Murphy Oil Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed August 6, 2010. Financial statements are unaudited, except the December 31, 2009 balance sheet. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Murphy operated exploration and production (E&P) and refining and marketing businesses. Results improved year over year, led by higher crude oil prices and production volumes and stronger U.S. retail marketing margins. The 2009 comparison included Ecuador discontinued operations and insurance proceeds related to the Meraux refinery.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales and operating revenues | $5,592.4 | $4,496.0 | $10,821.0 | $7,912.4 |
| Total revenues | $5,591.9 | $4,555.8 | $10,772.1 | $8,001.4 |
| Income from continuing operations | $272.3 | $160.8 | $421.2 | $232.1 |
| Net income | $272.3 | $158.8 | $421.2 | $329.9 |
| Diluted EPS | $1.41 | $0.83 | $2.18 | $1.72 |
| Operating cash flow | Not presented separately | Not presented separately | $1,447.7 | $512.5 |
The 2009 six-month net income included $97.8 million from discontinued Ecuador operations, primarily a $103.6 million after-tax sale gain. Continuing-operations income is the more comparable measure.
Financial position, cash flow, and operating metrics
- At June 30, cash and cash equivalents were $398.8 million and Canadian government securities with maturities over 90 days were $802.8 million. Working capital was $992.1 million, down $202.0 million from year-end 2009.
- Long-term debt was $1,226.6 million, down from $1,353.2 million at December 31, 2009; current maturities were $2.4 million. Long-term debt was 13.8% of capital employed, versus 15.6% at year-end.
- Six-month capital expenditures for continuing operations were $1,099.4 million. Cash property additions and dry-hole costs were $992.3 million. Cash dividends paid were $95.7 million.
- Operating cash flow included a $249.8 million working-capital cash source; the filing attributes $244.4 million to recovery of prior-year U.S. federal Gulf of Mexico royalties. Cash flow is therefore not solely an indicator of recurring earnings.
- Q2 worldwide hydrocarbon production averaged 189,951 barrels of oil equivalent per day, up 33%; the six-month average was 193,071 barrels per day, up 28%. Q2 average crude oil, condensate, and liquids price was $64.68 per barrel, versus $53.55. Natural gas sales volumes rose sharply with new and ramping production.
- Q2 continuing-operations income by business: E&P $219.1 million versus $118.3 million; refining and marketing $83.8 million versus $27.8 million; corporate costs of $30.6 million versus a $14.8 million benefit. No single consolidated operating-margin figure is provided.
- U.S. retail fuel margin was $0.162 per gallon in Q2 versus $0.078; six-month margin was $0.123 versus $0.064. U.S. refining unit margin was $0.69 per barrel in Q2 and negative $1.23 for the first half; U.K. refining and marketing unit margin was $0.52 per barrel in Q2 and negative $1.65 for the first half.
Material changes, outlook, and risks
- Management attributed higher E&P earnings mainly to higher realized oil prices and increased volumes. New production at Thunder Hawk and Azurite, and ramp-up of gas production, supported volumes. Azurite output remained below expectations because of well-completion delays and complications.
- Refining results faced weaker margins and refinery turnarounds, including Milford Haven in Wales and Meraux in Louisiana. U.S. retail margins were stronger, though they had eased somewhat by July.
- In July 2010, after quarter-end, the board approved plans to exit U.S. refining and U.K. refining and marketing, with the businesses to be placed for sale. Murphy anticipated completion in the first quarter of 2011.
- Management expected Q3 2010 production of about 180,000 barrels of oil equivalent per day and full-year 2010 capital expenditures of approximately $2.6 billion. July crude prices had improved slightly from the Q2 average; refinery margins remained under pressure.
- Terra Nova working-interest arbitration was ongoing. Murphy anticipated a reduction from 12.0% to about 10.5%, had recorded cumulative expense of $94.4 million through June, and expected the process to conclude by year-end 2010. A cash settlement may be required; the final outcome was uncertain.
- Malaysia’s Blocks L and M production-sharing contracts were terminated in April 2010 following a boundary change. Murphy’s $12.2 million remaining investment in Block L remained on the balance sheet pending resolution of possible participation in replacement contracts.
- The Gulf of Mexico drilling moratorium following the April 2010 offshore accident forced deferral of planned exploration drilling. The company could not predict when the moratorium would end or the extent of potential new regulation, cost, and insurance impacts.
- Other exposures include commodity and foreign-exchange volatility, exploration and production risks, political and regulatory instability, environmental obligations, and legal proceedings. Murphy reported one remaining Superfund site where it believed its share of cleanup costs would be immaterial; the Meraux fire insurance-indemnity arbitration remained pending. Guarantees and letters of credit totaled $7.8 million and $215.4 million, respectively; the company considered draws on the letters of credit remote.
Important facts for investors to verify
- Progress, sale terms, timing, and accounting treatment for the planned U.S. and U.K. refining-business exits.
- Whether production reaches management’s Q3 estimate, particularly Azurite’s ramp-up and the performance of other newer projects.
- The final Terra Nova interest determination, settlement amount, and any further expense or cash payment.
- How sustainable operating cash flow is after separating the federal royalty recovery and working-capital effects.
- Effects of the Gulf drilling moratorium and subsequent regulatory, operational, and insurance changes.
- Refining-margin trends, turnaround performance, and the implications of lower refinery utilization for earnings.