MURPHY OIL CORP - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
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 incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
| 9805 Katy Fwy, Suite G-200 | 77024 | |||||||
| Houston, | Texas | (Zip Code) | ||||||
| (Address of principal executive offices) | ||||||||
(281) | 675-9000 | |||||||
| (Registrant’s telephone number, including area code) | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, $1.00 Par Value | MUR | New York Stock Exchange | ||||||
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
Number of shares of Common Stock, $1.00 par value, outstanding at April 30, 2021 was 154,399,812.
MURPHY OIL CORPORATION
TABLE OF CONTENTS
| Page | |||||
1
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS (unaudited)
(Thousands of dollars) | March 31, 2021 | December 31, 2020 | |||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 230,870 | 310,606 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $1,605 in 2021 and 2020 | 278,819 | 262,014 | |||||||||
| Inventories | 66,585 | 66,076 | |||||||||
| Prepaid expenses | 37,634 | 33,860 | |||||||||
| Assets held for sale | 77,397 | 327,736 | |||||||||
| Total current assets | 691,305 | 1,000,292 | |||||||||
Property, plant and equipment, at cost less accumulated depreciation, depletion and amortization of $11,869,715 in 2021 and $11,455,305 in 2020 | 8,216,722 | 8,269,038 | |||||||||
| Operating lease assets | 911,941 | 927,658 | |||||||||
| Deferred income taxes | 433,617 | 395,253 | |||||||||
| Deferred charges and other assets | 30,759 | 28,611 | |||||||||
| Total assets | $ | 10,284,344 | 10,620,852 | ||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 538,327 | 407,097 | ||||||||
| Income taxes payable | 17,370 | 18,018 | |||||||||
| Other taxes payable | 18,032 | 22,498 | |||||||||
| Operating lease liabilities | 102,983 | 103,758 | |||||||||
| Other accrued liabilities | 174,575 | 150,578 | |||||||||
| Liabilities associated with assets held for sale | 14,097 | 14,372 | |||||||||
| Total current liabilities | 865,384 | 716,321 | |||||||||
| Long-term debt | 2,755,596 | 2,988,067 | |||||||||
| Asset retirement obligations | 904,085 | 816,308 | |||||||||
| Deferred credits and other liabilities | 691,254 | 680,580 | |||||||||
| Non-current operating lease liabilities | 829,760 | 845,088 | |||||||||
| Deferred income taxes | 138,656 | 180,341 | |||||||||
| Total liabilities | 6,184,735 | 6,226,705 | |||||||||
| Equity | |||||||||||
Cumulative Preferred Stock, par $100, authorized 400,000 shares, none issued | — | — | |||||||||
Common Stock, par $1.00, authorized 450,000,000 shares, issued 195,100,628 shares in 2021 and 195,100,628 shares in 2020 | 195,101 | 195,101 | |||||||||
| Capital in excess of par value | 914,303 | 941,692 | |||||||||
| Retained earnings | 5,062,813 | 5,369,538 | |||||||||
| Accumulated other comprehensive loss | (575,610) | (601,333) | |||||||||
| Treasury stock | (1,661,416) | (1,690,661) | |||||||||
| Murphy Shareholders' Equity | 3,935,191 | 4,214,337 | |||||||||
| Noncontrolling interest | 164,418 | 179,810 | |||||||||
| Total equity | 4,099,609 | 4,394,147 | |||||||||
| Total liabilities and equity | $ | 10,284,344 | 10,620,852 | ||||||||
See Notes to Consolidated Financial Statements, page 7.
2
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
| Three Months Ended March 31, | |||||||||||
(Thousands of dollars, except per share amounts) | 2021 | 2020 | |||||||||
| Revenues and other income | |||||||||||
| Revenue from sales to customers | $ | 592,527 | 600,558 | ||||||||
| (Loss) gain on crude contracts | (214,385) | 400,672 | |||||||||
| Gain on sale of assets and other income | 1,843 | 2,498 | |||||||||
| Total revenues and other income | 379,985 | 1,003,728 | |||||||||
| Costs and expenses | |||||||||||
| Lease operating expenses | 147,164 | 209,148 | |||||||||
| Severance and ad valorem taxes | 9,231 | 9,422 | |||||||||
| Transportation, gathering and processing | 42,912 | 44,367 | |||||||||
| Exploration expenses, including undeveloped lease amortization | 11,780 | 20,126 | |||||||||
| Selling and general expenses | 29,503 | 36,772 | |||||||||
| Depreciation, depletion and amortization | 198,278 | 306,102 | |||||||||
| Accretion of asset retirement obligations | 10,492 | 9,966 | |||||||||
| Impairment of assets | 171,296 | 967,530 | |||||||||
| Other expense (benefit) | 21,079 | (45,188) | |||||||||
| Total costs and expenses | 641,735 | 1,558,245 | |||||||||
| Operating loss from continuing operations | (261,750) | (554,517) | |||||||||
| Other income (loss) | |||||||||||
| Interest and other income (loss) | (5,341) | 241 | |||||||||
| Interest expense, net | (88,100) | (41,097) | |||||||||
| Total other loss | (93,441) | (40,856) | |||||||||
| Loss from continuing operations before income taxes | (355,191) | (595,373) | |||||||||
| Income tax benefit | (88,159) | (91,533) | |||||||||
| Loss from continuing operations | (267,032) | (503,840) | |||||||||
| Income (loss) from discontinued operations, net of income taxes | 208 | (4,862) | |||||||||
| Net loss including noncontrolling interest | (266,824) | (508,702) | |||||||||
| Less: Net income (loss) attributable to noncontrolling interest | 20,614 | (92,598) | |||||||||
| NET LOSS ATTRIBUTABLE TO MURPHY | $ | (287,438) | (416,104) | ||||||||
| LOSS PER COMMON SHARE – BASIC | |||||||||||
| Continuing operations | $ | (1.87) | (2.68) | ||||||||
| Discontinued operations | — | (0.03) | |||||||||
| Net loss | $ | (1.87) | (2.71) | ||||||||
| LOSS PER COMMON SHARE – DILUTED | |||||||||||
| Continuing operations | $ | (1.87) | (2.68) | ||||||||
| Discontinued operations | — | (0.03) | |||||||||
| Net loss | $ | (1.87) | (2.71) | ||||||||
| Cash dividends per Common share | 0.125 | 0.25 | |||||||||
| Average Common shares outstanding (thousands) | |||||||||||
| Basic | 153,953 | 153,313 | |||||||||
| Diluted | 153,953 | 153,313 | |||||||||
See Notes to Consolidated Financial Statements, page 7.
3
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
| Three Months Ended March 31, | |||||||||||
| (Thousands of dollars) | 2021 | 2020 | |||||||||
| Net (loss) income including noncontrolling interest | $ | (266,824) | (508,702) | ||||||||
| Other comprehensive (loss) income, net of tax | |||||||||||
| Net (loss) gain from foreign currency translation | 19,897 | (118,411) | |||||||||
| Retirement and postretirement benefit plans | 4,136 | (9,711) | |||||||||
| Deferred loss on interest rate hedges reclassified to interest expense | 1,690 | 299 | |||||||||
| Other comprehensive (loss) income | 25,723 | (127,823) | |||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | (241,101) | (636,525) | ||||||||
See Notes to Consolidated Financial Statements, page 7.
4
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Three Months Ended March 31, | |||||||||||
| (Thousands of dollars) | 2021 | 2020 | |||||||||
| Operating Activities | |||||||||||
| Net loss including noncontrolling interest | $ | (266,824) | (508,702) | ||||||||
| Adjustments to reconcile net loss to net cash provided by continuing operations activities | |||||||||||
| (Income) loss from discontinued operations | (208) | 4,862 | |||||||||
| Depreciation, depletion and amortization | 198,278 | 306,102 | |||||||||
| Previously suspended exploration costs | 717 | 97 | |||||||||
| Amortization of undeveloped leases | 4,602 | 7,478 | |||||||||
| Accretion of asset retirement obligations | 10,492 | 9,966 | |||||||||
| Impairment of assets | 171,296 | 967,530 | |||||||||
| Deferred income tax benefit | (88,867) | (81,373) | |||||||||
| Mark to market loss (gain) on contingent consideration | 14,923 | (59,151) | |||||||||
| Mark to market loss (gain) on crude contracts | 153,505 | (358,302) | |||||||||
| Long-term non-cash compensation | 12,124 | 9,805 | |||||||||
| Net (increase) decrease in noncash working capital | (9,052) | 107,827 | |||||||||
| Other operating activities, net | 36,780 | (13,482) | |||||||||
| Net cash provided by continuing operations activities | 237,766 | 392,657 | |||||||||
| Investing Activities | |||||||||||
| Property additions and dry hole costs | (240,545) | (354,834) | |||||||||
| Property additions for King's Quay FPS | (17,734) | (21,296) | |||||||||
| Proceeds from sales of property, plant and equipment | 268,023 | — | |||||||||
| Net cash provided (required) by investing activities | 9,744 | (376,130) | |||||||||
| Financing Activities | |||||||||||
| Borrowings on revolving credit facility | 140,000 | 170,000 | |||||||||
| Repayment of revolving credit facility | (340,000) | — | |||||||||
| Retirement of debt | (576,358) | (3,570) | |||||||||
| Debt issuance, net of cost | 541,980 | (613) | |||||||||
| Early redemption of debt cost | (34,177) | — | |||||||||
| Distributions to noncontrolling interest | (36,006) | (32,399) | |||||||||
| Cash dividends paid | (19,287) | (38,392) | |||||||||
| Withholding tax on stock-based incentive awards | (3,794) | (7,094) | |||||||||
| Capital lease obligation payments | (178) | (168) | |||||||||
| Net cash (required) provided by financing activities | (327,820) | 87,764 | |||||||||
Cash Flows from Discontinued Operations 1 | |||||||||||
| Operating activities | — | (1,202) | |||||||||
| Investing activities | — | 4,494 | |||||||||
| Net cash provided by discontinued operations | — | 3,292 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 574 | (3,298) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (79,736) | 100,993 | |||||||||
| Cash and cash equivalents at beginning of period | 310,606 | 306,760 | |||||||||
| Cash and cash equivalents at end of period | $ | 230,870 | 407,753 | ||||||||
1 Net cash provided by discontinued operations is not part of the cash flow reconciliation. See Notes to Consolidated Financial Statements, page 7.
