Murphy Oil Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Murphy Oil is an international oil and gas producer operating in the United States, Canada and Malaysia, with exploration activity elsewhere. Financial amounts below are in U.S. dollars; statements are unaudited.
Financial performance and position
- Revenue: Customer sales rose 19% to $607.0 million from $509.0 million. Total revenue fell to $585.6 million from $676.6 million, reflecting a $29.5 million loss on crude contracts and the absence of the prior-year $132.0 million asset-sale gain, partly offset by higher customer sales.
- Profit: Net income was $168.3 million ($0.96 diluted EPS), versus $58.5 million ($0.34) a year earlier. Continuing-operations income was $168.7 million. The quarter included a $120 million income-tax benefit related to IRS guidance on the Tax Cuts and Jobs Act; therefore, reported earnings were materially affected by a discrete tax item.
- Operating results: Operating income from continuing operations was $127.0 million, down from $214.5 million. E&P earnings declined to $115.6 million from $151.0 million; the 2017 comparison included the Seal asset-sale gain. E&P performance in 2018 benefited from higher oil prices and sales volumes, but faced higher lease operating costs. Total revenue-based operating margin was approximately 21.7%, versus 31.7% in Q1 2017; the comparison is affected by the prior-year gain.
- Production and prices: Production averaged 167,506 barrels of oil equivalent per day, down 1% year over year. Average crude production fell to 88,533 barrels per day from 95,605; natural gas sales volumes rose to 420 million cubic feet per day from 388 million. Worldwide realized crude price increased 27% to $63.58 per barrel.
- Cash flow and investment: Continuing operating cash flow was $278.5 million, compared with $305.5 million. Cash used for property additions and dry-hole costs was $273.9 million, versus $211.6 million. Accrual-basis capital expenditures were $300.4 million, up from $214.5 million. Dividends paid were $43.3 million.
- Liquidity and debt: Cash and equivalents were $938.6 million, down from $965.0 million at year-end. Working capital was $442.0 million, down $95.4 million from December 31, 2017. Long-term debt was $2.899 billion, slightly below $2.907 billion at year-end; current debt maturities were $9.6 million. The $1.1 billion credit facility had no borrowings, but $91.4 million of letters of credit reduced availability; the company reported covenant compliance.
- Other balance-sheet items: Total assets were $9.938 billion and stockholders’ equity was $4.692 billion. Accumulated other comprehensive loss increased to $544.7 million, including a $52.3 million foreign-currency translation loss.
Material changes versus Q1 2017
- Customer sales increased, supported by higher realized oil prices and increased Canadian natural gas volumes; total revenue nevertheless declined because of crude-contract losses and the nonrecurrence of the prior-year Seal sale gain.
- Net income increased substantially, principally because of the Q1 2018 tax benefit and the prior-year deferred tax charge, rather than solely from improved operating performance.
- Capital investment increased, while continuing operating cash flow decreased. Cash declined by $26.4 million during the quarter.
- Oil production declined, mainly due to field decline in Malaysia and fewer new Eagle Ford wells; natural gas volumes increased, primarily from Canadian growth.
Outlook, commentary and risks
- Management expected Q2 2018 production of 167,000–170,000 barrels of oil equivalent per day and full-year 2018 capital expenditures of approximately $1.11 billion. It expected to fund the remaining program primarily from operating cash flow, with credit facilities available if needed.
- Management said April 2018 worldwide crude prices had improved from the Q1 average and North American natural gas prices had increased slightly. Weaker commodity prices could reduce cash generation and require spending cuts or additional borrowing.
- As of May 2, 2018, oil swaps covered 21,000 barrels per day of U.S. crude sales for April–December 2018 at an average $54.88 per barrel. Canadian gas contracts covered 59 million cubic feet per day through December 2020 at C$2.81 per thousand cubic feet.
- The Seal field leak remediation liability was $7.1 million at March 31, 2018; the company recorded $3.8 million of additional expense in Q1 and received $15.0 million of insurance proceeds. Further remediation estimates and insurance claims remain uncertain. Management did not expect known environmental or routine legal matters to materially affect financial condition or liquidity, but acknowledged ultimate remediation costs could exceed the recorded liability.
- Key risks include commodity-price volatility, exploration and reserve-replacement outcomes, production declines, foreign exchange, political and regulatory uncertainty, and natural hazards. The filing reported no newly identified risk factors.
- The company adopted the revenue-recognition standard in Q1 2018 with no opening-equity adjustment; prior-year comparisons remain under the previous standard. It planned to adopt the new lease standard in Q1 2019 and was still assessing its impact.
Investor verification priorities
- Assess earnings excluding the $120 million tax benefit and compare underlying operating results with the prior period’s Seal sale gain and tax charge.
- Review whether forecast production, the $1.11 billion capital program and operating cash flow support investment and dividends without additional borrowing.
- Track crude and natural gas prices, hedge coverage and the reported crude-contract liability of $53.4 million.
- Monitor oil-production declines, Canadian volume growth, Gulf of Mexico operating costs and exploration spending.
- Follow Seal remediation costs, insurance recoveries, foreign cash repatriation costs and tax-audit outcomes.