Murphy Oil Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company explores for and produces oil and natural gas, primarily in the U.S. and Canada. Malaysia is reported as discontinued operations and held for sale; its sale closed July 10, 2019.
Financial and operating highlights
- Q2 revenue: $709.0 million, up from $389.6 million. Sales to customers were $646.1 million versus $426.8 million; a $57.9 million gain on crude contracts also contributed, compared with a $37.6 million loss a year earlier.
- Q2 earnings: Continuing-operations income was $98.8 million, versus a $25.2 million loss. Net income attributable to Murphy was $92.3 million, or $0.55 per basic share, compared with $45.5 million, or $0.27 per share. Discontinued operations contributed $24.4 million, down from $70.7 million.
- First-half results: Revenue was $1.300 billion versus $764.4 million. Income from continuing operations was $121.7 million versus $65.4 million; net income attributable to Murphy was $132.5 million versus $213.8 million. The 2018 comparison included a $120 million tax benefit.
- Costs and margins: Q2 operating income was $171.0 million, compared with $22.5 million. Depreciation, depletion and amortization rose to $264.3 million from $190.8 million, and lease operating expenses rose to $137.1 million from $81.2 million, mainly reflecting higher acquired Gulf of Mexico volumes.
- Production and prices: Continuing-operations production averaged 170,885 BOE/day in Q2, up 40% from 122,317 BOE/day, primarily due to Gulf of Mexico acquisitions. Average crude oil and condensate prices declined 8% to $62.46/barrel. Q2 average natural gas price was $1.25/MCF, versus $1.31.
- Cash flow and investment: First-half cash provided by continuing operations was $655.4 million, versus $331.7 million. Investing activities used $1.855 billion, including $1.226 billion for the LLOG acquisition. First-half capital expenditures on an accrual basis were $1.973 billion, compared with $554.3 million.
- Liquidity and debt: June 30 cash was $326.0 million. Long-term debt was $4.186 billion and a $500 million short-term loan was outstanding. The company reported working capital, excluding held-for-sale assets and liabilities, of negative $542.1 million. After quarter-end, the Malaysia sale proceeds funded repayment of the term loan and revolving credit facility.
- Capital returns: Murphy repurchased approximately 11.4 million shares for $299.9 million in Q2 at an average $26.34 per share. First-half dividends paid were $85.5 million; the quarterly dividend was $0.25 per share.
Material changes and unusual items
- The LLOG Gulf of Mexico acquisition closed May 31 for approximately $1.2 billion and added about 67 MMBOE of proved reserves. The earlier PAI transaction and LLOG acquisition drove much of the production and revenue growth.
- Malaysia was classified as discontinued operations and held for sale. Its July 2019 divestiture generated $2.0 billion in cash proceeds; Murphy expects to record an approximately $960 million gain in Q3 and may receive a further $100 million contingent payment tied to future drilling results.
- Acquisition-related contingent consideration was revalued, contributing to other expense. The company also wrote off $13.2 million of previously suspended Vietnam exploration costs in the first half.
- Adoption of lease accounting in Q1 recognized operating lease assets and liabilities; the filing reports a $116.8 million after-tax cumulative-effect credit to retained earnings. It had no material income-statement impact.
Outlook, risks and contingencies
- Management expected Q3 2019 production of 203,600–207,600 BOE/day, including approximately 11,700 BOE/day attributable to noncontrolling interest. Full-year 2019 capital spending was forecast at $1.35–$1.45 billion, excluding $48 million attributable to noncontrolling interest.
- Management planned to fund the remaining capital program primarily with operating cash flow, with credit facilities available as needed. It cautioned that weaker oil or gas prices could reduce cash flow and require spending cuts or additional borrowing. Oil prices at July month-end were below the Q2 average.
- Commodity-price exposure remains material. As of July 31, the company reported oil hedges and Canadian natural gas fixed-price contracts; a 10% benchmark-price increase at June 30 would have reduced the recorded commodity-derivative receivable by approximately $62.3 million.
- Other risks include commodity-price volatility, production and reserve replacement, exploration outcomes, foreign exchange, political and regulatory changes, capital-market conditions, and natural hazards. Environmental and routine legal matters were not expected by management to materially affect financial condition, earnings or liquidity.
Important facts for investors to verify
- Confirm post-quarter repayment of the $500 million term loan and revolver, and the resulting pro forma debt and liquidity after the Malaysia sale.
- Review the Q3 recognition and final proceeds of the Malaysia divestiture, including the contingent drilling payment and reported gain.
- Assess whether acquired Gulf of Mexico production and cash generation support the production outlook and planned capital program.
- Track realized commodity prices, hedge settlements, and their effects on reported earnings and cash flow.
- Monitor final purchase-price allocations and contingent consideration for the PAI and LLOG acquisitions, as well as the company’s capitalized exploratory-well costs.