MURPHY OIL CORP quarterly report, Q2 FY2016

Murphy Oil Corporation — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016. Murphy Oil is an international oil and gas producer operating in the United States, Canada and Malaysia, with exploration activities elsewhere. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.

Key financial metrics

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Total revenue	$437.5m	$738.3m	$867.8m	$1,660.0m
Net income (loss)	$2.9m	($73.8m)	($195.9m)	($88.3m)
Net income (loss) per diluted share	$0.02	($0.42)	($1.14)	($0.50)
Cash from continuing operations	Not stated for quarter	Not stated for quarter	$113.4m	$715.2m

Six-month sales and operating revenue was $840.3m, down from $1,467.8m. Q2 sales and operating revenue was $411.2m, down from $718.6m.
Q2 pretax loss was $131.3m, offset by a $134.2m income tax benefit. Six-month pretax loss was $396.3m, with a $199.7m tax benefit.
Six-month cash from continuing operations fell sharply, primarily due to weaker realized prices and lower sales volumes. Operating working capital used $86.8m of cash, including $261.8m in payments related to canceled deepwater rig contracts.
Cash and cash equivalents were $267.5m at June 30; Canadian government securities with maturities over 90 days were another $131.2m. Working capital was $157.1m.
Total debt, including current maturities, was approximately $2.46bn, down about $605m from year-end. The $2bn revolving facility had no borrowings; approximately $88m of letters of credit reduced availability. The facility matures in June 2017.
Accrual-basis capital expenditures were $463.6m for the first half, versus $1,145.1m in 2015. Cash property additions and dry-hole costs were $604.6m.
Average production was 168,642 barrels of oil equivalent per day in Q2, down 16.5% year over year; first-half production was 182,604 barrels per day, down from 211,699. Q2 crude oil and condensate price averaged $44.42 per barrel versus $56.49; North American natural gas averaged $1.35 per Mcf versus $2.42.

Material changes and significant transactions

Lower oil and gas prices and lower production volumes drove revenue declines. First-half continuing-operations loss widened to $196.6m from $85.5m, while Q2 continuing operations returned to $2.9m income from an $89.0m loss.
The Q2 improvement included a $71.7m after-tax gain from selling Murphy’s 5% Syncrude interest. The sale generated $739.1m net cash proceeds and was completed in June.
Murphy received $414.1m for selling certain Tupper-area midstream assets; approximately $187m of gain is deferred and recognized over 20 years. The company also acquired a 70% operated interest in Kaybob Duvernay and a 30% non-operated interest in liquids-rich Montney properties for approximately $375m: $206.7m paid at closing and $168.0m in carried interest over up to five years.
First-half results included $95.1m of noncash impairment charges on Canadian producing properties, including Terra Nova and Western Canada heavy oil properties. Cash proceeds from asset sales helped fund $600m of debt repayments.
Canadian synthetic-oil production was affected by a 44-day facility shutdown associated with nearby forest fires. The company cited cost reductions, lower depreciation and lower exploration expense as partial offsets to weaker prices and volumes.

Outlook, risks and other notable items

Management forecast Q3 2016 production of 167,500–169,500 barrels of oil equivalent per day and full-year capital expenditures of approximately $620m, excluding the Kaybob Duvernay and Montney acquisition cost.
Management expected no revolving-credit borrowings in the second half of 2016, while noting weaker commodity prices could reduce operating cash flow and require unanticipated borrowing. It expected to replace the revolving facility before its June 2017 maturity.
Management warned that sustained low prices could reduce reserves and production, trigger further impairments and cost actions, increase debt, and prompt reconsideration of the dividend. The August 3, 2016 quarterly dividend was declared at $0.25 per share, payable September 1.
Price-management contracts included WTI oil swaps for 25,000 barrels per day at $50.67 through December 2016 and 7,000 barrels per day at about $50.10 for 2017; Canadian gas contracts covered 99 MMcf/day for the second half of 2016 and 59 MMcf/day for 2017–2020 at an average C$2.81/Mcf.
A 2015 condensate pipeline leak at the Seal field remains under investigation and remediation. Murphy had recorded $43.9m of expense in 2015 and spent $32.7m to date; the ultimate net cost may exceed the recorded amount, and the estimate is incomplete.
Management said disclosure controls were effective. A global ERP implementation was ongoing, and related internal-control changes were being evaluated and tested. No other material control changes were reported.
Management identified commodity prices, exploration success, production and reserve replacement, foreign exchange, political and regulatory conditions, capital markets and natural hazards as key risks. No additional risk factors beyond those in the 2015 Form 10-K were identified.

Important facts for investors to verify

Whether production, realized prices and operating cash flow stabilize enough to support planned spending without additional borrowing.
The terms and remaining availability of the credit facility as it approaches its June 2017 maturity, and progress on refinancing.
Completion adjustments and value realization for the Canadian divestitures and acquisition, including the $168m carried-interest commitment.
Updated costs, potential fines and insurance recoveries for the Seal pipeline remediation.
Whether impairment assumptions, capitalized exploration costs in Brunei, and future reserve estimates remain supportable under commodity-price conditions.
The effects of ERP implementation on internal controls, and whether the declared dividend remains sustainable if prices or cash flow weaken.