Murphy Oil Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Figures below are in U.S. dollars; financial statements are unaudited except where noted. Murphy Oil reported exploration and production (E&P), refining and marketing, and corporate activities. U.K. oil and gas operations were reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Sales and other operating revenue | $6.648 billion | $6.954 billion |
| Income from continuing operations | $208.0 million | $281.4 million |
| Discontinued-operations income | $152.6 million | $8.6 million |
| Net income | $360.6 million; $1.88 diluted EPS | $290.1 million; $1.49 diluted EPS |
| Operating cash flow | $921.1 million | $991.0 million |
| Capital expenditures, continuing operations | $1.040 billion | $731.3 million |
| Cash and cash equivalents | $1.117 billion | $947.3 million at Dec. 31, 2012 |
| Canadian government securities with maturities over 90 days | $215.5 million | $115.6 million at Dec. 31, 2012 |
| Long-term debt | $2.507 billion | $2.245 billion at Dec. 31, 2012 |
| Working capital | $826.7 million | Up $127.2 million from Dec. 31, 2012 |
- Continuing-operations pretax income was $403.4 million, down from $465.6 million. The effective tax rate rose to 48.4% from 39.6%; management cited foreign-jurisdiction and state taxes and expenses without recognized tax benefits.
- Net income increased despite lower continuing earnings, primarily because Q1 2013 included a $147.4 million after-tax gain on the sale of two U.K. oil and gas properties.
- Operating cash flow was below continuing-operations capital expenditures. Property additions and dry-hole costs used $1.035 billion in cash; operating working capital provided $211.5 million.
- Current assets totaled $4.099 billion and current liabilities $3.272 billion. Working capital does not fully reflect inventory economics: LIFO carrying values were $623.7 million below FIFO values at quarter-end.
- Murphy had a $1.5 billion committed credit facility expiring June 2016. Debt was 21.5% of capital employed at quarter-end, compared with 20.1% at year-end.
Material changes and operating performance
- Continuing income fell 26% year over year. E&P income declined to $231.9 million from $313.0 million, while refining and marketing improved to $25.3 million from a $4.2 million loss. Corporate after-tax costs increased to $49.2 million from $27.3 million.
- Worldwide hydrocarbon production averaged 201,876 barrels of oil equivalent per day, up from 195,096. Crude oil and liquids production rose 18% to 126,888 barrels per day, supported chiefly by Eagle Ford development. Natural gas sales volumes declined 14% to about 450 million cubic feet per day, mainly due to lower Canadian production and planned Sarawak maintenance.
- Average worldwide crude oil and liquids sales prices were $96.00 per barrel, versus $97.78. Canadian heavy-oil prices fell to $28.04 per barrel from $51.14; North American natural gas prices improved.
- U.S. downstream income improved to $29.4 million, with retail fuel margins of $0.110 per gallon versus $0.071. U.K. downstream recorded a $4.1 million loss, compared with $3.0 million income, amid weaker refining margins and scheduled Milford Haven maintenance.
- Foreign-currency translation reduced other comprehensive income by $117.8 million, contributing to comprehensive income of $246.1 million, down from $378.0 million.
Outlook, risks and unusual items
- Management expected Q2 2013 production to average about 202,000 barrels of oil equivalent per day and forecast full-year 2013 capital expenditures of approximately $4.4 billion. The capital program was expected to be funded mainly by operating cash flow, with borrowing as needed.
- The 2013 budget assumed up to $1.0 billion of share repurchases. A $250 million accelerated repurchase was underway; 3,867,550 minimum shares had been delivered by March 31, with completion expected in May. The filing’s quarterly issuer-purchase table reported no other shares purchased during Q1.
- Management expected the separation of U.S. retail marketing into a standalone public company during 2013 and continued pursuing a sale of U.K. downstream assets. The separation was expected to include debt at the retail business and a cash dividend to Murphy. A loss on the U.K. downstream sale was possible; failure to sell on acceptable terms could increase borrowing needs.
- After these changes, Murphy expected materially lower revenue and less business diversification. Management noted possible credit-rating effects and, although not expected, a potential impact on its ability to repay long-term debt. Weaker oil or gas prices could reduce cash flow, require additional borrowing, or lead to impairment of oil-property investments.
- Other risks include exploration outcomes, production and reserve replacement, commodity and currency volatility, political and regulatory instability, and environmental obligations. The filing reported $178.5 million of outstanding letters of credit, not accrued because drawdown was considered remote. Management did not expect known environmental or routine legal matters to have a material adverse effect, but acknowledged possible additional remediation obligations.
- Murphy reported $444.2 million of capitalized exploratory well costs pending proved-reserve determination; $267.7 million had been capitalized for three years or more. The filing describes planned appraisal, development, or drilling activity for the relevant projects.
- Management said April crude prices had weakened and North American gas prices strengthened. Q1 results were not necessarily indicative of future results. No new risk factors beyond those in the 2012 Form 10-K were identified.
Important facts for investors to verify
- Whether the U.S. retail separation and U.K. downstream sale completed as planned, on what terms, and with what cash proceeds, debt allocation, or gain or loss.
- Whether projected $4.4 billion capital spending and share repurchases were funded without materially higher debt, particularly if commodity prices weakened.
- Whether E&P production, realized prices, exploration spending, and capitalized exploratory costs translated into proved reserves and sustainable cash flows.
- How the elevated effective tax rate, foreign cash repatriation costs, and foreign-exchange movements affected subsequent results and liquidity.
- Whether environmental, legal, guarantee, or asset-retirement obligations changed materially after quarter-end.