Murphy Oil Corporation — Q2 2014 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Murphy’s continuing business is exploration and production (E&P). U.K. refining and marketing operations were classified as discontinued and held for sale; Murphy USA had been spun off in August 2013. Unless noted, figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Continuing sales and operating revenue | $1.358bn | $1.316bn | $2.639bn | $2.615bn |
| Income from continuing operations | $142.7m | $259.9m | $312.0m | $442.6m |
| Discontinued operations income (loss) | ($13.3m) | $142.8m | ($27.3m) | $320.7m |
| Net income | $129.4m | $402.6m | $284.7m | $763.2m |
| Diluted EPS | $0.72 | $2.12 | $1.57 | $4.00 |
- Continuing-operations income margin, calculated as income from continuing operations divided by continuing revenue, was about 10.6% in Q2 2014 versus 19.5% a year earlier; first-half margin was about 11.8% versus 16.9%.
- Operating cash flow was $1.460bn for the first half, including $1.455bn from continuing operations, versus $1.669bn total and $1.269bn from continuing operations in 2013. Investing used $1.912bn, principally $1.841bn for property additions and dry holes. Financing provided $354.9m.
- Cash and cash equivalents were $661.1m at June 30, down from $750.2m at year-end; Canadian government securities with maturities over 90 days totaled $427.4m. Working capital was $382.4m and the current ratio was approximately 1.13.
- Long-term debt was $3.786bn, up $849.9m from year-end; current debt maturities were $35.1m. The company borrowed $850m during the first half. Long-term debt represented 31.1% of capital employed, versus 25.5% at year-end. A $2bn committed credit facility expires in June 2017.
- Worldwide production averaged 210,191 barrels of oil equivalent per day in Q2, up from 207,401; first-half production averaged 207,329, up from 204,653. First-half capital expenditures were $1.856bn, compared with $1.967bn.
Material changes and management explanation
- Q2 continuing income fell $117.2m year over year despite higher continuing revenue. Management cited higher extraction and exploration costs, higher depreciation, and increased corporate costs; higher oil sales volumes partly offset these pressures. First-half continuing income fell $130.6m, primarily due to higher exploration and depreciation expenses.
- Reported net income fell more sharply because 2013 included substantial discontinued-operation earnings and U.K. asset-sale gains: $68.8m after tax in Q2 and $216.2m in the first half. 2013 also included earnings from the U.S. retail business before its spin-off. U.K. refining and marketing lost $13.2m in Q2 2014; the refinery stopped processing crude in May amid weak margins.
- Q2 E&P income was $200.8m versus $290.2m. Malaysia income declined to $172.3m from $213.5m, reflecting lower Kikeh volumes, lower Sarawak realized prices, higher government revenue sharing, and higher operating and depreciation costs. Other international losses widened to $126.1m, mainly on higher seismic and exploration costs.
- U.S. E&P income was $101.7m versus $122.9m. Eagle Ford growth raised volumes, but higher operating, tax and depreciation costs and WTI hedge impacts weighed on results. Canada earned $52.9m versus $51.7m in Q2; first-half Canadian income rose to $120.5m from $65.0m, helped by improved conventional operations and the absence of a prior-year impairment.
- First-half corporate costs increased to $99.4m from $79.5m, principally due to higher interest expense and unfavorable foreign exchange. The effective tax rate was 53.2% for Q2 and 51.2% for the first half, above the U.S. statutory rate; management cited foreign-jurisdiction taxes and expenses for which tax benefits were unavailable or not recorded.
Outlook, risks and unusual items
- Management expected Q3 2014 production to average 225,000 barrels of oil equivalent per day and forecast approximately $3.8bn of full-year 2014 capital expenditures. The filing gives no earnings or price guidance.
- The capital program was expected to be funded primarily from operating cash flow, supplemented by borrowing. Management warned that weaker oil or gas prices could reduce cash generation and require more borrowing; failure to complete the U.K. asset sales on acceptable terms could also increase borrowing needs. A completed exit could result in future accounting losses.
- On July 31, 2014, after quarter-end, Murphy signed an agreement to sell the Milford Haven refinery and terminal assets, subject to approvals and other conditions, with completion planned by October 31. The U.K. retail sale process was described as advanced.
- At June 30, WTI swaps covered 26,000 barrels per day for July–September at $94.89 per barrel and 16,000 barrels per day for October–December at $92.33. Their fair value was a $36.9m liability. Additional forward contracts covered Canadian natural gas and heavy-oil sales through 2016.
- Exploration expense included dry-hole costs, including unsuccessful Cameroon drilling in the first half. Capitalized exploratory well costs pending proved-reserve determination were $396.4m; $364.2m had been capitalized for more than one year. Future appraisal, development and commercial viability remain relevant.
- Newly disclosed risk factors addressed hydraulic fracturing: contamination or spills, water availability, and regulatory changes could increase costs, delay activity or constrain production. Broader disclosed risks include commodity prices, exploration success, production and reserve replacement, foreign exchange, political and regulatory instability, and natural hazards.
- The company described environmental and other legal proceedings as routine and did not expect their resolution to materially harm income, financial condition or liquidity based on information then available. It noted potential remediation obligations and that future costs or regulatory requirements could arise.
Key facts for investors to verify
- Whether the Milford Haven transaction closed on the proposed terms and timetable, and the status and proceeds of the U.K. retail sale.
- Actual production, capital spending and funding needs against the Q3 production and full-year capital expenditure outlook, including sensitivity to commodity prices.
- The realized effect and remaining exposure from oil and gas hedges, including the recorded commodity-derivative liability.
- Progress on the $396.4m of capitalized exploratory well costs, particularly the older projects and reserve determinations.
- Whether higher Malaysian revenue sharing, E&P cost growth, exploration losses and the elevated effective tax rate persist.
- Debt growth, available credit capacity, and the potential cost of repatriating foreign-held cash; the filing reports approximately $500m in Canada, $509m in Malaysia and $242m in the U.K. in cash and investments held outside the U.S.