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MURPHY OIL CORP - Quarter Report: 2015 September (Form 10-Q)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

                            

FORM 10-Q

                            

(Mark one)

 

 

 

 

 

 

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

       ACT OF 1934

 

 

 

 

 

 

 

For the quarterly period ended September 30, 2015

 

 

 

 

 

 

 

OR

 

 

 

 

 

 

 

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

       ACT OF 1934

 

 

 

 

 

 

 

For the transition period from ________ to ________

Commission File Number 1-8590

 

 

 

 

 

 

 

MURPHY OIL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware      

 

 

71-0361522

 

(State or other jurisdiction of       

 

 

(I.R.S. Employer

 

incorporation or organization)      

 

 

Identification Number)

 

 

 

 

 

 

 

 

200 Peach Street      

 

 

71730-7000

P.O. Box 7000, El Dorado, Arkansas              

 

(Zip Code)

(Address of principal executive offices)               

 

 

 

 

 

 

 

 

 

 

(870) 862-6411

(Registrant's telephone number, including area code)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes    [  ] No

 

 

 

 

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] Yes    [  ] No 

 

 

 

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange act.

 

 

 

 

 

 

 

Large accelerated filer [X]                Accelerated filer [  ]               Non-accelerated filer [  ]              Smaller reporting company [  ]

 

 

 

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[  ] Yes    [X] No 

Number of shares of Common Stock, $1.00 par value, outstanding at September 30, 2015 was 172,024,733

 

 


 

MURPHY OIL CORPORATION

 

TABLE OF CONTENTS

 

 

 

 

Page

Part I – Financial Information 

 

Item 1.  Financial Statements 

 

Consolidated Balance Sheets 

2

Consolidated Statements of Operations 

3

Consolidated Statements of Comprehensive Income (Loss)  

4

Consolidated Statements of Cash Flows 

5

Consolidated Statements of Stockholders’ Equity 

6

Notes to Consolidated Financial Statements 

7

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 

19

Item 3.  Quantitative and Qualitative Disclosures About Market Risk 

30

Item 4.  Controls and Procedures 

31

Part II – Other Information 

31

Item 1.  Legal Proceedings 

31

Item 1A.  Risk Factors 

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

31

Item 6.  Exhibits 

31

Signature 

32

 

1

 


 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2015

 

2014*

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

878,667 

 

 

1,193,308 

Canadian government securities with maturities greater than 90 days at
   the date of acquisition

 

 

415,097 

 

 

461,313 

Accounts receivable, less allowance for doubtful accounts of $1,605 in 
   2015 and $1,609 in 2014

 

 

432,791 

 

 

873,277 

Inventories, at lower of cost or market

 

 

 

 

 

 

Crude oil

 

 

53,170 

 

 

51,757 

Materials and supplies

 

 

127,426 

 

 

190,976 

Prepaid expenses

 

 

157,455 

 

 

77,281 

Deferred income taxes

 

 

48,781 

 

 

55,107 

Assets held for sale

 

 

52,416 

 

 

376,130 

Total current assets

 

 

2,165,803 

 

 

3,279,149 

Property, plant and equipment, at cost less accumulated depreciation,
   depletion and amortization of $11,617,367 in 2015 and $9,503,524 in 2014

 

 

10,168,750 

 

 

13,331,047 

Deferred charges and other assets

 

 

293,409 

 

 

62,582 

Assets held for sale

 

 

– 

 

 

50,960 

Total assets

 

$

12,627,962 

 

 

16,723,738 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

12,173 

 

 

465,388 

Accounts payable and accrued liabilities

 

 

1,621,415 

 

 

2,471,897 

Income taxes payable

 

 

7,588 

 

 

59,054 

Liabilities associated with assets held for sale

 

 

10,059 

 

 

151,548 

Total current liabilities

 

 

1,651,235 

 

 

3,147,887 

Long-term debt, including capital lease obligation

 

 

3,327,689 

 

 

2,517,669 

Deferred income taxes

 

 

306,379 

 

 

1,193,864 

Asset retirement obligations

 

 

885,984 

 

 

841,526 

Deferred credits and other liabilities

 

 

428,221 

 

 

441,048 

Liabilities associated with assets held for sale

 

 

– 

 

 

8,310 

Stockholders’ equity

 

 

 

 

 

 

Cumulative Preferred Stock, par $100, authorized 400,000 shares,
   none issued

 

 

– 

 

 

– 

Common Stock, par $1.00, authorized 450,000,000 shares, issued
   195,055,724 shares in 2015 and 195,040,149 shares in 2014

 

 

195,056 

 

 

195,040 

Capital in excess of par value

 

 

902,241 

 

 

906,741 

Retained earnings

 

 

6,859,542 

 

 

8,728,032 

Accumulated other comprehensive loss

 

 

(621,759)

 

 

(170,255)

Treasury stock, 23,030,991 shares of Common Stock in 2015 and
   17,540,636 shares of Common Stock in 2014, at cost

 

 

(1,306,626)

 

 

(1,086,124)

Total stockholders’ equity

 

 

6,028,454 

 

 

8,573,434 

Total liabilities and stockholders’ equity

 

$

12,627,962 

 

 

16,723,738 

 

*Reclassified to conform to current presentation.

 

See Notes to Consolidated Financial Statements, page 7.

 

The Exhibit Index is on page 33.

2


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Thousands of dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

REVENUES

 

 

 

 

 

 

 

 

Sales and other operating revenues

$

665,589 

 

1,431,007 

 

2,133,360 

 

4,070,120 

Gain (loss) on sale of assets

 

60 

 

(133)

 

154,183 

 

(5,130)

Interest and other income

 

49,300 

 

2,163 

 

87,443 

 

3,468 

Total revenues

 

714,949 

 

1,433,037 

 

2,374,986 

 

4,068,458 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Lease operating expenses

 

183,826 

 

265,518 

 

643,736 

 

813,638 

Severance and ad valorem taxes

 

14,265 

 

28,574 

 

54,099 

 

83,793 

Exploration expenses, including undeveloped
  lease amortization

 

58,149 

 

117,433 

 

251,842 

 

390,711 

Selling and general expenses

 

71,791 

 

82,960 

 

237,934 

 

269,986 

Depreciation, depletion and amortization

 

433,706 

 

499,151 

 

1,318,123 

 

1,354,393 

Impairment of assets

 

2,300,974 

 

– 

 

2,300,974 

 

– 

Accretion of asset retirement obligations

 

11,918 

 

12,600 

 

35,437 

 

36,992 

Interest expense

 

32,009 

 

34,970 

 

91,945 

 

101,625 

Interest capitalized

 

(1,864)

 

(5,323)

 

(5,072)

 

(19,244)

Other expense

 

18,192 

 

662 

 

81,804 

 

1,297 

Total costs and expenses

 

3,122,966 

 

1,036,545 

 

5,010,822 

 

3,033,191 

Income (loss) from continuing operations
  before income taxes

 

(2,408,017)

 

396,492 

 

(2,635,836)

 

1,035,267 

Income tax expense (benefit)

 

(820,935)

 

125,435 

 

(963,298)

 

452,255 

Income (loss) from continuing operations

 

(1,587,082)

 

271,057 

 

(1,672,538)

 

583,012 

Loss from discontinued operations, net of taxes

 

(8,344)

 

(25,350)

 

(11,163)

 

(52,639)

NET INCOME (LOSS)

$

(1,595,426)

 

245,707 

 

(1,683,701)

 

530,373 

PER COMMON SHARE – BASIC

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(9.22)

 

1.52 

 

(9.55)

 

3.25 

Loss from discontinued operations

 

(0.04)

 

(0.14)

 

(0.07)

 

(0.29)

Net income (loss)

$

(9.26)

 

1.38 

 

(9.62)

 

2.96 

PER COMMON SHARE – DILUTED

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(9.22)

 

1.51 

 

(9.55)

 

3.23 

Loss from discontinued operations

 

(0.04)

 

(0.14)

 

(0.07)

 

(0.29)

Net income (loss)

$

(9.26)

 

1.37 

 

(9.62)

 

2.94 

Average Common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

172,205,433 

 

177,535,503 

 

175,047,295 

 

179,259,573 

Diluted

 

172,205,433 

 

178,856,078 

 

175,047,295 

 

180,578,085 

 

 

See Notes to Consolidated Financial Statements, page 7. 

3


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,595,426)

 

245,707 

 

(1,683,701)

 

530,373 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

Net loss from foreign currency translation

 

(195,440)

 

(192,329)

 

(462,054)

 

(195,374)

Retirement and postretirement benefit plans

 

3,116 

 

1,505 

 

9,105 

 

3,996 

Deferred loss on interest rate hedges reclassified
   to interest expense

 

482 

 

484 

 

1,445 

 

1,450 

Other comprehensive loss

 

(191,842)

 

(190,340)

 

(451,504)

 

(189,928)

COMPREHENSIVE INCOME (LOSS)

$

(1,787,268)

 

55,367 

 

(2,135,205)

 

340,445 

 

See Notes to Consolidated Financial Statements, page 7.

 

4


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

2015

 

2014

OPERATING ACTIVITIES

 

 

 

 

Net income (loss)

$

(1,683,701)

 

530,373 

Adjustments to reconcile net income (loss) to net cash provided by
  continuing operations activities:

 

 

 

 

Loss from discontinued operations

 

11,163 

 

52,639 

Depreciation, depletion and amortization

 

1,318,123 

 

1,354,393 

Impairment of assets

 

2,300,974 

 

– 

Amortization of deferred major repair costs

 

5,450 

 

6,390 

Dry hole costs

 

120,459 

 

203,607 

Amortization of undeveloped leases

 

62,331 

 

55,745 

Accretion of asset retirement obligations

 

35,437 

 

36,992 

Deferred and noncurrent income tax charges (benefits)

 

(975,120)

 

64,557 

Pretax (gains) losses from disposition of assets

 

(154,183)

 

5,130 

Net decrease in noncash operating working capital

 

97,026 

 

6,940 

Other operating activities, net

 

(41,431)

 

17,531 

Net cash provided by continuing operations activities

 

1,096,528 

 

2,334,297 

INVESTING ACTIVITIES

 

 

 

 

Property additions and dry hole costs

 

(1,975,069)

 

(2,806,705)

Proceeds from sales of property, plant and equipment

 

423,842 

 

3,138 

Purchase of investment securities*

 

(865,251)

 

(672,689)

Proceeds from maturity of investment securities*

 

852,394 

 

587,341 

Other investing activities, net

 

(19,538)

 

(19,233)

Net cash required by investing activities

 

(1,583,622)

 

(2,908,148)

FINANCING ACTIVITIES

 

 

 

 

Borrowings of debt

 

885,000 

 

1,050,000 

Repayments of debt

 

(450,000)

 

– 

Capital lease obligation payments

 

(7,156)

 

– 

Purchase of treasury stock

 

(250,000)

 

(375,000)

Withholding tax on stock-based incentive awards

 

(8,976)

 

(6,786)

Cash dividends paid

 

(184,789)

 

(174,248)

Other financing activities, net

 

(153)

 

(1,384)

Net cash provided (required) by financing activities

 

(16,074)

 

492,582 

CASH FLOWS FROM DISCONTINUED OPERATIONS

 

 

 

 

Operating activities

 

(4,866)

 

(83,974)

Investing activities

 

5,343 

 

(12,101)

Changes in cash included in current assets held for sale

 

179,774 

 

103,694 

Net increase in cash and cash equivalents of discontinued operations

 

180,251 

 

7,619 

Effect of exchange rate changes on cash and cash equivalents

 

8,276 

 

(2,484)

Net decrease in cash and cash equivalents

 

(314,641)

 

(76,134)

Cash and cash equivalents at January 1

 

1,193,308 

 

750,155 

Cash and cash equivalents at September 30

$

878,667 

 

674,021 

 

*Investments are Canadian government securities with maturities greater than 90 days at the date of acquisition.

 

See Notes to Consolidated Financial Statements, page 7.

