Murphy Oil Corporation — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filed February 26, 2010. This annual filing covers a global oil and gas exploration and production business and refining and marketing operations in North America and the United Kingdom. Amounts below are U.S. dollars unless stated otherwise.
Financial and operating performance
| Metric | 2009 | 2008 |
|---|---|---|
| Sales and other operating revenues | $18.92 billion | $27.36 billion |
| Income from continuing operations | $740.5 million | $1.745 billion |
| Net income | $837.6 million | $1.740 billion |
| Diluted earnings per share | $4.35 | $9.06 |
| Cash provided by operating activities | $1.865 billion | $3.040 billion |
| Capital expenditures | $2.207 billion | $2.365 billion |
| Working capital / current ratio | $1.194 billion / 1.55 | $958.8 million / 1.51 |
| Long-term debt | $1.353 billion | $1.026 billion |
| Stockholders’ equity | $7.346 billion | $6.279 billion |
- Revenue fell about 31%, and net income fell about 52%. Management attributed the decline to weaker oil and natural gas prices and lower refining and marketing margins.
- Average realized crude oil price from continuing operations was $56.41 per barrel, down 37%; North American natural gas averaged $3.57 per thousand cubic feet, down 63%.
- Exploration and production income was $691.8 million, versus $1.603 billion in 2008. Refining and marketing income was $71.7 million, versus $313.8 million. Within refining and marketing, North America earned $92.2 million and the U.K. recorded a $20.5 million loss.
- North American and U.K. refining and marketing unit margins averaged $2.45 and $0.50 per barrel, respectively, compared with $4.30 per barrel in each region in 2008.
- Oil and gas production rose: crude oil, condensate and natural gas liquids averaged 131,839 barrels per day, up 11%; total production averaged 163,050 barrels of oil equivalent per day, up 28%. Natural gas sales averaged 187.3 million cubic feet per day, up 237%.
- At year-end, proved reserves were 183.9 million barrels of oil, 129.5 million barrels of synthetic oil and 754.6 billion cubic feet of natural gas. Synthetic oil reserves were included for the first time under revised SEC rules, so reserve comparisons with prior years are affected by a reporting change.
- Operating cash flow declined about 39%. Capital spending exceeded operating cash flow by approximately $343 million, using the simple difference between reported cash flow and total capital expenditures.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $301.1 million; Canadian government securities with maturities over 90 days totaled $779.0 million. Working capital was $1.194 billion.
- Long-term debt increased $327 million during 2009; long-term debt was 15.6% of capital employed. The company had $625 million drawn on its $1.963 billion committed credit facility and $47 million borrowed under uncommitted lines. The committed facility expires in 2012.
- Management said it expected to fund the 2010 program primarily from operating cash flow, with little or no borrowing planned, but noted weaker prices or refining margins could require borrowing.
- Cash dividends were $190.8 million, or $1.00 per share for the year. The annualized dividend had been increased to $1.00 per share in the third quarter of 2008.
Material changes and unusual items
- Federal royalty recovery: The company recognized $244.4 million of income and $42.0 million of related interest for anticipated recovery of Gulf of Mexico federal royalties. The royalty amount was collected on February 25, 2010. This item supported E&P results and increased receivables and working-capital use in 2009.
- Terra Nova interest redetermination: Murphy recorded an $83.5 million expense, anticipating its working interest will fall from 12.0% to about 10.5%. Arbitration remained pending; a cash settlement for past production is expected when interests are finalized. Management expected resolution by the end of 2010 but could not predict the outcome.
- Ecuador sale: The company sold its Ecuador operations in March 2009 for $78.9 million net cash proceeds and recorded a $103.6 million after-tax disposal gain. Ecuador results were reported as discontinued operations.
- Insurance recoveries: 2009 included benefits from final settlements related to Hurricane Katrina damage and a 2003 refinery fire/spill. The filing reports $32.6 million of pretax benefits in U.S. refining and marketing from insurance proceeds and related settlements.
- Acquisition: Murphy acquired a North Dakota ethanol plant for $92 million, financed primarily with $82 million of nonrecourse seller debt due in 2014.
- The effective consolidated tax rate increased to 42.0% from 38.1%, partly reflecting the geographic mix of earnings and foreign exploration expenses for which tax benefits were not recognized.
Outlook, risks and contingencies
- Management forecast 2010 production of slightly more than 200,000 barrels of oil equivalent per day, mainly from full-year production at fields started in 2009 and ramp-ups in Malaysia and Western Canada. Achieving the forecast depended on production reliability and expected ramp-ups.
- 2010 capital expenditures were projected at approximately $2.4 billion, including about $2.0 billion for E&P. Management said spending could be adjusted to actual cash flow. It also reported that early-2010 North American gas prices and refining margins were below budget assumptions.
- Early-2010 refining and marketing margins were described as very weak, with U.S. and U.K. operations showing operating losses in January. Commodity-price volatility is a central risk; Murphy generally did not hedge a significant portion of its commodity exposure.
- Other principal risks include reserve-estimation uncertainty and replacement needs; exploration dry holes; operating hazards, hurricanes and other severe weather; environmental regulation and remediation; political, fiscal and contract risks in foreign jurisdictions; third-party-operated assets; and availability of financing.
- Terra Nova arbitration is a material unresolved contingency. The company also cited pending insurance arbitration concerning the 2003 Meraux refinery fire. Management did not expect the other disclosed legal and environmental matters, including its status as a de minimis party at two Superfund sites, to materially affect financial condition or liquidity.
- Environmental compliance capital expenditures were $109.2 million in 2009 and projected at $146.9 million for 2010. The company was negotiating with the EPA on refinery compliance matters and expected to conclude those negotiations in 2010; potential costs and penalties were not yet clear.
- About 23% of proved reserves were undeveloped. The company expected to spend about $589 million in 2010 to convert proved undeveloped reserves to developed reserves. Some projects require extended development timelines.
Important facts for investors to verify
- Whether the $286.4 million federal royalty and interest recovery was fully collected and whether further related recoveries or adjustments arose.
- The final Terra Nova working-interest determination, arbitration outcome and settlement amount versus the $83.5 million accrual.
- Whether 2010 production, project ramp-ups and the approximately $2.4 billion capital program were achieved within cash-flow and borrowing expectations.
- How much of the 2009 earnings decline reflected recurring commodity and refining economics versus the royalty recovery, Ecuador disposal gain and insurance settlements.
- Reserve revisions and development progress, considering the first-time inclusion of Syncrude synthetic oil reserves under the new SEC rules and the substantial undeveloped gas reserve position.
- Refining margin recovery, environmental compliance costs and any outcomes from EPA negotiations or pending insurance matters.