5
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
| Three Months Ended March 31, | ||||||||||||||
(Thousands of dollars) | 2021 | 2020 | ||||||||||||
Cumulative Preferred Stock – par $100, authorized 400,000 shares, none issued | $ | — | — | |||||||||||
Common Stock – par $1.00, authorized 450,000,000 shares, issued 195,100,628 shares at March 31, 2021 and 195,083,364 shares at March 31, 2020 | ||||||||||||||
| Balance at beginning of period | 195,101 | 195,089 | ||||||||||||
| Exercise of stock options | — | 12 | ||||||||||||
| Balance at end of period | 195,101 | 195,101 | ||||||||||||
| Capital in Excess of Par Value | ||||||||||||||
| Balance at beginning of period | 941,692 | 949,445 | ||||||||||||
| Exercise of stock options, including income tax benefits | (39) | (156) | ||||||||||||
| Restricted stock transactions and other | (33,000) | (32,604) | ||||||||||||
| Share-based compensation | 5,650 | 8,245 | ||||||||||||
| Balance at end of period | 914,303 | 924,930 | ||||||||||||
| Retained Earnings | ||||||||||||||
| Balance at beginning of period | 5,369,538 | 6,614,304 | ||||||||||||
| Net (loss) income for the period | (287,438) | (416,104) | ||||||||||||
| Cash dividends | (19,287) | (38,392) | ||||||||||||
| Balance at end of period | 5,062,813 | 6,159,808 | ||||||||||||
| Accumulated Other Comprehensive Loss | ||||||||||||||
| Balance at beginning of period | (601,333) | (574,161) | ||||||||||||
| Foreign currency translation (loss) gain, net of income taxes | 19,897 | (118,411) | ||||||||||||
| Retirement and postretirement benefit plans, net of income taxes | 4,136 | (9,711) | ||||||||||||
| Deferred loss on interest rate hedges reclassified to interest expense, net of income taxes | 1,690 | 299 | ||||||||||||
| Balance at end of period | (575,610) | (701,984) | ||||||||||||
| Treasury Stock | ||||||||||||||
| Balance at beginning of period | (1,690,661) | (1,717,217) | ||||||||||||
| Awarded restricted stock, net of forfeitures | 29,206 | 25,511 | ||||||||||||
| Exercise of stock options | 39 | — | ||||||||||||
Balance at end of period – 40,784,118 shares of Common Stock in 2021 and 21,456,366 shares of Common Stock in 2020, at cost | (1,661,416) | (1,691,706) | ||||||||||||
| Murphy Shareholders’ Equity | 3,935,191 | 4,886,149 | ||||||||||||
| Noncontrolling Interest | ||||||||||||||
| Balance at beginning of period | 179,810 | 337,151 | ||||||||||||
| Net (loss) income attributable to noncontrolling interest | 20,614 | (92,598) | ||||||||||||
| Distributions to noncontrolling interest owners | (36,006) | (32,399) | ||||||||||||
| Balance at end of period | 164,418 | 212,154 | ||||||||||||
| Total Equity | $ | 4,099,609 | 5,098,303 | |||||||||||
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 exploration and production company that conducts its business through various operating subsidiaries. The Company primarily produces oil and natural gas in the United States and Canada and conducts oil and natural gas exploration activities worldwide.
In connection with the LLOG acquisition, we hold a 0.5% interest in two variable interest entities (VIEs), Delta House Oil and Gas Lateral LLC and Delta House Floating Production System (FPS) LLC (collectively Delta House). These VIEs have not been consolidated because we are not considered the primary beneficiary. These non-consolidated VIEs are not material to our financial position or results of operations. As of March 31, 2021, our maximum exposure to loss was $3.5 million, which represents our net investment in Delta House. We have not provided any financial support to Delta House other than amounts previously required by our membership interest.
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 March 31, 2021 and December 31, 2020, and the results of operations, cash flows and changes in stockholders’ equity for the interim periods ended March 31, 2021 and 2020, 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 2020 Form 10-K report, as certain notes and other pertinent information have been abbreviated or omitted in this report. Financial results for the three-month period ended March 31, 2021 are not necessarily indicative of future results.
Note B – New Accounting Principles and Recent Accounting Pronouncements
Accounting Principles Adopted
Income Taxes. In December 2019, the FASB issued ASU 2019-12, which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Implementation on a prospective or retrospective basis varies by specific topics within the ASU. The Company adopted this guidance in the first quarter of 2021 and it did not have a material impact on its consolidated financial statements.
Recent Accounting Pronouncements
None.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note C – Revenue from Contracts with Customers
Nature of Goods and Services
The Company explores for and produces crude oil, natural gas and natural gas liquids (collectively oil and gas) in select basins around the globe. The Company’s revenue from sales of oil and gas production activities are primarily subdivided into two key geographic segments: the U.S. and Canada. Additionally, revenue from sales to customers is generated from three primary revenue streams: crude oil and condensate, natural gas liquids, and natural gas.
For operated oil and gas production where the non-operated working interest owner does not take-in-kind its proportionate interest in the produced commodity, the Company acts as an agent for the working interest owner and recognizes revenue only for its own share of the commingled production. The exception to this is the reporting of the noncontrolling interest in MP GOM as prescribed by ASC 810-10-45.
U.S. - In the United States, the Company primarily produces oil and gas from fields in the Eagle Ford Shale area of South Texas and in the Gulf of Mexico. Revenue is generally recognized when oil and gas are transferred to the customer at the delivery point. Revenue recognized is largely index based with price adjustments for floating market differentials.
Canada - In Canada, contracts include long-term floating commodity index priced and natural gas physical forward sales fixed-price contracts. For the Offshore business in Canada, contracts are based on index prices and revenue is recognized at the time of vessel load based on the volumes on the bill of lading and point of custody transfer.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note C – Revenue from Contracts with Customers (Contd.)
Disaggregation of Revenue
The Company reviews performance based on two key geographical segments and between onshore and offshore sources of revenue within these geographies.
For the three-month period ended March 31, 2021 and 2020, the Company recognized $592.5 million and $600.6 million, respectively, from contracts with customers for the sales of oil, natural gas liquids and natural gas.
| Three Months Ended March 31, | ||||||||||||||
| (Thousands of dollars) | 2021 | 2020 | ||||||||||||
| Net crude oil and condensate revenue | ||||||||||||||
United States | Onshore | $ | 114,490 | 131,236 | ||||||||||
| Offshore | 328,341 | 346,972 | ||||||||||||
Canada | Onshore | 29,903 | 23,383 | |||||||||||
| Offshore | 18,062 | 24,614 | ||||||||||||
Other | — | 1,864 | ||||||||||||
Total crude oil and condensate revenue | 490,796 | 528,069 | ||||||||||||
| Net natural gas liquids revenue | ||||||||||||||
United States | Onshore | 7,528 | 5,503 | |||||||||||
| Offshore | 10,054 | 5,026 | ||||||||||||
Canada | Onshore | 3,987 | 2,034 | |||||||||||
Total natural gas liquids revenue | 21,569 | 12,563 | ||||||||||||
| Net natural gas revenue | ||||||||||||||
United States | Onshore | 6,443 | 5,558 | |||||||||||
| Offshore | 22,138 | 14,995 | ||||||||||||
Canada | Onshore | 51,581 | 39,373 | |||||||||||
Total natural gas revenue | 80,162 | 59,926 | ||||||||||||
| Total revenue from contracts with customers | 592,527 | 600,558 | ||||||||||||
| (Loss) gain on crude contracts | (214,385) | 400,672 | ||||||||||||
| Gain on sale of assets and other income | 1,843 | 2,498 | ||||||||||||
| Total revenue and other income | $ | 379,985 | 1,003,728 | |||||||||||
Contract Balances and Asset Recognition
As of March 31, 2021, and December 31, 2020, receivables from contracts with customers, net of royalties and associated payables, on the balance sheet from continuing operations, were $179.1 million and $135.2 million, respectively. Payment terms for the Company’s sales vary across contracts and geographical regions, with the majority of the cash receipts required within 30 days of billing. Based on a forward-looking expected loss model in accordance with ASU 2016-13, the Company did not recognize any impairment losses on receivables or contract assets arising from customer contracts during the reporting periods.
The Company has not entered into any upstream oil and gas sale contracts that have financing components as at March 31, 2021.
The Company does not employ sales incentive strategies such as commissions or bonuses for obtaining sales contracts. For the periods presented, the Company did not identify any assets to be recognized associated with the costs to obtain a contract with a customer.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note C – Revenue from Contracts with Customers (Contd.)
Performance Obligations
The Company recognizes oil and gas revenue when it satisfies a performance obligation by transferring control over a commodity to a customer. Judgment is required to determine whether some customers simultaneously receive and consume the benefit of commodities. As a result of this assessment for the Company, each unit of measure of the specified commodity is considered to represent a distinct performance obligation that is satisfied at a point in time upon the transfer of control of the commodity.
For contracts with market or index-based pricing, which represent the majority of sales contracts, the Company has elected the allocation exception and allocates the variable consideration to each single performance obligation in the contract. As a result, there is no price allocation to unsatisfied remaining performance obligations for delivery of commodity product in subsequent periods.
The Company has entered into several long-term, fixed-price contracts in Canada. The underlying reason for entering a fixed price contract is generally unrelated to anticipated future prices or other observable data and serves a particular purpose in the company’s long-term strategy.