5


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

2015

 

2014

Cumulative Preferred Stock – par $100, authorized 400,000 shares,
   none issued

$

– 

 

 

– 

Common Stock – par $1.00, authorized 450,000,000 shares,
   issued 195,055,724 shares at September 30, 2015 and
   195,036,689 shares at September 30, 2014

 

 

 

 

 

Balance at beginning of period

 

195,040 

 

 

194,920 

Exercise of stock options

 

16 

 

 

117 

Balance at end of period

 

195,056 

 

 

195,037 

Capital in Excess of Par Value

 

 

 

 

 

Balance at beginning of period

 

906,741 

 

 

902,633 

Exercise of stock options, including income tax benefits

 

(73)

 

 

(11,354)

Restricted stock transactions and other

 

(38,260)

 

 

(27,977)

Stock-based compensation

 

33,925 

 

 

33,291 

Other

 

(92)

 

 

(26)

Balance at end of period

 

902,241 

 

 

896,567 

Retained Earnings

 

 

 

 

 

Balance at beginning of period

 

8,728,032 

 

 

8,058,792 

Net income (loss) for the period

 

(1,683,701)

 

 

530,373 

Cash dividends

 

(184,789)

 

 

(174,248)

Balance at end of period

 

6,859,542 

 

 

8,414,917 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of period

 

(170,255)

 

 

172,119 

Foreign currency translation loss, net of income taxes

 

(462,054)

 

 

(195,374)

Retirement and postretirement benefit plans, net of income taxes

 

9,105 

 

 

3,996 

Deferred loss on interest rate hedges reclassified to interest expense,
   net of income taxes

 

1,445 

 

 

1,450 

Balance at end of period

 

(621,759)

 

 

(17,809)

Treasury Stock

 

 

 

 

 

Balance at beginning of period

 

(1,086,124)

 

 

(732,734)

Purchase of treasury shares

 

(250,000)

 

 

(375,000)

Sale of stock under employee stock purchase plans

 

322 

 

 

345 

Awarded restricted stock, net of forfeitures

 

29,176 

 

 

21,185 

Balance at end of period

 

(1,306,626)

 

 

(1,086,204)

Total Stockholders’ Equity

$

6,028,454 

 

 

8,402,508 

 

See Notes to Consolidated Financial Statements, page 7.

6


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

These notes are an integral part of the financial statements of Murphy Oil Corporation and Consolidated Subsidiaries (Murphy/the Company) on pages 2 through 6 of this Form 10-Q report.

 

Note A – Nature of Business and Interim Financial Statements

 

NATURE OF BUSINESS – Murphy Oil Corporation is an international oil and gas company that conducts its business through various operating subsidiaries.  The Company produces oil and natural gas in the United States, Canada and Malaysia and conducts oil and natural gas exploration activities worldwide.  The Company has an interest in a Canadian synthetic oil operation.

 

INTERIM FINANCIAL STATEMENTS – In the opinion of Murphy's management, the unaudited financial statements presented herein include all accruals necessary to present fairly the Company's financial position at September 30, 2015 and December 31, 2014, and the results of operations,  cash flows and changes in stockholders’ equity for the interim periods ended September 30, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America (U.S.).  In preparing the financial statements of the Company in conformity with accounting principles generally accepted in the U.S., management has made a number of estimates and assumptions related to the reporting of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities.  Actual results may differ from the estimates.

 

Financial statements and notes to consolidated financial statements included in this Form 10-Q report should be read in conjunction with the Company's 2014 Form 10-K report, as certain notes and other pertinent information have been abbreviated or omitted in this report.  Financial results for the nine-month period ended September 30, 2015 are not necessarily indicative of future results.

 

Note B – Property, Plant and Equipment

 

During the third quarter 2015, declines in future oil and gas prices provided indications of possible impairments in certain of the Company’s producing properties.  As a result of management’s assessments, during the third quarter of 2015, the Company recognized a pretax noncash impairment charge of approximately $2,301.0 million to reduce the carrying value of certain producing properties in the Gulf of Mexico, Western Canada and Malaysia to their estimated fair value.  The fair values were determined by internal discounted cash flow models using estimates of future production, prices from futures exchanges, costs, and a discount rate believed to be consistent with those used by principal market participants in the applicable region.  The following table reflects the recognized impairments for the three-month and nine-month periods of 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months and Nine Months Ended

 

 

September 30, 2015

 

(Thousands of dollars)

 

Impairment
Expense

 

Net of Taxes

 

Gulf of Mexico

$

144,800 

 

94,120 

 

Western Canada – Heavy Oil

 

683,574 

 

495,591 

 

Malaysia

 

1,472,600 

 

946,773 

 

 

$

2,300,974 

 

1,536,484 

 

 

Under U.S. generally accepted accounting principles for companies that use the successful efforts method of accounting, exploratory well costs should continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the company is making sufficient progress assessing the reserves and the economic and operating viability of the project.

 

At September 30, 2015, the Company had total capitalized exploratory well costs pending the determination of proved reserves of 209.7 million.  The following table reflects the net changes in capitalized exploratory well costs during the nine-month periods ended September 30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

2015

 

 

2014

Beginning balance at January 1

$

120,455 

 

 

393,030 

Additions pending the determination of proved reserves

 

89,197 

 

 

13,595 

Balance at September 30

$

209,652 

 

 

406,625 

 

7

 


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note B – Property, Plant and Equipment (Contd.)

 

The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed for each individual well and the number of projects for which exploratory well costs have been capitalized.  The projects are aged based on the last well drilled in the project.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

2015

 

2014

(Thousands of dollars)

Amount

 

No. of Wells

 

No. of Projects

 

Amount

 

No. of Wells

 

No. of Projects

Aging of capitalized well costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Zero to one year

$

52,249 

 

 

 

$

32,192 

 

 

One to two years

 

32,192 

 

 

 

 

36,676 

 

 

Two to three years

 

27,842 

 

 

– 

 

 

51,898 

 

 

– 

Three years or more

 

97,369 

 

 

 

 

285,859 

 

22 

 

 

$

209,652 

 

13 

 

 

$

406,625 

 

32 

 

 

Of the $157.4 million of exploratory well costs capitalized more than one year at September 30, 2015, $91.5 million is in the U.S. and $65.9 million is in Brunei.  In both geographical areas, either further appraisal or development drilling is planned and/or development studies/plans are in various stages of completion.

 

During 2015, the Company completed the second phase of the sale of 30% of its oil and gas assets in Malaysia and received net cash proceeds of $417.2 million.  The Company recorded an after-tax gain of $218.8 million on the sale of the final 10% portion of the total 30% sold.  Combined net cash proceeds received to date from the 30% sale totaled $1.87 billion.

 

See also Note E for discussion regarding a capital lease of production equipment at the Kakap field.

 

Note C – Inventories

 

Inventories are carried at the lower of cost or market.  For the Company’s U.K. refining and marketing operations reported as discontinued operations, the cost of crude oil and finished products in prior periods was predominantly determined on the last-in, first-out (LIFO) method.  The sale of the U.K. refining and marketing operations was completed in June 2015 and all inventories reported under the LIFO method were included in the sale.  At December 31, 2014, the carrying value of inventories under the LIFO method was $44.9 million less than such inventories would have been valued using the first-in, first-out (FIFO) method.  These inventories were included in Current assets held for sale on the Consolidated Balance Sheet as of December 31, 2014.

 

 

8


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note D – Discontinued Operations

 

The Company has accounted for its U.K. refining and marketing operations as discontinued operations for all periods presented.  The Company completed its agreement to sell the remaining U.K. downstream assets at the end of the second quarter of 2015.  The 2015 nine-month period includes an adjustment to the impairment recognized as a result of the

final sale of the U.K. downstream assets.  There were no adjustments to impairment in the three month period ended September 30, 2015.

 

The results of operations associated with these discontinued operations for the three-month and nine-month periods ended September 30, 2015 and 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

Ended September 30,

 

Ended September 30,

(Thousands of dollars)

 

2015

 

2014

 

2015

 

2014

Revenues

$

(1,342)

 

509,037 

 

381,154 

 

2,752,557 

 

 

 

 

 

 

 

 

 

Loss before income taxes

$

(8,366)

 

(27,163)

 

(8,029)

 

(61,396)

Income tax (benefit) expense

 

(22)

 

(1,813)

 

3,134 

 

(8,757)

Loss from discontinued operations

$

(8,344)

 

(25,350)

 

(11,163)

 

(52,639)

 

The following table presents the carrying value of the major categories of assets and liabilities of U.K. refining and marketing operations reflected as held for sale on the Company’s Consolidated Balance Sheets at September 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Thousands of dollars)

2015

 

2014

Current assets

 

 

 

 

Cash

$

20,738 

 

200,512 

Accounts receivable

 

12,067 

 

97,568 

Inventories

 

313 

 

42,161 

Other

 

19,298 

 

35,889 

Total current assets held for sale

$

52,416 

 

376,130 

Non-current assets

 

 

 

 

Property, plant and equipment, net

$

– 

 

50,947 

Other

 

– 

 

13 

Total non-current assets held for sale

$

– 

 

50,960 

Current liabilities

 

 

 

 

Accounts payable

$

2,895 

 

59,023 

Other accrued taxes payable

 

428 

 

40,653 

Accrued compensation and severance

 

3,715 

 

30,872 

Refinery decommissioning cost

 

3,021 

 

21,000 

Total current liabilities associated with assets held for sale

$

10,059 

 

151,548 

Non-current liabilities

 

 

 

 

Deferred income taxes payable

$

– 

 

3,873 

Deferred credits and other liabilities

 

– 

 

4,437 

Total non-current liabilities associated with assets held for sale

$

– 

 

8,310 

 

 

 

9


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note E – Financing Arrangements and Debt

 

The Company has a $2.0 billion committed credit facility that expires in June 2017.  Borrowings under the facility bear interest at 1.25% above LIBOR based on the Company’s current credit rating as of September 30, 2015.  In addition, facility fees of 0.25% are charged on the full $2.0 billion commitment.  The Company also had unused uncommitted credit facilities that totaled approximately $157.2 million at September 30, 2015.  These uncommitted facilities may be withdrawn by the various banks at any time.  On October 16, 2015, the Company renewed its shelf registration statement on file with the U.S. Securities and Exchange Commission that permits the offer and sale of debt and/or equity securities through October 2018.

 

The Company and its partners are parties to a 25-year lease of production equipment at the Kakap field offshore Malaysia.  The lease has been accounted for as a capital lease, and payments under the agreement are to be made over a 15-year period through June 2028.  Current maturities and long-term debt on the Consolidated Balance Sheet included $12.2 million and $213.0 million, respectively, associated with this lease at September 30, 2015.

 

Note F – Cash Flow Disclosures

 

Additional disclosures regarding cash flow activities are provided below.

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months

 

 

Ended September 30,

(Thousands of dollars)

2015

 

2014

Net decrease in operating working capital other than
   cash and cash equivalents:

 

 

 

 

Decrease in accounts receivable

$

389,413 

 

29,586 

Increase in inventories

 

(16,607)

 

(3,326)

Increase in prepaid expenses

 

(87,051)

 

(2,235)

Decrease in deferred income tax assets

 

4,863 

 

1,290 

Increase (decrease) in accounts payable and accrued liabilities

 

(134,458)

 

59,369 

Decrease in current income tax liabilities

 

(59,134)

 

(77,744)

Total

$

97,026 

 

6,940 

Supplementary disclosures (including discontinued operations):

 

 

 

 

Cash income taxes paid, net of refunds

$

111,897 

 

438,309 

Interest paid, net of amounts capitalized

 

60,766 

 

44,657 

 

 

 

 

 

Non-cash investing activities, related to continuing operations:

 

 

 

 

Asset retirement costs capitalized

$

55,258 

 

15,509 

Decrease in capital expenditure accrual

 

374,720 

 

106,031 

 

 

 

 

 

 

Note G – Employee and Retiree Benefit Plans

 

The Company has defined benefit pension plans that are principally noncontributory and cover most full-time employees.  All pension plans are funded except for the U.S. and Canadian nonqualified supplemental plans and the U.S. directors’ plan.  All U.S. tax qualified plans meet the funding requirements of federal laws and regulations.  Contributions to foreign plans are based on local laws and tax regulations.  The Company also sponsors health care and life insurance benefit plans, which are not funded, that cover most active and retired U.S. employees.  Additionally, most U.S. retired employees are covered by a life insurance benefit plan.  The health care benefits are contributory; the life insurance benefits are noncontributory.

 

10


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note G – Employee and Retiree Benefit Plans (Contd.)

