Murphy Oil Corporation — Q3 2010 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Murphy reported exploration and production (E&P), refining and marketing, and corporate operations. The filing’s financial statements are in thousands of dollars unless otherwise stated; amounts below are shown in millions.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $6,063.8 | $5,183.8 | $16,835.9 | $13,185.2 |
| Income from continuing operations | $202.8 | $188.9 | $624.0 | $421.0 |
| Net income | $202.8 | $188.9 | $624.0 | $518.8 |
| Diluted EPS | $1.05 | $0.98 | $3.24 | $2.70 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $2,200.9 | $1,186.5 |
- Q3 revenue rose about 17% and net income about 7% year over year. Nine-month continuing income rose about 48%; reported net income rose about 20%, while 2009 included $97.8 million of discontinued-operations income, primarily the after-tax gain on the Ecuador sale.
- Q3 E&P income was $186.7 million versus $184.1 million; refining and marketing income was $50.6 million versus $37.2 million. For nine months, E&P income increased to $652.8 million from $352.7 million and refining and marketing income to $104.7 million from $75.8 million.
- Q3 worldwide production averaged 181,733 barrels of oil equivalent per day, up 12%; nine-month production averaged 189,250 boe/d, up 23%. Nine-month crude oil, condensate and liquids production was nearly flat, while natural gas sales volumes increased 140% to 354 million cubic feet per day. Higher prices and gas volumes supported E&P results.
- Downstream performance was mixed. Nine-month U.S. retail marketing income rose to $132.7 million from $58.1 million, while U.S. manufacturing recorded a $3.6 million loss and U.K. refining and marketing a $24.4 million loss. Weaker refining margins and refinery turnaround downtime weighed on results. Q3 U.S. retail fuel margin was 13.7 cents per gallon; U.S. refining margin was $0.23 per barrel and U.K. refining and marketing margin was negative $1.84 per barrel.
- Operating cash flow increased to $2.20 billion from $1.19 billion for nine months. Working-capital changes provided $417.2 million, including a $244.4 million recovery of prior-year U.S. federal Gulf of Mexico royalties; in 2009, working capital used $139.0 million.
- Continuing-operations capital expenditures were $1.76 billion on an accrual basis for nine months, versus $1.62 billion. Cash property additions and dry-hole costs were $1.61 billion. Cash dividends paid were $148.4 million. The annualized dividend rate increased from $1.00 to $1.10 per share effective in Q3.
- At September 30, cash was $462.4 million and Canadian government securities with maturities over 90 days were $630.2 million. Working capital was $705.2 million, down $488.9 million from year-end; current assets were $3.46 billion and current liabilities $2.75 billion. Long-term debt was $1.02 billion, down $328.8 million from year-end; stockholders’ equity was $7.97 billion. Long-term debt represented 11.4% of reported capital employed.
Changes, outlook, risks and unusual items
- Management attributed improved results mainly to higher realized crude oil and natural gas prices and increased gas sales volumes. Nine-month corporate costs rose sharply to $133.5 million from $7.5 million, reflecting foreign-currency transaction losses of $58.8 million versus gains of $42.7 million in 2009, as well as higher interest and administrative expense.
- Management expected Q4 2010 production of about 198,000 boe/d and full-year capital expenditures of approximately $2.6 billion. October WTI averaged over $80 per barrel, around $5 above the Q3 average. Management reported October retail and refinery margins below Q3 levels. No EPS guidance was provided.
- In July, the board approved plans to exit the U.S. refining and U.K. refining and marketing businesses; sale was anticipated in 2011. The filing said these operations were placed for sale, but did not yet report them as discontinued operations. Murphy also bought an unfinished Hereford, Texas, ethanol plant for $40 million and expected operation by the end of Q1 2011.
- Terra Nova working-interest arbitration could reduce Murphy’s share from 12.0% to approximately 10.5%. The company had recorded cumulative expense of $98.9 million through September and expected the process to conclude by year-end 2010; the final outcome and settlement remained uncertain.
- Capitalized exploratory well costs pending proved-reserve determination totaled $459.7 million, including $376.0 million capitalized for more than one year. The filing described ongoing appraisal, drilling and development evaluation across several countries.
- Azurite production in the Republic of the Congo remained below expectations because of delays and complications completing wells; management expected output to ramp up as additional wells came online. The U.S. Gulf of Mexico drilling moratorium had been lifted in October, but permitting, regulatory requirements, costs and timing remained uncertain.
- Risks and contingencies include commodity and foreign-exchange volatility, environmental remediation, tax audits, and litigation. A decision remained pending on Murphy’s insurer-indemnity claim relating to the 2003 Meraux refinery fire. At quarter-end, the company reported $7.8 million of financial guarantees and $154.5 million of letters of credit, which it had not accrued because draws were considered remote. Management did not expect disclosed environmental and legal matters to have a material adverse effect.
- The 45-cent-per-gallon federal ethanol blending tax credit was scheduled to expire December 31, 2010; any extension or effect of expiration was uncertain. Management said the health-care reform law had no significant effect on current-period statements and was not expected, based on its evaluation to date, to have a material future effect.
Investor verification priorities
- Track the planned downstream divestitures, their proceeds and timing, and the accounting treatment once held-for-sale criteria are met.
- Monitor E&P production, especially Azurite ramp-up, Malaysian oil volumes, and the effect of Gulf permitting and regulation.
- Compare actual spending with the approximately $2.6 billion full-year capital plan and assess whether operating cash flow covers investment and dividends.
- Follow Terra Nova arbitration and the eventual working-interest adjustment, cash settlement and related expense.
- Review aging and project status of the $459.7 million in capitalized exploratory well costs, along with material environmental, tax and insurance developments.