Murphy Oil Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 28, 2013. The filing also reports fourth-quarter results. Murphy was a global exploration and production company with U.S. retail and wholesale fuel operations and U.K. refining and marketing operations. The company planned to separate its U.S. downstream business and sell its U.K. downstream and U.K. upstream businesses.
Financial and operating performance
| Metric | 2012 | Prior comparable period |
|---|---|---|
| Sales and other operating revenues | $28.62 billion | $27.58 billion in 2011 |
| Net income | $970.9 million; diluted EPS $4.99 | $872.7 million; diluted EPS $4.49 |
| Income from continuing operations | $964.0 million; diluted EPS $4.95 | $729.5 million; diluted EPS $3.75 |
| Cash from continuing operating activities | $3.00 billion | $1.96 billion in 2011 |
| Capital expenditures, continuing operations | $4.33 billion | $2.88 billion in 2011 |
| Cash and cash equivalents at year-end | $947.3 million | $513.9 million in 2011 |
| Long-term debt at year-end | $2.25 billion | $249.6 million in 2011 |
| Working capital / current ratio | $699.5 million / 1.21 | $622.7 million / 1.22 in 2011 |
- Fourth-quarter 2012 revenue was $7.39 billion, continuing-operations income was $162.4 million, and net income was $158.7 million. Fourth-quarter 2011 reported a continuing-operations loss of $117.9 million and a net loss of $113.9 million.
- Continuing E&P income was $905.0 million, up from $614.2 million; continuing refining and marketing income was $157.6 million, down from $190.3 million. Corporate and other costs were $98.5 million.
- Consolidated operating margin is not stated as a single measure in the filing. U.S. retail fuel margin declined to $0.129 per gallon from $0.156; U.K. refining margin improved to $1.94 per barrel from negative $0.67.
- Operating cash flow from continuing operations was below continuing capital expenditures by approximately $679 million. This is a simple comparison, not a company-reported free-cash-flow measure.
- Long-term debt was 20.1% of total capital employed, versus 2.8% a year earlier. Murphy had no year-end borrowings on its $1.5 billion committed credit facility, which expires in June 2016.
- Worldwide production averaged 194,278 barrels of oil equivalent per day, up 8% from 2011. Oil and liquids averaged 112,591 barrels per day and natural gas sales averaged 490 million cubic feet per day.
Material changes versus 2011
- Net income rose approximately 11%, mainly on stronger continuing E&P results, higher oil volumes, lower exploration expense, lower Congo impairment charges, and $108.3 million of U.S. tax benefits related to exploration activities in the Republic of the Congo and Suriname.
- North American natural gas prices weakened: Murphy’s average realized North American gas price fell 35% to $2.65 per thousand cubic feet. The company’s average realized continuing oil price increased 1% to $95.58 per barrel.
- Continuing E&P capital expenditures increased to $4.19 billion from $2.75 billion. Net property, plant and equipment rose to $13.01 billion from $10.48 billion.
- Debt rose substantially following $2.0 billion of note issuances; proceeds funded refinancing, capital spending, a $486.1 million special dividend, and a $250 million accelerated share repurchase.
- Discontinued-operations income fell to $6.8 million from $143.2 million, largely because 2011 included earnings and a sale gain from the two U.S. refineries sold that year. U.K. upstream results were classified as discontinued operations in all periods presented.
Outlook, risks and unusual items
- Management expected 2013 production of about 200,000 barrels of oil equivalent per day, around 3% above 2012, with oil and liquids up approximately 17% and natural gas down approximately 16%. Eagle Ford growth was expected to offset gas declines, particularly in Canada.
- 2013 capital expenditures were projected at approximately $4.3 billion, including $4.1 billion for E&P. Management anticipated borrowing during 2013 and said weaker commodity prices could require additional borrowing.
- The company expected higher 2013 extraction costs, including a projected increase of about $5 per barrel of oil equivalent, and a higher unit depreciation rate. Weak North American gas prices, field declines, execution of development plans and cost inflation could affect results.
- Azurite in the Republic of the Congo had no proved reserves at year-end after poor well performance and a well failure; Murphy recorded a $200 million 2012 impairment, following a $368.6 million impairment in 2011. The Hereford, Texas ethanol facility was written down by $61.0 million pretax ($39.6 million after tax) due to weak expected margins.
- Murphy intended to complete the U.S. downstream separation and U.K. upstream sale in 2013 and continued pursuing a sale of U.K. downstream assets. Completion, sale terms, regulatory and tax approvals, and post-transaction creditworthiness were uncertainties. Management noted that downstream operations produced about 84% of 2012 consolidated revenue but about 15% of continuing operating income before corporate costs.
- Other material risks include oil and gas price volatility, exploration failures, reserve-estimate uncertainty, political and regulatory exposure, operational and severe-weather hazards, environmental requirements, foreign exchange movements and the ability to replace reserves. The filing describes an approximately $118 million Ecuador arbitration claim and a U.K. emissions-allowance penalty of approximately $1.7 million being contested. Management did not expect routine legal and environmental matters to materially affect results or liquidity.
Important facts for investors to verify
- Whether the planned U.S. downstream separation and U.K. business sales closed on expected terms, and their effects on earnings, cash flow, debt service and credit ratings.
- Whether the Eagle Ford and other development programs achieved production targets within the $4.3 billion 2013 capital budget, and how Canadian gas declines affected volumes and unit costs.
- How sustainable earnings are after excluding the $108.3 million tax benefit and considering the $200 million Azurite and $61 million Hereford impairments.
- How the company funded capital spending, dividends and remaining share repurchases, and whether debt and liquidity changed materially after year-end.
- Whether proved undeveloped reserves—about 36% of proved reserves—were converted to developed reserves as planned, and whether reserve estimates or impairment assumptions changed.