Murphy Oil Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Murphy Oil is an international oil and gas producer operating primarily in the United States, Canada and Malaysia, with exploration interests elsewhere. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $674.8 million | $498.3 million | $1,878.6 million | $1,683.2 million |
| Operating income from continuing operations | $210.8 million | $38.1 million | $479.9 million | $314.2 million |
| Net income (loss) | $93.9 million | $(65.9) million | $307.7 million | $(25.0) million |
| Diluted EPS | $0.54 | $(0.38) | $1.77 | $(0.14) |
| Operating cash flow from continuing operations | — | $996.9 million | $818.8 million |
Q3 operating margin was approximately 31% versus 8% a year earlier; nine-month operating margin was approximately 26% versus 19%. Nine-month customer sales revenue increased to $1,921.9 million from $1,498.1 million, while total reported revenue growth was more modest partly because 2017 included a $130.8 million asset-sale gain.
- Production and prices: Q3 production averaged 168,776 BOE/day, up 10% year over year; nine-month production averaged 169,095 BOE/day, up 4%. Q3 realized crude oil and condensate price averaged $69.39/barrel versus $49.31; nine-month average was $67.01 versus $49.04.
- Cash investment and dividends: Nine-month cash flow from continuing operations was $996.9 million; cash property additions and dry-hole costs were $858.4 million. Accrual-basis capital expenditures were $893.0 million, versus $701.6 million in 2017. Dividends paid were $129.8 million; the quarterly dividend was $0.25 per share.
- Debt and liquidity: September 30 cash was $947.7 million. Current and long-term debt totaled approximately $2.914 billion, implying net debt of about $1.97 billion. Working capital was $505.8 million. The $1.1 billion credit facility had no borrowings and $28.0 million of letters of credit outstanding; the company reported compliance with its covenants.
- Balance sheet: Total assets were $10.027 billion and stockholders’ equity was $4.767 billion at September 30, 2018.
Material changes versus the prior comparable period
- Quarterly earnings improved to net income of $93.9 million from a $65.9 million loss. Higher oil prices, increased production and lower corporate losses contributed; U.S. E&P earnings turned positive. Malaysia earnings declined year over year, reflecting lower sales volumes, higher operating expense and an $11.3 million redetermination/unitization charge.
- Nine-month net income improved to $307.7 million from a $25.0 million loss. The 2018 period included a $120.0 million tax benefit tied to IRS guidance on the Tax Act. The 2017 period included a $132.4 million pretax gain on the Seal asset sale and a $65.2 million deferred tax charge related to anticipated repatriation of foreign earnings.
- Nine-month operating cash flow rose from $818.8 million to $996.9 million, while cash capital spending increased. Cash declined by $17.3 million from year-end to $947.7 million.
- Crude oil hedge losses were $69.3 million for the first nine months of 2018, compared with gains of $50.4 million in 2017.
Outlook, commentary, risks and unusual items
- Management expected Q4 2018 production of 167,000–169,000 BOE/day and full-year capital expenditures of approximately $1.18 billion. It expected to fund the remaining program primarily with operating cash flow, supplemented by cash or credit if needed.
- At the end of October, worldwide crude prices had fallen from the Q3 average, while North American natural gas prices were about 12% higher. Management cautioned that weaker prices could reduce cash flow and require lower capital spending or additional borrowing.
- Hedges at September 30 included 21,000 barrels/day of U.S. crude oil swaps for the remainder of 2018 at an average $54.88/barrel, and Canadian gas forward sales of 59 MMcf/day through 2020 at C$2.81/Mcf.
- Subsequent event: Murphy announced a planned Gulf of Mexico joint venture with Petrobras, effective October 1 and expected to close by year-end. Murphy would own 80%, operate the venture and pay $900 million, subject to adjustments. Petrobras could receive up to $150 million of contingent consideration; Murphy also agreed to carry $50 million of Petrobras costs at St. Malo if specified enhanced-recovery projects proceed. Funding was expected from cash and the credit facility. A related credit amendment would provide covenant relief and greater flexibility upon closing.
- Q3 unusual items included $26.0 million of Ecuador arbitration settlement income, approximately $10 million of Seal insurance income and $16.0 million of Brunei working-interest income, partly offset by the $11.3 million Malaysian redetermination expense. The Brunei participation agreement also requires Murphy to settle its share of past operating and capital costs.
- Environmental exposure includes ongoing remediation of the Seal pipeline leak. The recorded remaining liability was $4.7 million; $43.1 million had been spent through September 30, and further cost estimates and insurance claims remained uncertain. Management did not expect known or unidentified remediation costs or routine legal matters to materially affect results, cash flows or liquidity.
- Key broader risks include commodity-price volatility, production and exploration results, foreign exchange, political and regulatory developments, environmental requirements, and access to capital markets. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Petrobras joint venture closed on the expected terms and how its $900 million payment, contingent consideration and cost carry affect debt, liquidity and production.
- The composition and sustainability of reported earnings, particularly the $120.0 million tax benefit and Q3 settlement, insurance and Brunei items.
- Whether production and capital spending track management’s Q4 and full-year expectations, and how weaker oil prices affect cash generation and spending plans.
- The timing and final cost of Seal leak remediation, and the outcome of related insurance claims.
- The scale and commercial resolution of $210.8 million in capitalized exploratory well costs pending proved-reserve determinations, including $164.0 million aged more than one year.