As of March 31, 2021, the Company had the following sales contracts in place which are expected to generate revenue from sales to customers for a period of more than 12 months starting at the inception of the contract:
| Current Long-Term Contracts Outstanding at March 31, 2021 | ||||||||||||||||||||||||||
| Approximate Volumes | ||||||||||||||||||||||||||
| Location | Commodity | End Date | Description | |||||||||||||||||||||||
| U.S. | Oil | Q4 2021 | Fixed quantity delivery in Eagle Ford | 17,000 BOED | ||||||||||||||||||||||
| U.S. | Natural Gas and NGL | Q1 2023 | Deliveries from dedicated acreage in Eagle Ford | As produced | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2021 | Contracts to sell natural gas at USD Index pricing | 10 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2022 | Contracts to sell natural gas at USD Index pricing | 8 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2022 | Contracts to sell natural gas at Alberta AECO fixed prices | 5 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2022 | Contracts to sell natural gas at USD index fixed pricing | 20 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2023 | Contracts to sell natural gas at USD Index pricing | 25 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2023 | Contracts to sell natural gas at Alberta AECO fixed prices | 38 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2024 | Contracts to sell natural gas at USD Index pricing | 31 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2024 | Contracts to sell natural gas at Alberta AECO fixed prices | 134 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2024 | Contracts to sell natural gas at USD index fixed pricing | 15 MMCFD | ||||||||||||||||||||||
| Canada | Natural Gas | Q4 2026 | Contracts to sell natural gas at USD Index pricing | 49 MMCFD | ||||||||||||||||||||||
| Canada | NGL | Q3 2023 | Contracts to sell natural gas liquids at various CAD pricing | 730 BOED | ||||||||||||||||||||||
Fixed price contracts are accounted for as normal sales and purchases for accounting purposes.
Note D – Property, Plant, and Equipment
Exploratory Wells
Under FASB guidance 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.
As of March 31, 2021, the Company had total capitalized exploratory well costs for continuing operations pending the determination of proved reserves of $182.4 million. The following table reflects the net changes in capitalized exploratory well costs during the three-month periods ended March 31, 2021 and 2020.
| (Thousands of dollars) | 2021 | 2020 | |||||||||
| Beginning balance at January 1 | $ | 181,616 | 217,326 | ||||||||
| Additions pending the determination of proved reserves | 785 | 816 | |||||||||
| Capitalized exploratory well costs charged to expense | — | (39,709) | |||||||||
| Balance at March 31 | $ | 182,401 | 178,433 | ||||||||
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note D – Property, Plant and Equipment (Contd.)
The capitalized well costs charged to expense during 2020 represent a charge for asset impairments (see below).
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.
| March 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| (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 | $ | — | — | — | 24,637 | 3 | 3 | ||||||||||||||||||||||||||||
| One to two years | 23,514 | 3 | 3 | 31,541 | 2 | 2 | |||||||||||||||||||||||||||||
| Two to three years | 30,562 | 2 | 2 | — | — | — | |||||||||||||||||||||||||||||
| Three years or more | 128,325 | 6 | — | 122,255 | 6 | — | |||||||||||||||||||||||||||||
| $ | 182,401 | 11 | 5 | 178,433 | 11 | 5 | |||||||||||||||||||||||||||||
Of the $182.4 million of exploratory well costs capitalized more than one year at March 31, 2021, $90.6 million is in Vietnam, $45.9 million is in the U.S., $25.7 million is in Brunei, $15.4 million is in Mexico, and $4.8 million is in Canada. In all geographical areas, either further appraisal or development drilling is planned and/or development studies/plans are in various stages of completion.
Impairments
During the first quarter of 2021, the Company recorded an impairment charge of $171.3 million for Terra Nova due to the current status, including agreements with the partners, of operating and production plans.
In the first quarter of 2020, declines in future oil and natural gas prices (principally driven by increased supply from foreign oil producers and reduced demand in response to the COVID-19 pandemic) led to impairments in certain of the Company’s U.S. Offshore and Other Foreign properties. The Company recorded pretax noncash impairment charges of $967.5 million to reduce the carrying values to their estimated fair values as of March 31, 2020 at select properties.
The fair values were determined by internal discounted cash flow models using estimates of future production, prices, costs and discount rates 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 months ended March 31, 2021 and 2020.
| Three Months Ended March 31, | |||||||||||
| (Thousands of dollars) | 2021 | 2020 | |||||||||
| U.S. | $ | — | 927,821 | ||||||||
| Canada | 171,296 | — | |||||||||
| Other Foreign | — | 39,709 | |||||||||
| $ | 171,296 | 967,530 | |||||||||
Divestments
On March 17, 2021, the King’s Quay FPS was sold to ArcLight Capital Partners, LLC (ArcLight) for proceeds of $267.7 million, which reimburses the Company for previously incurred capital expenditures.
Note E – Assets Held for Sale and Discontinued Operations
The Company has accounted for its former Malaysian exploration and production operations and its former U.K., U.S. refining and marketing operations as discontinued operations for all periods presented. The results of operations associated with discontinued operations for the three-month periods ended March 31, 2021 and 2020 were as follows:
11
| Three Months Ended March 31, | |||||||||||
| (Thousands of dollars) | 2021 | 2020 | |||||||||
| Revenues | $ | 44 | 4,073 | ||||||||
| Costs and expenses | |||||||||||
| Other costs and expenses (benefits) | (164) | 8,935 | |||||||||
| (Loss) income before taxes | 208 | (4,862) | |||||||||
| Income tax expense | — | — | |||||||||
| (Loss) income from discontinued operations | $ | 208 | (4,862) | ||||||||
The following table presents the carrying value of the major categories of assets and liabilities of the Brunei exploration and production operations and the Company’s office building in El Dorado, Arkansas that are reflected as held for sale on the Company’s Consolidated Balance Sheets.
| (Thousands of dollars) | March 31, 2021 | December 31, 2020 | |||||||||
| Current assets | |||||||||||
| Cash | $ | 9,469 | 10,185 | ||||||||
| Inventories | 193 | 406 | |||||||||
| Property, plant, and equipment, net | 58,294 | 307,704 | |||||||||
| Deferred income taxes and other assets | 9,441 | 9,441 | |||||||||
| Total current assets associated with assets held for sale | $ | 77,397 | 327,736 | ||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 5,213 | 5,306 | ||||||||
| Other accrued liabilities | 36 | 45 | |||||||||
| Current maturities of long-term debt (finance lease) | 746 | 737 | |||||||||
| Taxes payable | 1,510 | 1,510 | |||||||||
| Long-term debt (finance lease) | 6,325 | 6,513 | |||||||||
| Asset retirement obligation | 267 | 261 | |||||||||
| Total current liabilities associated with assets held for sale | $ | 14,097 | 14,372 | ||||||||
Note F – Financing Arrangements and Debt
As of March 31, 2021, the Company had a $1.6 billion revolving credit facility (RCF). The RCF is a senior unsecured guaranteed facility which expires in November 2023. At March 31, 2021, the Company had no outstanding borrowings under the RCF and $3.8 million of outstanding letters of credit, which reduce the borrowing capacity of the RCF. At March 31, 2021, the interest rate in effect on borrowings under the facility was 1.78%. At March 31, 2021, the Company was in compliance with all covenants related to the RCF.
In March 2021, the Company issued $550 million of new notes that bear interest at a rate of 6.375% and mature on July 15, 2028. The Company incurred transaction costs of $8.0 million on the issuance of these new notes. The Company will pay interest semi-annually on January 15 and July 15 of each year, beginning July 15, 2021. The proceeds of the $550 million notes, along with cash on hand, were used to redeem and cancel $259.3 million of the Company’s 4.00% notes due June 2022 and $317.1 million of the Company’s 4.95% notes due December 2022 (originally issued as 3.70% notes due 2022) (collectively the 2022 Notes). The cost of the debt extinguishment of $36.9 million is included in Interest expense, net on the Consolidated Statement of Operations for the three months ended March 31, 2021. The cash costs of $34.2 million are shown as a financing activity on the Consolidated Statement of Cash Flows for the three months ended March 31, 2021.
The Company also has a 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 2021.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note G – Other Financial Information
Additional disclosures regarding cash flow activities are provided below.
| Three Months Ended March 31, | |||||||||||
| (Thousands of dollars) | 2021 | 2020 | |||||||||
| Net (increase) decrease in operating working capital, excluding cash and cash equivalents: | |||||||||||
| (Increase) decrease in accounts receivable ¹ | $ | (16,954) | 186,436 | ||||||||
| Decrease in inventories | 392 | 7,553 | |||||||||
| (Increase) in prepaid expenses | (3,652) | (10,179) | |||||||||
| Increase (decrease) in accounts payable and accrued liabilities ¹ | 11,810 | (76,287) | |||||||||
| Increase (decrease) in income taxes payable | (648) | 304 | |||||||||
| Net (increase) decrease in noncash operating working capital | $ | (9,052) | 107,827 | ||||||||
| Supplementary disclosures: | |||||||||||
| Cash income taxes paid, net of refunds | $ | 720 | 72 | ||||||||
Interest paid, net of amounts capitalized of $3.3 million in 2021 and $2.4 million in 2020 | 44,577 | 42,344 | |||||||||
| Non-cash investing activities: | |||||||||||
| Asset retirement costs capitalized ² | $ | 6,390 | 280 | ||||||||
| Decrease in capital expenditure accrual | 13,617 | 10,633 | |||||||||
1 Excludes receivable/payable balances relating to mark-to-market of crude contracts and contingent consideration relating to acquisitions.
2 Excludes non-cash capitalized cost offset by impairment of $74.4 million in 2021.
13
Note H – 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 plan and the U.S. director’s 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 retired U.S. employees. The health care benefits are contributory; the life insurance benefits are noncontributory.
The table that follows provides the components of net periodic benefit expense for the three-month periods ended March 31, 2021 and 2020.
| Three Months Ended March 31, | |||||||||||||||||||||||
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
| (Thousands of dollars) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Service cost | $ | 1,768 | 2,166 | 326 | 447 | ||||||||||||||||||
| Interest cost | 4,286 | 5,791 | 521 | 794 | |||||||||||||||||||
| Expected return on plan assets | (6,133) | (6,344) | — | — | |||||||||||||||||||
| Amortization of prior service cost (credit) | 156 | 183 | — | — | |||||||||||||||||||
| Recognized actuarial loss | 5,279 | 4,269 | (7) | — | |||||||||||||||||||
| Net periodic benefit expense | $ | 5,356 | 6,065 | 840 | 1,241 | ||||||||||||||||||
The components of net periodic benefit expense, other than the service cost, curtailment and special termination benefits components, are included in the line item “Interest and other income (loss)” in Consolidated Statements of Operations.
