Murphy Oil Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. All financial amounts below are in U.S. dollars; amounts are in millions unless otherwise noted. Murphy is an international oil and gas producer operating in the U.S., Canada and Malaysia, with exploration activities worldwide.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales and other operating revenue | $718.6 | $1,357.9 | $1,467.8 | $2,639.1 |
| Total revenue | $738.3 | $1,349.0 | $1,660.0 | $2,635.4 |
| Continuing operations income (loss) | $(89.0) | $142.7 | $(85.5) | $312.0 |
| Net income (loss) | $(73.8) | $129.4 | $(88.3) | $284.7 |
| Diluted earnings (loss) per share | $(0.42) | $0.72 | $(0.50) | $1.57 |
| Cash from continuing operating activities | — | $715.2 | $1,455.2 |
- Q2 oil and gas sales revenue fell about 47% year over year. Management attributed the deterioration primarily to lower realized commodity prices; production also declined 3.9% to 201,952 barrels of oil equivalent per day.
- Worldwide realized crude oil and condensate prices averaged $56.49 per barrel in Q2, down 40% from $93.56. North American natural gas averaged $2.42 per thousand cubic feet, down 40% from $4.03.
- For the first half, total production averaged 211,699 barrels of oil equivalent per day, up from 207,329. Higher Eagle Ford and North American gas volumes were offset by declines in other areas, including Malaysia after asset sales.
- Q2 results included $15.2 million of income from discontinued operations, reflecting an adjustment associated with the completed U.K. downstream asset sale. The first-half discontinued-operations loss was $2.8 million.
- Cash, cash equivalents and Canadian government securities totaled approximately $1.305 billion at June 30; current assets were $2.499 billion and current liabilities were $1.807 billion, yielding working capital of $692.6 million. Cash and investments held outside the U.S. included approximately $458 million in Canada and $811 million in Malaysia; repatriation may incur taxes or other costs.
- Total debt was approximately $3.280 billion, including $14.9 million of current maturities and $3.265 billion of long-term debt. Long-term debt increased $747.2 million from year-end; net borrowings during the first half were $373 million. Debt was 29.3% of capital employed, versus 22.7% at December 31, 2014.
- Continuing-operations capital expenditures were $1.145 billion on an accrual basis for the first half. Property additions and dry-hole costs used $1.434 billion in cash. Cash dividends were $124.6 million and share repurchases used $250 million.
- The filing does not provide a single consolidated operating-margin measure; operating results vary substantially by segment and include gains, taxes and exploration costs.
Material changes and notable items
- Lower commodity prices drove the move from profit to loss. U.S. and Canadian exploration and production operations were loss-making in both the quarter and first half; Malaysia remained profitable but earnings were lower year over year.
- During the first quarter, Murphy completed the second phase of the sale of a 30% interest in Malaysian assets, receiving $417.2 million in net proceeds. Total net cash proceeds received to date were approximately $1.88 billion, subject to final adjustments. The company reported a first-half pretax gain on asset sales of $154.1 million; the filing also discusses an after-tax Malaysian sale gain, with amounts described in different contexts.
- The U.K. downstream asset sale was completed June 30. Murphy retained responsibility for overseeing former refinery-site demolition and obligations related to a defined-benefit pension plan; settlement may result in future accounting losses.
- A condensate transfer pipeline leak or leaks at the Seal field in Alberta were identified in Q1. Murphy recorded $43.9 million of remediation expense, but had not completed its cost estimate; ultimate net costs could exceed the amount recorded. Potential regulatory fines and insurance recoveries remain uncertain.
- First-half foreign-currency translation losses were $266.6 million, contributing to accumulated other comprehensive loss of $429.9 million at June 30.
Outlook, risks and contingencies
- Management forecast third-quarter 2015 production of approximately 200,000 barrels of oil equivalent per day and full-year capital expenditures of approximately $2.3 billion.
- The company expected to fund its capital program primarily with operating cash flow, supplementing it with borrowings as needed. Management warned that weaker oil or gas prices could reduce cash flow, require higher borrowing, and lead to lower production, reserve reductions, impairment charges, cost controls or reconsideration of the dividend.
- Management reported that worldwide crude prices in July were below the Q2 average; it cited a stronger U.S. dollar, expected additional Iranian supply and weakness in Chinese demand. North American natural gas prices strengthened in July.
- Price-risk contracts included U.S. oil swaps covering 15,000 barrels per day for July–December 2015 at an average $63.07 per barrel, plus Western Canadian natural gas contracts covering 65 million cubic feet per day for the second half of 2015 at C$4.13 per thousand cubic feet and 59 million cubic feet per day in 2016 at C$3.19.
- Murphy cited commodity-price volatility, exploration success, production and reserve replacement, foreign exchange, political and regulatory instability, capital-market conditions and natural hazards as risks. It reported no newly identified risk factors beyond those in its 2014 Form 10-K.
- The company had a $2.0 billion committed credit facility expiring June 2017 and approximately $315 million of unused uncommitted facilities, which banks may withdraw. A portion of overseas cash may incur taxes or costs if repatriated.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing identifies no legal proceedings expected, based on currently available information, to materially affect financial condition or liquidity.
Most important facts for investors to verify
- Whether commodity prices and realized sales prices recover, and how price changes affect operating cash flow and production economics.
- The final Seal pipeline remediation estimate, including regulatory penalties and insurance recoveries.
- Final settlement adjustments and recognized gains and proceeds from the Malaysian asset sale.
- Debt, credit-facility availability and the location, tax treatment and practical availability of overseas cash.
- Progress toward the production and capital-spending outlook, and the retained U.K. refinery demolition and pension obligations.