Murphy Oil Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; it also reports a fourth-quarter net loss. Murphy operated globally in exploration and production (E&P), U.S. retail and wholesale fuel marketing, U.S. ethanol, and U.K. refining and marketing. It sold its Superior and Meraux U.S. refineries in 2011 and continued to pursue a sale of its U.K. downstream business.
Financial and operating highlights
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Sales and other operating revenues | $27.69 billion | $20.23 billion |
| Net income | $872.7 million; $4.49 diluted EPS | $798.1 million; $4.13 diluted EPS |
| Income from continuing operations | $740.9 million; $3.81 diluted EPS | $779.6 million; $4.03 diluted EPS |
| Cash from continuing operating activities | $2.00 billion | $3.03 billion |
| Capital expenditures, continuing operations | $2.90 billion | $2.33 billion |
| Year-end working capital | $622.7 million | $619.8 million |
| Year-end cash and cash equivalents | $513.9 million | $535.8 million |
| Year-end total debt, including current maturities | $599.6 million | $939.4 million |
- Revenue rose about 37%, while net income rose about 9%. Continuing-operations income fell about 5%; the difference reflects higher income from discontinued operations, including U.S. refinery operations and sale-related effects.
- Total operating cash flow, including discontinued operations, was $2.15 billion, down from $3.13 billion. Management attributed the decline mainly to working-capital timing, including payments of refinery-related payables and income taxes.
- Liquidity included $532.1 million of Canadian government securities with maturities over 90 days. The current ratio was 1.22 and working capital was $622.7 million. Murphy had no borrowings against its $1.5 billion committed credit facility at year-end; approximately $400 million of uncommitted lines were also unused.
- Long-term debt was $249.6 million, but $350.0 million of notes due May 1, 2012 was classified as current. The company said it expected to replace the notes and anticipated borrowing during 2012 to help fund its capital program.
- E&P segment income was $625.7 million, down from $806.9 million. U.S. refining and marketing income was $223.6 million; U.K. refining and marketing recorded a $33.3 million loss.
- Worldwide oil and liquids production averaged 103,160 barrels per day, down 19%; natural gas sales averaged 457.4 MMcf per day, up 28%; total production was 179,388 boe per day, down 4%.
- Average realized oil price increased 41% to $94.54 per barrel. North American natural gas realization fell 6% to $4.08 per Mcf, while Sarawak gas realization rose 34% to $7.10 per Mcf.
- Proved reserves at year-end were 220.2 million barrels of oil, 129.5 million barrels of synthetic oil, and 1,106.1 Bcf of natural gas. Proved undeveloped reserves were about 33% of total proved reserves on a boe basis.
Material changes and unusual items
- A $368.6 million impairment of the Azurite field in the Republic of the Congo followed a downward reserve revision after poorer-than-expected well performance. E&P income also faced higher dry-hole costs, lower oil volumes, and weaker North American gas prices.
- Net income included $131.8 million from discontinued operations, including $113.1 million of U.S. refinery operating income and an $18.7 million after-tax net gain on refinery sales. Refinery inventory liquidation contributed materially to the disposal result.
- Oil production declined chiefly because of well downtime and sand-production issues at Malaysia’s Kikeh field, as well as declines and downtime elsewhere. Natural gas growth came largely from Tupper West in Canada and Malaysian offshore fields.
- Exploration expense rose to $489.9 million from $292.3 million, including $251.0 million of dry-hole costs versus $90.1 million in 2010. Unsuccessful drilling included work in Brunei, Indonesia, Southern Alberta, and Suriname.
- The effective consolidated tax rate rose to 52.2% from 43.9%, in part because no tax benefit was recorded for the Azurite impairment and certain foreign exploration costs, and because of higher U.K. oil-and-gas taxes.
- The Terra Nova working-interest redetermination reduced Murphy’s stake from 12.0% to 10.475%; final settlement was $5.4 million below the prior estimate, recorded as a 2011 benefit.
- Fourth-quarter 2011 net loss was $113.9 million, including a $113.3 million loss from continuing operations. The filing’s quarterly information does not separately explain all drivers of the quarter’s result; the annual impairment and tax disclosures are relevant context.
Outlook, risks, and contingencies
- Management forecast 2012 production of about 200,000 boe per day, approximately 11% above 2011, assuming higher Tupper West gas output, Kikeh recovery, and Eagle Ford growth. Weak Canadian gas prices could delay Montney drilling and reduce expected production.
- Projected 2012 capital expenditures were approximately $3.53 billion, with $3.32 billion allocated to E&P. The company expected to fund spending mainly from operating cash flow, supplemented by borrowing as needed.
- Management identified oil and gas price volatility, exploration success, reserve replacement, production reliability, service costs, political and regulatory conditions, and foreign exchange as significant uncertainties. Gulf of Mexico permitting delays following the Macondo incident could increase costs and constrain production.
- Environmental and safety regulation, severe weather, operational accidents, and insurance limits could affect results. Environmental compliance capital expenditures were $103.7 million in 2011 and projected at $74.7 million for 2012. Murphy retained certain environmental liabilities after the U.S. refinery sales.
- The filing lists approximately $1.85 billion in capital-project commitments and $5.22 billion in total contractual obligations. It also reports $162.9 million of letters of credit and $7.8 million of financial guarantees, which were not accrued because management considered draws remote.
- Murphy was pursuing an approximately $118 million Ecuador arbitration claim. The filing also discusses routine legal matters, one Superfund site where it considered itself a de minimis party, and potential environmental remediation exposure; management did not expect these matters to have a material adverse effect based on information then available.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether the 2012 production target and $3.53 billion capital plan were achieved, particularly given weak North American gas prices and planned Kikeh and Eagle Ford growth.
- Whether the $350 million notes due May 1, 2012 were refinanced on acceptable terms and how much additional borrowing was required.
- Subsequent Azurite well performance, reserve revisions, and the potential for further impairments or changes to the field’s economics.
- Progress and terms of the planned U.K. refining and marketing divestiture, including any sale loss or transition costs.
- Cash conversion and working-capital trends, while separating continuing operations from refinery divestiture proceeds and discontinued operations.
- Developments in the Ecuador arbitration, retained refinery-related environmental obligations, and other material contingencies.