During the three-month period ended March 31, 2021, the Company made contributions of $10.6 million to its defined benefit pension and postretirement benefit plans. Remaining funding in 2021 for the Company’s defined benefit pension and postretirement plans is anticipated to be $31.3 million.
Note I – Incentive Plans
The costs resulting from all share-based and cash-based incentive plans are recognized as an expense in the Consolidated Statements of Operations using a fair value-based measurement method over the periods that the awards vest.
The 2017 Annual Incentive Plan (2017 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 certain other employees. Cash awards under the 2017 Annual Plan are determined based on the Company’s actual financial and operating results as measured against the performance goals established by the Committee.
In May 2020, the Company’s shareholders approved the replacement of the 2018 Long-Term Incentive Plan (2018 Long-Term Plan) with the 2020 Long-Term Incentive Plan (2020 Long-Term Plan). All awards on or after May 13, 2020, will be made under the 2020 Long-Term Plan.
The 2020 Long-Term Plan and the 2018 Long-Term Incentive Plan authorizes the Committee to make grants of the Company’s Common Stock 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 2020 Long-Term Plan expires in 2030. A total of 5 million shares are issuable during the life of the 2020 Long-Term Plan. Shares issued pursuant to awards granted under this Plan may be shares that are authorized and unissued or shares that were reacquired by the Company, including shares purchased in the open market. Share awards that have been canceled, expired, forfeited or otherwise not issued under an award shall not count as shares issued under this Plan.
The Stock Plan for Non-Employee Directors (2018 NED Plan) that permits the issuance of restricted stock, restricted stock units and stock options or a combination thereof to the Company’s Non-Employee Directors.
During the first three months of 2021, the Committee granted 1,156,800 performance-based RSUs and 385,600 time-based RSUs to certain employees under the 2020 Long-Term Plan. The fair value of the performance-based RSUs, using a Monte Carlo valuation model, was $16.03 per unit. The fair value of the time-based RSUs was estimated based on the fair market value of the Company’s stock on the date of grant of $12.30 per unit. Additionally, in February 2021, the Committee granted 1,022,700 cash-settled RSUs (CRSU) to certain employees. The CRSUs are to be settled in cash, net of applicable income
14
taxes, and are accounted for as liability-type awards. The initial fair value of the CRSUs granted in February 2021 was $12.30. Also, in February, the Committee granted 182,652 shares of time-based RSUs to the Company’s non-employee Directors under the 2018 Stock Plan for Non-Employee Directors. These units are scheduled to vest on the first anniversary of the date of grant. The estimated fair value of these awards was $13.14 per unit on date of grant.
All stock option exercises are non-cash transactions for the Company. The employee receives net shares, after applicable withholding obligations, upon each stock option exercise. The actual income tax benefit realized from the tax deductions related to stock option exercises of the share-based payment arrangements were immaterial for the three-month period ended March 31, 2021.
Amounts recognized in the financial statements with respect to share-based plans are shown in the following table:
| Three Months Ended March 31, | |||||||||||
| (Thousands of dollars) | 2021 | 2020 | |||||||||
| Compensation charged against income before tax benefit | $ | 8,196 | 553 | ||||||||
| Related income tax (expense) benefit recognized in income | 1,165 | (592) | |||||||||
Certain incentive compensation granted to the Company’s named executive officers, to the extent their total compensation exceeds $1.0 million per executive per year, is not eligible for a U.S. income tax deduction under the Tax Cuts and Jobs Act (2017 Tax Act).
15
Note J – Earnings Per Share
Net (loss) income attributable to Murphy was used as the numerator in computing both basic and diluted income per Common share for the three-month periods ended March 31, 2021 and 2020. The following table reports the weighted-average shares outstanding used for these computations.
| Three Months Ended March 31, | ||||||||||||||
| (Weighted-average shares) | 2021 | 2020 | ||||||||||||
| Basic method | 153,952,552 | 153,312,647 | ||||||||||||
| Dilutive stock options and restricted stock units ¹ | — | — | ||||||||||||
| Diluted method | 153,952,552 | 153,312,647 | ||||||||||||
1 Due to a net loss recognized by the Company for the three-month periods ended March 31, 2021, no unvested stock awards were included in the computation of diluted earnings per share because the effect would have been antidilutive.
The following table reflects certain options to purchase shares of common stock that were outstanding during the periods presented but were not included in the computation of diluted shares above because the incremental shares from the assumed conversion were antidilutive.
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Antidilutive stock options excluded from diluted shares | 1,771,575 | 2,490,542 | ||||||||||||
| Weighted average price of these options | $ | 35.62 | $ | 42.58 | ||||||||||
Note K – Income Taxes
The Company’s effective income tax rate is calculated as the amount of income tax expense (benefit) divided by income from continuing operations before income taxes. For the three-month periods ended March 31, 2021 and 2020, the Company’s effective income tax rates were as follows:
| 2021 | 2020 | ||||||||||
| Three months ended March 31, | 24.8% | 15.4% | |||||||||
The effective tax rate for the three-month period ended March 31, 2021 was above the U.S. statutory tax rate of 21% primarily due to losses recorded in Canada which has a higher tax rate, exploration expenses in certain foreign jurisdictions in which no income tax benefit is currently available, as well as no tax applied to the pre-tax income of the noncontrolling interest in MP GOM.
The effective tax rate for the three-month period ended March 31, 2020 was below the statutory tax rate of 21% due to impairment charges, exploration expenses in certain foreign jurisdictions in which no income tax benefit is available, as well as no tax benefit available from the pre-tax loss of the noncontrolling interest in MP GOM.
The Company’s tax returns in multiple jurisdictions are subject to audit by taxing authorities. These audits often take multiple 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 March 31, 2021, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows: United States – 2016; Canada – 2016; Malaysia – 2014; and United Kingdom – 2018. Following the divestment of Malaysia in the third quarter of 2019, the Company has retained certain possible liabilities and rights to income tax receivables relating to Malaysia for the years prior to 2019. The Company believes current recorded liabilities are adequate.
Note L – Financial Instruments and Risk Management
Murphy 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 with creditworthy major financial
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note L – Financial Instruments and Risk Management (Contd.)
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 gain or loss associated with recording the fair value of these contracts was deferred in Accumulated other comprehensive loss and amortized to the income statement over time. During the three-month period ended March 31, 2021, the Company redeemed all of the remaining notes due 2022 and expensed the remainder of the previously deferred loss on the interest rate swap of $2.1 million to Interest expense in the Consolidated Statement of Operations.
Commodity Price Risks
At March 31, 2021, the Company had 45,000 barrels per day in WTI crude oil swap financial contracts maturing through December 2021 at an average price of $42.77, and 20,000 barrels per day in WTI crude oil swap financial contracts maturing from January to December of 2022 at an average price of $44.88. Under these contracts, which mature monthly, the Company pays the average monthly price in effect and receives the fixed contract price.
At March 31, 2020, the Company had 45,000 barrels per day in WTI crude oil swap financial contracts maturing through the end of April 2020 at an average price of $56.42, 65,000 barrels per day in WTI crude oil swap contracts maturing in May and June 2020 at an average price of $47.20, and 45,000 barrels per day in WTI crude oil swap contracts maturing through the end of 2020 at an average price of $56.42.
Foreign Currency Exchange Risks
The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S. The Company had no foreign currency exchange short-term derivatives outstanding at March 31, 2021 and 2020.
At March 31, 2021 and December 31, 2020, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| (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 payable | $ | — | Accounts receivable | $ | 13,050 | ||||||||||||||||||||
| Accounts payable | (234,473) | Accounts payable | (89,842) | |||||||||||||||||||||||
| Deferred credits and other liabilities | (49,034) | Deferred credits and other liabilities | (12,833) | |||||||||||||||||||||||
For the three-month periods ended March 31, 2021 and 2020, 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) | |||||||||||||||||
| (Thousands of dollars) | Statement of Operations Location | Three months ended March 31, | |||||||||||||||
| Type of Derivative Contract | 2021 | 2020 | |||||||||||||||
| Commodity | (Loss) gain on crude contracts | $ | (214,385) | 400,672 | |||||||||||||
Interest Rate Risks
Under hedge accounting rules, the Company deferred the net cost associated with derivative contracts purchased to manage interest rate risk associated with 10-year notes sold in May 2012 to match the payment of interest on these notes through 2022. During the three-month period ended March 31, 2021, the Company redeemed all of the remaining notes due 2022 and expensed the remainder of the previously deferred loss on the interest rate swap of $2.1 million to Interest expense in the Consolidated Statement of Operations.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note L – Financial Instruments and Risk Management (Contd.)
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 March 31, 2021 and December 31, 2020, are presented in the following table.
| March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Thousands of dollars) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commodity derivative contracts | $ | — | — | — | — | — | 13,050 | — | 13,050 | |||||||||||||||||||||||||||||||||||||||||
| $ | — | — | — | — | — | 13,050 | — | 13,050 | ||||||||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Nonqualified employee savings plans | $ | 15,654 | — | — | 15,654 | 14,988 | — | — | 14,988 | |||||||||||||||||||||||||||||||||||||||||
| Commodity derivative contracts | — | 283,507 | — | 283,507 | — | 102,675 | — | 102,675 | ||||||||||||||||||||||||||||||||||||||||||
| Contingent consideration | — | — | 147,927 | 147,927 | — | — | 133,004 | 133,004 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 15,654 | 283,507 | 147,927 | 431,434 | 14,988 | 102,675 | 133,004 | 250,667 | ||||||||||||||||||||||||||||||||||||||||||
The fair value of WTI crude oil derivative contracts in 2021 and 2020 were based on active market quotes for WTI crude oil. The before tax income effect of changes in the fair value of crude oil derivative contracts is recorded in Gain (loss) on crude contracts in the Consolidated Statements of Operations.
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 in the fair value of the nonqualified employee savings plan is recorded in Selling and general expenses in the Consolidated Statements of Operations.
