Murphy Oil Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; balance sheet as of March 31, 2010. The interim financial statements are unaudited. Murphy Oil’s continuing businesses include exploration and production (E&P) and refining and marketing (R&M).
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Sales and operating revenues | $5.229 billion | $3.416 billion |
| Total revenues | $5.180 billion | $3.446 billion |
| Income from continuing operations | $148.9 million | $71.2 million |
| Net income | $148.9 million | $171.1 million |
| Diluted EPS | $0.77 | $0.89 |
| Cash from operating activities | $829.4 million | $380.0 million |
- Continuing-operations income more than doubled, mainly on improved E&P results; net income fell because Q1 2009 included $99.9 million of after-tax discontinued-operations income, primarily the Ecuador sale gain.
- E&P income was $247.0 million versus $50.3 million. R&M recorded a $29.7 million loss versus $10.8 million of income; corporate activities were a $68.4 million cost versus a $10.1 million benefit.
- Worldwide average realized oil and liquids price rose to $64.89 per barrel from $43.15. Production averaged 196,226 barrels of oil equivalent per day, up 29%; natural gas sales rose to 343 million cubic feet per day from 111 million.
- Refining margins weakened: U.S. refining was negative $4.23 per barrel versus positive $1.09; U.K. refining and marketing was negative $3.23 versus positive $0.08. U.S. retail fuel margin improved to $0.081 per gallon from $0.050.
Cash flow, liquidity and debt
- Operating cash flow of $829.4 million included a $244.3 million working-capital cash source, substantially reflecting recovery of $244.4 million of prior-year U.S. federal royalties.
- Capital expenditures for continuing operations were $524.7 million on an accrual basis. Cash property additions and dry-hole costs were $481.0 million; major-repair spending was $50.5 million, mainly for refinery turnarounds. Dividends paid were $47.8 million.
- Cash and equivalents were $300.0 million; Canadian government securities with maturities over 90 days were $895.6 million. Working capital was $1.035 billion, down $159.5 million from year-end; management notes that LIFO inventory carrying values were $566.3 million below fair value.
- Long-term debt was $1.231 billion, down $122.0 million from December 31, 2009. Long-term debt represented 14.0% of capital employed, compared with 15.6% at year-end. Total assets were $13.170 billion and stockholders’ equity was $7.554 billion.
Material changes and notable items
- Higher E&P earnings reflected stronger realized prices, increased natural gas sales and lower exploration expense. Newer production at Thunder Hawk, Sarawak and Azurite, and ramp-up at Tupper, contributed to increased volumes.
- R&M performance was hurt by weak margins and turnarounds at Meraux and Milford Haven. Milford Haven was expected to restart in early May after its turnaround and capacity expansion work.
- Foreign-currency transactions produced $41.3 million of after-tax losses in Q1 2010, compared with $26.1 million of after-tax gains in Q1 2009. The filing reports a $14.3 million pretax gain on foreign-exchange derivatives in Q1 2010.
- Terra Nova’s working interest may fall from 12.0% to about 10.5%, subject to arbitration expected to conclude in late 2010. Murphy recorded cumulative expense of $89.0 million through March, including $5.5 million in Q1, and expects a cash settlement after final determination.
- After quarter-end, Murphy was informed that Malaysia’s Blocks L and M production-sharing contracts had been terminated effective April 7, 2010. The company’s $12.2 million remaining Block L investment was carried in property, plant and equipment pending discussions about replacement contracts.
- Capitalized exploratory well costs pending proved-reserve determinations totaled $379.2 million; $206.7 million had been capitalized for three years or more. Management described appraisal, drilling, development planning or evaluation activity for these projects.
Outlook, risks and contingencies
- Management expected full-year 2010 production of approximately 200,000 barrels of oil equivalent per day and full-year capital expenditures of about $2.5 billion. Q2 production was projected at about 188,000 barrels of oil equivalent per day and sales at about 184,000, with lower volumes expected mainly from Sarawak gas and Kikeh oil interruptions.
- Management said U.S. downstream margins had improved somewhat in April 2010. The filing does not provide specific full-year earnings or commodity-price guidance.
- An April 2010 Gulf of Mexico drilling accident and oil spill at another company’s property could affect Murphy through disruption at Meraux or additional offshore drilling regulation; Murphy said the impact was uncertain.
- Environmental and routine legal matters were not expected by management to materially affect financial condition, earnings or liquidity. A decision remained pending on Murphy’s insurer-indemnity claim relating to the settled 2003 Meraux refinery fire.
- At March 31, contingent obligations included a $7.8 million financial guarantee and $59.4 million in letters of credit; no liability was accrued for the letters of credit because management considered a draw unlikely. Murphy reported one remaining Superfund site and considered its expected share immaterial.
- Management stated that the newly enacted U.S. health-care reform law was not expected, based on its evaluation to date, to have a material future effect, while noting the evaluation was ongoing.
Investor verification priorities
- Check whether the projected 2010 production and capital-spending levels were achieved, and assess the Q2 production interruptions and refinery restart.
- Follow Terra Nova arbitration, the final working-interest change and settlement amount against the $89.0 million cumulative expense recorded.
- Monitor the outcome of the Blocks L and M termination and any replacement production-sharing arrangements, including possible effects on the $12.2 million Block L investment.
- Assess the Gulf spill’s subsequent operational, regulatory and financial effects, and the status of the Meraux insurance arbitration and environmental contingencies.
- Review aging and project progress for the $379.2 million of capitalized exploratory well costs, especially the $206.7 million aged three years or more.
- Distinguish recurring operating cash generation from the quarter’s significant royalty recovery and movements in Canadian government securities.