Murphy Oil Corporation — Q2 2022 Form 10-Q
Business context and period. Murphy Oil is an international oil and natural gas exploration and production company, with operations primarily in the U.S. and Canada. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods.
Financial and operating performance
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Revenue from customer sales | $1.196 billion | $2.068 billion |
| Operating income from continuing operations | $551.6 million | $509.5 million |
| Income from continuing operations, including noncontrolling interests | $410.4 million | $345.5 million |
| Net income attributable to Murphy | $350.6 million; diluted EPS $2.23 | $237.2 million; diluted EPS $1.50 |
| Cash provided by continuing operating activities | Not separately stated for the quarter | $959.2 million |
| Capital expenditures, accrual basis | $317.1 million | $621.9 million |
Q2 total revenue and other income was $1.101 billion after a $103.1 million loss on crude contracts. For the first half, the crude-contract loss was $423.8 million. Q2 production averaged 173,173 BOE per day including noncontrolling interest, down 5% year over year; first-half production averaged 161,579 BOE per day, down 7%. Q2 realized crude oil and condensate prices averaged $109.25 per barrel, compared with $65.57 in Q2 2021.
At June 30, cash and cash equivalents were $432.0 million. Long-term debt, including finance lease obligations, was $2.268 billion, down $197.5 million from year-end 2021. The company had a $1.6 billion revolving credit facility, no borrowings outstanding and $27.6 million in letters of credit; reported available capacity was $1.572 billion. Working capital was a deficit of $566.9 million. Total liabilities were $6.084 billion and total equity was $4.488 billion.
Changes versus prior comparable periods
- Q2 net income attributable to Murphy improved from a $63.1 million loss in 2021 to $350.6 million of income. First-half net income improved from a $350.5 million loss to $237.2 million of income.
- Customer sales revenue rose 58% in Q2 and 53% in the first half, principally reflecting higher commodity prices; lower production volumes partly offset the benefit.
- First-half operating cash flow increased from $686.3 million to $959.2 million. Management attributed the increase mainly to higher production revenue, partly offset by working-capital timing and higher realized derivative losses.
- Capital expenditures rose to $621.9 million from $458.2 million in the first half. The increase included Kodiak acquisition spending, the Cutthroat-1 well and development activity.
- First-half 2021 included a $171.3 million Terra Nova impairment; there were no impairments in the first half of 2022. The 2022 first half also included $34.1 million of unsuccessful exploration well costs, including Cutthroat-1 offshore Brazil, where no hydrocarbons were found.
Outlook, management commentary and risks
- Management expected Q3 2022 production of 180,000–188,000 BOE per day, excluding noncontrolling interest, and full-year 2022 capital expenditures of $900–$950 million, excluding acquisitions and noncontrolling interest.
- Management said it planned to fund the remaining 2022 capital program with operating cash flow and available cash, and to use surplus cash for debt repayment. It also noted that weaker commodity prices could reduce cash flow, require capital-spending cuts or prompt use of credit facilities.
- Management cited inflationary pressure on exploration and production goods and services. It also noted that recession concerns were putting downward pressure on oil prices. The NYMEX WTI forward curve on August 2 was $92.82 per barrel for the remainder of 2022 and $86.14 for 2023.
- After quarter-end, Murphy declared a $0.25 quarterly dividend per share, announced a capital allocation framework allowing additional shareholder returns while pursuing debt reduction, and announced debt actions. It issued a notice to redeem the remaining $42.4 million of 6.875% notes due 2024, with redemption scheduled for August 19, 2022, and announced tender offers for up to $200 million of certain outstanding notes.
- Commodity-price derivatives materially affect reported results. At June 30, crude swaps and collars had a combined liability of approximately $386.2 million; the company reported $423.8 million of first-half crude-contract losses. Contingent consideration tied to prior Gulf of Mexico acquisitions was valued at $244.2 million, with a $129.8 million first-half mark-to-market expense. These amounts are sensitive to commodity prices.
- Other disclosed risks include commodity-price volatility, production and exploration uncertainty, cost inflation, regulatory and environmental requirements, foreign operations and potential tax disputes. Management said routine legal proceedings and identified environmental matters were not expected to materially affect financial condition or liquidity. The company reported compliance with revolving-credit covenants and effective disclosure controls.
Important facts for investors to verify
- Whether production and Q3 guidance are achieved, and how planned downtime, field declines and new Gulf of Mexico and Canadian volumes affect output.
- How realized commodity prices and the company’s swap, collar and Canadian gas contracts affect cash flow and earnings; distinguish operating performance from derivative mark-to-market effects.
- Whether full-year capital spending remains within the $900–$950 million outlook while sustaining operating cash flow and debt reduction.
- Debt redemption and tender-offer completion, available revolver capacity, liquidity and the timing and amount of additional shareholder returns.
- Progress on contingent consideration payments, exploration projects with capitalized costs, and environmental, tax and other contingencies.