The contingent consideration, related to two acquisitions in 2019 and 2018, is valued using a Monte Carlo simulation model. The income effect of changes in the fair value of the contingent consideration is recorded in Other expense (benefit) in the Consolidated Statements of Operations. Any remaining contingent consideration payable will be due annually in years 2021 to 2026.
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 March 31, 2021 and December 31, 2020.
Note M – Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss on the Consolidated Balance Sheets at December 31, 2020 and March 31, 2021 and the changes during the three-month period ended March 31, 2021, are presented net of taxes in the following table.
18
| (Thousands of dollars) | Foreign Currency Translation Gains (Losses) | Retirement and Postretirement Benefit Plan Adjustments | Deferred Loss on Interest Rate Derivative Hedges | Total | |||||||||||||||||||
| Balance at December 31, 2020 | $ | (324,011) | (275,632) | (1,690) | (601,333) | ||||||||||||||||||
| Components of other comprehensive income (loss): | |||||||||||||||||||||||
| Before reclassifications to income and retained earnings | 19,897 | — | — | 19,897 | |||||||||||||||||||
| Reclassifications to income | — | 4,136 | ¹ | 1,690 | ² | 5,826 | |||||||||||||||||
| Net other comprehensive income (loss) | 19,897 | 4,136 | 1,690 | 25,723 | |||||||||||||||||||
| Balance at March 31, 2021 | $ | (304,114) | (271,496) | — | (575,610) | ||||||||||||||||||
1 Reclassifications before taxes of $5,252 are included in the computation of net periodic benefit expense for the three-month period ended March 31, 2021. See Note H for additional information. Related income taxes of $1,116 are included in Income tax expense (benefit) for the three-month period ended March 31, 2021.
2 Reclassifications before taxes of $2,140 are included in Interest expense, net, for the three-month period ended March 31, 2021. Related income taxes of $450 are included in Income tax expense (benefit) for the three-month period ended March 31, 2021. See Note L for additional information.
Note N – 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 legislation changes, including tax rate changes, 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 natural 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. Governmental actions are often motivated by political considerations and may be taken without full consideration of their consequences or 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.
ENVIRONMENTAL MATTERS – Murphy and other companies in the oil and natural 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. Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed a specified threshold. Pursuant to recent SEC amendments to this item, the Company will be using a threshold of $1.0 million for such proceedings.
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. 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 not under Murphy’s control. Under existing laws, the Company could be required to investigate, remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to investigate and 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. Murphy USA Inc. has retained any environmental exposure associated with Murphy’s former U.S. marketing operations that were spun-off in August 2013. The Company believes costs related to these sites will not have a material adverse effect on Murphy’s net income, financial condition or liquidity in a future period.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Note N– Environmental and Other Contingencies (Contd.)
There is the possibility that environmental expenditures could be required at currently unidentified sites, and additional expenditures could be required at known sites. However, based on information currently available to the Company, the amount of future investigation and 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.
LEGAL MATTERS – 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 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.
20
Note O – Business Segments
Information about business segments and geographic operations is reported in the following table. For geographic purposes, revenues are attributed to the country in which the sale occurs. Corporate, including interest income, other gains and losses (including foreign exchange gains/losses and realized and unrealized gains/losses on crude oil contracts), interest expense and unallocated overhead, is shown in the tables to reconcile the business segments to consolidated totals.
| Total Assets at March 31, 2021 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||
| (Millions of dollars) | External Revenues | Income (Loss) | External Revenues | Income (Loss) | ||||||||||||||||||||||||||||
| Exploration and production ¹ | ||||||||||||||||||||||||||||||||
| United States | $ | 6,737.8 | 490.3 | 119.0 | 511.5 | (696.0) | ||||||||||||||||||||||||||
| Canada | 2,364.0 | 104.0 | (124.3) | 89.7 | (6.9) | |||||||||||||||||||||||||||
| Other | 264.3 | — | (6.9) | 1.8 | (52.3) | |||||||||||||||||||||||||||
| Total exploration and production | 9,366.1 | 594.3 | (12.2) | 603.0 | (755.2) | |||||||||||||||||||||||||||
| Corporate | 917.4 | (214.3) | (254.8) | 400.7 | 251.4 | |||||||||||||||||||||||||||
| Assets/revenue/income (loss) from continuing operations | 10,283.5 | 380.0 | (267.0) | 1,003.7 | (503.8) | |||||||||||||||||||||||||||
| Discontinued operations, net of tax | 0.8 | — | 0.2 | — | (4.9) | |||||||||||||||||||||||||||
| Total | $ | 10,284.3 | 380.0 | (266.8) | 1,003.7 | (508.7) | ||||||||||||||||||||||||||
1 Additional details about results of oil and gas operations are presented in the table on pages 25.
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary
In 2021, the effects of the ongoing coronavirus disease 2019 (COVID-19) pandemic have been tempered by the global dissemination of several vaccinations. This has led to a current and expected future recovery of energy demand. The OPEC+ group of oil producing countries scaled back production cuts marginally by 0.5 MMBOD to 7.2 MMBOD in January 2021 and 7.1 MMBOD for February and March. Outside of the OPEC+ agreement, Saudi Arabia unilaterally implemented an additional 1.0 MMBOD cut in February and March 2021. These items combined have supported a higher oil price for the Company’s product sales compared to one year ago.
For the three months ended March 31, 2021, West Texas Intermediate (WTI) crude oil prices averaged approximately $58 per barrel (compared to $46 in the first quarter of 2020 and $39 for 2020 full year). The closing price for WTI at the end of the first quarter of 2021 was approximately $62 per barrel, reflecting a 32% increase from the price at the end of 2020. The average price in April 2021 was $61.70 per barrel. As of close on May 4, 2021, the NYMEX WTI forward curve price for the remainder of 2021 and 2022 were $64.70 and $60.46 per barrel, respectively.
For the three months ended March 31, 2021, the Company produced 165 thousand barrels of oil equivalent per day (including noncontrolling interest) from continuing operations. The Company invested $251.1 million in capital expenditures (on a value of work done basis) in the three months ended March 31, 2021, which included $17.2 million to fund the development of the King’s Quay FPS (subsequently reimbursed by Arclight). The Company reported net loss from continuing operations of $267.0 million (which includes post tax impairment charges of $128.0 million and loss attributable to noncontrolling interest of $20.6 million) for the three months ended March 31, 2021.
For the three months ended March 31, 2020, the Company produced 199 thousand barrels of oil equivalent per day (including noncontrolling interest) from continuing operations. The Company invested $378.0 million in capital expenditures (on a value of work done basis) for the three months ended March 31, 2020, which included $28.8 million to fund the development of the King’s Quay FPS. The Company reported net loss from continuing operations of $503.8 million (which includes loss attributable to noncontrolling interest of $92.6 million) for the three months ended March 31, 2020.
During the three-month periods ended March 31, 2021, crude oil and condensate volumes from continuing operations were lower than the prior year period. The decrease in production volumes is due to lower capital expenditures throughout 2020 and the first quarter of 2021 to support generating positive free cash flow. Revenue from sales to customers was 1% lower compared to 2020, whilst revenue from commodity price hedges decreased 154%, primarily as a result of increasing oil prices.
In March 2021, the Company’s subsidiary "Murphy Exploration & Production Company USA" closed a transaction with ArcLight Capital Partners, LLC (ArcLight) for the sale of Murphy’s entire 50% interest in the King’s Quay floating production system (FPS) and associated export lateral pipelines. The transaction reimbursed Murphy for its share of project costs from inception to closing with proceeds of $267.7 million. Further, in March 2021, the Company executed a series of financial transactions which redeemed the remaining notes due 2022 and issued new 7 year senior unsecured notes maturing in July 2028. The 2022 notes were redeemed for total use of funds of $619.5 million, which includes redemption at par of $576.4 million, early retirement premium (make whole payment) of $34.2 million, and $8.9 million of accrued interest. The 2028 notes were issued for total proceeds of $550.0 million and incurred closing costs of $8.0 million (the proceeds from issue are reported net of costs to issue on the balance sheet).
22
Results of Operations
Murphy’s income (loss) by type of business is presented below.
| Income (Loss) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
| Exploration and production | (12.2) | (755.2) | |||||||||
| Corporate and other | (254.8) | 251.4 | |||||||||
| (Loss) income from continuing operations | (267.0) | (503.8) | |||||||||
| Discontinued operations ¹ | 0.2 | (4.9) | |||||||||
| Net (loss) income including noncontrolling interest | (266.8) | (508.7) | |||||||||
1 The Company has presented its Malaysia E&P operations and former U.K. and U.S. refining and marketing operations as discontinued operations in its consolidated financial statements.
Exploration and Production
Results of E&P continuing operations are presented by geographic segment below.
| Income (Loss) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
| Exploration and production | |||||||||||
| United States | 119.0 | (696.0) | |||||||||
| Canada | (124.3) | (6.9) | |||||||||
| Other | (6.9) | (52.3) | |||||||||
| Total | (12.2) | (755.2) | |||||||||
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Contd.)
Results of Operations (contd.)
