Murphy Oil Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated interim financial statements; dollar amounts below are in millions unless noted. Comparisons are with Q1 2010, except balance-sheet comparisons, which are with December 31, 2010.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $7,351.7 | $5,180.2 | +41.9% |
| Income before income taxes | $460.4 | $286.1 | +60.9% |
| Net income | $268.9 | $148.9 | +80.6% |
| Diluted EPS | $1.38 | $0.77 | +$0.61 |
| Net margin, calculated as net income / total revenue | 3.7% | 2.9% | +0.8 percentage points |
| Operating cash flow | $522.9 | $829.4 | −36.9% |
| Capital expenditures, accrual basis | $566.6 | $524.7 | +$41.9 |
- Management attributed improved earnings mainly to higher crude oil prices, stronger U.S. refining results, and lower foreign-currency transaction losses. Total costs rose to $6,891.3 million from $4,894.0 million; crude oil and product purchases were the largest cost item.
- Effective income tax rate was 41.6%, down from 48.0%. The filing says foreign-jurisdiction income, state taxes, and expenses without currently available tax benefits contributed to rates above the 35% U.S. statutory rate.
- Exploration and production income was $260.4 million versus $247.0 million. Refining and marketing swung to income of $30.7 million from a loss of $29.7 million. Corporate costs declined to $22.2 million from $68.4 million, principally due to lower foreign-currency losses.
Cash, liquidity, debt, and balance sheet
- At March 31, cash and cash equivalents were $689.4 million, versus $535.8 million at year-end. Canadian government securities with maturities over 90 days were $457.0 million, down from $616.6 million.
- Operating cash flow fell despite higher net income: noncash operating working capital used $140.4 million, compared with providing $244.3 million in Q1 2010. The 2011 use largely reflected increased receivables associated with higher sales prices; prior-year working-capital cash generation included a $244.4 million recovery of U.S. federal royalties.
- Investing activities used $362.5 million and financing activities used $15.1 million. The quarter included $526.8 million of cash spending on property additions and dry-hole costs, $53.1 million of dividends, and a $35.0 million increase in notes payable.
- Working capital was $740.5 million, up $120.7 million from December 31. Management cautioned that reported working capital does not fully reflect inventory value: LIFO inventory carrying values were $950.3 million below FIFO values.
- Long-term debt was $974.4 million, up from $939.4 million; stockholders’ equity was $8,531.2 million. Long-term debt represented 10.3% of capital employed. Total assets were $14,884.1 million.
Material changes and operating developments
- Worldwide production averaged 182,152 barrels of oil equivalent per day, down from 196,226; oil and liquids production declined to 113,313 barrels per day from 139,060. Average oil and liquids sales price increased to $86.73 per barrel from $64.89.
- Natural gas sales volumes rose to 413 million cubic feet per day from 343 million, while North American natural gas prices averaged $4.35 per thousand cubic feet versus $5.14. Tupper West production in Canada began in February 2011 and supported the volume increase.
- Malaysia remained the largest E&P earnings contributor, at $195.8 million versus $173.5 million, despite lower Kikeh oil output and workovers. Other international E&P losses widened to $50.9 million from $13.5 million, largely due to unsuccessful exploratory wells offshore Suriname and costs related to a new Iraq license.
- U.S. manufacturing earned $28.7 million versus a $23.6 million loss, with stronger refining margins and record throughput. U.K. downstream losses narrowed to $8.7 million from $15.0 million. Prior-year refinery turnarounds at Meraux and Milford Haven make throughput and earnings comparisons less representative of underlying year-over-year changes.
- The Terra Nova working-interest reduction lowered Murphy’s interest from 12.0% to approximately 10.475%. Final settlement costs were below the prior estimate, producing a $5.4 million Q1 2011 benefit.
Outlook, risks, and unusual items
- Management forecast Q2 2011 production of about 187,000 barrels of oil equivalent per day and sales of about 180,000. Full-year production guidance was approximately 200,000 barrels of oil equivalent per day; full-year capital expenditures were expected to be about $3.0 billion.
- Management said April crude oil prices remained above the Q1 average, while U.S. downstream margins were generally weaker than in Q1. Guidance is subject to commodity prices, production performance, exploration outcomes, customer demand, political and regulatory conditions, and natural hazards.
- The company was pursuing sales of its U.S. refineries and U.K. downstream operations, with completion anticipated in 2011. The filing says discontinued-operations presentation would apply in future periods once the accounting criteria are met.
- The U.K. announced a prospective increase in the oil-and-gas supplemental tax rate from 50% to 62%, expected to be enacted in June or July 2011. Based on its understanding at filing, Murphy estimated about $19 million of additional 2011 tax expense, mainly from remeasuring U.K. deferred tax liabilities.
- Murphy had $500.7 million of capitalized exploratory well costs pending proved-reserve determinations, including $368.1 million capitalized for more than one year. A substantial portion of the aged balance was in Malaysia and the U.S.; project evaluation and planned drilling or development work remain relevant to recoverability.
- Commodity and foreign-exchange derivatives were used for risk management, not speculation. The company reported derivative losses in the quarter overall, while foreign-exchange gains partly offset commodity losses. Environmental, routine legal, and Superfund exposures were described as not expected to have a material adverse effect; a decision remained pending on insurance indemnity for the 2003 Meraux refinery fire. Guarantees and letters of credit totaled $7.8 million and $72.4 million, respectively, and were not accrued as drawdown was considered remote.
Important facts for investors to verify
- Whether the production recovery assumed in Q2 and the 200,000-barrel-per-day full-year target was achieved, particularly as Tupper West ramps up and Kikeh workovers progress.
- How much of the earnings increase reflects higher commodity prices and unusual comparison effects, versus durable operating improvement; confirm the effect of the prior-year refinery turnarounds.
- Cash conversion and working-capital trends, including receivables, capital spending, and the distinction between cash and Canadian government securities.
- Progress, timing, and proceeds from the planned downstream divestitures, and when the assets meet held-for-sale and discontinued-operations accounting criteria.
- Final enactment and financial-statement impact of the U.K. tax increase, and subsequent developments in aged exploratory costs, environmental matters, and the Meraux insurance arbitration.