Murphy Oil Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are included where disclosed. Murphy is now focused on oil and gas exploration and production, with producing operations principally in the United States, Canada and Malaysia.
Key financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Sales and other operating revenue | $1.810 billion | $2.787 billion |
| Total revenue | $1.874 billion | $3.033 billion |
| Net loss | $276.0 million; diluted EPS $(1.60) | $2.271 billion; diluted EPS $(13.03) |
| Cash from continuing operating activities | $600.8 million | $1.183 billion |
| Capital expenditures, continuing operations | $811.5 million | $2.187 billion |
| Production | About 175,700 boe/day | About 207,900 boe/day |
| Cash and cash equivalents at year-end | $872.8 million | $283.2 million |
| Working capital | $56.8 million | $(277.4) million |
| Total debt, including current maturities | $2.993 billion | $3.059 billion |
| Long-term debt as a share of capital employed | 33.0% | 36.4% |
| Common dividend per share | $1.20 | $1.40 |
Revenue fell about 35% year over year. Worldwide crude oil and condensate production averaged 103,400 barrels/day, down 18%; natural gas liquids averaged 9,200 barrels/day, down 10%; and natural gas sales averaged 378 million cubic feet/day, down 12%. The filing does not provide a single comparable consolidated operating-margin figure.
Fourth-quarter 2016 sales and other operating revenue was $483.0 million, continuing-operations loss was $62.8 million, net loss was $63.9 million, and diluted net loss per share was $0.37.
Material changes versus prior periods
- The net loss narrowed substantially from 2015, largely because asset impairment expense fell to $95.1 million from $2.493 billion. The 2016 loss nevertheless reflected low realized prices, reduced sales volumes, interest costs, and a $39.1 million pretax Kakap-Gumusut redetermination expense.
- Oil and gas sales volumes declined as capital spending was sharply reduced and Murphy sold its Syncrude interest. The company also reported natural field declines and production interruptions in some areas.
- Continuing operating cash flow fell by $582.6 million to $600.8 million, primarily due to weaker prices and lower volumes, partly offset by lower operating costs. Cash flow also included $266.6 million of payments related to Gulf of Mexico rig contract exits.
- Capital expenditures declined about 63% to $811.5 million. Lease operating expense per boe, excluding synthetic oil operations, was reported down year over year; selling and general expense fell about 14%.
- Non-core asset dispositions generated about $1.2 billion of cash, including $739.1 million from the Syncrude sale and $414.1 million from the sale of Tupper-area gas processing and pipeline assets. Murphy acquired Canadian Kaybob Duvernay and Placid Montney interests.
- Proved reserves ended the year at 684.5 million boe, down 89.5 million boe. The Syncrude sale removed 113.2 million boe, partly offset by additions, including Canadian acquisitions. Proved undeveloped reserves were 341.1 million boe, about half of total proved reserves.
Outlook, risks and unusual items
- Management forecast 2017 production of 162,000–168,000 boe/day and a capital budget of $890 million, based on assumed WTI of $52/barrel and Henry Hub gas of $3.10 per MCF. The company said spending could be reduced or borrowing increased if prices or cash flow weaken.
- About 65% of 2017 capital was allocated to onshore unconventional operations, primarily Eagle Ford and Kaybob Duvernay. The company expected to repay $550 million of 2.5% notes due in December 2017.
- Year-end total debt included $569.8 million of current maturities. Murphy had no borrowings under its $1.1 billion 2016 revolving facility, but had $88 million of letters of credit outstanding; its separate $630 million 2011 facility was due to expire in June 2017. The company anticipated it might need to borrow during 2017 and was in compliance with facility covenants at year-end.
- Moody’s and Fitch downgraded Murphy’s debt to below investment grade in 2016. The downgrade raised the coupon on certain notes by one percentage point and may increase financing costs or collateral requirements. The company’s earnings were insufficient to cover fixed charges by $477 million in 2016.
- At year-end, Murphy had hedged approximately 22,000 barrels/day of 2017 U.S. oil production at an average $50.41/barrel, and 124 million cubic feet/day of 2017 Canadian gas at C$2.97/MCF. These hedges limit exposure to price declines and potential benefit from price rises.
- In February 2017, PETRONAS approved a reduction in Murphy’s Kakap oil working interest to 6.67%, effective April 1, 2017. Murphy expected an additional approximately $10 million pretax redetermination expense and a production reduction of about 2,300 barrels/day for 2017.
- The Seal field sale closed in January 2017 for approximately $49 million net proceeds; Murphy expected a $132.4 million pretax gain in first-quarter 2017. A condensate pipeline leak at Seal remains under remediation: $43.9 million was accrued in 2015 and $35.3 million had been spent through 2016; the final cost is not yet established and could exceed the recorded liability.
- An Ecuador arbitration panel awarded Murphy $31.3 million on February 10, 2017. Other routine legal proceedings were not expected by management to have a material adverse effect.
- Key risks include volatile oil and gas prices, reserve and production declines, exploration outcomes, impairment and reserve-estimation uncertainty, environmental and decommissioning obligations, offshore operating hazards, regulation, foreign exchange, and access to financing. The filing also notes that 50% of proved reserves were undeveloped and some projects require extended development periods.
Important facts for investors to verify
- Whether operating cash flow and asset-sale proceeds are sufficient to fund the 2017 capital plan and the $550 million note maturity, while maintaining covenant compliance and liquidity.
- Actual 2017 production versus the 162,000–168,000 boe/day forecast, particularly the effects of natural declines, asset sales and the Kakap interest change.
- Commodity-price assumptions behind the reserve estimates and the potential for further impairments or revisions to proved and undeveloped reserves.
- The final Seal pipeline remediation cost, any insurance recoveries or regulatory penalties, and the realized financial impact of the Seal sale.
- Whether planned capital spending, project execution and development timing support conversion of undeveloped reserves to production and cash flow.