Murphy Oil Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Financial statements are unaudited, except the December 31, 2008 balance sheet. Dollar amounts below are in millions unless noted.
Business context and results
Murphy operates in exploration and production (E&P) and refining and marketing. Second-quarter results fell sharply from 2008, principally because oil and gas prices were lower and U.K. refining earnings weakened. The six-month comparison also reflects the March 2009 sale of the Ecuador operations.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenues | $4,555.8 | $8,344.2 | $8,001.4 | $14,853.7 |
| Income from continuing operations | $160.8 | $618.5 | $232.1 | $1,026.7 |
| Net income, including discontinued operations | $158.8 | $619.2 | $329.9 | $1,028.2 |
| Diluted EPS | $0.83 | $3.22 | $1.72 | $5.36 |
| Operating cash flow | Not presented separately | Not presented separately | $512.5 | $1,508.6 |
- Q2 E&P earnings were $118.3 million versus $576.5 million; refining and marketing earned $27.8 million versus $77.3 million. Corporate activities produced a $14.8 million benefit versus $35.3 million of costs.
- H1 E&P earnings were $168.6 million versus $1,003.7 million; refining and marketing earned $38.6 million versus $87.5 million. Corporate activities produced a $24.9 million benefit versus $64.5 million of costs.
- Worldwide crude oil, condensate and liquids realized prices averaged $53.55 per barrel in Q2, versus $115.35; the six-month average was $47.09 versus $101.65. North American natural gas prices averaged $3.25 per Mcf in Q2, versus $11.70.
- Q2 liquids production averaged 118,145 barrels per day, up from 111,493; H1 averaged 128,673, up from 112,416. Natural gas sold averaged 147 million cubic feet per day in Q2 and 129 million in H1, compared with 55 million and 62 million, respectively.
- No consolidated profit-margin percentage is clearly provided in the filing text.
Cash flow, liquidity and capital
- H1 operating cash flow was $512.5 million. Continuing-operations capital expenditures were $1,028.9 million; property additions and dry-hole costs in the cash-flow statement were $1,004.9 million. Cash and cash equivalents declined by $159.0 million to $507.1 million.
- At June 30, cash plus Canadian government securities with maturities over 90 days totaled about $1,091.8 million. Working capital was $1,283.2 million, up $324.4 million from year-end; management cautioned that LIFO inventory costs were $525.4 million below fair value.
- Notes payable increased $505.1 million from year-end to $1,531.3 million. Stockholders’ equity was $6,637.6 million; notes payable represented 18.7% of capital employed, versus 14.0% at year-end. Current maturities of long-term debt were nil.
- Cash dividends paid in H1 were $95.3 million. The annualized dividend rate had increased from $0.75 to $1.00 per share beginning in Q3 2008. The six-month ratio of earnings to fixed charges was 11.7 to 1.
Material changes and unusual items
- The Ecuador operations were sold in March for $78.9 million net cash proceeds; the buyer assumed certain liabilities. The sale generated a $103.6 million after-tax gain, reported in discontinued operations. The sold properties had produced approximately 6,700 net barrels per day.
- A $35.1 million pretax ($24.7 million after-tax) charge reflected an anticipated Terra Nova working-interest reduction from 12.0% to 11.5%. The final redetermination is subject to arbitration, expected to conclude in 2010, and could reduce Murphy’s interest further.
- Insurance settlements related to past Meraux refinery fire and hurricane damage produced $21.9 million pretax ($13.4 million after tax) of Q2 gains. The 2008 comparative periods included asset-sale gains, including the Lloydminster sale and, for H1, Berkana.
- H1 results included a $20.6 million net loss on derivative instruments not designated as hedges: a $24.9 million commodity loss partly offset by a $4.3 million foreign-exchange gain. Derivatives are described as risk-management instruments, not speculative positions.
- Pension and postretirement benefit expense rose, primarily reflecting lower pension asset values; H1 also included early-retirement termination and curtailment expense.
Outlook, risks and contingencies
- Management expected Q3 2009 production to average about 169,000 barrels of oil equivalent per day and full-year capital expenditures of approximately $2.1 billion. Oil prices improved slightly in July versus Q2; U.S. downstream margins improved, while U.K. margins weakened considerably.
- Key stated risks include oil and gas price volatility, exploration success and reserve replacement, production levels, political and regulatory instability, and natural hazards. The filing says no additional risk factors were identified beyond those in the 2008 Form 10-K.
- Environmental and legal matters include remaining claims and insurance proceedings related to the Meraux refinery incidents. Management did not expect these or routine litigation to materially affect results, financial condition or liquidity. One insurer’s coverage arbitration over the 2005 oil spill was pending; a separate insurer indemnity hearing concerning the 2003 refinery fire was scheduled for September 2009.
- At June 30, contingent obligations included a $7.8 million financial guarantee and $132.5 million in letters of credit; no liability was accrued because management considered a draw remote. The company was a potentially responsible party at two Superfund sites and considered its expected share immaterial.
- Exploratory well costs pending proved-reserve determinations totaled $375.1 million, including $281.7 million capitalized for more than one year. Management described ongoing appraisal, development or evaluation work in the listed locations.
Important facts for investors to verify
- Whether the expected Terra Nova interest and settlement are confirmed by arbitration, and the resulting cash and earnings impact.
- Whether production, realized prices and the stated Q3 production outlook develop as expected, particularly in Malaysia, Canada and natural gas.
- Whether the $2.1 billion full-year capital plan and current borrowing levels remain consistent with operating cash generation and liquidity.
- Whether Meraux insurance recoveries and remaining legal proceedings resolve on the company’s expected terms.
- Progress and reserve outcomes for the $375.1 million of capitalized exploratory well costs, especially the costs aged over one year.