Murphy Oil Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Amounts are U.S. dollars unless stated otherwise. Murphy is an international oil and gas producer operating in the United States, Canada and Malaysia.
Financial performance and position
- Revenue: Sales and other operating revenues were $544.7 million, up from $429.1 million a year earlier. Total revenues were $664.6 million, including a $132.0 million gain on asset sales; interest and other income was a $12.0 million loss.
- Profit: Net income was $58.5 million ($0.34 diluted EPS), versus a net loss of $198.8 million ($1.16 diluted loss per share) in Q1 2016. Continuing-operations income was $57.5 million. The effective tax rate was 62.9%, including a $54.6 million deferred tax charge related to the expected repatriation of Canadian and Malaysian earnings.
- Cash flow and investment: Cash from continuing operating activities was $305.5 million, compared with $43.3 million. Cash property additions and dry-hole costs were $211.6 million; accrual-basis capital expenditures were $214.5 million. Cash dividends were $43.1 million.
- Margins: The filing does not provide a single consolidated operating-margin measure. Lease operating expense declined to $122.1 million from $159.1 million; depreciation, depletion and amortization declined to $236.2 million from $286.1 million.
- Debt and liquidity: Long-term debt was $2.422 billion, with $562.4 million of current maturities, for total reported debt of about $2.984 billion. Cash and cash equivalents were $875.9 million; Canadian government securities were $211.5 million. Working capital was $141.2 million. The $1.1 billion credit facility had no borrowings and $171.9 million of letters of credit outstanding; the company reported compliance with facility covenants.
- Production: Total production averaged 169,224 barrels of oil equivalent per day, down 13.9% from 196,568. Oil and condensate production averaged 95,604 barrels per day; natural gas sales averaged 388 million cubic feet per day.
Material changes versus Q1 2016
- Higher realized oil and gas prices, lower operating and selling costs, and the Seal field sale contributed to the return to profitability. Worldwide realized crude oil and condensate prices averaged $50.10 per barrel versus $34.19.
- Exploration and production income improved to $175.1 million from a loss of $156.8 million. Results by region were: United States income of $23.0 million versus a $65.6 million loss; Canada income of $100.6 million versus an $87.3 million loss; and Malaysia income of $58.6 million versus $22.3 million.
- Q1 2016 included $95.1 million of property impairment charges; none were recorded in Q1 2017. Production volumes were lower, primarily due to declines and reduced prior-period drilling, as well as the sale of Canadian properties.
- Corporate costs increased to $117.6 million from $42.7 million, reflecting the foreign-earnings tax charge, foreign-exchange losses and higher net interest costs, partly offset by lower administrative expenses.
Outlook, commentary and risks
- Management forecast Q2 2017 production of 160,000–164,000 barrels of oil equivalent per day and full-year 2017 capital expenditures of approximately $890 million.
- The company expected to fund its 2017 capital program primarily from operating cash flow, with credit-facility borrowings available if needed. Its projections included repayment of $550 million of 2.5% notes due December 2017. Weaker commodity prices could reduce cash flow and require lower spending or additional borrowing.
- As of May 2, 2017, Murphy reported 2017 oil swaps covering 22,000 barrels per day at an average $50.41 per barrel, and Canadian natural gas sales contracts covering 124 million cubic feet per day at C$2.97 per thousand cubic feet through December 2017. Additional contracts cover 59 million cubic feet per day at C$2.81 through 2020.
- The Seal field sale generated approximately $49.0 million cash proceeds and transferred about $85.9 million of asset retirement obligations; the company reported a $132.4 million pretax gain. Murphy retained responsibility for remediation of a prior pipeline leak at the field. The accrued liability was $7.1 million, and ultimate remediation costs could exceed the recorded amount.
- The Kakap field working-interest reduction took effect April 1, 2017. The company expected a Q2 cash settlement related to the redetermination; the final adjustment could differ from its estimate. A subsequent-event disclosure estimated a $56.7 million reduction in recorded debt and property, plant and equipment from lower lease obligations.
- Management said routine legal and environmental matters were not expected to have a material adverse effect, while noting regulatory, commodity-price, foreign-exchange, operational and environmental risks. The filing identifies no additional risk factors beyond those in the 2016 Form 10-K.
Important facts for investors to verify
- Whether production and operating cash flow meet management’s expectations, given the year-over-year production decline and commodity-price sensitivity.
- Funding plans and liquidity for the $550 million note repayment, the $890 million capital program, and the June 2017 expiration of the separate $630 million revolving facility.
- The extent of additional deferred tax charges expected in 2017 from foreign earnings and the cash-tax consequences of repatriation.
- Final Seal leak remediation costs and any insurance recoveries, plus the amount and timing of the Kakap redetermination settlement and lease-related balance-sheet adjustment.
- Execution and economic effect of the disclosed oil and gas hedges and forward sales, including exposure to changes in benchmark prices.