10-Q 1 mur-20140930x10q.htm 10-Q 20140930 10Q

 

 

 

 

 

 

 

 

 

                                                                                                                                                                                                                                                                                                                                

                                                                                                                                                                                                                                                                                                                                 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

                                                                       

FORM 10-Q

                                                                       

                        (Mark one)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

Commission File Number 1-8590

                                                    

 

MURPHY OIL CORPORATION

(Exact name of registrant as specified in its charter)

                                                    

 

 

 

 

 

 

 

Delaware

 

71-0361522

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

 

200 Peach Street

 

 

P.O. Box 7000, El Dorado, Arkansas

 

71731-7000

(Address of principal executive offices)

 

(Zip Code)

(870) 862-6411

(Registrant's telephone number, including area code)

                                                    

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes     No

 

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

 

Large accelerated filer  Accelerated filer  Non-accelerated filer  Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     No

 

Number of shares of Common Stock, $1.00 par value, outstanding at September 30, 2014 was 177,494,772.

 

                                                                                                                                                                                                                                                                                                                                

                                                                                                                                                                                                                                                                                                                                 

 

 


 

MURPHY OIL CORPORATION

 

TABLE OF CONTENTS

 

 

1

 


 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

674,021 

 

 

750,155 

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

 

 

460,190 

 

 

374,842 

Accounts receivable, less allowance for doubtful accounts of $1,609
   in 2014 and 2013

 

 

970,286 

 

 

999,872 

Inventories, at lower of cost or market

 

 

 

 

 

 

Crude oil

 

 

40,311 

 

 

40,077 

Materials and supplies

 

 

259,644 

 

 

254,118 

Prepaid expenses

 

 

86,091 

 

 

83,856 

Deferred income taxes

 

 

60,700 

 

 

61,991 

Assets held for sale

 

 

735,875 

 

 

943,732 

Total current assets

 

 

3,287,118 

 

 

3,508,643 

Property, plant and equipment, at cost less accumulated depreciation, depletion
   and amortization of $9,698,266 in 2014 and $8,540,239 in 2013

 

 

14,372,837 

 

 

13,481,055 

Goodwill

 

 

38,198 

 

 

40,259 

Deferred charges and other assets

 

 

87,106 

 

 

98,123 

Assets held for sale

 

 

60,507 

 

 

381,404 

Total assets

 

$

17,845,766 

 

 

17,509,484 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

39,607 

 

 

26,249 

Accounts payable and accrued liabilities

 

 

2,249,579 

 

 

2,335,712 

Income taxes payable

 

 

145,185 

 

 

222,930 

Liabilities associated with assets held for sale

 

 

185,846 

 

 

639,140 

Total current liabilities

 

 

2,620,217 

 

 

3,224,031 

Long-term debt, including capital lease obligation

 

 

3,986,261 

 

 

2,936,563 

Deferred income taxes

 

 

1,519,677 

 

 

1,466,100 

Asset retirement obligations

 

 

897,765 

 

 

852,488 

Deferred credits and other liabilities

 

 

344,301 

 

 

339,028 

Liabilities associated with assets held for sale

 

 

75,037 

 

 

95,544 

Stockholders’ equity

 

 

 

 

 

 

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

 

 

– 

 

 

– 

Common Stock, par $1.00, authorized 450,000,000 shares, issued
   195,036,689 shares in 2014 and 194,920,155 shares in 2013

 

 

195,037 

 

 

194,920 

Capital in excess of par value

 

 

896,567 

 

 

902,633 

Retained earnings

 

 

8,414,917 

 

 

8,058,792 

Accumulated other comprehensive income (loss)

 

 

(17,809)

 

 

172,119 

Treasury stock, 17,541,917 shares of Common Stock in 2014 and
   11,513,642 shares of Common Stock in 2013, at cost

 

 

(1,086,204)

 

 

(732,734)

Total stockholders’ equity

 

 

8,402,508 

 

 

8,595,730 

Total liabilities and stockholders’ equity

 

$

17,845,766 

 

 

17,509,484 

 

See Notes to Consolidated Financial Statements, page  7.

 

The Exhibit Index is on page 38.

