Murphy Oil Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2009. Murphy operates in exploration and production (E&P) and refining and marketing. Ecuador operations were sold in March 2009 and are presented as discontinued operations; prior-year results were reclassified for comparison. Unless noted otherwise, financial amounts below are U.S. dollars.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenues | $5.184 billion | $8.167 billion | $13.185 billion | $23.021 billion |
| Income from continuing operations | $188.9 million | $585.0 million | $421.0 million | $1.612 billion |
| Net income | $188.9 million | $584.4 million | $518.8 million | $1.613 billion |
| Diluted EPS | $0.98 | $3.04 | $2.70 | $8.39 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.186 billion | $2.597 billion |
- Q3 revenues fell about 36% year over year and net income about 68%. Nine-month revenues declined about 43% and net income about 68%. Management attributed the earnings declines principally to lower oil and gas prices and weaker refining and marketing results.
- Q3 continuing-operations segment income: E&P $184.1 million versus $530.5 million; refining and marketing $37.2 million versus $85.8 million; corporate costs $32.4 million versus $31.3 million.
- Nine-month segment income: E&P $352.7 million versus $1.534 billion; refining and marketing $75.8 million versus $173.3 million; corporate costs $7.5 million versus $95.8 million. E&P included a $36.4 million pretax Terra Nova redetermination charge; 2008 included significant Canadian asset-sale gains.
- Q3 worldwide oil and liquids production from continuing operations averaged 131,637 barrels per day, up from 111,751; natural gas sales averaged 182 million cubic feet per day versus 46 million. Nine-month oil and liquids production averaged 127,911 barrels per day versus 106,993, and gas sales averaged 147 million cubic feet per day versus 57 million.
- Average realized oil and liquids prices were $61.13 per barrel in Q3 versus $112.55; North American gas averaged $3.01 per thousand cubic feet versus $11.51. Nine-month averages were $52.59 per barrel versus $105.36 and $3.50 per thousand cubic feet versus $10.27.
- At September 30, cash was $315.1 million and Canadian government securities with maturities over 90 days were $794.3 million. Working capital was $1.197 billion. Notes payable were $1.480 billion, up $453.7 million from year-end 2008; stockholders’ equity was $6.951 billion.
- Committed revolving credit capacity totaled $1.962 billion, with $1.08 billion unused; additional unused, uncommitted facilities were about $350 million, with no assurance they could be accessed. Management said available cash, investments and facilities were adequate for anticipated needs.
- Nine-month continuing-operations capital expenditures were $1.624 billion. Operating cash flow was $1.186 billion, down from $2.597 billion; dividends paid were $143.0 million versus $118.8 million. Cash and cash equivalents declined by $351.0 million during the period.
Material changes, outlook and notable items
- Lower realized commodity prices drove weaker E&P earnings despite higher production, particularly from Kikeh, Tupper, Thunder Hawk and new Republic of the Congo production. Refining and marketing earnings weakened on lower U.S. retail margins and weak U.K. refining margins.
- The Ecuador sale generated $78.9 million in net cash proceeds and a $103.6 million after-tax gain, included in nine-month discontinued-operations income. Proceeds were used to reduce debt and help fund development.
- Management expected fourth-quarter 2009 production of about 193,000 barrels of oil equivalent per day and full-year capital expenditures of approximately $2.1 billion. It reported stronger oil and North American gas prices in October, but weaker U.S. retail margins and continued weak refining margins.
- In October, after quarter-end, a subsidiary acquired an ethanol plant for $92 million, mostly financed by an $82 million, five-year nonrecourse loan at 5%; rated capacity is 110 million gallons annually.
- A $244 million, plus interest, potential Gulf of Mexico royalty refund remains an unrecorded contingent gain; Murphy filed a claim in October and said recognition depends on evidence the government intends to honor it.
- Terra Nova working-interest arbitration is expected to conclude in 2010. Murphy estimated its interest would fall from 12.0% to 11.5%, recorded a $36.4 million pretax charge, and said the final interest could be lower; the ultimate financial effect was uncertain.
- New vessel and platform operating leases carry minimum payments of $254.7 million over their minimum terms. The related approximately $282.7 million of assets and liabilities were removed from the balance sheet upon acceptance in sale-leaseback transactions.
- Other exposures include environmental remediation, governmental and regulatory actions, and routine litigation. Management did not expect known environmental matters or remaining Meraux refinery claims to materially affect results, financial condition or liquidity. Financial guarantees of $7.8 million and letters of credit of $166.0 million were not accrued because draws were considered remote.
- Murphy uses derivatives for risk management, not speculation. The filing identifies commodity, foreign-exchange and interest-rate exposures; derivative positions and fair-value sensitivity are disclosed. Management cited commodity prices, exploration success, production and reserve replacement, political and regulatory instability, and natural hazards as risks. No additional risk factors were identified; disclosure controls were considered effective.
Important facts for investors to verify
- Whether commodity prices and downstream margins recover, and how they affect earnings and cash generation.
- Whether anticipated production growth and the approximately $2.1 billion capital program are achieved within available liquidity.
- The final Terra Nova ownership share, settlement amount and resulting effect on future production and earnings.
- The timing and outcome of the $244 million royalty-refund claim; it is not recognized as income in this filing.
- The effects of increased notes payable, lease commitments and the post-quarter ethanol-plant acquisition on financing needs.
- Developments in environmental obligations, insurance recoveries and contingent legal matters; the filing notes that estimates and actual outcomes may differ.