Murphy Oil Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Murphy is an independent oil and gas exploration and production company, with producing operations in the United States, Canada and Malaysia. The filing was signed February 23, 2018.
Financial and operating results
| Metric | 2017 | 2016 |
|---|---|---|
| Sales and other operating revenues | $2.098 billion | $1.810 billion |
| Total revenues, including asset-sale gains | $2.225 billion | $1.811 billion |
| Income (loss) before tax, continuing operations | $71.8 million | $(493.1) million |
| Net loss | $(311.8) million | $(276.0) million |
| Diluted loss per share | $(1.81) | $(1.60) |
| Cash from continuing operating activities | $1.130 billion | $600.8 million |
| Capital expenditures | $975.7 million | $811.5 million |
| Cash and cash equivalents at year-end | $965.0 million | $872.8 million |
| Total debt, including current maturities | $2.916 billion | $2.993 billion |
- Higher realized prices lifted revenue: average realized crude oil price was $51.21/barrel, up from $42.32; U.S. natural gas averaged $2.49/MCF, up from $1.89. Total revenue also benefited from a $127.4 million gain on asset sales, principally Seal.
- Exploration and production recorded $296.6 million of segment profit, versus a $124.9 million loss in 2016. Lease operating expense fell to $468.4 million from $559.4 million; overall lease operating expense was $7.89/BOE.
- Despite positive pretax income, the company reported a net loss, including $274.0 million of provisional tax expense related to the 2017 Tax Cuts and Jobs Act. The filing cites deemed repatriation and remeasurement of deferred taxes among the effects.
- Production averaged 163,536 BOE/day, down 7% from 2016; crude oil and condensate averaged 90,431 barrels/day, down 13%. Proved reserves increased 13.8 MMBOE to 698.3 MMBOE; management reported a 123% replacement rate. Proved undeveloped reserves were 351.7 MMBOE, about half of total proved reserves.
- Liquidity improved: working capital was $537.4 million and the current ratio was 1.64. Long-term debt was 38.6% of capital employed, versus 33.0% in 2016. The $1.1 billion revolving facility had no borrowings outstanding, with $90.7 million of letters of credit reducing availability.
- The company issued $550 million of 5.75% notes due 2025 and used the proceeds to redeem $550 million of 3.50% notes due December 2017. Cash dividends were $1.00/share, down from $1.20 in 2016.
Material changes versus 2016
- Higher commodity prices, the Seal sale gain, lower operating costs and the absence of 2016 impairment charges helped E&P results recover to a profit. These factors were partly offset by lower volumes, increased exploration and other expenses, foreign-exchange losses, higher interest expense and higher taxes.
- Continuing-operations operating cash flow rose by $528.9 million, also benefiting from the prior-year $266.6 million payment for deepwater rig contract exits.
- Capital spending increased from $811.5 million to $975.7 million. Debt was refinanced into 2025 notes; year-end cash rose, while stockholders’ equity declined to $4.62 billion from $4.92 billion, primarily due to net loss and dividends.
- In January 2017, Murphy sold the Seal field for $48.8 million cash; the buyer assumed about $85.9 million in abandonment obligations, contributing to a $129.0 million pretax gain. The 2016 Syncrude sale and Tupper-area midstream asset sale were also important prior-year portfolio changes.
Outlook, commentary and risks
- 2018 outlook: The filing gives two different production forecasts: 166,000–170,000 BOE/day in the Business section and 164,000–168,000 BOE/day in MD&A. North American onshore unconventional production is expected to represent 56% of the total. The discrepancy should be clarified.
- The 2018 capital budget is approximately $1.06 billion, based on assumed WTI of $52/barrel and Henry Hub gas of $3.00/MCF. Management says spending may change with cash flow, commodity prices and asset transactions; lower prices could require spending cuts or additional borrowing.
- Management described early-2018 oil and gas prices as above 2017 averages, while noting upward pressure on oilfield service costs. The company hedged 21,000 barrels/day of 2018 U.S. oil at an average $54.88/barrel and had Canadian gas forward contracts covering specified volumes through 2020.
- Key exposures include commodity-price volatility, declining production, reserve-estimation uncertainty, exploration results, foreign exchange, partner and third-party performance, and below-investment-grade ratings from Moody’s and Fitch. Moody’s rated the debt Ba3 and Fitch BB, both stable; S&P rated it BBB-.
- Environmental and regulatory risks include hydraulic-fracturing rules, offshore well-control and decommissioning requirements, climate-related measures and remediation obligations. For the 2015 Seal pipeline leak, Murphy had spent $39.7 million through 2017; it received $15.0 million of insurance proceeds in early 2018, while further claims and final remediation costs remained unresolved.
- Murphy’s $274.0 million Tax Act charge was provisional; the filing says the ultimate effect could change with interpretations and further guidance. The company expected $29.7 million of AMT credits/refunds over four years and planned to repatriate $700 million of Canadian earnings in 2018, with a $35.0 million withholding-tax payment provided for.
- Other notable items: a $15.0 million pretax Malaysian field-interest redetermination expense; an Ecuador arbitration award of $31.3 million subject to Ecuador’s pending challenge; and Block H Malaysia first production expected in 2020, dependent on development and FLNG facilities.
Most important facts for investors to verify
- Reconcile the conflicting 2018 production guidance of 164,000–168,000 versus 166,000–170,000 BOE/day.
- Track the final Tax Act accounting, including treatment of the 2017 tax loss, foreign tax credits and planned Canadian cash repatriation.
- Assess whether operating cash flow can fund the $1.06 billion capital plan, dividends and debt service if commodity prices weaken or costs rise.
- Review production declines and execution of reserve development: 50% of proved reserves were undeveloped, with material spending planned to convert them.
- Monitor Seal remediation and insurance recoveries, the Ecuador award challenge, and the timing and cost of the Malaysian Block H project.
- Confirm available revolver capacity, covenant headroom and effects of the company’s below-investment-grade ratings.