Murphy Oil Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 5, 2011. Financial statements are unaudited except the December 31, 2010 balance sheet. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenues | $8,721.5 | $5,591.9 | $16,073.2 | $10,772.1 |
| Income before taxes | $552.7 | $445.0 | $1,013.0 | $731.1 |
| Net income | $311.6 | $272.3 | $580.5 | $421.2 |
| Diluted EPS | $1.60 | $1.41 | $2.98 | $2.18 |
| Net cash from operating activities | Not presented by quarter | $917.9 | $1,447.7 |
- Q2 revenue rose approximately 56% and net income 14%; first-half revenue rose approximately 49% and net income 38% year over year. Higher crude oil prices and improved U.S. refining and marketing results were principal earnings drivers.
- Q2 exploration and production (E&P) earned $243.3 million versus $219.1 million; refining and marketing earned $91.7 million versus $83.8 million. First-half E&P earnings were $503.7 million versus $466.1 million, and refining and marketing earnings were $122.4 million versus $54.1 million.
- Worldwide hydrocarbon production averaged 170,457 barrels of oil equivalent per day in Q2, down from 189,951 a year earlier. First-half production averaged 176,272 versus 193,071 boe/day. Higher oil prices and natural gas volumes partly offset lower oil production.
- U.S. refining margin improved to $2.54 per barrel in Q2 from $0.69; first-half margin was $2.73 versus negative $1.23. U.K. refining and marketing remained weak, with a Q2 loss of $15.8 million and first-half loss of $24.5 million.
Cash flow, liquidity and debt
- First-half operating cash flow fell to $917.9 million from $1,447.7 million. Working capital used $455.7 million, compared with a $249.8 million source in 2010, mainly as receivables and crude inventories increased. The 2010 comparison included a $244.4 million recovery of prior-year U.S. federal royalties.
- Capital expenditures on an accrual basis were $1,348.7 million for the first half, up from $1,099.4 million. Property additions and dry-hole costs used $1,258.7 million of cash.
- Cash and cash equivalents were $801.2 million at June 30, up from $535.8 million at year-end; Canadian government securities with maturities over 90 days were $538.1 million. Working capital was $870.4 million.
- Total current and long-term debt was approximately $1,534.5 million, versus $939.4 million in long-term debt at December 31. The $350 million notes due May 2012 were reclassified as current. Stockholders’ equity was $8,829.2 million.
- In June, Murphy replaced its $1.9 billion facility, due to expire in July 2012, with a five-year $1.5 billion credit facility. Borrowings bear interest at 1.5% above LIBOR at the company’s current credit rating.
Changes, outlook and notable items
- Management forecast 2011 capital expenditures of approximately $3.3 billion and Q3 production averaging about 173,000 boe/day. It reported lower average crude oil prices in July than in Q2, significantly weaker U.S. retail margins, stronger U.S. refining margins, and extremely weak U.K. downstream margins.
- Murphy continued plans to exit U.S. and U.K. refining and marketing. After quarter-end, it agreed to sell the Superior, Wisconsin refinery and related assets for $214 million; closing was expected late Q3 or early Q4. A gain was expected, dependent partly on liquid inventory levels and prices. Sales of the Meraux refinery and U.K. downstream assets remained in process; losses on those transactions were possible.
- Q2 included a $13.1 million after-tax gain on the sale of Spanish gas storage assets. First-half E&P results also included a $5.4 million benefit from final settlement of the Terra Nova working-interest redetermination.
- Exploration expense increased to $218.8 million for the first half from $119.5 million, driven principally by unsuccessful offshore wildcat drilling in Indonesia and Suriname. The filing reported $532.9 million of capitalized exploratory well costs pending proved-reserve determinations, including $416.4 million capitalized for more than one year.
- A U.K. supplemental oil-and-gas tax enacted in July, retroactive to March 2011, raised the stated tax rate from 50% to 62%. Murphy estimated about $19 million of additional 2011 tax expense, with approximately $15 million expected in Q3.
- Environmental remediation, governmental and regulatory actions, commodity and currency volatility, exploration success, production interruptions, and political risks are discussed as exposures. Murphy reported $7.8 million of financial guarantees and $332.2 million of outstanding letters of credit, with no balance-sheet accrual because drawdown was considered remote. Management stated known environmental and routine legal matters were not expected to materially affect results or liquidity.
Key investor verification points
- Track the production recovery and workover progress at Malaysia’s Kikeh field, Gulf of Mexico permitting constraints, and the effects of Terra Nova, Syncrude and other operating interruptions.
- Verify actual cash conversion and working-capital trends against the first-half cash-flow decline, and assess funding for the $3.3 billion full-year capital plan.
- Follow execution, proceeds, inventory treatment and any gains or losses from the Superior, Meraux and U.K. downstream exits.
- Assess the scale and persistence of U.K. downstream losses, U.S. retail-margin changes, and refining-margin movements.
- Monitor the U.K. tax charge, unresolved tax audits, exploratory well-cost recoverability, and environmental or other contingencies.