Murphy Oil Corporation — Q3 2015 Form 10-Q
Business context and reporting period
International oil and gas producer operating in the United States, Canada and Malaysia, with exploration activities worldwide. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are U.S. dollars unless noted.
Financial and operating results
- Quarter: Sales and other operating revenue was $665.6 million, down from $1.431 billion. Net loss was $1.595 billion, or $9.26 per diluted share, compared with net income of $245.7 million, or $1.37 per diluted share.
- Nine months: Sales and other operating revenue was $2.133 billion, compared with $4.070 billion. Net loss was $1.684 billion, or $9.62 per diluted share, versus net income of $530.4 million, or $2.94 per diluted share.
- Impairments: Q3 included a $2.301 billion pretax, noncash impairment charge ($1.536 billion after tax) on producing properties: $1.473 billion in Malaysia, $683.6 million in Western Canada and $144.8 million in the Gulf of Mexico. This charge was the principal driver of the reported loss.
- Cash flow and investment: Nine-month cash from continuing operating activities was $1.097 billion, down from $2.334 billion. Cash property additions and dry-hole costs were $1.975 billion, versus $2.807 billion. Cash and cash equivalents fell $314.6 million to $878.7 million; Canadian government securities with maturities over 90 days totaled $415.1 million at period-end.
- Liquidity and debt: Working capital was $514.6 million. Total debt, including current maturities, was approximately $3.340 billion, including a $213.0 million Kakap production-equipment capital lease. Long-term debt rose $810.0 million from year-end 2014. The company had a $2.0 billion committed credit facility maturing June 2017 and about $157.2 million in uncommitted facilities.
- Production and prices: Q3 production averaged 207,586 boe/d, down 9.7% from 229,759 boe/d; adjusted for the sale of 30% of its Malaysian interests, management reported production growth of about 2%. Average crude oil and condensate price fell 48% to $46.20/bbl from $89.36/bbl.
- Margins: The filing does not provide a single consolidated operating-margin measure suitable for comparison; reported results include major impairment, tax, and other items.
Material changes versus 2014
- Lower realized oil and gas prices and lower oil volumes weighed on revenue and earnings; management cited lower operating, exploration and depreciation costs as partial offsets.
- E&P reported a Q3 loss of $1.596 billion versus earnings of $311.4 million a year earlier. Q3 segment losses were $952.7 million in Malaysia, $507.0 million in Canada and $107.8 million in the United States.
- During 2015, Murphy completed the sale of its remaining U.K. downstream assets, reported as discontinued operations. It also received $417.2 million net proceeds from the final phase of its Malaysian asset sale and recorded a $218.8 million after-tax gain on the sale of the final 10% interest.
- The company spent $250 million repurchasing 5.97 million shares through an accelerated share repurchase; the remaining authorization expired in August and was not renewed. Nine-month cash dividends were $184.8 million.
Outlook, commentary and risks
- Management expected Q4 2015 production to average 199,000 boe/d and full-year 2015 capital expenditures to be approximately $2.3 billion. It projected 2016 capital spending to be well below 2015 levels, which could reduce future production.
- Management warned that continued low or falling commodity prices could reduce cash flow, increase borrowing needs, prompt further impairments or reserve reductions, require additional cost controls, and lead to reconsideration of the dividend.
- Two Gulf of Mexico drilling-rig contracts run through February and November 2016. Remaining day-rate commitments could be as high as $277 million, with potential pretax costs from Q4 2015 through Q4 2016 depending on the company’s decisions on rig use.
- Price protection included WTI contracts for 15,000 bbl/d at $63.30 for Q4 2015 and 20,000 bbl/d at $52.01 for 2016. Canadian gas forward sales covered 65 mmcf/d at C$4.13/mcf for Q4 2015 and 59 mmcf/d at C$3.19/mcf for 2016.
- A condensate pipeline leak at the Seal field in Alberta led to a $43.9 million remediation provision. The estimate remains incomplete; additional costs, regulatory fines and insurance recoveries are possible. Management stated that known environmental and legal matters were not expected to materially adversely affect future results, cash flows or liquidity, but the Seal estimate could exceed the amount recorded.
- Cash and short-term investments held outside the U.S. included approximately $475.4 million in Canada and $787.3 million in Malaysia; repatriation could incur taxes or other costs. The filing also notes exposure to commodity-price, foreign-exchange, political, regulatory and environmental risks.
Important facts for investors to verify
- Whether the impairment assumptions for future commodity prices, production, costs and discount rates remain supportable, and whether further impairments or reserve changes are likely.
- Actual operating cash flow, capital spending, debt levels and credit-facility availability as commodity prices and production change.
- Q4 production and full-year capital-spending performance against management’s outlook, including implications of lower 2016 investment for production.
- The final cost, timing, regulatory exposure and insurance recovery for the Seal pipeline remediation, and the outcome of the Gulf rig-contract decisions.
- The net proceeds, tax effects and continuing production impact of the Malaysian and U.K. asset dispositions, as well as the sustainability of the dividend.