Murphy Oil Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. Murphy is an international oil and gas producer operating in the United States, Canada and Malaysia, with exploration activities worldwide.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Sales and other operating revenue | $429.1 | $749.2; down about 43% |
| Total revenue | $430.3 | $921.7 |
| Net loss | $198.8; $1.16 per diluted share | $14.4; $0.08 per diluted share |
| Continuing-operations result | Loss of $199.5 | Income of $3.5 |
| Cash from continuing operating activities | $43.3 | $533.8 |
| Property additions and dry-hole costs, cash basis | $210.0 | $823.8 |
| Accrual-basis capital expenditures | $144.9 | $612.9 |
Lower realized commodity prices and sales volumes, plus a $95.1 million noncash impairment charge, weighed on results. Lower operating costs, depreciation and exploration expense partly offset the decline. The impairment reduced the carrying value of Terra Nova and Western Canada heavy-oil properties; it was based on internal discounted-cash-flow estimates.
Worldwide production averaged 196,568 barrels of oil equivalent per day, down 11.3% year over year. Average crude oil and condensate sales price was $34.19 per barrel versus $47.12; North American natural gas averaged $1.57 per thousand cubic feet versus $2.46. Total hydrocarbon sales averaged 192,815 boe/d versus 230,149 boe/d.
At March 31, cash and cash equivalents were $423.1 million and Canadian government securities were $146.1 million. Total current assets were $1.699 billion and current liabilities $1.378 billion. Long-term debt was $3.410 billion, plus $19.1 million of current maturities; long-term debt increased $368.9 million from year-end. Stockholders’ equity was $5.205 billion. The company borrowed $371 million and paid $60.3 million in dividends during the quarter. Operating cash flow was reduced by a $104.3 million working-capital use, including $253.2 million of payments to exit deepwater rig contracts.
Material changes and notable items
- Q1 2015 included a $199.5 million after-tax gain on the sale of a 10% interest in Malaysian assets; there was no comparable sale gain in Q1 2016.
- U.S. exploration and production losses narrowed year over year, while Canada’s loss widened, principally due to the impairment and lower prices. Malaysia earnings fell substantially, largely reflecting the prior-year sale gain and lower production and prices.
- U.K. refining and marketing is reported as discontinued operations; the remaining assets were sold in 2015. Q1 2016 discontinued operations reported $0.7 million of income versus a $17.9 million loss a year earlier.
- The company had a $2.0 billion committed credit facility expiring June 2017, with $925 million drawn, and about $82 million of estimated uncommitted borrowing capacity, of which $46 million was outstanding. Approximately $88 million of letters of credit reduced revolving-facility availability.
- Subsequent to quarter-end, Murphy completed the sale of Canadian gas-processing and pipeline assets for C$538 million. It also agreed to sell its 5% Syncrude interest for about C$937 million, subject to adjustments, approvals and closing conditions, and agreed to acquire interests in Athabasca’s Kaybob Duvernay and Montney assets for C$475 million total consideration, including about C$250 million cash and a C$225 million carried interest.
Outlook, risks and contingencies
- Management forecast Q2 2016 production of 177,000–180,000 boe/d and full-year 2016 capital expenditures of approximately $580 million. The 2016 capital program was expected to be funded primarily from operating cash flow, supplemented by borrowing.
- Management said April oil prices had improved from Q1 lows, while global inventories remained high; North American natural gas prices were pressured by mild winter weather and production growth. Continued low prices could reduce cash flow, increase borrowing, prompt further cost reductions or impairments, reduce reserves and production, and lead to reconsideration of dividends.
- Price-risk contracts included WTI coverage of 20,000 barrels per day at $52.01 for April–December 2016 and an additional 5,000 barrels per day at $45.30 for July–December. Canadian gas forward sales covered 59 million cubic feet per day at C$3.19 per MCF for April–December.
- A 2015 condensate pipeline leak at the Seal field in Alberta remains under investigation and remediation. Murphy had recorded $43.9 million of expense in 2015 and spent $31.7 million to date; the final cost is not established and could exceed the recorded expense. Potential fines and insurance recoveries remain uncertain.
- Other risks include volatile oil and gas prices, production and reserve replacement, foreign exchange, political and regulatory conditions, environmental obligations and access to capital. The company stated that its existing risk factors were unchanged. Disclosure controls were deemed effective; ERP-related control changes continued to be evaluated and tested.
Important facts for investors to verify
- Whether production, realized prices and operating cash flow stabilize, and how much additional borrowing is needed.
- Assumptions and sensitivity behind the $95.1 million impairment and the potential for further impairments.
- Final costs, insurance recoveries and any regulatory penalties related to the Seal pipeline leak.
- Closing, proceeds, adjustments and accounting treatment for the announced Canadian asset transactions.
- Available borrowing capacity and refinancing plans ahead of the June 2017 credit-facility maturity.
- Whether the stated Q2 production and full-year capital expenditure outlook is maintained, and whether low prices affect future production or dividends.