2


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Thousands of dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2014

 

2013*

 

2014

 

2013*

REVENUES

 

 

 

 

 

 

 

 

Sales and other operating revenues

$

1,431,007 

 

1,366,434 

 

4,070,120 

 

3,980,960 

Loss on sale of assets

 

(133)

 

(38)

 

(5,130)

 

(262)

Interest and other income

 

2,163 

 

53,100 

 

3,468 

 

61,722 

Total revenues

 

1,433,037 

 

1,419,496 

 

4,068,458 

 

4,042,420 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Lease operating expenses

 

265,518 

 

258,524 

 

813,638 

 

847,522 

Severance and ad valorem taxes

 

28,574 

 

22,393 

 

83,793 

 

57,790 

Exploration expenses, including undeveloped
   lease amortization

 

117,433 

 

147,845 

 

390,711 

 

345,110 

Selling and general expenses

 

82,960 

 

99,333 

 

269,986 

 

267,704 

Depreciation, depletion and amortization

 

499,151 

 

394,667 

 

1,354,393 

 

1,139,193 

Impairment of assets

 

– 

 

– 

 

– 

 

21,587 

Accretion of asset retirement obligations

 

12,600 

 

12,539 

 

36,992 

 

36,396 

Interest expense

 

34,970 

 

33,535 

 

101,625 

 

90,156 

Interest capitalized

 

(5,323)

 

(13,011)

 

(19,244)

 

(40,877)

Other expense

 

662 

 

– 

 

1,297 

 

– 

Total costs and expenses

 

1,036,545 

 

955,825 

 

3,033,191 

 

2,764,581 

Income from continuing operations before
   income taxes

 

396,492 

 

463,671 

 

1,035,267 

 

1,277,839 

Income tax expense

 

125,435 

 

198,593 

 

452,255 

 

570,189 

Income from continuing operations

 

271,057 

 

265,078 

 

583,012 

 

707,650 

Income (loss) from discontinued operations,
   net of taxes

 

(25,350)

 

19,731 

 

(52,639)

 

340,402 

NET INCOME

$

245,707 

 

284,809 

 

530,373 

 

1,048,052 

PER COMMON SHARE – BASIC

 

 

 

 

 

 

 

 

Income from continuing operations

$

1.52 

 

1.42 

 

3.25 

 

3.75 

Income (loss) from discontinued operations

 

(0.14)

 

0.10 

 

(0.29)

 

1.80 

Net income

$

1.38 

 

1.52 

 

2.96 

 

5.55 

PER COMMON SHARE – DILUTED

 

 

 

 

 

 

 

 

Income from continuing operations

$

1.51 

 

1.41 

 

3.23 

 

3.72 

Income (loss) from discontinued operations

 

(0.14)

 

0.10 

 

(0.29)

 

1.79 

Net income

$

1.37 

 

1.51 

 

2.94 

 

5.51 

Average Common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

177,535,503 

 

186,938,328 

 

179,259,573 

 

188,914,000 

Diluted

 

178,856,078 

 

188,337,511 

 

180,578,085 

 

190,245,166 

 

*Reclassified to conform to current presentation - See Note D.

 

See Notes to Consolidated Financial Statements, page 7. 

3


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Net income

$

245,707 

 

284,809 

 

530,373 

 

1,048,052 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

Net gain (loss) from foreign currency translation

 

(192,329)

 

95,065 

 

(195,374)

 

(139,943)

Retirement and postretirement benefit plans

 

1,505 

 

1,279 

 

3,996 

 

8,549 

Deferred loss on interest rate hedges reclassified
   to interest expense

 

484 

 

483 

 

1,450 

 

1,453 

Other comprehensive income (loss)

 

(190,340)

 

96,827 

 

(189,928)

 

(129,941)

COMPREHENSIVE INCOME

$

55,367 

 

381,636 

 

340,445 

 

918,111 

 

See Notes to Consolidated Financial Statements, page 7.