Other key performance metrics
The Company uses other operational performance and income metrics to review operational performance. The table below presents Earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted EBITDA. Management uses EBITDA and adjusted EBITDA internally to evaluate the Company’s operational performance and trends between periods and relative to its industry competitors. EBITDA and adjusted EBITDA are non-GAAP financial measures and should not be considered a substitute for Net (loss) income or Cash provided by operating activities as determined in accordance with accounting principles generally accepted in the United States of America. Also presented below is adjusted EBITDA per barrel of oil equivalent sold, a non-GAAP financial metric. Management uses EBITDA per barrel of oil equivalent sold to evaluate the Company’s profitability of one barrel of oil equivalent sold in the period.
| Three Months Ended March 31, | |||||||||||
(Millions of dollars, except per barrel of oil equivalents sold) | 2021 | 2020 | |||||||||
| Net loss attributable to Murphy (GAAP) | (287.4) | (416.1) | |||||||||
| Income tax benefit | (88.2) | (91.5) | |||||||||
| Interest expense, net | 88.1 | 41.1 | |||||||||
| Depreciation, depletion and amortization expense ¹ | 188.3 | 286.2 | |||||||||
| EBITDA attributable to Murphy (Non-GAAP) | (99.2) | (180.3) | |||||||||
| Impairment of assets ¹ | 171.3 | 866.4 | |||||||||
| Mark-to-market loss (gain) on crude oil derivative contracts | 153.5 | (358.3) | |||||||||
| Mark-to-market loss (gain) on contingent consideration | 14.9 | (59.2) | |||||||||
| Accretion of asset retirement obligations | 10.5 | 10.0 | |||||||||
| Unutilized rig charges | 2.8 | 3.5 | |||||||||
| Foreign exchange losses (gains) | 1.3 | (4.7) | |||||||||
| Discontinued operations (income) loss | (0.2) | 4.9 | |||||||||
| Inventory loss | — | 4.8 | |||||||||
| Adjusted EBITDA attributable to Murphy (Non-GAAP) | 254.9 | 287.1 | |||||||||
| Total barrels of oil equivalents sold from continuing operations attributable to Murphy (thousands of barrels) | 13,670 | 17,071 | |||||||||
| Adjusted EBITDA per barrel of oil equivalents sold | 18.65 | 16.82 | |||||||||
1 Depreciation, depletion, and amortization expense used in the computation of EBITDA and impairment of assets used in the computation of Adjusted EBITDA exclude the portion attributable to the non-controlling interest.
24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Contd.)
Results of Operations (contd.)
OIL AND GAS OPERATING RESULTS – THREE MONTHS ENDED MARCH 31, 2021 AND 2020
| (Millions of dollars) | United States 1 | Canada | Other | Total | |||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||
| Oil and gas sales and other operating revenues | $ | 490.3 | 104.0 | — | 594.3 | ||||||||||||||||||
| Lease operating expenses | 116.1 | 30.8 | 0.3 | 147.2 | |||||||||||||||||||
| Severance and ad valorem taxes | 8.9 | 0.3 | — | 9.2 | |||||||||||||||||||
| Transportation, gathering and processing | 28.5 | 14.4 | — | 42.9 | |||||||||||||||||||
| Depreciation, depletion and amortization | 149.6 | 44.8 | 0.5 | 194.9 | |||||||||||||||||||
| Impairment of assets | — | 171.3 | — | 171.3 | |||||||||||||||||||
| Accretion of asset retirement obligations | 9.0 | 1.5 | — | 10.5 | |||||||||||||||||||
| Exploration expenses | |||||||||||||||||||||||
| Dry holes and previously suspended exploration costs | 0.7 | — | — | 0.7 | |||||||||||||||||||
| Geological and geophysical | 0.6 | — | 0.2 | 0.8 | |||||||||||||||||||
| Other exploration | 0.6 | — | 5.0 | 5.6 | |||||||||||||||||||
| 1.9 | — | 5.2 | 7.1 | ||||||||||||||||||||
| Undeveloped lease amortization | 2.3 | 0.1 | 2.2 | 4.6 | |||||||||||||||||||
| Total exploration expenses | 4.2 | 0.1 | 7.4 | 11.7 | |||||||||||||||||||
| Selling and general expenses | 5.5 | 4.1 | 1.4 | 11.0 | |||||||||||||||||||
| Other | 21.5 | 3.1 | (3.5) | 21.1 | |||||||||||||||||||
| Results of operations before taxes | 147.0 | (166.4) | (6.1) | (25.5) | |||||||||||||||||||
| Income tax provisions (benefits) | 28.0 | (42.1) | 0.8 | (13.3) | |||||||||||||||||||
| Results of operations (excluding Corporate segment) | $ | 119.0 | (124.3) | (6.9) | (12.2) | ||||||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||
| Oil and gas sales and other operating revenues | $ | 511.5 | 89.7 | 1.8 | 603.0 | ||||||||||||||||||
| Lease operating expenses | 178.2 | 30.6 | 0.3 | 209.1 | |||||||||||||||||||
| Severance and ad valorem taxes | 9.1 | 0.3 | — | 9.4 | |||||||||||||||||||
| Transportation, gathering and processing | 34.6 | 9.8 | — | 44.4 | |||||||||||||||||||
| Depreciation, depletion and amortization | 247.5 | 52.0 | 0.5 | 300.0 | |||||||||||||||||||
| Impairment of assets | 927.8 | — | 39.7 | 967.5 | |||||||||||||||||||
| Accretion of asset retirement obligations | 8.6 | 1.4 | — | 10.0 | |||||||||||||||||||
| Exploration expenses | |||||||||||||||||||||||
| Dry holes and previously suspended exploration costs | 0.1 | — | — | 0.1 | |||||||||||||||||||
| Geological and geophysical | 1.3 | — | 3.7 | 5.0 | |||||||||||||||||||
| Other exploration | 0.8 | 0.2 | 6.5 | 7.5 | |||||||||||||||||||
| 2.2 | 0.2 | 10.2 | 12.6 | ||||||||||||||||||||
| Undeveloped lease amortization | 5.1 | 0.2 | 2.2 | 7.5 | |||||||||||||||||||
| Total exploration expenses | 7.3 | 0.4 | 12.4 | 20.1 | |||||||||||||||||||
| Selling and general expenses | 3.7 | 4.4 | 1.6 | 9.7 | |||||||||||||||||||
| Other | (45.7) | 0.2 | (1.2) | (46.7) | |||||||||||||||||||
| Results of operations before taxes | (859.6) | (9.4) | (51.5) | (920.5) | |||||||||||||||||||
| Income tax provisions (benefits) | (163.6) | (2.5) | 0.8 | (165.3) | |||||||||||||||||||
| Results of operations (excluding Corporate segment) | $ | (696.0) | (6.9) | (52.3) | (755.2) | ||||||||||||||||||
1 Includes results attributable to a noncontrolling interest in MP GOM.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Contd.)
Results of Operations (contd.)
Exploration and Production
First quarter 2021 vs. 2020
All amounts include amount attributable to a noncontrolling interest in MP GOM, unless otherwise noted.
United States E&P operations reported earnings of $119.0 million in the first three months of 2021 compared to a loss of $696.0 million in the first three months of 2020. Results were $815 million favorable in the 2021 quarter compared to the 2020 period primarily due to no impairment charge (for the United States) in the current period (2020: $927.8 million). Further, the change year over year is driven by lower depreciation, depletion and amortization (DD&A: $97.9 million), lower lease operating expenses (LOE: $62.1 million) and lower transportation, gathering, and processing charges ($6.1 million), partially offset by higher income tax expense ($191.6 million), higher other operating expense ($67.2 million), lower revenues ($21.2 million), and higher G&A ($1.8 million). The impairment charge in the prior year was primarily the result of lower forecast future prices as of March 31, 2020, as a result of decreased oil demand and abundant oil supply at the time of the assessment. Lower DD&A is a result of the prior year impairment charge reducing the depreciable asset base. Lower revenues were primarily due to lower sales volumes in the U.S., following temporary operational issues at the Cascade & Chinook and Kodiak fields in the Gulf of Mexico (these operational issues are now resolved) and lower Eagle Ford Shale volumes following lower capital expenditures throughout 2020 and the effects of a winter storm. Lower lease operating expenses were primarily due to higher Gulf of Mexico workover costs in the prior year at the Cascade asset. Higher income tax expense is a result of pre-tax profits principally due to the recovering oil price and lower DD&A and LOE. Higher other operating expense is primarily due to a unfavorable mark to market revaluation on contingent consideration (as a result of higher commodity prices) from prior Gulf of Mexico (GOM) acquisitions ($14.9 million).
Canadian E&P operations reported a loss of $124.3 million in the first three months of 2021 compared to a loss of $6.9 million in the first three months quarter of 2020. Results were $117.4 million unfavorable compared to the 2020 period primarily due to an impairment charge ($171.3 million) in the current period, partially offset by higher income tax benefit ($39.6 million), higher revenue ($14.3 million) and lower DD&A ($7.2 million). The impairment charge in the current year is due to the current status, including agreements with the partners, of operating and production plans at Terra Nova. The operator and joint venture partners continue to evaluate options that could support a long-term production plan for Terra Nova. Higher income tax benefit is a result of a pre-tax loss driven by the impairment charge. Higher revenues were primarily attributable to higher prices (oil and condensate, natural gas and NGLs) versus the prior year. Lower lease operating expenses and lower DD&A were a result of lower sales volume following reduced capital expenditures throughout 2020.
Other international E&P operations reported a loss from continuing operations of $6.9 million in the first three months of 2021 compared to a loss of $52.3 million in the prior year. The 2020 results include an impairment charge of $39.7 million related to the Brunei asset.
Corporate
First quarter 2021 vs. 2020
Corporate activities, which include interest expense and income, foreign exchange effects, realized and unrealized gains/losses on commodity contracts (typically forward swaps to hedge/fix the price of oil sold) and corporate overhead not allocated to Exploration and Production, reported a loss of $254.8 million in the first three months of 2021 compared to earnings of $251.4 million in the first three months of 2020. The $506.2 million unfavorable variance is primarily due to realized and unrealized losses on forward swap commodity contracts in 2021 compared to gains in 2020 (2021: $214.4 million loss; 2020: $400.7 million gain), and higher interest expense ($46.5 million), partially offset by higher tax benefits ($148.7 million), lower G&A ($8.5 million) and lower DD&A ($2.6 million). Realized and unrealized losses in the quarter on forward swap commodity contracts are due to higher market (West Texas Intermediate) prices whereby the contract provides the Company with a fixed price. Interest charges are higher primarily due an early redemption premium incurred by the Company upon the early retirement of the notes originally due June and December 2022. Higher income tax benefit is a result of pre-tax loss driven by the higher realized and unrealized losses on forward swap commodity contracts. As of March 31, 2021, the average forward NYMEX WTI price for the remainder of 2021 was $58.28 and for 2022 was $54.63 (versus fixed hedge prices of $42.77 and $44.88; see below).
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Contd.)
Results of Operations (contd.)
Production Volumes and Prices
First quarter 2021 vs. 2020
Total hydrocarbon production from continuing operations averaged 165,382 barrels of oil equivalent per day in the first quarter of 2021, which represented a 17% decrease from the 199,194 barrels per day produced in first quarter 2020. The decrease in production volumes is principally due to lower capital expenditures throughout 2020 and the first quarter of 2021 to support generating positive free cashflow.