 

The table that follows provides the components of net periodic benefit expense for the three-month and nine-month periods ended September 30, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2015

 

 

2014

 

2015

 

2014

Service cost

$

5,898 

 

 

6,208 

 

 

826 

 

 

672 

Interest cost

 

8,972 

 

 

8,239 

 

 

1,192 

 

 

1,278 

Expected return on plan assets

 

(10,471)

 

 

(8,506)

 

 

– 

 

 

– 

Amortization of prior service cost

 

187 

 

 

227 

 

 

(21)

 

 

(20)

Amortization of transitional asset

 

402 

 

 

208 

 

 

 

 

Recognized actuarial loss

 

3,885 

 

 

1,735 

 

 

193 

 

 

59 

Net periodic benefit expense

$

8,873 

 

 

8,111 

 

 

2,192 

 

 

1,990 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2015

 

 

2014

 

2015

 

2014

Service cost

$

15,751 

 

 

19,048 

 

 

2,482 

 

 

2,016 

Interest cost

 

24,893 

 

 

24,707 

 

 

3,576 

 

 

3,833 

Expected return on plan assets

 

(27,882)

 

 

(25,514)

 

 

– 

 

 

– 

Amortization of prior service cost

 

580 

 

 

680 

 

 

(62)

 

 

(61)

Amortization of transitional asset

 

947 

 

 

628 

 

 

 

 

Recognized actuarial loss

 

11,667 

 

 

5,201 

 

 

578 

 

 

177 

 

 

25,956 

 

 

24,750 

 

 

6,579 

 

 

5,969 

Special termination benefits

 

8,606 

 

 

– 

 

 

– 

 

 

– 

Curtailments

 

306 

 

 

– 

 

 

– 

 

 

– 

Net periodic benefit expense

$

34,868 

 

 

24,750 

 

 

6,579 

 

 

5,969 

 

Termination and curtailment expenses for the nine months ended September 30, shown in the table above relate to restructuring activities in the U.S. undertaken by the Company in the second quarter 2015.

 

During the nine-month period ended September 30, 2015, the Company made contributions of $33.8 million to its defined benefit pension and postretirement benefit plans.  Remaining required funding in 2015 for the Company’s defined benefit pension and postretirement plans is anticipated to be $2.4 million.

 

Note H – Incentive Plans

 

The costs resulting from all share-based payment transactions are recognized as an expense in the Consolidated Statements of Income using a fair value-based measurement method over the periods that the awards vest.

 

The 2012 Annual Incentive Plan (2012 Annual Plan) authorizes the Executive Compensation Committee (the Committee) to establish specific performance goals associated with annual cash awards that may be earned by officers, executives and other key employees.  Cash awards under the 2012 Annual Plan are determined based on the Company’s actual financial and operating results as measured against the performance goals established by the Committee.  The 2012 Long-Term Incentive Plan (2012 Long-Term Plan) authorizes the Committee to make grants of the Company’s Common Stock and other stock-based incentives to employees.  These grants may be in the form of stock options (nonqualified or incentive), stock appreciation rights (SAR), restricted stock, restricted stock units (RSU), performance units, performance shares, dividend equivalents and other stock-based incentives.  The 2012 Long-Term Plan expires in 2022.  A total of 8,700,000 shares are issuable during the life of the 2012 Long-Term Plan, with annual grants limited to 1% of Common shares outstanding.  The Company has an Employee Stock Purchase Plan that permits the issuance of up to 980,000 shares through September 30, 2017.  The Company also has a Stock Plan for Non-Employee Directors that permits the issuance of restricted stock and stock options or a combination thereof to the Company’s Directors. 

 

11


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note H – Incentive Plans (Contd.)

 

In February 2015, the Committee granted stock options for 991,000 shares at an exercise price of either $49.65 or $51.63 per share.  The Black-Scholes valuation for these awards was $10.97 per option.  The Committee also granted 455,000 performance-based RSU and 233,400 time-based RSU in February.  The fair value of the performance-based RSU, using a Monte Carlo valuation model, ranged from $44.03 to $48.12 per unit.  The fair value of time-based RSU was estimated based on the fair market value of the Company’s stock on the date of grant, which was $49.65 per share.  Additionally, the Committee granted 847,400 SAR and 616,790 units of cash-settled RSU (RSU-C) to certain employees.  The SAR and RSU- C are to be settled in cash, net of applicable income taxes, and are accounted for as liability-type awards.  The initial fair value of these SAR was equivalent to the stock options granted, while the initial value of RSU-C was equivalent to equity-settled restricted stock units granted.  Also in February, the Committee granted 48,665 shares of time-based RSU to the Company’s Directors under the Non-employee Director Plan.  These shares vest on the third anniversary of the date of grant. The estimated fair value of these awards ranged between $49.09 and $50.90 per unit on date of grant.

 

Beginning January 1, 2014, all stock option exercises are non-cash transactions for the Company.  The employee will receive net shares, after applicable statutory withholding taxes, upon each exercise.  The actual income tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements totaled $3.8 million for the nine-month period ended September 30, 2014.  No income tax benefit was realized from option exercises for the nine-month period ended September 30, 2015.

 

Amounts recognized in the financial statements with respect to share-based plans are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

(Thousands of dollars)

 

2015

 

2014

Compensation charged against income before tax benefit

$

30,722 

 

45,373 

Related income tax benefit recognized in income

 

9,046 

 

14,036 

 

 

 

Note I – Earnings per Share

 

Net income (loss) was used as the numerator in computing both basic and diluted income per Common share for the

three-month and nine-month periods ended September 30, 2015 and 2014.  The following table reconciles the

weighted-average shares outstanding used for these computations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Weighted-average shares)

2015

 

2014

 

2015

 

2014

Basic method

172,205,433 

 

177,535,503 

 

175,047,295 

 

179,259,573 

Dilutive stock options and restricted stock units*

– 

 

1,320,575 

 

– 

 

1,318,512 

   Diluted method

172,205,433 

 

178,856,078 

 

175,047,295 

 

180,578,085 

 

 

    *Due to a net loss recognized by the Company for the three-month and nine-month periods ended September 30, 2015,

      no unvested stock awards were included in the computation of diluted earnings per share because the effect would have

      been anti-dilutive.

 

The following table reflects certain options to purchase shares of common stock that were outstanding during the 2015 and 2014 periods but were not included in the computation of diluted earnings per share because the incremental shares from the assumed conversion were antidilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

Antidilutive stock options excluded from diluted shares

 

5,807,453 

 

 

1,998,009 

 

 

5,770,731 

 

 

1,855,667 

Weighted average price of these options

$

53.13 

 

 

58.53 

 

 

53.25 

 

 

58.80 

 

 

 

 

 

12


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note J – Income Taxes

 

The Company’s effective income tax rate often exceeds the statutory U.S. tax rate of 35%.  The effective tax rate is calculated as the amount of income tax expense divided by income before income tax expense.  For the three-month and nine-month periods in 2015 and 2014, the Company’s effective income tax rates were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

Three months ended September 30

34.1%

 

31.6%

 

Nine months ended September 30

36.6%

 

43.7%

 

 

The effective tax rates for most periods generally exceed the U.S. statutory tax rate of 35% due to several factors, including:  the effects of income generated in foreign tax jurisdictions, certain of which have income tax rates that are higher than the U.S. Federal rate; U.S. state tax expense; and certain expenses, including exploration and other expenses in certain foreign jurisdictions, for which no income tax benefits are available or are not presently being recorded due to a lack of reasonable certainty of adequate future revenue against which to utilize these expenses as deductions.  The effective tax rate for the

nine-month period ended September 30, 2015 was above the U.S. statutory tax rate primarily due to a deferred tax benefit associated with the sale of Malaysian assets.  The effective tax rate for the nine-month period ended September 30, 2014 was above the U.S. statutory tax rate, primarily due to other expenses in certain foreign jurisdictions for which no tax benefits were recognized.

 

The Company’s tax returns in multiple jurisdictions are subject to audit by taxing authorities.  These audits often take years to complete and settle.  Although the Company believes that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future years from resolution of outstanding unsettled matters.  As of September 30, 2015, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows:

United States – 2011; Canada – 2008; Malaysia – 2008; and United Kingdom – 2012.

 

During the third quarter of 2015, the Company received approval from the Malaysia Ministry of Finance granting marginal field status to three of its fields in its two shallow-water blocks, SK 309 and SK 311, offshore Sarawak.  A marginal field is a field with a Field Development Plan which shows potential crude oil reserves not exceeding 30 million stock tank barrels or natural gas reserves not exceeding 500 billion standard cubic feet.  Incentives include a reduced tax rate from the current 38% statutory rate to 25% on taxable income in the fields, accelerated capital allowance claims on capital spending and export duty exemption on crude oil sales.  The benefits of the reduced statutory tax rate may be carried back to the earliest date of production from the impacted field from 2013 forward.  As a result of this reduced tax rate, the Company

recorded total income tax benefits of approximately $21.8 million in the three-month and nine-month periods ended September 30, 2015.

 

Note K – Financial Instruments and Risk Management

 

Murphy often uses derivative instruments to manage certain risks related to commodity prices, foreign currency exchange rates and interest rates.  The use of derivative instruments for risk management is covered by operating policies and is closely monitored by the Company’s senior management.  The Company does not hold any derivatives for speculative purposes and it does not use derivatives with leveraged or complex features.  Derivative instruments are traded primarily with creditworthy major financial institutions or over national exchanges, such as the New York Mercantile Exchange (NYMEX).  The Company has a risk management control system to monitor commodity price risks and any derivatives obtained to manage a portion of such risks.  For accounting purposes, the Company has not designated commodity and foreign currency derivative contracts as hedges, and therefore, it recognizes all gains and losses on these derivative contracts in its Consolidated Statements of Operations.  Certain interest rate derivative contracts were accounted for as hedges and the net payment upon settlement recording the fair value of these contracts was deferred in Accumulated Other Comprehensive Loss.  This deferred cost is being reclassified to Interest Expense in the Consolidated Statements of Operations over the period until the associated notes mature in 2022.

13


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note K – Financial Instruments and Risk Management (Contd.)

 

Commodity Purchase Price Risks 

The Company is subject to commodity price risk related to crude oil, natural gas liquids and natural gas it produces and sells.  The Company had open derivative contracts at September 30, 2015 and 2014.  The impact from marking to market these commodity derivative contracts improved loss before income taxes by $24.2 million for the nine-month period ended September 30, 2015 and decreased income before income taxes by $17.2 million for the nine-month period ended September 30, 2014.

 

Open West Texas Intermediate (WTI) contracts for each period were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volumes

 

 

 

At September 30, 2015

 

(barrels per day)

 

Swap Prices

October – December 2015

 

15,000

 

$
63.30 

per barrel

 

 

 

 

 

 

At September 30, 2014

 

 

 

 

 

October – December 2014

 

22,000

 

$
93.26 

per barrel

 

Subsequent to September 30, 2015, the Company added 20,000 barrels per day in WTI contracts for all of 2016 at an average price of $52.01 per barrel.

 

Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S.  Short-term derivative instrument contracts totaling $6.2 million and $15.0 million U.S. dollars were outstanding at September 30, 2015 and 2014, respectively, to manage the risk of certain U.S. dollar accounts receivable associated with sale of crude oil production in Canada.  The impact from marking to market these foreign currency derivative contracts improved income (loss) before income taxes by $22 thousand and $0.2 million for the nine-month periods ended September 30, 2015 and 2014, respectively.

 

At September 30, 2015 and December 31, 2014, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

(Thousands of dollars)

 

Asset (Liability) Derivatives

 

Asset (Liability) Derivatives

Type of Derivative Contract

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

Commodity

 

Accounts receivable

 

$

31,999 

 

Accounts receivable

 

$

23,168 

Foreign exchange

 

Accounts receivable

 

 

22 

 

Accounts payable

 

 

(25)

 

For the three-month and nine-month periods ended September 30, 2015 and 2014, the gains and losses recognized in the Consolidated Statements of Operations for derivative instruments not designated as hedging instruments are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss)

 

 

 

 

Three Months Ended

 

Nine Months Ended

(Thousands of dollars)

 

 

 

September 30,

 

September 30,

Type of Derivative Contract

 

Statement of Operations Location

 

 

2015

 

2014

 

2015

 

2014

Commodity

 

Sales and other operating revenues

 

$

39,392 

 

37,305 

 

46,811 

 

(17,150)

Foreign exchange

 

Interest and other income

 

 

33 

 

(838)

 

47 

 

4,062 

 

 

 

 

$

39,425 

 

36,467 

 

46,858 

 

(13,088)

 

Interest Rate Risks

In 2011 the Company entered into a series of derivative contracts known as forward starting interest rate swaps to manage interest rate risk associated with $350 million of 10-year notes that were sold in May 2012.  These interest rate swaps matured in May 2012.  Under hedge accounting rules, the Company deferred the net cost associated with these contracts to match the payment of interest on these notes through 2022.  During each of the nine-month periods ended September 30, 2015 and 2014, $2.2 million of the deferred cost on the interest rate swaps was charged to income as a component of Interest Expense.  The remaining cost deferred on these matured contracts at September 30, 2015 was $12.8 million, which is recorded, net of income taxes of $6.9 million, in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheet.  The Company expects to charge approximately $0.7 million of this deferred cost to income in the form of interest expense during the remaining three months of 2015.