 

4


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

2014

 

20131

OPERATING ACTIVITIES

 

 

 

 

 

Net income

$

530,373 

 

 

1,048,052 

Adjustments to reconcile net income to net cash provided by
  operating activities:

 

 

 

 

 

Loss (income) from discontinued operations

 

52,639 

 

 

(340,402)

Depreciation, depletion and amortization

 

1,354,393 

 

 

1,139,193 

Impairment of assets

 

– 

 

 

21,587 

Amortization of deferred major repair costs

 

6,390 

 

 

6,387 

Dry hole costs

 

203,607 

 

 

160,540 

Amortization of undeveloped leases

 

55,745 

 

 

53,287 

Accretion of asset retirement obligations

 

36,992 

 

 

36,396 

Deferred and noncurrent income tax charges

 

64,557 

 

 

141,402 

Pretax loss from disposition of assets

 

5,130 

 

 

262 

Net (increase) decrease in noncash operating working capital

 

6,940 

 

 

(24,545)

Other operating activities, net

 

17,531 

 

 

(24,206)

Net cash provided by continuing operations

 

2,334,297 

 

 

2,217,953 

Net cash provided by discontinued operations

 

19,720 

 

 

460,563 

Net cash provided by operating activities

 

2,354,017 

 

 

2,678,516 

INVESTING ACTIVITIES

 

 

 

 

 

Property additions and dry hole costs2

 

(2,806,705)

 

 

(2,695,507)

Proceeds from sales of assets

 

3,138 

 

 

1,371 

Purchase of investment securities3

 

(672,689)

 

 

(670,615)

Proceeds from maturity of investment securities3

 

587,341 

 

 

496,425 

Investing activities of discontinued operations:

 

 

 

 

 

Sales proceeds

 

– 

 

 

282,202 

Property additions and other

 

(12,101)

 

 

(158,363)

Other – net

 

(19,233)

 

 

(1,383)

Net cash required by investing activities

 

(2,920,249)

 

 

(2,745,870)

FINANCING ACTIVITIES

 

 

 

 

 

Borrowings of long-term debt2

 

1,050,000 

 

 

– 

Purchase of treasury stock

 

(375,000)

 

 

(250,000)

Proceeds from exercise of stock options and employee stock purchase plans

 

– 

 

 

2,778 

Witholding tax on stock-based incentive awards

 

(6,786)

 

 

(12,713)

Cash dividends paid

 

(174,248)

 

 

(177,805)

Separation of retail business:

 

 

 

 

 

Cash distributed to Company by Murphy USA

 

– 

 

 

650,000 

Cash held and retained by Murphy USA upon separation

 

– 

 

 

(55,506)

Other – net

 

(1,384)

 

 

(3,034)

Net cash provided by financing activities

 

492,582 

 

 

153,720 

Effect of exchange rate changes on cash and cash equivalents

 

(2,484)

 

 

255 

Net increase (decrease) in cash and cash equivalents

 

(76,134)

 

 

86,621 

Cash and cash equivalents at January 1

 

750,155 

 

 

947,316 

Cash and cash equivalents at September 30

$

674,021 

 

 

1,033,937 

 

1Reclassified to conform to current presentation – See Note D.

2  Excludes non-cash asset and long-term obligation of $356,170 in 2013 associated with commencement of a capital  lease of

   production equipment at the Kakap field offshore Malaysia.

3Investments are Canadian government securities with maturities greater than 90 days at the date of acquisition.

 

See Notes to Consolidated Financial Statements, page 7.

5


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

2014

 

2013

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

$

– 

 

 

– 

Common Stock – par $1.00, authorized 450,000,000 shares,
   issued 195,036,689 shares at September 30, 2014 and
   194,861,200 shares at September 30, 2013

 

 

 

 

 

Balance at beginning of period

 

194,920 

 

 

194,616 

Exercise of stock options

 

117 

 

 

245 

Balance at end of period

 

195,037 

 

 

194,861 

Capital in Excess of Par Value

 

 

 

 

 

Balance at beginning of period

 

902,633 

 

 

873,934 

Exercise of stock options, including income tax benefits

 

(11,354)

 

 

1,194 

Restricted stock transactions and other

 

(27,977)

 

 

(24,485)

Stock-based compensation

 

33,291 

 

 

44,079 

Other

 

(26)

 

 

