Murphy Oil Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited except the December 31, 2012 balance sheet. Results are not necessarily indicative of future periods.
Business context and significant portfolio changes
Murphy completed the spin-off of its U.S. retail marketing business, Murphy USA Inc. (MUSA), on August 30, 2013, and sold its U.K. oil and gas assets earlier in 2013. Both are presented as discontinued operations for all periods shown. The U.K. refining and marketing business remained in continuing operations; Murphy was pursuing its sale.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales and other operating revenues | $2,904.8 million | $2,655.4 million | $8,276.5 million | $7,979.6 million |
| Income from continuing operations | $252.1 million | $211.7 million | $684.9 million | $718.3 million |
| Income from discontinued operations | $32.7 million | $15.0 million | $363.1 million | $93.9 million |
| Net income | $284.8 million | $226.7 million | $1,048.1 million | $812.2 million |
| Diluted EPS | $1.51 | $1.16 | $5.51 | $4.17 |
| Cash provided by operating activities | — | — | $2,678.5 million | $2,101.2 million |
Q3 continuing revenue increased about 9% year over year, while continuing income rose about 19%. Nine-month net income growth chiefly reflected the $216.2 million after-tax gain on the U.K. upstream asset sale and higher discontinued-operation income; continuing income declined about 5%. The filing does not provide a single consolidated operating-margin measure.
- Production: Q3 total hydrocarbon production averaged 207,281 boe/day, up 14%; oil and liquids production was 138,075 barrels/day, up over 30%, while natural gas sales averaged 415 million cubic feet/day, down 9%. Nine-month production averaged 205,539 boe/day, up 9%.
- Segment results: Q3 exploration and production income was $264.2 million versus $221.1 million. U.S. E&P improved to $151.3 million, with Eagle Ford growth a major contributor; Malaysia declined to $183.8 million. U.K. refining and marketing recorded a $12.9 million loss versus $25.5 million income, reflecting weaker refining margins. Nine-month U.K. refining and marketing lost $22.7 million versus $35.7 million income.
- Expenses and taxes: Q3 exploration expense rose to $147.8 million from $94.1 million; nine-month exploration expense rose to $345.1 million from $243.7 million, including unsuccessful drilling in Cameroon and Australia and higher seismic costs. Nine-month DD&A was $1,174.5 million versus $916.9 million. Effective tax rates were 43.9% for Q3 and 45.3% year to date; Q3 included a $13.7 million tax benefit from reversal of a previously recorded U.S. tax liability.
- Cash investment: Nine-month property additions and dry-hole costs were $2,719.9 million, versus $2,156.6 million. Total accrual-basis capital expenditures, including discontinued operations, were $3,099.2 million versus $2,883.7 million.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $1,033.9 million and Canadian government securities with maturities over 90 days were $289.8 million. Total current assets were $3,770.8 million and current liabilities $3,184.2 million; reported working capital was $586.6 million.
- Long-term debt was $2,583.2 million, up $338.0 million from year-end 2012; the increase was essentially attributable to a $338.8 million capital-lease obligation for Kakap production equipment offshore Malaysia. Current debt maturities were $21.8 million. The company reported that long-term debt excluding the lease was 20.1% of capital employed.
- Murphy expanded its committed credit facility to $2.0 billion and extended its expiry to June 2017. Nine-month operating cash flow exceeded continuing-operation property additions and dry-hole spending by about $241 million; this comparison excludes other investing and financing cash flows.
- Cash, cash equivalents and Canadian securities held outside the U.S. included approximately $365 million in Canada, $577 million in Malaysia and $334 million in the U.K. Repatriation could incur withholding or additional U.S. taxes.
Outlook, risks and contingencies
- Management expected Q4 2013 production to average 199,000 boe/day and full-year capital expenditures to be approximately $4.2 billion. The company expected to fund its capital program primarily from operating cash flow, with borrowing as needed; it anticipated long-term borrowing during the remainder of 2013 and in 2014.
- Management noted slightly lower October crude prices, continued weak U.K. downstream margins and volatile foreign exchange rates. A weaker U.S. dollar against the Malaysian ringgit, if sustained, could result in Q4 foreign-exchange losses. Significantly lower oil or gas prices could reduce cash flow, increase borrowing needs and trigger property impairments.
- Murphy had repurchased 8,044,378 shares for $500 million through September 30, leaving $500 million available under its announced $1.0 billion buyback program. Further repurchases could affect debt levels.
- The proposed U.K. downstream sale could fail or yield proceeds below expectations; the filing said a sale could result in a loss and failure to sell on acceptable terms could require additional borrowing. The transition to a more focused E&P business and reduced revenue/diversification could affect the credit rating, although management said a material effect on debt repayment was not expected.
- Management anticipated the Azurite field in the Republic of the Congo would cease production in the near future; winding-down costs could be material. Risks also include commodity-price and foreign-exchange exposure, exploration outcomes, production decline, political/regulatory changes and environmental obligations.
- Environmental and other legal matters were not expected by management to materially affect earnings, financial condition or liquidity. Murphy was identified as a potentially responsible party at one Superfund site and considered its likely share immaterial; no liability was recorded. Outstanding letters of credit were $22.8 million, with drawdown considered remote. A $151,250 pipeline-safety fine was paid in March 2013 for violations at a former refinery; the expense had been recorded in a prior year.
Most important facts for investors to verify
- How much reported earnings growth depends on discontinued operations and the one-time U.K. upstream sale gain, versus continuing E&P performance.
- Whether Eagle Ford production growth and planned investment can offset lower gas volumes, natural decline and elevated exploration costs.
- Progress, terms and potential accounting loss from the planned U.K. downstream sale, including implications for revenue, credit quality and borrowing.
- Capital-spending delivery against the approximately $4.2 billion full-year outlook, and funding needs after dividends, repurchases and the Kakap lease.
- Exposure to oil and gas price movements, foreign-exchange swings, Malaysian gas revenue sharing, and potential Azurite closure and environmental costs.