Average crude oil and condensate production from continuing operations was 97,475 barrels per day in the first quarter of 2021 compared to 122,078 barrels per day in the first quarter of 2020. The decrease of 24,603 barrels per day was associated with lower Eagle Ford Shale production (8,868 barrels per day) due to lower capital expenditures and a winter storm resulting in shut-in production (2,250 barrels per day). Lower volumes in the Gulf of Mexico (14,367 barrels per day) are principally due to temporary operational issues at the Cascade & Chinook and Kodiak fields (these operational issues are now resolved). On a worldwide basis, the Company’s crude oil and condensate prices averaged $58.08 per barrel in the first quarter 2021 compared to $46.66 per barrel in the 2020 period, an increase of 24% quarter over quarter.
Total production of natural gas liquids (NGL) from continuing operations was 9,845 barrels per day in the first quarter 2021 compared to 13,656 barrels per day in the 2020 period. The average sales price for U.S. NGL was $22.68 per barrel in the 2021 quarter compared to $9.44 per barrel in 2020. The average sales price for NGL in Canada was $35.92 per barrel in the 2021 quarter compared to $15.96 per barrel in 2020. NGL prices are higher in Canada due to the higher value of product produced at the Kaybob and Placid assets.
Natural gas production volumes from continuing operations averaged 348 million cubic feet per day (MMCFD) in the first quarter 2021 compared to 381 MMCFD in 2020. The decrease of 32 MMCFD was a result of lower volumes in Canada (13 MMCFD), in the Gulf of Mexico (9 MMCFD) and in the Eagle Ford Shale (10 MMCFD). Lower volumes in the Gulf of Mexico are principally due to temporary operational issues at the Cascade & Chinook and Kodiak fields (these operational issues are now resolved). Lower volumes in Canada and Eagle Ford Shale are due to normal well decline and lower capital expenditures throughout 2020 and the effects of a winter storm impacting the Eagle Ford Shale.
Natural gas prices for the total Company averaged $2.56 per thousand cubic feet (MCF) in the 2021 quarter, versus $1.73 per MCF average in the same quarter of 2020. Average natural gas prices in the US and Canada in the quarter were $3.35 and $2.26 respectively.
Additional details about results of oil and gas operations are presented in the tables on pages 25.
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Contd.)
Results of Operations (contd.)
The following table contains hydrocarbons produced during the three-month periods ended March 31, 2021 and 2020.
| Three Months Ended March 31, | ||||||||||||||
| Barrels per day unless otherwise noted | 2021 | 2020 | ||||||||||||
| Continuing operations | ||||||||||||||
| Net crude oil and condensate | ||||||||||||||
| United States | Onshore | 22,165 | 31,033 | |||||||||||
Gulf of Mexico 1 | 64,363 | 78,730 | ||||||||||||
| Canada | Onshore | 6,288 | 6,833 | |||||||||||
| Offshore | 4,589 | 5,138 | ||||||||||||
| Other | 70 | 344 | ||||||||||||
| Total net crude oil and condensate - continuing operations | 97,475 | 122,078 | ||||||||||||
| Net natural gas liquids | ||||||||||||||
| United States | Onshore | 3,933 | 5,585 | |||||||||||
Gulf of Mexico 1 | 4,679 | 6,670 | ||||||||||||
| Canada | Onshore | 1,233 | 1,401 | |||||||||||
| Total net natural gas liquids - continuing operations | 9,845 | 13,656 | ||||||||||||
| Net natural gas – thousands of cubic feet per day | ||||||||||||||
| United States | Onshore | 22,016 | 31,962 | |||||||||||
Gulf of Mexico 1 | 72,658 | 81,950 | ||||||||||||
| Canada | Onshore | 253,697 | 266,848 | |||||||||||
| Total net natural gas - continuing operations | 348,371 | 380,760 | ||||||||||||
Total net hydrocarbons - continuing operations including NCI 2,3 | 165,382 | 199,194 | ||||||||||||
| Noncontrolling interest | ||||||||||||||
| Net crude oil and condensate – barrels per day | (9,174) | (12,020) | ||||||||||||
| Net natural gas liquids – barrels per day | (354) | (559) | ||||||||||||
| Net natural gas – thousands of cubic feet per day | (4,159) | (5,091) | ||||||||||||
| Total noncontrolling interest | (10,221) | (13,428) | ||||||||||||
Total net hydrocarbons - continuing operations excluding NCI 2,3 | 155,161 | 185,767 | ||||||||||||
1 Includes net volumes attributable to a noncontrolling interest in MP Gulf of Mexico, LLC (MP GOM).
2 Natural gas converted on an energy equivalent basis of 6:1
3 NCI – noncontrolling interest in MP GOM.
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Contd.)
Results of Operations (contd.)
The following table contains hydrocarbons sold during the three-month periods ended March 31, 2021 and 2020.
| Three Months Ended March 31, | ||||||||||||||
| Barrels per day unless otherwise noted | 2021 | 2020 | ||||||||||||
| Continuing operations | ||||||||||||||
| Net crude oil and condensate | ||||||||||||||
| United States | Onshore | 22,165 | 31,033 | |||||||||||
Gulf of Mexico 1 | 62,066 | 81,002 | ||||||||||||
| Canada | Onshore | 6,288 | 6,833 | |||||||||||
| Offshore | 3,379 | 5,175 | ||||||||||||
| Other | — | 313 | ||||||||||||
| Total net crude oil and condensate - continuing operations | 93,898 | 124,356 | ||||||||||||
| Net natural gas liquids | ||||||||||||||
| United States | Onshore | 3,933 | 5,585 | |||||||||||
Gulf of Mexico 1 | 4,679 | 6,670 | ||||||||||||
| Canada | Onshore | 1,233 | 1,401 | |||||||||||
| Total net natural gas liquids - continuing operations | 9,845 | 13,656 | ||||||||||||
| Net natural gas – thousands of cubic feet per day | ||||||||||||||
| United States | Onshore | 22,016 | 31,962 | |||||||||||
Gulf of Mexico 1 | 72,658 | 81,950 | ||||||||||||
| Canada | Onshore | 253,697 | 266,848 | |||||||||||
| Total net natural gas - continuing operations | 348,371 | 380,760 | ||||||||||||
Total net hydrocarbons - continuing operations including NCI 2,3 | 161,805 | 201,472 | ||||||||||||
| Noncontrolling interest | ||||||||||||||
| Net crude oil and condensate – barrels per day | (8,868) | (12,475) | ||||||||||||
| Net natural gas liquids – barrels per day | (354) | (559) | ||||||||||||
Net natural gas – thousands of cubic feet per day 2 | (4,159) | (5,091) | ||||||||||||
| Total noncontrolling interest | (9,915) | (13,883) | ||||||||||||
Total net hydrocarbons - continuing operations excluding NCI 2,3 | 151,890 | 187,590 | ||||||||||||
1 Includes net volumes attributable to a noncontrolling interest in MP GOM.
2 Natural gas converted on an energy equivalent basis of 6:1
3 NCI – noncontrolling interest in MP GOM.
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS (Contd.)
Results of Operations (contd.)
The following table contains the weighted average sales prices excluding transportation cost deduction for the three-month periods ended March 31, 2021 and 2020. Comparative periods are conformed to current presentation.
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Weighted average Exploration and Production sales prices | ||||||||||||||
| Continuing operations | ||||||||||||||
| Crude oil and condensate – dollars per barrel | ||||||||||||||
| United States | Onshore | 57.41 | 46.46 | |||||||||||
Gulf of Mexico 1 | 58.78 | 47.07 | ||||||||||||
Canada 2 | Onshore | 52.84 | 37.61 | |||||||||||
| Offshore | 59.39 | 57.27 | ||||||||||||
| Other | — | 65.55 | ||||||||||||
| Natural gas liquids – dollars per barrel | ||||||||||||||
| United States | Onshore | 21.25 | 10.79 | |||||||||||
Gulf of Mexico 1 | 23.87 | 8.28 | ||||||||||||
Canada 2 | Onshore | 35.92 | 15.96 | |||||||||||
| Natural gas – dollars per thousand cubic feet | ||||||||||||||
| United States | Onshore | 3.27 | 1.85 | |||||||||||
Gulf of Mexico 1 | 3.39 | 2.01 | ||||||||||||
Canada 2 | Onshore | 2.26 | 1.62 | |||||||||||
1 Prices include the effect of noncontrolling interest share for MP GOM.
2 U.S. dollar equivalent.
Financial Condition
Cash Provided by Operating Activities
Net cash provided by continuing operating activities was $237.8 million for the first three months of 2021 compared to $392.7 million during the same period in 2020. The decreased cash from operating activities is primarily attributable to lower revenue from sales to customers ($8.0 million) and higher cash payments made on forward swap commodity contracts (2021: realized loss of $60.9 million; 2020: realized gain of $42.4 million), offset by lower lease operating expense ($62.0 million) and lower general and administrative expense ($7.3 million). For the three months ended March 31, 2021, realized losses on crude oil derivative contracts were $60.9 million (pre-tax) and $48.1 million (post-tax.)
Cash Provided by/ Used in Investing Activities
Cash provided by investing activities was $9.7 million for the first three months of 2021 compared to $376.1 million cash used in the first three months of 2020. On March 17, 2021, the King’s Quay FPS was sold to ArcLight Capital Partners, LLC (ArcLight) for proceeds of $267.7 million, which reimburses the Company for previously incurred capital expenditures. Property additions and dry hole costs, which includes amounts expensed, were $258.3 million and $376.1 million in the first three months of 2021 and 2020, respectively. These amounts include $17.7 million and $21.3 million used to fund the development of the King’s Quay FPS in the first three months of 2021 and 2020, respectively. Lower property additions in 2021 are principally due to lower capital spending at Eagle Ford Shale to support generating positive free cashflow. See Outlook section on page 32 for further details.