14


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note K – Financial Instruments and Risk Management (Contd.)

 

Fair Values – Nonrecurring

As a result of significantly lower commodity prices during the third quarter of 2015, the Company recognized approximately $2,301.0 million in pretax noncash impairment charges related to producing properties.    The fair value information associated with these impaired properties is presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

Net Book

 

Pretax

 

 

 

 

 

 

 

 

 

Value

 

(Noncash)

 

 

Fair Value

 

Prior to

 

Impairment

 

 

 

Level 1

 

Level 2

 

Level 3

 

Impairment

 

Loss

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

  Impaired proved properties

 

 

 

 

 

 

 

 

 

 

 

      Gulf of Mexico

 

$

– 

 

– 

 

216,602 

 

361,402 

 

144,800 

      Western Canada

 

 

– 

 

– 

 

23,526 

 

707,100 

 

683,574 

      Malaysia

 

 

– 

 

– 

 

1,208,900 

 

2,681,500 

 

1,472,600 

 

 

$

– 

 

– 

 

1,449,028 

 

3,750,002 

 

2,300,974 

 

The fair values were determined by internal discounted cash flow models using estimates of future production, prices from futures exchanges, costs, and a discount rate believed to be consistent with those used by principal market participants in the applicable region.

 

Fair Values – Recurring

The Company carries certain assets and liabilities at fair value in its Consolidated Balance Sheets.  The fair value hierarchy is based on the quality of inputs used to measure fair value, with Level 1 being the highest quality and Level 3 being the lowest quality.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are observable inputs other than quoted prices included within Level 1.  Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.

 

The carrying value of assets and liabilities recorded at fair value on a recurring basis at September 30, 2015 and December 31, 2014 are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

(Thousands of dollars)

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Foreign currency exchange
        derivative contracts

$

– 

 

22 

 

– 

 

22 

 

– 

 

 

– 

 

– 

 

– 

     Commodity derivative
        contracts

 

– 

 

31,999 

 

– 

 

31,999 

 

– 

 

 

23,168 

 

– 

 

23,168 

 

$

– 

 

32,021 

 

– 

 

32,021 

 

– 

 

 

23,168 

 

– 

 

23,168 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Nonqualified employee
        savings plans

$

12,195 

 

– 

 

– 

 

12,195 

 

14,408 

 

 

– 

 

– 

 

14,408 

      Foreign currency exchange
        derivative contracts

 

– 

 

– 

 

– 

 

– 

 

– 

 

 

25 

 

– 

 

25 

 

$

12,195 

 

– 

 

– 

 

12,195 

 

14,408 

 

 

25 

 

– 

 

14,433 

 

 

The fair value of WTI crude oil derivative contracts was determined based on active market quotes for WTI crude oil at the balance sheet date.  The fair value of foreign exchange derivative contracts was based on market quotes for similar contracts at the balance sheet dates.  The income effect of changes in the fair value of crude oil derivative contracts is recorded in Sales and Other Operating Revenues in the Consolidated Statements of Operations and changes in fair value of foreign exchange derivative contracts is recorded in Interest and Other Income.  The nonqualified employee savings plan is an unfunded savings plan through which participants seek a return via phantom investments in equity securities and/or mutual funds.  The fair value of this liability was based on quoted prices for these equity securities and mutual funds.  The income effect of changes

15


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note K – Financial Instruments and Risk Management (Contd.)

 

in the fair value of the nonqualified employee savings plan is recorded in Selling and General Expenses in the Consolidated Statements of Operations.  

 

The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists.  There were no offsetting positions recorded at September 30, 2015 and December 31, 2014.

 

Note L – Accumulated Other Comprehensive Loss

 

The components of Accumulated Other Comprehensive Loss on the Consolidated Balance Sheets at December 31, 2014 and September 30, 2015 and the changes during the nine-month period ended September 30, 2015 are presented net of taxes in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

Loss on

 

 

 

 

Foreign

 

Retirement and

 

Interest

 

 

 

 

Currency

 

Postretirement

 

Rate

 

 

 

 

Translation

 

Benefit Plan

 

Derivative

 

 

(Thousands of dollars)

 

Gains (Losses)1

 

Adjustments1

 

Hedges1

 

Total1

Balance at December 31, 2014

$

33,701 

 

(189,752)

 

(14,204)

 

(170,255)

Components of other comprehensive income (loss):

 

 

 

 

 

 

 

 

Before reclassifications to income

 

(503,799)

 

767 

 

– 

 

(503,032)

Reclassifications to income

 

41,745 

2

8,338 

3

1,445 

4

51,528 

Net other comprehensive income (loss)

 

(462,054)

 

9,105 

 

1,445 

 

(451,504)

Balance at September 30, 2015

$

(428,353)

 

(180,647)

 

(12,759)

 

(621,759)

 

1All amounts are presented net of income taxes.

2Reclassifications for the nine-month period ended September 30, 2015 are included in discontinued operations and primarily relate to financial adjustments recognized upon selling all operational assets in the U.K.

3Reclassifications before taxes of $12,768 for the nine-month period ended September 30, 2015 are included in the computation of net periodic benefit expense.  See Note G for additional information.  Related income taxes of $4,430 for the nine-month period ended September 30, 2015 are included in Income tax expense.

4Reclassifications before taxes of $2,222 for the nine-month period ended September 30, 2015 are included in Interest expense.  Related income taxes of $777 for the nine-month period ended September 30, 2015 are included in Income tax expense.

 

Note M – Environmental and Other Contingencies

 

The Company’s operations and earnings have been and may be affected by various forms of governmental action both in the United States and throughout the world.  Examples of such governmental action include, but are by no means limited to: tax increases and retroactive tax claims; royalty and revenue sharing increases; import and export controls; price controls; currency controls; allocation of supplies of crude oil and petroleum products and other goods; expropriation of property; restrictions and preferences affecting the issuance of oil and gas or mineral leases; restrictions on drilling and/or production; laws and regulations intended for the promotion of safety and the protection and/or remediation of the environment; governmental support for other forms of energy; and laws and regulations affecting the Company’s relationships with employees, suppliers, customers, stockholders and others.  Because governmental actions are often motivated by political considerations and may be taken without full consideration of their consequences, and may be taken in response to actions of other governments, it is not practical to attempt to predict the likelihood of such actions, the form the actions may take or the effect such actions may have on the Company.

 

Murphy and other companies in the oil and gas industry are subject to numerous federal, state, local and foreign laws and regulations dealing with the environment. Violation of federal or state environmental laws, regulations and permits can result in the imposition of significant civil and criminal penalties, injunctions and construction bans or delays.  A discharge of hazardous substances into the environment could, to the extent such event is not insured, subject the Company to substantial expense, including both the cost to comply with applicable regulations and claims by neighboring landowners and other third parties for any personal injury and property damage that might result.

 

The Company currently owns or leases, and has in the past owned or leased, properties at which hazardous substances have been or are being handled. Although the Company has used operating and disposal practices that were standard in the industry at the time, hazardous substances may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where these wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes were

 

16


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note M – Environmental and Other Contingencies (Contd.)

 

not under Murphy’s control. Under existing laws the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination.  Certain of these historical properties are in various stages of negotiation, investigation, and/or cleanup and the Company is investigating the extent of any such liability and the availability of applicable defenses.  The Company has retained certain liabilities related to environmental matters at formerly owned U.S. refineries that were sold in 2011.  The Company also obtained insurance covering certain levels of environmental exposures related to past operations of these refineries.  The Company believes costs related to these sites will not have a material adverse affect on Murphy’s net income, financial condition or liquidity in a future period.

 

During the first quarter 2015, the Company’s subsidiary in Canada identified a leak or leaks at an infield condensate transfer pipeline at the Seal field in a remote area of Alberta.  The pipeline was immediately shut down and the Company’s emergency response plan was activated.  In cooperation with local governmental regulators, and with the assistance of qualified consultants, an investigation and remediation plan is progressing as planned and the Company’s insurers have been notified.  The Company has not yet established a complete estimate of the costs to remediate the site.  Based on the assessments done to date, the Company recorded $43.9 million in other expense during the first quarter 2015 associated with the estimated costs of remediating the site.  Further refinements in the estimated total cost to remediate the site are anticipated in future periods, including possible fines from regulators and insurance recoveries.  It is possible that the ultimate net remediation costs

to the Company associated with the condensate leak or leaks will exceed the amount of expense recorded through September 30, 2015.

 

There is the possibility that environmental expenditures could be required at currently unidentified sites, and new or revised regulations could require additional expenditures at known sites. However, based on information currently available to the Company, the amount of future remediation costs incurred at known or currently unidentified sites is not expected to have a material adverse effect on the Company’s future net income, cash flows or liquidity.

 

Murphy and its subsidiaries are engaged in a number of other legal proceedings, all of which Murphy considers routine and incidental to its business.  Based on information currently available to the Company, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s net income, financial condition or liquidity in a future period.

 

Note N – Commitments

 

The Company has entered into forward sales contracts to mitigate the price risk for a portion of its 2015 and 2016 natural gas sales volumes in Western Canada.  The natural gas sales contracts call for deliveries in 2015 and 2016 of approximately 65 million cubic feet per day at Cdn $4.13 per MCF and 59 million cubic feet per day at Cdn $3.19 per MCF, respectively.  These natural gas contracts have been accounted for as normal sales for accounting purposes.

 

Note O – New Accounting Principles

 

In April 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that simplifies the presentation of debt issuance costs.  The ASU requires that the cost of issuing debt be presented on the balance sheet as a direct reduction from the associated debt liability.  These costs have historically been recorded as an asset, rather than a direct reduction of debt.  This ASU does not affect the results of operations, as costs of debt issuance will continue to be amortized to interest expense.  The Company is required to adopt the ASU effective in the first quarter of 2016, but early adoption is permitted.  The Company has elected to adopt this ASU early, effective with the first quarter of 2015.  This change in accounting principle is preferable due to allowing debt issuance costs and debt issuance discounts to be presented similarly in the Balance Sheet as reductions to recorded debt balances.  A retrospective change to the December 31, 2014 Balance Sheet as previously presented is required due to the adoption.  The retrospective adjustment to the December 31, 2014 Balance Sheet is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Previously

 

 

 

 

 

Reported

 

Adjustment

 

December 31, 2014

(Thousands of dollars)

December 31, 2014

 

Effect

 

As Adjusted

Deferred charges and other assets

$

81,151 

 

(18,569)

 

62,582 

Long-term debt

 

(2,536,238)

 

18,569 

 

(2,517,669)

 

 

 

17


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note P – Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Total Assets

 

September 30, 2015

 

September 30, 2014

 

at September 30,

 

External

 

Income

 

External

 

Income

(Millions of dollars)

2015

 

Revenues

 

(Loss)

 

Revenues

 

(Loss)

Exploration and production*

 

 

 

 

 

 

 

 

 

 

United States

$

5,935.2 

 

335.1 

 

(107.8)

 

667.6 

 

130.5 

Canada

 

2,540.5 

 

123.2 

 

(507.0)

 

246.9 

 

40.4 

Malaysia

 

2,527.8 

 

207.3 

 

(952.7)

 

516.4 

 

148.0 

Other

 

155.3 

 

– 

 

(28.6)

 

– 

 

(7.5)

Total exploration and production

 

11,158.8 

 

665.6 

 

(1,596.1)

 

1,430.9 

 

311.4 

Corporate

 

1,416.8 

 

49.3 

 

9.0 

 

2.1 

 

(40.4)

Assets/revenue/income (loss) from continuing operations

 

12,575.6 

 

714.9 

 

(1,587.1)

 

1,433.0 

 

271.0 

Discontinued operations, net of tax

 

52.4 

 

– 

 

(8.3)

 

– 

 

(25.3)

Total

$

12,628.0 

 

714.9 

 

(1,595.4)

 

1,433.0 

 

245.7 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2015

 

September 30, 2014

 

 

 

External

 

Income

 

External

 

Income

(Millions of dollars)

 

 

Revenues

 

(Loss)

 

Revenues

 

(Loss)

Exploration and production*

 

 

 

 

 

 

 

 

 

 

United States

 

 

$

955.0 

 

(218.1)

 

1,660.4 

 

335.3 

Canada

 

 

 

428.4 

 

(577.8)

 

807.4 

 

160.9 

Malaysia

 

 

 

897.6 

 

(701.9)

 

1,592.2 

 

482.6 

Other

 

 

 

– 

 

(130.7)

 

(0.2)

 

(256.0)

Total exploration and production

 

 

 

2,281.0 

 

(1,628.5)

 

4,059.8 

 

722.8 

Corporate

 

 

 

94.0 

 

(44.0)

 

8.6 

 

(139.8)

Revenue/income (loss) from continuing operations

 

 

 

2,375.0 

 

(1,672.5)

 

4,068.4 

 

583.0 

Discontinued operations, net of tax

 

 

 

– 

 

(11.2)

 

– 

 

(52.6)

Total

 

 

$

2,375.0 

 

(1,683.7)

 

4,068.4 

 

530.4 

 

*Additional details about results of oil and gas operations are presented in the table on pages 25 and 26.

