MURPHY OIL CORP quarterly report, Q3 FY2020

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Murphy Oil Corporation — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. Murphy Oil explores for and produces oil and natural gas, primarily in the U.S. and Canada. The filing compares continuing operations with 2019; prior-year net income included substantial gains from discontinued operations, including the Malaysian business divestiture.

Financial and operating results

  • Revenue: Q3 customer sales were $425.3 million versus $750.3 million in Q3 2019; nine-month sales were $1.312 billion versus $2.060 billion. Including crude-contract gains/losses and other income, total revenue and other income was $421.9 million in Q3 and $1.637 billion for nine months.
  • Profit/loss: Q3 continuing-operations loss was $265.8 million, compared with income of $158.3 million a year earlier. Nine-month continuing-operations loss was $1.093 billion, versus income of $280.1 million. Net loss attributable to Murphy was $243.6 million for Q3 and $976.8 million for nine months. Diluted loss per share was $1.59 and $6.36, respectively.
  • Impairments and restructuring: The company recorded $1.206 billion of noncash impairment charges in the first nine months, principally on U.S. properties, due to lower forecast commodity prices; Q3 charges were $219.1 million. Restructuring expenses were $46.4 million for nine months, including severance, pension/termination benefits, contract exit costs and other items.
  • Cash flow and investment: Continuing-operations operating cash flow was $578.0 million for nine months, down from $1.153 billion. Investing activities used $723.7 million. Accrual-basis capital expenditures were $680.3 million, including $80.7 million for the King’s Quay FPS project.
  • Margins and non-GAAP measures: The filing reports operating losses of $278.1 million in Q3 and $1.207 billion for nine months. Adjusted EBITDA attributable to Murphy, a non-GAAP measure, was $249.4 million in Q3 and $661.1 million for nine months; adjusted EBITDA per barrel sold was $17.61 and $14.22, respectively.
  • Production and prices: Q3 continuing-operations production averaged 162,824 BOE per day, down 20% year over year; nine-month production averaged 180,443 BOE per day. Worldwide crude oil and condensate prices averaged $39.79 per barrel in Q3 and $36.88 for nine months, down 33% and 39% year over year, respectively.
  • Debt and liquidity: Long-term debt was $2.987 billion at September 30, up from $2.803 billion at year-end 2019. Cash was $219.6 million. The $1.6 billion revolving credit facility had $200 million drawn and $1.396 billion available, net of letters of credit; the company reported covenant compliance. Working capital, excluding assets and liabilities held for sale, was $30.0 million.
  • Dividends: The quarterly dividend was reduced 50% effective Q2 2020; cash dividends paid in the first nine months totaled $76.8 million, versus $125.4 million a year earlier.

Material changes versus 2019

  • Lower oil prices, lower Eagle Ford production following reduced capital spending, and Gulf of Mexico hurricane-related shut-ins reduced revenue and production in Q3. Q3 crude oil and condensate production averaged 95,391 barrels per day versus 122,950 a year earlier.
  • Nine-month results were heavily affected by the impairment charge and lower sales revenue. Operating cash flow also fell substantially, partly offset by $194.0 million of higher cash receipts on forward crude contracts.
  • 2019 comparisons include the Malaysian divestiture and related discontinued-operations income: discontinued operations contributed $953.4 million in Q3 2019 and $1.028 billion for the first nine months of 2019. No comparable divestiture gain was recorded in 2020.
  • Capital expenditures fell from $2.329 billion in the first nine months of 2019, which included the LLOG acquisition, to $680.3 million in 2020. Debt increased through net revolver borrowings.

Outlook, commentary and risks

  • Management expected Q4 2020 production of 146,000–154,000 BOE per day, excluding noncontrolling interest. It said further production curtailments could be considered if price volatility persisted.
  • The 2020 capital-spending plan was reduced from an original $1.4–$1.5 billion to $680–$720 million, excluding noncontrolling interest. Management expected to fund the remaining program primarily with operating cash flow, supplementing it with revolver borrowings if needed.
  • Management cited COVID-19-related demand weakness, commodity-price volatility, supply decisions by major producers, and hurricane and storm disruptions. Lower prices could reduce cash flow, economic production and asset values and could lead to further impairments.
  • At November 4, 2020, management cited WTI forward prices of $39.15 per barrel for the remainder of 2020 and $41.06 for 2021. At September 30, the company had WTI swaps covering 45,000 barrels per day through December 2020 at $56.42 and 18,000 barrels per day for 2021 at $43.31, plus fixed-price Canadian natural gas sales contracts.
  • The company closed its El Dorado, Arkansas and Calgary offices and consolidated staff in Houston. The office building and two airplanes were classified as held for sale; one airplane was sold after quarter-end.
  • Environmental and other legal matters were described as routine or not expected, based on currently available information, to materially affect financial condition, earnings or liquidity. The company disclosed retained potential Malaysian tax and other liabilities and rights to tax receivables relating to pre-2019 periods.

Important facts for investors to verify

  • Whether commodity prices, production volumes and operating cash flow recover, and how much the company may curtail production.
  • Whether the reduced capital budget is sufficient to execute key projects, including King’s Quay, and whether the expected third-party refund for King’s Quay is realized.
  • The assumptions behind the $1.206 billion impairment and whether further price declines could trigger additional write-downs.
  • Debt levels, revolver availability, covenant headroom and the company’s ability to fund operations and capital spending under weaker-price scenarios.
  • Realized cash effects and remaining obligations from hedges, restructuring, contingent consideration and retained liabilities related to divested operations.