(122)

Balance at end of period

 

896,567 

 

 

894,600 

Retained Earnings

 

 

 

 

 

Balance at beginning of period

 

8,058,792 

 

 

7,717,389 

Net income for the period

 

530,373 

 

 

1,048,052 

Cash dividends

 

(174,248)

 

 

(177,805)

Distribution of common stock of Murphy USA Inc. to shareholders

 

– 

 

 

(552,587)

Balance at end of period

 

8,414,917 

 

 

8,035,049 

Accumulated Other Comprehensive Income

 

 

 

 

 

Balance at beginning of period

 

172,119 

 

 

408,901 

Foreign currency translation loss, net of income taxes

 

(195,374)

 

 

(139,943)

Retirement and postretirement benefit plans, net of income taxes

 

3,996 

 

 

8,549 

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

 

1,450 

 

 

1,453 

Balance at end of period

 

(17,809)

 

 

278,960 

Treasury Stock

 

 

 

 

 

Balance at beginning of period

 

(732,734)

 

 

(252,805)

Purchase of treasury shares

 

(375,000)

 

 

(250,000)

Sale of stock under employee stock purchase plans

 

345 

 

 

836 

Awarded restricted stock, net of forfeitures

 

21,185 

 

 

16,545 

Balance at end of period

 

(1,086,204)

 

 

(485,424)

Total Stockholders’ Equity

$

8,402,508 

 

 

8,918,046 

 

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 – Interim Financial Statements

 

The consolidated financial statements of the Company presented herein have not been audited by independent auditors, except for the Consolidated Balance Sheet at December 31, 2013.  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, 2014, and the results of operations,  cash flows and changes in stockholders’ equity for the three-month and nine-month periods ended September 30, 2014 and 2013, 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 2013 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 and nine-month periods ended September 30, 2014 are not necessarily indicative of future results.

 

 

Note B – Property, Plant and Equipment

 

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, 2014, the Company had total capitalized exploratory well costs pending the determination of proved reserves of $406.6 million.  The following table reflects the net changes in capitalized exploratory well costs during the nine-month periods ended September  30, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

2014

 

 

2013

Beginning balance at January 1

$

393,030 

 

 

445,697 

Additions pending the determination of proved reserves

 

13,595 

 

 

28,168 

Reclassifications to proved properties based on the determination of proved
  reserves

 

– 

 

 

(52,865)

Balance at September 30

$

406,625 

 

 

421,000 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

2014

 

2013

(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

$

32,192 

 

 

 

$

36,424 

 

 

One to two years

 

36,676 

 

 

 

 

51,444 

 

 

– 

Two to three years

 

51,898 

 

 

– 

 

 

35,504 

 

 

Three years or more

 

285,859 

 

22 

 

 

 

297,628 

 

27 

 

 

$

406,625 

 

32 

 

 

$

421,000 

 

38 

 

10 

 

7

 


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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

 

Of the $374.4 million of exploratory well costs capitalized more than one year at September 30, 2014, $214.8 million is in Malaysia, $125.9 million is in the U.S. and $33.7 million is in Brunei.  In all three geographical areas, either further appraisal or development drilling is planned and/or development studies/plans are in various stages of completion.

 

The Company has entered into an agreement to sell 30% of its working interest in most of its oil and gas properties in Malaysia.  The sale price of $2.0 billion is subject to normal closing costs and adjustments.  The sale is expected to close in two phases, with 20% being completed in December 2014 and 10% being completed in the first quarter 2015.

 

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 is predominantly determined on the last-in, first-out (LIFO) method.  At September 30, 2014 and December 31, 2013, the carrying value of inventories under the LIFO method was $133.0 million and $268.6 million, respectively, less than such inventories would have been valued using the first-in, first-out (FIFO) method.  These inventories are included in assets held for sale on the Consolidated Balance Sheet.

