pending insurance indemnity decision related to the Meraux fire.