 

 

18


 

 

 

 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overall Review

 

During the third quarter 2015, worldwide benchmark oil and natural gas prices continued to be significantly below average comparable benchmark prices during the third quarter 2014.  These lower oil and natural gas prices have led the Company to incur losses from operations in 2015 and due to decline of future oil prices from previous quarter-end levels resulted in the Company recognizing significant noncash impairment expenses totaling $2,301.0 million before tax and $1,536.5 million after-tax for producing heavy oil properties in Western Canada and producing offshore properties in Malaysia and the Gulf of Mexico.  Although the Company is aggressively attacking its overall cost structure, a continuation of very low commodity prices would continue to lead to adverse effects on the Company’s income and cash flow.

 

Results of Operations

 

Murphy’s income by type of business is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(Millions of dollars)

 

2015

 

 

2014

 

2015

 

2014

Exploration and production

 

$

(1,596.1)

 

 

311.4 

 

 

(1,628.5)

 

 

722.8 

Corporate and other

 

 

9.0 

 

 

(40.4)

 

 

(44.0)

 

 

(139.8)

Income (loss) from continuing operations

 

 

(1,587.1)

 

 

271.0 

 

 

(1,672.5)

 

 

583.0 

Discontinued operations

 

 

(8.3)

 

 

(25.3)

 

 

(11.2)

 

 

(52.6)

Net income (loss)

 

$

(1,595.4)

 

 

245.7 

 

 

(1,683.7)

 

 

530.4 

 

Murphy’s net loss in the third quarter of 2015 was $1,595.4 million ($9.26 per diluted share) compared to net income of $245.7 million ($1.37 per diluted share) in the third quarter of 2014.  Income (loss) from continuing operations decreased from a profit of $271.0 million ($1.51 per diluted share) in the 2014 quarter to a loss of $1,587.1 million ($9.22 per diluted share) in 2015.  In the 2015 third quarter, the Company’s exploration and production continuing operations incurred a loss of $1,596.1 million compared to earnings of $311.4 million in the 2014 quarter.  The net loss in the 2015 quarter was unfavorably impacted by impairments and lower revenues due to significantly lower realized oil and natural gas sales prices, offset in part by lower exploration costs, depreciation expense and lease operating expenses.  The corporate function had  after-tax income of $9.0 million in the 2015 third quarter compared to after-tax costs of $40.4 million in the 2014 period with the favorable variance in the current period mostly due to foreign exchange effects and lower administrative costs.  The 2015 third quarter included a loss from discontinued operations of $8.3 million ($0.04 per diluted share) compared to a loss of $25.3 million ($0.14 per diluted share) in the 2014 period.  Discontinued operations primarily consist of costs relating to winding down of refining and marketing operations in the U.K., the final components of which were sold at the end of the second quarter 2015.

 

For the first nine months of 2015, net loss totaled $1,683.7 million ($9.62 per diluted share) compared to net income of $530.4 million ($2.94 per diluted share) for the same period in 2014.  Continuing operations had a loss of $1,672.5 million ($9.55 per diluted share) in the first nine months of 2015, down from income of $583.0 million ($3.23 per diluted share) for the 2014 period.  In the first nine months of 2015, the Company’s exploration and production operations incurred a loss of $1,628.5 million compared to earnings of $722.8 million in the same period of 2014.  Exploration and production earnings in 2015 were below the 2014 period primarily due to impairment charges coupled with significantly lower oil prices realized and lower oil volumes sold, partially offset by lower operating expenses, lower depreciation expense,  lower exploration expenses and lower selling and general expenses coupled with the gain on the second phase of its sale of assets in Malaysia.  Corporate after-tax costs were $44.0 million in the first nine months of 2015 compared to after-tax costs of $139.8 million in 2014 as the current period had a favorable variance for the effects of foreign currency exchange, lower administrative cost, and increased tax benefits partially offset by higher net interest expense.  Net loss in the first nine months of 2015 included a loss from discontinued operations of $11.2 million ($0.07 per diluted share) compared to a loss of $52.6 million ($0.29 per diluted share) in the 2014 period.

 

 

 

19


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Exploration and Production

 

Results of exploration and production continuing operations are presented by geographic segment below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss)

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Millions of dollars)

2015

 

2014

 

2015

 

2014

Exploration and production

 

 

 

 

 

 

 

 

United States

$

(107.8)

 

130.5 

 

(218.1)

 

335.3 

Canada

 

(507.0)

 

40.4 

 

(577.8)

 

160.9 

Malaysia

 

(952.7)

 

148.0 

 

(701.9)

 

482.6 

Other International

 

(28.6)

 

(7.5)

 

(130.7)

 

(256.0)

Total

$

(1,596.1)

 

311.4 

 

(1,628.5)

 

722.8 

 

Third quarter 2015 vs. 2014

 

United States exploration and production operations reported a loss of $107.8 million in the third quarter of 2015 compared to a profit of $130.5 million in the 2014 quarter.  Results were $238.3 million lower in the 2015 quarter compared to the same period in 2014 due to asset impairments primarily caused by low oil prices and lower realized oil and natural gas sales prices, partially offset by increased oil sales volumes.  Revenue in the U.S. fell $332.5 million in the third quarter 2015 primarily due to lower oil and natural gas realized sales prices.  However, produced oil volumes were higher in 2015 at both Eagle Ford Shale in South Texas and in the Gulf of Mexico.  Lease operating expenses decreased by $17.1 million due to lower costs in Eagle Ford Shale and lower repair costs offshore Gulf of Mexico compared to same quarter 2014.  Severance and ad valorem taxes in the 2015 quarter were $13.2 million lower than the 2014 period primarily due to weaker average commodity prices.  Depreciation expense decreased $13.7 million in 2015 compared to 2014 due to lower unit rates in the 2015 period.  Impairment expense was $144.8 million in 2015 due to write down of certain producing properties in the Gulf of Mexico.  Exploration expenses were down $64.1 million in the third quarter of 2015 primarily related to lower dry hole costs.

 

Operations in Canada had losses of $507.0 million in the third quarter 2015 compared to earnings of $40.4 million in the 2014 quarter.  Canadian results of operations were $547.4 million lower in the 2015 quarter and included losses for both conventional oil and natural gas operations and synthetic oil operations.  Results for conventional operations were $525.6 million lower in 2015 due to impairment expense, lower average realized sales prices for crude oil and natural gas and lower oil volume sold.  These were partially offset by higher natural gas volumes produced and lower operating expenses.  Oil production for conventional operations was lower in Canada in the 2015 period compared to 2014 primarily due to lower volumes for both the Seal heavy oil area and offshore East Coast properties.  Natural gas sales volumes increased in 2015 due to higher production in the Tupper area of Western Canada as a result of second half 2014 drilling activities.  Lease operating expenses associated with conventional operations were $20.0 million lower in the 2015 quarter due to weaker Canadian dollar exchange rates and lower repair costs.  Impairment expense was $683.6 million in 2015 due to a write down of heavy oil properties at Seal in Western Canada.    Synthetic operations results were lower by $21.8 million in the third quarter of 2015 due to lower oil production and lower sales price.  Lease operating expenses associated with synthetic operations were $18.3 million lower in the 2015 quarter due to lower maintenance costs, lower fuel costs and a weaker Canadian dollar exchange rate.

 

Malaysia operations reported losses of $952.7 million in the 2015 quarter compared to earnings of $148.0 million during the same period in 2014.  Results were down $1,100.7 million in 2015 in Malaysia due to impairment expense, lower volumes sold and lower realized sales prices for oil and natural gas, partially offset by lower lease operating expenses and lower depreciation expense. Crude oil and natural gas sales volumes in Malaysia were lower in the 2015 quarter, primarily due to impacts from the sale of 30% of the Company’s total interest and lower entitlements.  Lease operating expenses decreased in the 2015 period by $26.3 million due to the sale mentioned above, less maintenance costs and lower volume sold compared to 2014.  Depreciation expense was $41.5 million lower in 2015 compared to the 2014 quarter primarily due to lower oil and natural gas volumes sold.  Impairment expense was $1,472.6 million in 2015 due to write downs of certain offshore producing properties.    Other expenses increased by $17.3 million in the 2015 period primarily due to write down of certain material and supply inventory to fair market value.

20


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Exploration and Production (Contd.)

 

Third quarter 2015 vs. 2014 (Contd.)

 

Other international operations reported a loss of $28.6 million in the third quarter of 2015 compared to a loss of $7.5 million in the 2014 quarter.  The $21.1 million decrease in the 2015 period was primarily related to income tax benefits recognized in the 2014 quarter related to exiting the Central Dohuk block in the Kurdistan region of Iraq.

 

Total hydrocarbon production averaged 207,586 barrels of oil equivalent per day in the 2015 third quarter, which represented a 9.7% decrease from the 229,759 barrels of oil equivalents per day produced in the 2014 quarter.  The Company sold 30% of its interests in Malaysia in late 2014 and early 2015.   On a pro-forma basis, assuming the sale of 30% of the Company’s interest in Malaysia properties occurred at the beginning of 2014, total hydrocarbon production in the 2015 third quarter increased approximately 2% compared to the 2014 period as adjusted for the sale.    Average crude oil and condensate production was 125,170 barrels per day in the third quarter of 2015 compared to 144,934 barrels per day in the third quarter of 2014.  Crude oil production increased in the Eagle Ford Shale area of South Texas in 2015 where an ongoing development program continues.  Crude oil production in the Gulf of Mexico was higher in the 2015 quarter due to added production from the Medusa field’s subsea expansion project completed in June 2015.  Heavy oil production from the Seal area in Western Canada was lower in 2015 primarily due to volumes shut-in associated with uneconomic wells and environmental monitoring together with natural decline.  Oil production offshore Eastern Canada was lower during 2015 primarily due to downtime for a turnaround at the Hibernia facilities.  Lower oil production in 2015 in Malaysia was primarily attributable to less net oil volumes produced due to the sale of 30% of the Company’s total interest in late 2014 and early 2015.  On a worldwide basis, the Company's crude oil and condensate prices averaged $46.20 per barrel in the third quarter 2015 compared to $89.36 per barrel in the 2014 period, a decline of 48% quarter to quarter.  Total production of natural gas liquids (NGL) was 11,093 barrels per day in the 2015 third quarter compared to 10,923 barrels per day in the same 2014 period.  The increase in NGL production was primarily associated with the ongoing drilling program in the Eagle Ford.  The average sales price for U.S. NGL was $10.25 per barrel in the 2015 quarter compared to $27.89 per barrel in 2014.  Natural gas sales volumes averaged 428 million cubic feet per day in the third quarter 2015 compared to 443 million cubic feet per day in 2014.  Natural gas sales volumes increased in North America for 2015 due to growth of associated gas production caused by ongoing development drilling in our predominately oil-based Eagle Ford Shale in South Texas and second half 2014 drilling in the Tupper area of Western Canada, somewhat offset by lower production volumes in the Gulf of Mexico.  The increase in natural gas sales volumes in 2015 was somewhat offset by lower volumes in Malaysia due to both lower entitlement percentages and the sale of 30% of the Company’s total interests.  North American natural gas sales prices averaged $2.42 per thousand cubic feet (MCF) in the 2015 quarter, 33% below the $3.63 per MCF average in the same quarter of 2014.  The average realized price for natural gas produced in the 2015 quarter at fields offshore Sarawak was $3.75 per MCF, compared to a price of $5.11 per MCF in the 2014 quarter and decreased due to lower sales prices received offset in part by lower levels of revenue sharing with the local government in the 2015 period.

 

Nine months 2015 vs. 2014

 

U.S. E&P operations incurred a loss of $218.1 million for the nine months ended September 30, 2015 compared to income of $335.3 million in the 2014 period.  The 2015 income reduction of $553.4 million was primarily caused by impairment expense and lower realized sales prices for oil and natural gas, partially offset by higher production volume.  Depreciation expense increased by $31.2 million in 2015 primarily due to increased production volumes at both Eagle Ford Shale and Gulf of Mexico.  Severance and ad valorem tax expense in the first nine months of 2015 was $29.2 million lower than the 2014 period primarily due to weaker average commodity prices.  Impairment expense was $144.8 million in 2015 due to a write down of certain producing properties in the Gulf of Mexico.