 

 

Note D – Discontinued Operations

 

The Company has previously announced its intention to sell its U.K. refining and marketing operations.  The Company has accounted for this U.K. downstream business as discontinued operations for all periods presented, including a reclassification of 2013 operating results and cash flows for this business to discontinued operations.  The U.K. downstream operations were previously reported as a separate segment within the Company’s former refining and marketing business.  On September 30, 2014, the Company completed the sale of its U.K. retail marketing operations.  The Company received the net proceeds of $232.7 million upon open of banking operations on October 1, 2014.    Although Murphy had previously signed an agreement to sell the Milford Haven, Wales, refinery and terminal assets,  the transaction could not be completed by the October 31, 2014 deadline.  The refinery is currently in a period of shut-down and will be decommissioned and operated as a petroleum storage and distribution terminal while the Company seeks a buyer for the terminal facility and three inland terminals. The Company realized an after-tax gain of $98.7 million on the sale of the U.K. retail marketing operation in the third quarter 2014, but this gain was essentially offset by a similar reduction in the carrying value of its held for sale Milford Haven, Wales refinery.

 

On August 30, 2013, Murphy Oil Corporation (the “Company”) distributed 100% of the outstanding common stock of Murphy USA Inc. (“MUSA”) to its shareholders in a generally tax-free spin-off for U.S. federal income tax purposes.  Prior to the separation, MUSA held all of the Company’s U.S. downstream operations, including retail gasoline stations and other marketing assets, plus two ethanol production facilities.  The shares of MUSA common stock are traded on the New York Stock Exchange under the ticker symbol “MUSA.”  The Company has no continuing involvement with MUSA operations.  Accordingly, the operating results and the cash flows for these former U.S. downstream operations have been reported as discontinued operations in the 2013 consolidated financial statements.  The U.S. downstream operations were previously reported as a separate segment within the Company’s former refining and marketing business.

 

The Company also sold its oil and gas assets in the United Kingdom during 2013.  After-tax gains on sale of the assets were $216.2 million in the nine months ended September 30, 2013.  The Company has accounted for these U.K. upstream operations as discontinued operations in its consolidated financial statements for all periods presented.

 

8


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note D – Discontinued Operations (Contd.)

 

The results of operations associated with these discontinued operations for the three-month and nine-month periods ended September 30, 2014 and 2013 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

Ended September 30,

 

Ended September 30,

(Thousands of dollars)

 

2014

 

2013

 

2014

 

2013

Revenues

$

509,037 

 

4,502,100 

 

2,752,557 

 

15,981,683 

Income before income taxes, including pretax gain on
  disposals of $130,568 during the nine-month period in 2013

$

(27,163)

 

38,329 

 

(61,396)

 

355,668 

Income tax expense (benefit)

 

(1,813)

 

18,598 

 

(8,757)

 

15,266 

Income (loss) from discontinued operations

$

(25,350)

 

19,731 

 

(52,639)

 

340,402 

 

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, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Millions of dollars)

2014

 

2013

Current assets

 

 

 

 

Cash

$

197,607 

 

301,302 

Accounts receivable

 

378,804 

 

302,059 

Inventories

 

85,757 

 

254,240 

Other

 

73,707 

 

86,131 

Total current assets held for sale

$

735,875 

 

943,732 

Non-current assets

 

 

 

 

Property, plant and equipment, net

$

37,304 

 

360,347 

Other

 

23,203 

 

21,057 

Total non-current assets held for sale

$

60,507 

 

381,404 

Current liabilities

 

 

 

 

Accounts payable

$

185,846 

 

637,432 

Other

 

– 

 

1,708 

Total current liabilities associated with assets held for sale

$

185,846 

 

639,140 

Non-current liabilities

 

 

 

 

Deferred income taxes payable

$

70,424 

 

68,096 

Other

 

4,613 

 

27,448 

Total non-current liabilities associated with assets held for sale

$

75,037 

 

95,544 

 

 

9


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note E – Financing Arrangements and Debt

 

The Company has a $2.0 billion committed credit facility that expires in June 2017.  Borrowings under the facility bear interest at 1.25% above LIBOR based on the Company’s current credit rating as of September 30, 2014.  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 $270 million at September 30, 2014.  These uncommitted facilities may be withdrawn by the various banks at any time.  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 2015.

 

During June 2013, the Company and its partners entered into 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 $39.6 million and $341.3 million associated with this lease at September 30, 2014.

