Murphy Oil Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless noted. Murphy is an oil and gas exploration and production company operating principally in the United States and Canada. Malaysia was reported as discontinued operations and was sold in July 2019.
Financial performance and position
- Q3 revenue: $817.1, up from $490.5 in Q3 2018. This included $750.3 of customer sales and a $63.2 gain on crude contracts. Continuing-operations operating income was $226.5; income from continuing operations was $158.3, including $22.7 attributable to noncontrolling interests.
- Q3 net income attributable to Murphy: $1,089.0, or $6.79 per diluted share, versus $93.9, or $0.54, a year earlier. Discontinued operations contributed $953.4, including the $960.0 gain on the Malaysia sale. Continuing-operations diluted EPS was $0.84.
- Nine-month results: Revenue was $2,191.6 versus $1,287.8; income from continuing operations was $280.1 versus $121.5; and net income attributable to Murphy was $1,221.5 versus $307.7. The discontinued-operations contribution included the Malaysia sale gain.
- Margins: The filing does not present a headline margin measure. Calculated continuing-operations operating margin was approximately 27.7% in Q3 2019 versus 25.0% in Q3 2018, using reported operating income divided by total revenue.
- Cash flow and investment: Nine-month cash provided by continuing operating activities was $1,153.2, up from $601.4. Investing activities used $2,203.0, including $1,212.9 for property acquisitions. The company reported $2,329.1 of accrual-basis capital expenditures, including the $1,226.3 LLOG acquisition.
- Liquidity and debt: Cash was $434.9 at September 30. Long-term debt was $2,779.2, down $330.1 from year-end 2018. The $1.6 billion revolving facility had no borrowings outstanding and $4.6 of letters of credit; Murphy said it was in compliance with its covenants.
- Equity returns: Nine-month dividends were $125.4. Murphy repurchased 16.4 million shares for approximately $405.6 through September; subsequent repurchases completed the $500 million program.
- Production: Continuing-operations production averaged 203,035 barrels of oil equivalent per day in Q3, including noncontrolling interest, up 66% year over year, largely from the MP GOM and LLOG acquisitions. Murphy’s net production excluding noncontrolling interest was 191,668 BOE per day. Q3 crude oil and condensate price averaged $59.40 per barrel, down 17% year over year.
Material changes versus the prior period
- Gulf of Mexico acquisitions materially increased production, sales, operating costs and depreciation. In Q3, acquired PAI assets contributed $263.7 of revenue and $99.6 of pretax income; LLOG assets contributed $126.4 of revenue and $29.2 of pretax income.
- Higher production and crude-contract gains supported revenue and continuing earnings, while lower benchmark oil and gas prices pressured realized prices. Q3 crude oil and condensate prices averaged $59.40 per barrel versus $71.73 a year earlier.
- Malaysia’s July sale generated approximately $2.035 billion in proceeds after closing adjustments and a $960.0 gain. Its results are classified as discontinued operations.
- Murphy adopted the lease accounting standard in 2019, recognizing operating lease assets and liabilities. At September 30, operating lease assets were $566.0 and current and non-current operating lease liabilities totaled $574.3. Adoption included a $116.8 credit to retained earnings related to a prior sale-leaseback gain.
Outlook, risks and unusual items
- Outlook: Management expected Q4 2019 production of 210,700–219,300 BOE per day, including 12,900 BOE per day attributable to noncontrolling interests. Full-year 2019 capital expenditures were forecast at $1.35–$1.45 billion, excluding $48 million attributable to noncontrolling interests. The filing also reports $2,329.1 of year-to-date accrual-basis capital expenditures including the LLOG acquisition; these figures have different scopes.
- Management said weaker oil or natural gas prices could reduce operating cash flow and require capital-spending cuts or additional borrowing. Average worldwide crude prices at the end of October were below the Q3 average.
- At October 30, Murphy reported WTI swaps of 35,000 barrels per day for the remainder of 2019 at $60.51 per barrel and 45,000 barrels per day for 2020 at $56.42 per barrel, plus Canadian natural-gas price contracts. These derivatives can affect reported earnings and cash realizations.
- Other items to monitor include a possible $100 million Malaysia exploration bonus contingent on drilling results before October 2020; contingent consideration tied to PAI and LLOG acquisition thresholds and development milestones; and $13.2 of previously suspended Vietnam exploration costs written off during the first nine months.
- Risks identified include commodity-price volatility, exploration and production performance, foreign exchange, political and regulatory developments, environmental obligations, and natural hazards. Murphy said routine legal and environmental matters were not expected to have a material adverse effect; it disclosed no new risk factors.
Important facts for investors to verify
- Separate recurring continuing-operations earnings from the $960.0 Malaysia sale gain and other discontinued-operations results.
- Assess the sustainability and net contribution of acquisition-driven Gulf of Mexico production, including operating costs, depreciation and noncontrolling interests.
- Reconcile the $1.35–$1.45 billion full-year capital-spending outlook with the $2,329.1 year-to-date figure, which includes the LLOG acquisition and uses a different scope.
- Review commodity-price sensitivity, hedge volumes and prices, and the potential need for spending reductions or borrowing if prices weaken.
- Track acquisition contingent payments, the Malaysia bonus condition, lease commitments and remaining environmental or tax exposures.