 

Canadian operations had a loss of $577.8 million in the first nine months of 2015 compared to income of $160.9 million a year ago.  Operating results for conventional operations declined by $662.5 million in the 2015 period while synthetic operation’s operating results declined by $76.2 million compared to the same period in 2014.  Sales revenue within conventional operations declined for 2015 by $228.3 million compared to 2014, primarily due to lower realized oil and natural gas prices and lower oil sales volumes.  Lease operating and depreciation expenses for conventional operations were lower by $42.2 million and $21.1 million, respectively, in 2015 mostly related to lower oil sales volumes and weaker Canadian dollar exchange rate in the current year.  Impairment expense of $683.6 million in 2015 was due to a write down of heavy oil properties at Seal in Western Canada.  Other expenses increased by $43.9 million due to an environmental remediation provision associated with the condensate leak or leaks in the transfer pipeline at the Seal heavy oil area.  Synthetic operating results were lower by $76.2 million in the first nine months of 2015 due to weaker realized oil prices and lower production volumes.  Lease operating expenses associated with synthetic operations were reduced by $55.4 million in 2015 due to lower maintenance costs and weaker Canadian dollar exchange rates.

21


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Exploration and Production (Contd.)

 

Nine months 2015 vs. 2014 (Contd.)

 

Malaysia operations had a loss of $701.9 million in the first nine months of 2015 compared to earnings of $482.6 million in the 2014 period.  Earnings were down $1,184.5 million in 2015 primarily due to impairment expense and lower realized sales prices for oil and natural gas and lower volumes sold, partially offset by a $218.8 million after-tax gain on sale of a 10% interest in Malaysian assets and lower lease operating expenses.  Lease operating expense in 2015 was lower than in 2014 by $77.5 million primarily due to lower volume sold, lower maintenance costs and no repeat of 2014 start-up costs for Siakap North, offshore Sabah.  Depreciation expense in 2015 was $46.0 million less than 2014 due to lower volumes sold.  Impairment expense was $1,472.6 million due to write down of certain offshore producing properties.    Other expense increased by $17.3 million in the 2015 period primarily due to write down of certain material and supply inventory to fair market value.

 

Other international operations reported a loss of $130.7 million in the first nine months of 2015 compared to a loss of $256.0 million in the 2014 period.  The 2015 period included lower dry hole costs of $98.3 million, with the higher 2014 costs primarily associated with unsuccessful wildcat drilling offshore Cameroon.  The current period included lower geological and geophysical expense of $33.1 million, principally for seismic data acquired in 2014 in Namibia.  Other exploration expenses were $11.2 million lower in the current year, mostly attributable to an expense incurred in connection with relinquishing the exploration license on the South Barito block onshore Indonesia in 2014.

 

Total worldwide production averaged 210,313 barrels of oil equivalent per day during the nine months ended September 30, 2015, a decrease from 214,888 barrels of oil equivalent produced in the same period in 2014.  On a pro-forma basis, assuming the sale of 30% of the Company’s interest in Malaysia properties occurred at the beginning of 2014, total hydrocarbon production for the nine month period ended September 30, 2015 increased 11% compared to the 2014 period as adjusted for the sale.    Crude oil, condensate and gas liquids production in the nine months of 2015 averaged 128,888 barrels per day compared to 135,801 barrels per day a year ago.  Higher oil production in the Eagle Ford Shale, where additional wells have been brought on production as part of an ongoing development drilling and completion program, essentially offset oil production declines in certain other areas.  Heavy oil production in Canada declined in 2015 in the Seal area of Western Canada primarily due to wells shut in related to the condensate leak or leaks and uneconomic conditions together with natural well decline.  Oil production offshore Eastern Canada was lower in 2015 due to less production at Hibernia field primarily due to planned maintenance in 2015.  Synthetic oil production in Canada also was lower in 2015 due to impacts of unplanned outages and higher Canadian royalty rates.  Lower oil production in 2015 in Malaysia was primarily attributable to impacts from the sale of 30% of the Company’s total interest.  For the first nine months of 2015, the Company’s sales price for crude oil and condensate averaged $49.58 per barrel, down from $93.49 per barrel in 2014.  The sales price for U.S. natural gas liquids averaged $11.90 per barrel in 2015 compared to $29.92 per barrel in 2014.  Natural gas sales volumes increased from 423 million cubic feet per day in 2014 to 426 million cubic feet per day in 2015, with the increase due to higher gas production volumes in the Dalmatian field in the Gulf of Mexico, Eagle Ford Shale area of South Texas, and Tupper area in Western Canada nearly offset by declines in Malaysia due primarily to sale of 30% of the Company’s total interests.  The average sales price for North American natural gas in the first nine months of 2015 was $2.44 per MCF, down from $3.92 per MCF realized in 2014.  Natural gas production at fields offshore Sarawak was sold at an average realized price of $4.31 per MCF in 2015 compared to $5.67 per MCF in 2014.  The Sarawak gas price was weaker in 2015 primarily due to lower average selling prices offset in part by lower levels of revenue sharing with the local government during the current year.

 

Additional details about results of oil and gas operations are presented in the tables on pages 25 and 26.

22


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Exploration and Production (Contd.)

 

Selected operating statistics for the three-month and nine-month periods ended September 30, 2015 and 2014 follow.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

Net crude oil and condensate produced – barrels per day

 

125,170 

 

144,934 

 

128,888 

 

135,801 

United States – Eagle Ford Shale

 

48,304 

 

47,745 

 

48,423 

 

43,653 

                             – Gulf of Mexico and other

 

16,992 

 

16,534 

 

14,027 

 

13,266 

Canada – light

 

91 

 

38 

 

104 

 

38 

                    – heavy

 

4,975 

 

6,784 

 

5,837 

 

7,433 

                    – offshore

 

6,846 

 

7,823 

 

7,413 

 

8,216 

                    – synthetic

 

10,907 

 

11,200 

 

11,230 

 

11,481 

Malaysia1 – Sarawak

 

15,194 

 

21,679 

 

15,696 

 

19,590 

                        – Block K

 

21,861 

 

33,131 

 

26,158 

 

32,124 

Net crude oil and condensate sold – barrels per day

 

124,549 

 

142,440 

 

129,294 

 

135,942 

United States – Eagle Ford Shale

 

48,304 

 

47,745 

 

48,423 

 

43,653 

                             – Gulf of Mexico and other

 

16,992 

 

16,534 

 

14,027 

 

13,266 

Canada – light

 

91 

 

38 

 

104 

 

38 

                    – heavy

 

4,975 

 

6,784 

 

5,837 

 

7,433 

                    – offshore

 

5,611 

 

7,092 

 

7,238 

 

8,605 

                    – synthetic

 

10,907 

 

11,200 

 

11,230 

 

11,481 

Malaysia1 – Sarawak

 

18,493 

 

23,660 

 

17,546 

 

21,287 

                        – Block K

 

19,176 

 

29,387 

 

24,889 

 

30,179 

Net natural gas liquids produced – barrels per day

 

11,093 

 

10,923 

 

10,431 

 

8,580 

United States – Eagle Ford Shale

 

8,192 

 

6,521 

 

7,744 

 

5,409 

                             – Gulf of Mexico and other

 

2,264 

 

3,412 

 

2,020 

 

2,308 

Canada

 

 

23 

 

 

23 

Malaysia1 – Sarawak

 

636 

 

967 

 

658 

 

840 

Net natural gas liquids sold – barrels per day

 

11,789 

 

11,480 

 

10,466 

 

8,625 

United States – Eagle Ford Shale

 

8,192 

 

6,521 

 

7,744 

 

5,409 

                             – Gulf of Mexico

 

2,264 

 

3,412 

 

2,020 

 

2,308 

Canada

 

 

23 

 

 

23 

Malaysia1 – Sarawak

 

1,332 

 

1,524 

 

693 

 

885 

Net natural gas sold – thousands of cubic feet per day

 

427,937 

 

443,413 

 

425,964 

 

423,041 

United States – Eagle Ford Shale

 

39,543 

 

37,782 

 

39,203 

 

31,890 

                             – Gulf of Mexico and other

 

47,987 

 

67,137 

 

53,010 

 

50,831 

Canada

 

196,111 

 

151,784 

 

194,136 

 

144,873 

Malaysia1 – Sarawak

 

128,963 

 

174,958 

 

117,339 

 

166,036 

                        – Block K

 

15,333 

 

11,752 

 

22,276 

 

29,411 

Total net hydrocarbons produced – equivalent barrels per day2

 

207,586 

 

229,759 

 

210,313 

 

214,888 

Total net hydrocarbons sold – equivalent barrels per day2

 

207,661 

 

227,822 

 

210,754 

 

215,074 

 

1 The Company sold 20% of its interest in Malaysia properties on December 18, 2014 and sold an additional 10% interest on    

  January 29, 2015.  This table includes volumes for these sold interests through the date of disposition.  Total production volumes

  during the three-month and nine-month periods in 2014 for the 30% volumes sold were approximately 26,000 and 25,500 barrels

  of oil equivalent per day, respectively.

2 Natural gas converted on an energy equivalent basis of 6:1.

23


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Exploration and Production (Contd.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

Weighted average sales prices

 

 

 

 

 

 

 

 

Crude oil and condensate – dollars per barrel

 

 

 

 

 

 

 

 

United States – Eagle Ford Shale

$

48.70 

 

93.56 

 

49.27 

 

95.50 

                       – Gulf of Mexico and other

 

44.94 

 

97.03 

 

49.45 

 

99.36 

Canada1   – light

 

37.70 

 

85.92 

 

43.41 

 

93.17 

– heavy

 

20.28 

 

57.86 

 

25.09 

 

56.69 

– offshore

 

48.09 

 

97.63 

 

53.77 

 

105.41 

– synthetic

 

46.53 

 

93.55 

 

49.72 

 

96.83 

Malaysia – Sarawak2

 

46.38 

 

80.55 

 

50.27 

 

89.57 

  – Block K2

 

46.88 

 

89.00 

 

54.24 

 

95.18 

 

 

 

 

 

 

 

 

 

    Natural gas liquids – dollars per barrel

 

 

 

 

 

 

 

 

United States – Eagle Ford Shale

$

10.26 

 

26.55 

 

11.52 

 

28.77 

                       – Gulf of Mexico and other

 

10.25 

 

30.45 

 

13.13 

 

32.60 

Canada1

 

– 

 

64.95 

 

22.31 

 

75.96 

Malaysia – Sarawak2

 

54.27 

 

68.48 

 

55.23 

 

75.68 

 

 

 

 

 

 

 

 

 

    Natural gas – dollars per thousand cubic feet

 

 

 

 

 

 

 

 

United States – Eagle Ford Shale

$

2.39 

 

3.76 

 

2.39 

 

4.17 

                       – Gulf of Mexico and other

 

2.46 

 

3.60 

 

2.47 

 

4.20 

Canada1

 

2.42 

 

3.61 

 

2.44 

 

3.76 

Malaysia – Sarawak2

 

3.75 

 

5.11 

 

4.31 

 

5.67 

  – Block K

 

0.24 

 

0.24 

 

0.24 

 

0.24 

 

 

1  U.S. dollar equivalent.

2  Prices are net of payments under terms of the respective production sharing contracts.

 

24


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Exploration and Production (Contd.)

