Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2014

Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

Note K – Financial Instruments and Risk Management

Murphy utilizes 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.  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 unrealized gainsand losses on these derivative contracts in its Consolidated Statements of Income.  Certain interest rate derivative contracts were accounted for as hedges and the loss associated with settlement of these contracts was deferred in Accumulated Other Comprehensive Income.  This loss is being reclassified to Interest Expense in the Consolidated Statements of Income over the period until the associated notes mature in 2022.

Commodity Purchase Price Risks

The Company is subject to commodity price risk related to crude oil it will produce and sell in the remainder of 2014.  The Company has entered into a series of West Texas Intermediate (WTI) crude oil fixed-price swap financial contracts covering a portion of its Eagle Ford Shale production from October 2014 through December 2014.  Under these contracts, which mature monthly, the Company will pay the average monthly price in effect and will receive the fixed contract prices.  WTI open contracts at September 30, 2014 were as follows:

	Volumes
Dates	(barrels per day)	Swap Prices
October – December 2014	22,000	$    93.26	per barrel

The fair value of these open commodity derivative contracts was a net assetof $6.2 million at September 30, 2014.

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

Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the UnitedStates.  Short-term derivative instruments were outstanding at September  30, 2013 to manage the risk of certain future income taxes that are payable in Malaysian ringgits.  The equivalent U.S. dollars of Malaysian ringgit derivative contracts open at September 30, 2013 were approximately $76.0 million.  There were no open ringgit contracts at September 30, 2014. Short-term derivative instrument contracts totaling $15.0 million and $28.0 million U.S. dollars were also outstanding at September 30, 2014 and 2013, 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 reduced income before taxes by $0.2 million and $4.1 million for the nine-month periods ended September 30, 2014 and September 30, 2013, respectively.

At September 30, 2014 and December 31, 2013, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

	September 30, 2014			December 31, 2013
(Thousands of dollars)	Asset (Liability) Derivatives			Asset (Liability) Derivatives
Type of Derivative Contract	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity	Accounts receivable	$	6,152	Accounts receivable	$	1,970
Foreign Currency	Accounts payable		(189)	Accounts payable		(1,038)

For the three-month and nine-month periods ended September 30, 2014 and 2013, the gains and losses recognized in the Consolidated Statements of Income for derivative instruments not designated as hedging instruments are presented in the following table.

			Gain (Loss)
		Three Months Ended			Nine Months Ended
(Thousands of dollars)	Statement of Income	September 30,			September 30,
Type of Derivative Contract	Location		2014	2013	2014	2013
Commodity	Sales and other operating revenues	$	37,305	(1,305)	(17,150)	(1,305)
Commodity	Discontinued operations		–	2,980	–	1,604
Foreign exchange	Interest and other income (loss)		(838)	(2,557)	4,062	(6,703)
		$	36,467	(882)	(13,088)	(6,404)

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 a loss on these contracts to match the payment of interest on these notes through 2022.  During each of the nine-month periods ended September 30, 2014 and 2013, $2.2 million of the deferred loss on the interest rate swaps was charged to income as a component of Interest Expense.  The remaining loss deferred on these matured contracts at September 30, 2014 was $22.6 million, which is recorded, net of income taxes of $7.9 million, in Accumulated Other Comprehensive Income in the Consolidated Balance Sheet.  The Company expects to charge approximately $0.8 million of this deferred loss to income in the form of interest expense during the remaining three months of 2014.

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.

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

The carrying value of assets and liabilities recorded at fair value on a recurring basis at September 30, 2014 and December 31, 2013 are presented in the following table.

	September 30, 2014					December 31, 2013
(Thousands of dollars)	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets:
Commodity derivative contracts	$	–	6,152	–	6,152	–	1,970	–	1,970
Liabilities:
Nonqualified employee savings         plans	$	13,979	–	–	13,979	13,267	–	–	13,267
Foreign currency exchange         derivative contracts		–	189	–	189	–	1,038	–	1,038
	$	13,979	189	–	14,168	13,267	1,038	–	14,305

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

The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists.  There were no offsetting positions recorded at September 30, 2014 and December 31, 2013.