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MURPHY OIL CORPORATION

 

TABLE OF CONTENTS

 

 

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PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

(Thousands of dollars)

 

 

*Reclassified to conform to current presentation.

 

See Notes to Consolidated Financial Statements, page 7.

 

The Exhibit Index is on page 33.

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Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Thousands of dollars, except per share amounts)

 

 

 

 

See Notes to Consolidated Financial Statements, page 7. 

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Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(Thousands of dollars)

 

 

 

 

See Notes to Consolidated Financial Statements, page 7.

 

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Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Thousands of dollars)

 

 

 

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

 

See Notes to Consolidated Financial Statements, page 7.

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Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(Thousands of dollars)

 

 

 

 

See Notes to Consolidated Financial Statements, page 7.

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

 

Note A – Nature of Business and Interim Financial Statements

 

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

 

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

 

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

 

Note B – Property, Plant and Equipment

 

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

 

 

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

 

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

 

 

 

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

 

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

 

 

 

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

 

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

 

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

 

Note C – Inventories

 

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

 

 

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Note D – Discontinued Operations

 

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

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

 

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

 

 

 

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

 

 

 

 

 

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Note E – Financing Arrangements and Debt

 

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

 

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

 

Note F – Cash Flow Disclosures

 

Additional disclosures regarding cash flow activities are provided below.

 

 

 

 

 

 

 

Note G – Employee and Retiree Benefit Plans

 

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

 

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

 

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

 

 

 

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

 

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

 

Note H – Incentive Plans

 

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

 

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

 

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Note H – Incentive Plans (Contd.)

 

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

 

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

 

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

 

 

 

 

 

Note I – Earnings per Share

 

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

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

weighted-average shares outstanding used for these computations.

 

 

 

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

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

      been anti-dilutive.

 

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

 

 

 

 

 

 

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Note J – Income Taxes

 

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

 

 

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

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

 

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

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

 

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

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

 

Note K – Financial Instruments and Risk Management

 

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

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

 

Commodity Purchase Price Risks 

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

 

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

 

 

 

 

 

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

 

Foreign Currency Exchange Risks

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

 

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

 

 

 

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

 

 

 

Interest Rate Risks

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

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

 

Fair Values – Nonrecurring

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