 

OIL AND GAS OPERATING RESULTS – THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

 

 

 

 

 

 

 

United

 

Conven-

 

 

 

 

 

 

 

 

(Millions of dollars)

 

States

 

tional

 

Synthetic

 

Malaysia

 

Other

 

Total

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales and other operating revenues

 

$

335.1 

 

76.4 

 

46.8 

 

207.3 

 

– 

 

665.6 

Lease operating expenses

 

 

66.9 

 

22.6 

 

37.3 

 

57.0 

 

– 

 

183.8 

Severance and ad valorem taxes

 

 

12.1 

 

0.9 

 

1.3 

 

– 

 

– 

 

14.3 

Depreciation, depletion and amortization

 

 

220.8 

 

51.6 

 

12.1 

 

144.2 

 

1.6 

 

430.3 

Accretion of asset retirement obligations

 

 

5.2 

 

1.6 

 

1.3 

 

3.8 

 

– 

 

11.9 

Impairment of assets

 

 

144.8 

 

683.6 

 

– 

 

1,472.6 

 

– 

 

2,301.0 

Exploration expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry holes

 

 

10.2 

 

– 

 

– 

 

14.1 

 

(2.9)

 

21.4 

Geological and geophysical

 

 

2.5 

 

– 

 

– 

 

– 

 

4.8 

 

7.3 

Other

 

 

1.8 

 

0.1 

 

– 

 

– 

 

11.0 

 

12.9 

 

 

 

14.5 

 

0.1 

 

– 

 

14.1 

 

12.9 

 

41.6 

Undeveloped lease amortization

 

 

12.0 

 

3.9 

 

– 

 

– 

 

0.6 

 

16.5 

Total exploration expenses

 

 

26.5 

 

4.0 

 

– 

 

14.1 

 

13.5 

 

58.1 

Selling and general expenses

 

 

22.9 

 

5.1 

 

0.2 

 

3.3 

 

15.2 

 

46.7 

Other expenses

 

 

0.9 

 

– 

 

– 

 

17.3 

 

– 

 

18.2 

Results of operations before taxes

 

 

(165.0)

 

(693.0)

 

(5.4)

 

(1,505.0)

 

(30.3)

 

(2,398.7)

Income tax benefits

 

 

(57.2)

 

(190.2)

 

(1.2)

 

(552.3)

 

(1.7)

 

(802.6)

Results of operations (excluding corporate
   overhead and interest)

 

$

(107.8)

 

(502.8)

 

(4.2)

 

(952.7)

 

(28.6)

 

(1,596.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales and other operating revenues

 

$

667.6 

 

150.1 

 

96.8 

 

516.4 

 

– 

 

1,430.9 

Lease operating expenses

 

 

84.0 

 

42.6 

 

55.6 

 

83.3 

 

– 

 

265.5 

Severance and ad valorem taxes

 

 

25.3 

 

1.9 

 

1.4 

 

– 

 

– 

 

28.6 

Depreciation, depletion and amortization

 

 

234.5 

 

61.9 

 

13.4 

 

185.7 

 

1.3 

 

496.8 

Accretion of asset retirement obligations

 

 

4.5 

 

1.5 

 

2.4 

 

4.2 

 

– 

 

12.6 

Exploration expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry holes

 

 

66.0 

 

– 

 

– 

 

– 

 

9.8 

 

75.8 

Geological and geophysical

 

 

3.9 

 

0.1 

 

– 

 

0.5 

 

1.4 

 

5.9 

Other

 

 

8.9 

 

0.3 

 

– 

 

– 

 

8.6 

 

17.8 

 

 

 

78.8 

 

0.4 

 

– 

 

0.5 

 

19.8 

 

99.5 

Undeveloped lease amortization

 

 

11.8 

 

4.9 

 

– 

 

– 

 

1.2 

 

17.9 

Total exploration expenses

 

 

90.6 

 

5.3 

 

– 

 

0.5 

 

21.0 

 

117.4 

Selling and general expenses

 

 

24.2 

 

6.3 

 

0.3 

 

3.4 

 

19.5 

 

53.7 

Other expenses

 

 

0.7 

 

– 

 

– 

 

– 

 

– 

 

0.7 

Results of operations before taxes

 

 

203.8 

 

30.6 

 

23.7 

 

239.3 

 

(41.8)

 

455.6 

Income tax provisions (benefits)

 

 

73.3 

 

7.8 

 

6.1 

 

91.3 

 

(34.3)

 

144.2 

Results of operations (excluding corporate
   overhead and interest)

 

$

130.5 

 

22.8 

 

17.6 

 

148.0 

 

(7.5)

 

311.4 

 

 

 

 

 

 

 

25


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Exploration and Production (Contd.)

 

OIL AND GAS OPERATING RESULTS – NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

 

 

 

 

 

 

 

United

 

Conven-

 

 

 

 

 

 

 

 

(Millions of dollars)

 

States

 

tional

 

Synthetic

 

Malaysia

 

Other

 

Total

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales and other operating revenues

 

$

955.0 

 

275.7 

 

152.7 

 

897.6 

 

– 

 

2,281.0 

Lease operating expenses

 

 

247.3 

 

80.9 

 

124.7 

 

190.8 

 

– 

 

643.7 

Severance and ad valorem taxes

 

 

46.5 

 

3.5 

 

4.1 

 

– 

 

– 

 

54.1 

Depreciation, depletion and amortization

 

 

622.4 

 

171.0 

 

37.4 

 

475.1 

 

4.7 

 

1,310.6 

Accretion of asset retirement obligations

 

 

14.9 

 

5.0 

 

4.1 

 

11.4 

 

– 

 

35.4 

Impairment of assets

 

 

144.8 

 

683.6 

 

– 

 

1,472.6 

 

– 

 

2,301.0 

Exploration expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry holes

 

 

74.5 

 

– 

 

– 

 

14.1 

 

31.8 

 

120.4 

Geological and geophysical

 

 

7.8 

 

– 

 

– 

 

1.2 

 

21.7 

 

30.7 

Other

 

 

6.7 

 

0.5 

 

– 

 

– 

 

31.1 

 

38.3 

 

 

 

89.0 

 

0.5 

 

– 

 

15.3 

 

84.6 

 

189.4 

Undeveloped lease amortization

 

 

48.5 

 

12.4 

 

– 

 

– 

 

1.5 

 

62.4 

Total exploration expenses

 

 

137.5 

 

12.9 

 

– 

 

15.3 

 

86.1 

 

251.8 

Selling and general expenses

 

 

68.2 

 

18.4 

 

0.7 

 

4.5 

 

44.3 

 

136.1 

Other expenses

 

 

8.4 

 

44.0 

 

– 

 

17.3 

 

12.1 

 

81.8 

Results of operations before taxes

 

 

(335.0)

 

(743.6)

 

(18.3)

 

(1,289.4)

 

(147.2)

 

(2,533.5)

Income tax provisions (benefits)

 

 

(116.9)

 

(188.7)

 

4.6 

 

(587.5)

 

(16.5)

 

(905.0)

Results of operations (excluding corporate
   overhead and interest)

 

$

(218.1)

 

(554.9)

 

(22.9)

 

(701.9)

 

(130.7)

 

(1,628.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas sales and other operating revenues

 

$

1,660.4 

 

504.0 

 

303.4 

 

1,592.2 

 

(0.2)

 

4,059.8 

Lease operating expenses

 

 

242.1 

 

123.1 

 

180.1 

 

268.3 

 

– 

 

813.6 

Severance and ad valorem taxes

 

 

75.7 

 

4.4 

 

3.7 

 

– 

 

– 

 

83.8 

Depreciation, depletion and amortization

 

 

591.2 

 

192.1 

 

39.8 

 

521.1 

 

3.6 

 

1,347.8 

Accretion of asset retirement obligations

 

 

12.9 

 

4.6 

 

7.0 

 

12.5 

 

– 

 

37.0 

Exploration expenses

 

 

 

 

 

 

 

 

 

 

 

 

– 

Dry holes

 

 

73.5 

 

– 

 

– 

 

– 

 

130.1 

 

203.6 

Geological and geophysical

 

 

19.7 

 

0.3 

 

– 

 

0.5 

 

54.8 

 

75.3 

Other

 

 

13.0 

 

0.8 

 

– 

 

– 

 

42.3 

 

56.1 

 

 

 

106.2 

 

1.1 

 

– 

 

0.5 

 

227.2 

 

335.0 

Undeveloped lease amortization

 

 

37.2 

 

14.8 

 

– 

 

– 

 

3.7 

 

55.7 

Total exploration expenses

 

 

143.4 

 

15.9 

 

– 

 

0.5 

 

230.9 

 

390.7 

Selling and general expenses

 

 

71.8 

 

21.4 

 

0.8 

 

11.8 

 

55.6 

 

161.4 

Other expenses

 

 

1.2 

 

0.1 

 

– 

 

– 

 

– 

 

1.3 

Results of operations before taxes

 

 

522.1 

 

142.4 

 

72.0 

 

778.0 

 

(290.3)

 

1,224.2 

Income tax provisions (benefits)

 

 

186.8 

 

34.8 

 

18.7 

 

295.4 

 

(34.3)

 

501.4 

Results of operations (excluding corporate
   overhead and interest)

 

$

335.3 

 

107.6 

 

53.3 

 

482.6 

 

(256.0)

 

722.8 

26


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Results of Operations (Contd.)

 

Corporate

 

Corporate activities, which include interest income and expense, foreign exchange effects, and corporate overhead not allocated to operating functions, had net income of $9.0 million in the 2015 third quarter compared to a net cost of $40.4 million in the same 2014 quarter.  The $49.4 million after-tax improvement in the quarter is primarily due to favorable impacts from foreign currency exchange and lower administrative costs.  An after-tax gain of $47.8 million occurred in 2015 on transactions denominated in foreign currencies, while the 2014 quarter had an after-tax gain of $3.1 million. 

 

For the nine months of 2015, corporate activities reflected net costs of $44.0 million compared to net costs of $139.8 million a year ago.  Nine-month corporate costs in 2015 were favorable to 2014 by $95.8 million mostly due to favorable impacts from foreign currency exchange, lower administrative costs and increased tax benefits offset in part by higher net interest expense.  Total after-tax gains associated with transactions denominated in foreign currencies were $82.3 million in the 2015 period compared to an after-tax loss of $1.0 million in the first nine months of 2014.

 

Discontinued Operations

 

The Company has presented refining and marketing operations in the U.K. as discontinued operations in its consolidated financial statements.  In June 2015, the Company completed an agreement to sell the remaining U.K. downstream assets.

 

The after-tax results of these operations for the three-month and nine-month periods ended September 30, 2015 and 2014 are reflected in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

(Millions of dollars)

 

 

2015

 

2014

 

2015

 

2014

U.K. refining and marketing

 

$

(8.3)

 

(25.4)

 

(11.0)

 

(52.4)

U.K. exploration and production

 

 

– 

 

0.1 

 

(0.2)

 

(0.2)

Loss from discontinued operations

 

$

(8.3)

 

(25.3)

 

(11.2)

 

(52.6)

 

Financial Condition

 

Net cash provided by continuing operating activities was $1,096.5 million for the first nine months of 2015 compared to $2,334.3 million during the same period in 2014.  The decline in cash provided by continuing operations activities in 2015 was primarily attributable to significantly lower realized sales prices for the Company’s oil and gas production during the current year.  Changes in operating working capital other than cash and cash equivalents from continuing operations generated cash of $97.0 million during the first nine months of 2015, compared to $6.9 million in 2014.    Proceeds from sales of property and equipment generated cash of $423.8 million in 2015 compared to $3.1 million in 2014 with the 2015 amount primarily relating to proceeds received upon sale of a 10% interest in Malaysian assets.    Other significant sources of cash included $852.4 million in the 2015 period and $587.3 million in 2014 from maturity of Canadian government securities that had maturity dates greater than 90 days at acquisition.  The Company had net borrowings of $885.0 million and $1,050.0 million in the nine-month periods of 2015 and 2014, respectively, to fund capital development activities and repurchase Company stock.

27


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Financial Condition (Contd.)

 

The most significant use of cash in both years was for property additions and dry holes for continuing operations, which including amounts expensed, were $1,975.1 million and $2,806.7 million in the nine-month periods ended September 2015 and 2014, respectively.  Total cash dividends to shareholders amounted to $184.8 million in 2015 and $174.2 million in 2014.  The Company expended $250.0 million to acquire 5,967,313 shares of Common stock through share repurchases during the first nine months of 2015.  In the first nine months of 2014, the Company spent $375.0 million to repurchase Common shares.  Also, the purchase of Canadian government securities with maturity dates greater than 90 days at acquisition used cash of $865.3 million in the 2015 period and $672.7 million in the 2014 period.  The Company used $450.0 million of cash in the 2015 period to repay current maturities of long-term debt.

 

Total accrual basis capital expenditures for continuing operations were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

(Millions of dollars)

2015

 

2014

Capital Expenditures – Continuing operations

 

 

 

 

 

Exploration and production

$

1,631.5 

 

 

2,828.0 

Corporate

 

37.5 

 

 

5.6 

Total capital expenditures

$

1,669.0 

 

 

2,833.6 

 

The reduction in capital expenditures in the exploration and production business in 2015 compared to 2014 was primarily attributable to lower development spending in the Eagle Ford Shale area in the United States and offshore Malaysia and lower spending on exploration drilling in other international operations.

 

A reconciliation of property additions and dry hole costs in the Consolidated Statements of Cash Flows to total capital expenditures for continuing operations follows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

(Millions of dollars)

 

2015

 

2014

Property additions and dry hole costs per cash flow statements

 

$

1,975.1 

 

 

2,806.7 

Geophysical and other exploration expenses

 

 

69.0 

 

 

131.4 

Capital expenditure accrual changes and other

 

 

(375.1)

 

 

(104.5)

Total capital expenditures

 

$

1,669.0 

 

 

2,833.6 

 

Working capital (total current assets less total current liabilities) at September 30, 2015 was $514.6 million, $383.3 million more than December 31, 2014, with the increase attributable to lower accounts payable for other operating activities and proceeds received from the sale of 10% interest in Malaysia in the first quarter 2015, partially offset by lower accounts receivable balances due to significant decline in realized sales prices and lower invested cash balances held by the Company’s Canadian operations.