30
Total accrual basis capital expenditures were as follows:
| Three Months Ended March 31, | |||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
| Capital Expenditures | |||||||||||
| Exploration and production | $ | 247.3 | 374.5 | ||||||||
| Corporate | 3.8 | 3.5 | |||||||||
| Total capital expenditures | $ | 251.1 | 378.0 | ||||||||
A reconciliation of property additions and dry hole costs in the Consolidated Statements of Cash Flows to total capital expenditures for continuing operations follows.
| Three Months Ended March 31, | |||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
| Property additions and dry hole costs per cash flow statements | $ | 240.5 | 354.8 | ||||||||
| Property additions King's Quay per cash flow statements | 17.7 | 21.3 | |||||||||
| Geophysical and other exploration expenses | 5.8 | 11.6 | |||||||||
| Capital expenditure accrual changes and other | (13.0) | (9.7) | |||||||||
| Total capital expenditures | $ | 251.1 | 378.0 | ||||||||
Capital expenditures in the exploration and production business in 2021 compared to 2020 have decreased as a result of significant capital expenditure reductions to support generating positive free cash flow, primarily in the Eagle Ford Shale.
Cash Used in/ Provided by Financing Activities
Net cash used in financing activities was $327.8 million for the first three months of 2021 compared to net cash provided by financing activities of $87.8 million during the same period in 2020. In 2021, the cash used in financing activities was principally for the early redemption of the notes due 2022 ($576.4 million), early redemption cost of the notes due 2022 ($34.2 million), repayment of the previously outstanding balance on the Company’s unsecured RCF ($200.0 million), distributions to the non-controlling interest (NCI) in the Gulf of Mexico ($36.0 million), and cash dividends to shareholders ($19.3 million), partially offset by the issuance of new notes due 2028, net of debt issuance cost ($542.0 million).
As of March 31, 2021 and in the event it is required to fund investing activities from borrowings, the Company has $1,596.2 million available on its committed RCF.
In 2020, the cash provided by financing activities was principally from borrowings on the Company’s unsecured revolving credit facility ($170.0 million), offset by cash dividends to shareholders ($38.4 million), distributions to the NCI ($32.4 million).
Working Capital
Working capital (total current assets less total current liabilities – excluding assets and liabilities held for sale) at March 31, 2021 was a deficit of $237.4 million, $208.0 million lower than December 31, 2020, with the decrease primarily attributable to higher accounts payable ($131.2 million), higher other accrued liabilities ($24.0 million), partly offset by a lower cash balance ($79.7 million) and higher accounts receivable ($16.8 million). Higher accounts payable is primarily due to the increase in unrealized losses on crude contracts maturing in the next 12 months.
Capital Employed
At March 31, 2021, long-term debt of $2,755.6 million had decreased by $232.5 million compared to December 31, 2020, as a result of repayment of the borrowings on the RCF ($200.0 million) and the redemption of the notes due 2022 ($576.4 million) in excess of the issuance of notes due 2028 ($550.0 million). The fixed-rate notes had a weighted average maturity of 7.7 years and a weighted average coupon of 6.3 percent.
31
A summary of capital employed at March 31, 2021 and December 31, 2020 follows.
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (Millions of dollars) | Amount | % | Amount | % | |||||||||||||||||||
| Capital employed | |||||||||||||||||||||||
| Long-term debt | $ | 2,755.6 | 41.2 | % | $ | 2,988.1 | 41.5 | % | |||||||||||||||
| Murphy shareholders' equity | 3,935.2 | 58.8 | % | 4,214.3 | 58.5 | % | |||||||||||||||||
| Total capital employed | $ | 6,690.8 | 100.0 | % | $ | 7,202.4 | 100.0 | % | |||||||||||||||
Cash and invested cash are maintained in several operating locations outside the United States. At March 31, 2021, Cash and cash equivalents held outside the U.S. included U.S. dollar equivalents of approximately $59.8 million in Canada. In addition, $9.5 million was held in Brunei (which is reported in current Assets held for sale on the Company’s Consolidated Balance Sheet at March 31, 2021). In certain cases, the Company could incur cash taxes or other costs should these cash balances be repatriated to the U.S. in future periods. Canada currently collects a 5% withholding tax on any earnings repatriated to the U.S.
Accounting changes and recent accounting pronouncements – see Note B
Outlook
As discussed in the Summary section on page 22, average crude oil prices continued to recover during the first quarter of 2021 versus the first quarter of 2020 (Q1 2020 WTI: $46.17; Q1 2021 WTI: $57.84). As of close on May 4, 2021, the NYMEX WTI forward curve price for the remainder of 2021 and 2022 were $64.70 and $60.46 per barrel, respectively; however we cannot predict what impact economic factors (including the ongoing COVID-19 pandemic) may have on future commodity pricing. Lower prices, should they occur, will result in lower profits and operating cash-flows. For the second quarter, production is expected to average between 160 and 168 MBOEPD, excluding NCI.
The Company’s capital expenditure spend for 2021 is expected to be between $675.0 million and $725.0 million. Capital and other expenditures will be routinely reviewed during 2021 and planned capital expenditures may be adjusted to reflect differences between budgeted and forecast cash flow during the year. Capital expenditures may also be affected by asset purchases or sales, which often are not anticipated at the time a budget is prepared. The Company will primarily fund its capital program in 2021 using operating cash flow and available cash. If oil and/or natural gas prices weaken, actual cash flow generated from operations could be reduced such that capital spending reductions are required and/or borrowings under available credit facilities might be required during the year to maintain funding of the Company’s ongoing development projects.
The Company continues to closely monitor the impact of lower commodity prices in 2020 on its financial position and is currently in compliance with the covenants related to the revolving credit facility (see Note F). The Company continues to monitor the effects of the COVID-19 pandemic and is encouraged by the progress and acceptance of the vaccinations which has positively impacted current and expected future energy demand for the next year compared to one year ago.
As of May 4, 2021, 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:
| Commodity | Type | Volumes (Bbl/d) | Price (USD/Bbl) | Remaining Period | ||||||||||||||||||||||||||||||||||
| Area | Start Date | End Date | ||||||||||||||||||||||||||||||||||||
| United States | WTI ¹ | Fixed price derivative swap | 45,000 | $42.77 | 4/1/2021 | 12/31/2021 | ||||||||||||||||||||||||||||||||
| United States | WTI ¹ | Fixed price derivative swap | 20,000 | $44.88 | 1/1/2022 | 12/31/2022 | ||||||||||||||||||||||||||||||||
1 West Texas Intermediate
| Volumes (MMcf/d) | Price (CAD/Mcf) | Remaining Period | ||||||||||||||||||||||||||||||||||||
| Area | Commodity | Type | Start Date | End Date | ||||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 203 | C$2.55 | 4/1/2021 | 5/31/2021 | ||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 241 | C$2.57 | 6/1/2021 | 12/31/2021 | ||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 231 | C$2.42 | 1/1/2022 | 1/31/2022 | ||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 221 | C$2.41 | 2/1/2022 | 4/30/2022 | ||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 250 | C$2.40 | 5/1/2022 | 5/31/2022 | ||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 292 | C$2.39 | 6/1/2022 | 12/31/2022 | ||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 201 | C$2.36 | 1/1/2023 | 12/31/2023 | ||||||||||||||||||||||||||||||||
| Montney | Natural Gas | Fixed price forward sales at AECO | 147 | C$2.41 | 1/1/2024 | 12/31/2024 | ||||||||||||||||||||||||||||||||
32
Forward-Looking Statements
This Form 10-Q contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identified through the inclusion of words such as “aim”, “anticipate”, “believe”, “drive”, “estimate”, “expect”, “expressed confidence”, “forecast”, “future”, “goal”, “guidance”, “intend”, “may”, “objective”, “outlook”, “plan”, “position”, “potential”, “project”, “seek”, “should”, “strategy”, “target”, “will” or variations of such words and other similar expressions. These statements, which express management’s current views concerning future events or results, are subject to inherent risks and uncertainties. Factors that could cause one or more of these future events or results not to occur as implied by any forward-looking statement include, but are not limited to: macro conditions in the oil and gas industry, including supply/demand levels, actions taken by major oil exporters and the resulting impacts on commodity prices; increased volatility or deterioration in the success rate of our exploration programs or in our ability to maintain production rates and replace reserves; reduced customer demand for our products due to environmental, regulatory, technological or other reasons; adverse foreign exchange movements; political and regulatory instability in the markets where we do business; the impact on our operations or market of health pandemics such as COVID-19 and related government responses; other natural hazards impacting our operations or markets; any other deterioration in our business, markets or prospects; any failure to obtain necessary regulatory approvals; any inability to service or refinance our outstanding debt or to access debt markets at acceptable prices; or adverse developments in the U.S. or global capital markets, credit markets or economies in general. For further discussion of factors that could cause one or more of these future events or results not to occur as implied by any forward-looking statement, see “Risk Factors” in Murphy’s 2020 Annual Report on Form 10-K on file with the U.S. Securities and Exchange Commission and on page 35 of this Form 10-Q report. Murphy undertakes no duty to publicly update or revise any forward-looking statements.
33
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 L 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 March 31, 2021, covering certain future U.S. crude oil sales volumes in 2021 and 2022. A 10% increase in the respective benchmark price of these commodities would have increased the net payable associated with these derivative contracts by approximately $111.3 million, while a 10% decrease would have decreased the recorded net payable by a similar amount.
There were no derivative foreign exchange contracts in place at March 31, 2021.
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.
During the quarter ended March 31, 2021, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
34
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Murphy and its subsidiaries are 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 matters referred to in this item is not expected to have a material adverse effect on the Company’s net income or loss, 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 2020 Form 10-K filed on February 26, 2021. The Company has not identified any additional risk factors not previously disclosed in its 2020 Form 10-K report.
ITEM 6. EXHIBITS
The Exhibit Index on page 37 of this Form 10-Q report lists the exhibits that are hereby filed or incorporated by reference.
35
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/ CHRISTOPHER D. HULSE | |||||||
| Christopher D. Hulse | ||||||||
| Vice President and Controller | ||||||||
| (Chief Accounting Officer and Duly Authorized Officer) | ||||||||
May 6, 2021
(Date)
36
EXHIBIT INDEX
| Exhibit No. | ||||||||
| 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.
37