Murphy Oil Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The unaudited filing covers an international oil and gas producer focused primarily on U.S. and Canadian production, with exploration activities worldwide.
Financial and operating highlights
- Revenue: Q2 customer sales were $285.7 million, down from $680.4 million a year earlier. Including crude-contract results and other income, total revenue and other income was $211.5 million, versus $744.0 million; the 2020 amount included a $75.9 million crude-contract loss. For the first half, customer sales were $886.3 million versus $1.310 billion, while total revenue and other income was $1.215 billion versus $1.374 billion.
- Profitability: Q2 loss from continuing operations was $323.1 million and net loss attributable to Murphy was $317.2 million, compared with continuing income of $98.8 million and net income attributable to Murphy of $92.3 million in Q2 2019. First-half loss from continuing operations was $827.0 million; net loss attributable to Murphy was $733.3 million, versus prior-year income of $121.7 million and $132.5 million, respectively. Q2 diluted loss per share was $2.06; first-half diluted loss per share was $4.78.
- Impairments and restructuring: First-half pretax asset impairment charges totaled $987.1 million, principally $947.4 million in U.S. properties and $39.7 million in other foreign properties. Management reported $708.3 million of post-tax impairment charges in first-half continuing results. Q2 restructuring expense was $41.4 million, related to office closures, staff consolidation, severance, pension and other costs.
- Cash flow and investment: First-half cash provided by continuing operating activities was $369.4 million, down from $655.4 million. Investing activities used $589.2 million. Capital expenditures on a value-of-work-done basis were $557.6 million, including $61.4 million for the King’s Quay FPS.
- Margins: Adjusted EBITDA, a non-GAAP measure, was $124.6 million in Q2 versus $362.4 million; adjusted EBITDA per barrel sold was $8.17 versus $25.40. For the first half, adjusted EBITDA was $411.6 million versus $672.8 million, and per-barrel adjusted EBITDA was $12.74 versus $24.23.
- Production and prices: Q2 production averaged 179,506 barrels of oil equivalent per day including noncontrolling interest (167,667 excluding it), up from 170,885 including noncontrolling interest. Worldwide crude oil and condensate prices averaged $23.03 per barrel, down from $64.74. First-half production averaged 189,350 barrels of oil equivalent per day including noncontrolling interest; crude prices averaged $35.65 per barrel versus $61.83.
- Liquidity and debt: Cash and cash equivalents were $145.5 million at June 30, down from $306.8 million at year-end 2019. Long-term debt, including capital lease obligation, was $2.956 billion, up $153.0 million. The $1.6 billion revolving credit facility had $170.0 million drawn, $3.7 million of letters of credit, and $1.426 billion available; the company reported covenant compliance. Working capital excluding held-for-sale assets and liabilities was negative $18.0 million.
- Dividends: Cash dividends were $0.13 per share in Q2 versus $0.25 a year earlier. The company reduced its quarterly dividend by 50% effective in Q2.
Material changes versus prior periods
- Lower commodity prices, weaker demand amid COVID-19, and the first-quarter supply increase materially reduced sales and earnings. Q2 WTI averaged approximately $28 per barrel; the filing also notes a recovery to about $38 at quarter-end.
- First-half results shifted from profit to substantial loss, driven especially by the noncash impairments, lower sales prices, and higher lease operating costs. Q2 adjusted EBITDA per barrel also fell sharply year over year.
- Production increased versus 2019, chiefly reflecting the LLOG Gulf of Mexico acquisition; lower Eagle Ford activity and temporary Gulf of Mexico shut-ins partly offset the increase. Terra Nova remained shut in for asset-integrity work and was expected to remain shut in for the rest of 2020.
- First-half operating cash flow declined, capital spending was reduced, and debt increased due to net revolving-credit borrowings. The company also recorded a $116.2 million deterioration in accumulated other comprehensive loss during the first half.
Outlook, commentary, and risks
- Management forecast Q3 production of 153,000–163,000 barrels of oil equivalent per day, excluding noncontrolling interest. It said it may consider further production curtailments if price volatility persists.
- The 2020 capital-spending outlook was reduced from an original $1.4–$1.5 billion to $680–$720 million, excluding noncontrolling interest. Management planned to fund the remaining program primarily with operating cash flow, supplemented by revolving-credit borrowings if needed, and cited a cost-reduction program.
- Management cautioned that COVID-19, demand weakness, oil-supply actions and commodity-price volatility could further pressure profits, operating cash flows, production economics and asset values. Other cited risks include operational disruption, counterparty and joint-venture credit risk, access to capital, regulation, environmental obligations and political or currency risks.
- At August 5, disclosed price protection included WTI swaps for 45,000 barrels per day through year-end 2020 at $56.42 per barrel and 15,000 barrels per day for 2021 at $42.93, plus Canadian natural-gas fixed-price sales. Derivative fair-value changes can create earnings volatility because commodity contracts are not designated as accounting hedges.
- The May restructuring consolidated worldwide staff activities in Houston and closed the El Dorado and Calgary offices. The filing reports a $63.0 million increase in pension and postretirement liabilities from the remeasurement and $16.7 million of restructuring accruals remaining at quarter-end.
- Brunei operations and certain other assets, including the El Dorado office building and two airplanes, were classified as held for sale. The King’s Quay FPS spending was expected to be refunded upon a planned sale to a third party. Murphy also remained eligible for a $100 million Malaysia divestiture bonus subject to specified exploration results before October 2020.
- Management considered routine legal proceedings and disclosed environmental matters not expected, based on information available, to have a material adverse effect. The filing notes that actual outcomes and remediation requirements may differ from estimates.
Important facts for investors to verify
- Whether commodity prices, demand, production curtailments and the company’s hedge positions support the stated production and cash-flow outlook.
- The assumptions behind the $987.1 million impairment, including reserve estimates, future prices, costs and discount rates, and the potential for further impairments.
- Whether operating cash flow and available credit can fund the reduced capital program while maintaining liquidity and compliance with facility covenants.
- Progress and terms for the King’s Quay FPS sale, held-for-sale assets, and the conditional Malaysia bonus.
- How the restructuring, pension remeasurement, Terra Nova outage, and Gulf of Mexico workovers affect future costs and production.