Murphy Oil Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context and financial results
Murphy operated exploration and production (E&P) and refining and marketing businesses. It completed the sale of its U.K. oil and gas assets during the first half and was pursuing a separation of U.S. retail marketing and a sale of U.K. downstream operations.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $7,217.8 | $7,157.6 | $13,857.8 | $14,114.5 |
| Income from continuing operations | $332.1 | $291.3 | $540.1 | $572.7 |
| Discontinued-operations income | $70.5 | $4.1 | $223.1 | $12.8 |
| Net income | $402.6 | $295.4 | $763.2 | $585.5 |
| Diluted EPS | $2.12 | $1.52 | $4.00 | $3.01 |
- Q2 continuing-operations income improved on higher oil volumes, particularly from Eagle Ford. First-half continuing income declined, mainly from lower oil and Sarawak gas prices and higher exploration, administration and financing costs.
- Q2 E&P income was $290.2 million versus $226.0 million; first-half E&P income was $522.1 million versus $538.9 million. Q2 refining and marketing income was $72.2 million versus $80.5 million; first-half income was $97.5 million versus $76.3 million.
- Worldwide production averaged 207,401 barrels of oil equivalent per day in Q2, up from 188,575; first-half production averaged 204,653, up from 191,836. First-half average crude oil, condensate and gas liquids price fell to $93.57/barrel from $97.21, while natural gas sales volumes fell to 440.6 million cubic feet per day from 516.5.
- Q2 U.S. retail fuel margin was $0.156/gallon versus $0.197; U.K. refining and marketing unit margin was negative $0.27/barrel versus positive $1.26. First-half U.S. ethanol results improved, including higher RIN credit values; U.K. unit margin fell to negative $0.16/barrel from positive $1.03.
- Effective income tax rates were 42.1% for Q2 and 44.7% for the first half, compared with 40.3% and 39.9%, respectively.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $1,669.0 million, compared with $1,347.1 million. Property additions and dry-hole costs used $1,963.6 million; total accrual-basis capital expenditures were $2,072.3 million, versus $1,627.1 million in the prior-year period.
- Cash and cash equivalents were $974.4 million at June 30, 2013; Canadian government securities with maturities over 90 days were $129.9 million. Working capital was $663.4 million.
- Long-term debt was $3,046.1 million, up $800.9 million from year-end 2012; current maturities were $17.6 million. The increase included a $338.6 million Kakap production-equipment capital lease. The company expanded its committed credit facility to $2.0 billion and extended it to June 2017.
- Murphy spent $250 million on treasury-share purchases and paid $119.4 million in dividends in the first half. The quarterly dividend was $0.3125 per share. At June 30, repurchases under the $1.0 billion authorization totaled $500 million.
- Stockholders’ equity was $9,134.2 million. Foreign-currency translation losses reduced accumulated other comprehensive income by $235.0 million in the first half.
Outlook, material changes and risks
- Management expected 2013 production of approximately 203,000 boe/d and Q3 production of about 190,000 boe/d, with anticipated Kikeh downtime for the Siakap tie-in. Full-year capital expenditures were forecast at approximately $4.3 billion.
- The company expected to fund its capital program primarily with operating cash flow, supplemented by borrowing as needed. The 2013 budget assumed further repurchases under the $1.0 billion program. Weaker oil or gas prices, a failed or delayed U.K. downstream sale, or the terms and timing of the U.S. retail separation could increase borrowing needs.
- Management reported stronger oil prices in July but weaker U.S. retail and ethanol margins than Q2 averages. Significantly lower future oil prices could lead to impairment of oil-property investments.
- The planned portfolio changes are significant: U.S. and U.K. downstream businesses generated about 81% of consolidated revenue and employed about 79% of the workforce at June 30. Management noted the reduced scale and diversification could affect Murphy’s credit rating and, although not expected, its ability to repay debt when due.
- U.K. downstream assets could be sold at a loss. The U.S. retail separation remained expected in 2013 and depended on approvals, tax treatment and market conditions. The filing also cites commodity-price, exploration, production, foreign-exchange, political, regulatory and natural-hazard risks.
- Other notable items: the U.K. upstream sale produced $216.2 million of first-half after-tax gains; a $21.6 million impairment was recorded for underperforming Kainai wells; and $444.4 million of exploratory well costs remained capitalized pending proved-reserve determinations. Environmental and routine legal matters were not expected by management to have a material effect. Outstanding letters of credit totaled $112.7 million and were not accrued because drawdown was considered remote.
Most important facts for investors to verify
- Whether Eagle Ford production growth and the projected 2013 production level are achieved, including the effect and timing of Kikeh downtime.
- Whether operating cash flow can support the $4.3 billion capital program, dividends and planned buybacks without materially greater borrowing.
- Progress, proceeds and potential costs of the U.S. retail separation and U.K. downstream sale, including any loss on sale and credit-rating implications.
- Exploration outcomes and reserve determinations for the $444.4 million of capitalized exploratory well costs, particularly the older project balances.
- Developments in commodity prices, regional gas volumes and prices, refining/ethanol margins, foreign-exchange exposure and environmental or tax contingencies.