 

At September 30, 2015, long-term debt of $3,327.7 million had increased by $810.0 million compared to December 31, 2014.    A summary of capital employed at September 30, 2015 and December 31, 2014 follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

(Millions of dollars)

Amount

 

%

 

Amount

 

%

Capital employed

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

3,327.7 

 

35.6 

%

 

$

2,517.7 

 

22.7 

%

Stockholders' equity

 

6,028.5 

 

64.4 

 

 

 

8,573.4 

 

77.3 

 

Total capital employed

$

9,356.2 

 

100.0 

%

 

$

11,091.1 

 

100.0 

%

 

 

28


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Financial Condition (Contd.)

 

Cash and invested cash are maintained in several operating locations outside the United States.  At September 30, 2015, cash, cash equivalents and cash temporarily invested in Canadian government securities held outside the U.S. included U.S. dollar equivalents of approximately $475.4 million in Canada and $787.3 million in Malaysia.  In addition $20.7 million of cash was held in the United Kingdom, but was reflected in current Assets Held for Sale on the Company’s Consolidated Balance Sheet at September 30, 2015.  In certain cases, the Company could incur taxes or other costs should these cash balances be repatriated to the U.S. in future periods.  This could occur due to withholding taxes and/or potential additional U.S. tax burden when less than the U.S. Federal tax rate of 35% has been paid for cash taxes in foreign locations.  A lower cash tax rate is often paid in foreign countries in the early years of operations when accelerated tax deductions are permitted to spur oil and gas investments; cash tax rates are generally higher in later years after accelerated tax deductions in early years are exhausted.  Canada collects a 5% withholding tax on any cash repatriated to the United States.

 

On August 6, 2014, the Company announced that its Board of Directors had approved a share buyback program of up to $500 million of the Company’s shares of Common stock over the next year.  On May 20, 2015, the Company entered into a variable term, capped accelerated share repurchase transaction (ASR) with a major financial institution to repurchase an aggregate of $250 million of the Company’s Common stock.  The Company completed the ASR on July 7, 2015.  A total of 5,967,313 shares of Common stock were acquired under this repurchase agreement.  The remaining Board authorization to repurchase the remaining $250 million expired in August 2015 and was not renewed.

 

Accounting and Other Matters

 

In April 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that simplifies the presentation of debt issuance costs.  The ASU requires that the cost of issuing debt be presented on the balance sheet as a direct reduction from the associated debt liability.  These costs have historically been recorded as an asset, rather than a direct reduction of debt.  This ASU does not affect the results of operations, as costs of debt issuance will continue to be amortized to interest expense.  The Company is required to adopt the ASU effective in the first quarter of 2016, but early adoption is permitted.  The Company has elected to adopt this ASU early, effective with the first quarter of 2015.  This change in accounting principle is preferable due to allowing debt issuance costs and debt issuance discounts to be presented similarly in the Balance Sheet as reductions to recorded debt balances.  A retrospective change to the December 31, 2014 Balance Sheet as previously presented is required due to the adoption.  See Note O for further discussion of the retrospective adjustment.

 

During the first quarter 2015, the Company’s subsidiary in Canada identified a leak or leaks at an infield condensate transfer pipeline at the Seal field in a remote area of Alberta.  Additional information associated with the leak or leaks is addressed in Note M to the Consolidated Financial Statements on page 17 of this Form 10-Q.  Based on information currently available to the Company, the changes in the recognized estimated remediation costs at the site are not expected to have a material adverse effect on the Company’s future net income, cash flows or liquidity.

 

Outlook

 

Average worldwide crude oil prices in October 2015 were similar to the average prices during the third quarter of 2015. While prices have recovered from their August 2015 lows, downward pressures include continued slowing Asian demand growth and record high domestic crude stocks.  North American natural gas prices have weakened in October 2015 as inventory levels continued to increase due to high production levels and lower seasonal demand.    The Company expects its total oil and natural gas production to average 199,000 barrels of oil equivalent per day in the fourth quarter 2015.  The Company currently anticipates total capital expenditures for the full year 2015 to be approximately $2.3 billion.

 

The Company will primarily fund its capital program in 2015 using operating cash flow, but supplements funding where necessary using borrowings under available credit facilities.  The Company’s 2015 budget calls for borrowings of long-term debt during the year to fund a portion of the capital program.  If oil and/or natural gas prices weaken further, actual cash flow generated from operations could be reduced such that higher than anticipated borrowings might be required during the year to maintain funding of the Company’s ongoing development projects.

 

The significant reduction in the sales prices of crude oil has caused the Company to reduce capital expenditures, including development drilling and completion operations in North America.  The Company currently projects that its capital spending program in 2016 will be well below 2015 levels.  The reduced level of capital expenditures, if it continues, could lead to lower production levels in future periods.  A continuation of very low oil and/or gas prices or further deterioration therein, could lead to negative future effects on the Company, which could include reductions in proved reserves, additional impairment charges, the necessity for further cost containment measures, higher debt levels, and a reconsideration of the level of dividends on its Common stock.

29


 

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS (Contd.)

 

Outlook (Contd.)

 

The Company has two deepwater drilling rigs under contract and in use in the Gulf of Mexico.  These contracts expire in February and November 2016.  The Company is evaluating its options as to these rig contracts in the face of low oil and gas prices, an expected reduction in the Company’s overall 2016 capital spending program and uncertainty about whether working interest partners will agree to participate in further Gulf drilling opportunities in 2016.  Options being considered over the remaining months of the contracts include cancellation of the contracts, assignment of the rig time to a third party at a day rate below the Company’s committed day rate, and normal drilling operations.  The Company currently estimates that the remaining day rate commitments following completion of present drilling operations could be up to $277 million.  Depending on the final determination of rig use, the Company could incur pretax costs of up to $277 million under those contracts during a period that ranges from as early as the fourth quarter of 2015 through the fourth quarter of 2016.

 

As of October 28, the Company has entered into derivative or forward fixed-price delivery contracts to manage risk associated with certain future oil and natural gas sales prices as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract or

 

 

 

Average

 

 

Commodities

 

Location

 

Dates

 

Volumes per Day

 

Average Prices

U.S. Oil

 

West Texas Intermediate

 

Oct. – Dec. 2015

 

 

15,000 bbls/d

 

$63.30 per bbl.

 

 

 

 

Jan. – Dec. 2016

 

 

20,000 bbls/d

 

$52.01 per bbl.

 

 

 

 

 

 

 

 

 

 

Canadian Natural Gas

 

TCPL–NOVA System

 

Oct. – Dec. 2015

 

 

65 mmcf/d

 

C$4.13 per mcf

 

 

 

 

Jan. – Dec. 2016

 

 

59 mmcf/d

 

C$3.19 per mcf

 

Forward-Looking Statements

 

This Form 10-Q contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.  These statements, which express management’s current views concerning future events or results, are subject to inherent risks and uncertainties.  Factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements include, but are not limited to, the volatility and level of crude oil and natural gas prices, the level and success rate of Murphy’s exploration programs, the Company’s ability to maintain production rates and replace reserves, customer demand for Murphy’s products, adverse foreign exchange movements, political and regulatory instability, adverse developments in the U.S. or global capital markets, credit markets or economies generally and uncontrollable natural hazards.  For further discussion of risk factors, see Murphy’s 2014 Annual Report on Form 10-K on file with the U.S. Securities and Exchange Commission and page 31 of this Form 10-Q report.  Murphy undertakes no duty to publicly update or revise any forward-looking statements.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to market risks associated with interest rates, prices of crude oil, natural gas and petroleum products, and foreign currency exchange rates.  As described in Note K to this Form 10-Q report, Murphy makes use of derivative financial and commodity instruments to manage risks associated with existing or anticipated transactions.

 

There were commodity transactions in place at September 30, 2015 covering certain future U.S. crude oil sales volumes in 2015.  A 10% increase in the respective benchmark price of these commodities would have decreased the recorded net asset associated with these derivative contracts by approximately $6.3 million, while a 10% decrease would have increased the recorded net asset by a similar amount.

 

There were derivative foreign exchange contracts in place at September 30, 2015 to hedge the value of the U.S. dollar against the Canadian dollar for certain U.S. dollar receivables to be collected in October 2015.  A 10% strengthening of the U.S. dollar against the Canadian dollar would have decreased the recorded net asset associated with these contracts by approximately $0.6 million, while a 10% weakening of the U.S. dollar would have increased the recorded net asset by approximately $0.6 million.  Changes in the fair value of these derivative contracts generally offset the financial statement impact of an equivalent volume of foreign currency exposures associated with other assets and/or liabilities.

 

 

 

30


 

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Under the direction of its principal executive officer and principal financial officer, controls and procedures have been established by the Company to ensure that material information relating to the Company and its consolidated subsidiaries is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.

 

Based on the Company’s evaluation as of the end of the period covered by the filing of this Quarterly Report on Form 10-Q, the principal executive officer and principal financial officer of Murphy Oil Corporation have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by Murphy Oil Corporation in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Murphy is engaged in a number of legal proceedings, all of which Murphy considers routine and incidental to its business.  Based on information currently available to the Company, the ultimate resolution of environmental and legal matters referred to in this note is not expected to have a material adverse effect on the Company’s net income, financial condition or liquidity in a future period.

 

ITEM 1A. RISK FACTORS

 

The Company’s operations in the oil and gas business naturally lead to various risks and uncertainties.  These risk factors are discussed in Item 1A Risk Factors in its 2014 Form 10-K filed on February 27, 2015.  The Company has not identified any additional risk factors not previously disclosed in its 2014 Form 10-K report.

 

 

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Murphy Oil Corporation

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Number

 

Approximate

 

 

 

 

 

 

 

 

of Shares

 

Dollar Value

 

 

 

 

 

 

 

 

Purchased

 

of Shares that

 

 

 

 

 

 

 

 

as Part of

 

May Yet Be

 

 

 

Total

 

Average

 

Publicly

 

Purchased

 

 

 

Number of

 

Price

 

Announced

 

Under the

 

 

 

Shares

 

Paid per

 

Plans or

 

Plans or

 

Period

 

Purchased

 

Share

 

 Programs

 

Programs

 

July 1, 2015 to July 31, 2015

 

– 

 

$

– 

 

– 

 

$

250,000,000 

 

August 1, 2015 to August 31, 2015

 

730,604 

 

 

– 

 

730,604 

 

 

– 

 

September 1, 2015 to September 30, 2015

 

– 

 

 

– 

 

– 

 

 

– 

 

Total July 1, 2015 to September 30, 2015

 

730,604 

 

 

 

 

730,604 

 

 

– 

 

 

On May 20, 2015 the Company announced that it had entered into a $250 million variable term, capped accelerated share repurchase agreement (ASR) with a major financial institution.  The total aggregate number of shares repurchased pursuant to this ASR was determined by reference to the Rule 10b-18 volume-weighted price of the Company’s Common stock, less a fixed discount, over the term of the ASR, subject to a minimum number of shares.  In May, the Company received the minimum number of shares under the transaction, which totaled 5,236,709 shares.  The ASR was completed in July 2015 and the Company received an additional 730,604 shares upon completion of the ASR.  This brought the total number of shares acquired under this ASR transaction to 5,967,313, with the average purchase price equal to $41.89 per share.

 

ITEM 6. EXHIBITS

 

The Exhibit Index on page 33 of this Form 10-Q report lists the exhibits that are hereby filed or incorporated by reference.

31


 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MURPHY OIL CORPORATION

(Registrant)

 

 

 

By

/s/ KEITH CALDWELL

 

Keith Caldwell, Senior Vice President

 

 and Controller (Chief Accounting Officer

 

  and Duly Authorized Officer)

 

November 5, 2015

(Date)

  

 

32


 

 

EXHIBIT INDEX

 

 

 

 

 

 

 

Exhibit

 

 

  No.   

 

 

 

 

 

12

 

Computation of Ratio of Earnings to Fixed Charges

 

 

 

31.1

 

Certification required by Rule 13a-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification required by Rule 13a-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101. INS

 

XBRL Instance Document

 

 

 

101. SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101. CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101. DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101. LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

101. PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

 

   Exhibits other than those listed above have been omitted since they are either not required or not applicable. 

33