Murphy Oil Corporation — Q3 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2011. Murphy reported exploration and production (E&P) and continuing refining and marketing operations. The company was exiting U.S. refining: Superior was sold September 30 and Meraux on October 1; both refinery businesses are presented as discontinued operations, with prior periods reclassified.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $7.240 billion | $5.200 billion | $20.928 billion | $14.606 billion |
| Income from continuing operations | $335.7 million | $197.4 million | $854.2 million | $630.1 million |
| Discontinued operations, net of tax | $70.4 million | $5.4 million | $132.4 million | Loss of $6.1 million |
| Net income | $406.1 million | $202.8 million | $986.6 million | $624.0 million |
| Diluted EPS | $2.09 | $1.05 | $5.07 | $3.24 |
Income growth was driven mainly by higher crude oil prices and stronger U.S. refining and marketing results. Q3 discontinued-operations income included $53.5 million of operating profit and a $16.9 million after-tax net disposal gain. For the nine months, E&P earned $765.6 million versus $652.8 million, while continuing refining and marketing earned $129.3 million versus $110.8 million.
- Cash flow: Nine-month operating cash flow was $1.877 billion, down from $2.201 billion. Continuing operations provided $1.713 billion; discontinued operations provided $163.5 million. Working capital consumed $309.4 million, compared with a $417.2 million source in the prior period.
- Investment and distributions: Cash property additions and dry-hole costs were $1.854 billion; accrual-basis capital expenditures were $2.036 billion. Dividends paid were $159.5 million.
- Liquidity: September 30 cash was $1.279 billion and Canadian government securities with maturities over 90 days were $493.7 million. Working capital was $996.8 million, up $377.0 million from year-end; management notes that LIFO inventory carrying values were $824.5 million below FIFO value.
- Debt: Balance-sheet debt comprised $350.0 million current maturities and $974.5 million long-term debt. Revolving debt outstanding was $725 million at September 30; the company reported repaying $725 million of debt in October using refinery-sale proceeds. A new five-year $1.5 billion committed credit facility replaced the former $1.9 billion facility.
- Operating indicators: Q3 worldwide production averaged 174,801 boe/day versus 181,733; nine-month production averaged 175,776 versus 189,250. Q3 crude oil and liquids prices averaged $95.95/barrel versus $65.45. Natural-gas sales volumes increased to 470 million cubic feet/day from 371 million, partly reflecting Tupper West start-up.
Material changes and significant items
- U.S. refinery dispositions generated a reported $91.1 million gain on Superior and an estimated $74.2 million loss on Meraux, including associated inventories, for a $16.9 million net after-tax gain. Meraux proceeds were received in Q4.
- U.K. oil-and-gas tax rates increased retroactively from 50% to 62%, adding $14.5 million to Q3 and nine-month tax expense. A $25.6 million Malaysia tax benefit for prior Block P expenditures and a $6.5 million U.S. uncertain-tax-position settlement benefit also affected 2011 results.
- Nine-month exploration expense rose to $304.5 million from $181.5 million, including unsuccessful offshore wildcat drilling in Indonesia, Suriname and Brunei. “Other international” E&P reported a $191.6 million loss versus $48.2 million.
- Foreign-currency translation reduced nine-month other comprehensive income by $177.5 million; a further $13.5 million after-tax loss was deferred on interest-rate hedges.
Outlook, commentary and risks
Management expected Q4 2011 production of 195,000–200,000 boe/day and full-year capital expenditures of approximately $3.0 billion. It reported October crude prices somewhat below the Q3 average, lower U.S. retail marketing margins in October, and extremely weak U.K. downstream margins. The filing gives no specific earnings or price guidance.
Risks highlighted include commodity-price volatility, exploration success and reserve replacement, production declines, regulatory and political uncertainty, natural hazards, foreign-exchange and interest-rate exposure, and environmental obligations. Gulf of Mexico permitting delays after the Macondo incident constrained development; maintenance, workovers and field declines also affected production. The company said it could incur a loss on future U.K. downstream asset sales. It reported $7.8 million of financial guarantees and $251.5 million of outstanding letters of credit, with no balance-sheet accrual for the letters of credit because drawdown was considered remote. Management did not expect known environmental or routine legal matters to materially affect results or liquidity.
Key facts for investors to verify
- Q4 production delivery against the 195,000–200,000 boe/day outlook and the sources and sustainability of the expected increase.
- Actual October Meraux sale proceeds and the final disposal accounting; subsequent repayment of revolving debt and remaining liquidity.
- U.K. downstream sale timing and proceeds or any impairment or loss, given weak margins.
- Whether exploration spending, particularly unsuccessful offshore drilling, produces reserves or future cash flows; monitor the $529.2 million of exploratory well costs pending proved-reserve determinations.
- Effects of lower oil prices, field maintenance/workovers, Gulf of Mexico permitting, and the new U.K. tax rate on production, earnings and cash flow.