 

 

Note F – Cash Flow Disclosures

 

Additional disclosures regarding cash flow activities are provided below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months

 

 

Ended September 30,

(Thousands of dollars)

2014

 

2013

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

 

 

 

 

Decrease (increase) in accounts receivable

$

29,586 

 

(75,735)

Increase in inventories

 

(3,326)

 

(51,279)

Increase in prepaid expenses

 

(2,235)

 

(52,793)

Decrease in deferred income tax assets

 

1,290 

 

40,145 

Increase (decrease) in accounts payable and accrued liabilities

 

59,369 

 

(84,344)

Increase (decrease) in current income tax liabilities

 

(77,744)

 

199,461 

Total

$

6,940 

 

(24,545)

Supplementary disclosures (including discontinued operations):

 

 

 

 

Cash income taxes paid

$

438,309 

 

414,676 

Interest paid, net of amounts capitalized

 

44,657 

 

1,077 

 

 

 

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.

 

Effective with the spin-off of Murphy’s former U.S. retail marketing operation, Murphy USA Inc. (MUSA) on August 30, 2013, significant modifications were made to the U.S. defined benefit pension plan.  Certain Murphy employees’ benefits under the U.S. plan were frozen at that time.  No further benefit service will accrue for the affected employees; however, the plan will recognize future eligible earnings after the spin-off date.  In addition, all previously unvested benefits became fully vested at the spin-off date.  For those affected active employees of the Company, additional U.S. retirement plan benefits will accrue in future periods under a cash balance formula.  Employees hired after August 30, 2013 will only accrue plan benefits under the cash balance formula. Upon the spin-off of MUSA, Murphy retained all vested pension defined benefit and other postretirement benefit obligations

 

10


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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

 

associated with current and former employees of this separated business.  No additional benefit will accrue for any employees of MUSA under the Company’s retirement plan after the spin-off date.

 

The table that follows provides the components of net periodic benefit expense for the three-month and

nine-month periods ended September 30, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2014

 

 

2013

 

2014

 

2013

Service cost

$

6,208 

 

 

7,252 

 

 

672 

 

 

1,232 

Interest cost

 

8,239 

 

 

8,450 

 

 

1,278 

 

 

1,352 

Expected return on plan assets

 

(8,506)

 

 

(8,257)

 

 

– 

 

 

– 

Amortization of prior service cost

 

227 

 

 

262 

 

 

(20)

 

 

(35)

Amortization of transitional asset

 

208 

 

 

125 

 

 

 

 

Recognized actuarial loss

 

1,735 

 

 

4,591 

 

 

59 

 

 

391 

Special termination benefits

 

– 

 

 

849 

 

 

– 

 

 

– 

Curtailments

 

– 

 

 

1,366 

 

 

– 

 

 

(443)

Net periodic benefit expense

$

8,111 

 

 

14,638 

 

 

1,990 

 

 

2,499 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

2014

 

2013

 

2014

 

2013

Service cost

$

19,048 

 

 

21,949 

 

 

2,016 

 

 

3,629 

Interest cost

 

24,707 

 

 

22,581 

 

 

3,833 

 

 

3,865 

Expected return on plan assets

 

(25,514)

 

 

(21,526)

 

 

– 

 

 

– 

Amortization of prior service cost

 

680 

 

 

841 

 

 

(61)

 

 

(121)

Amortization of transitional asset

 

628 

 

 

366 

 

 

 

 

Recognized actuarial loss

 

5,201 

 

 

12,882 

 

 

177 

 

 

1,321 

Special termination benefits

 

– 

 

 

849 

 

 

– 

 

 

– 

Curtailments

 

– 

 

 

1,366 

 

 

– 

 

 

(443)

Net periodic benefit expense

$

24,750 

 

 

39,308 

 

 

5,969 

 

 

8,257 

 

During the nine-month period ended September 30, 2014, the Company made contributions of $42.2 million to its defined benefit pension and postretirement benefit plans.  Remaining funding in 2014 for the Company’s defined benefit pension and postretirement plans is anticipated to be $9.7 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. 

11


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note H – Incentive Plans (Contd.)

 

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.    

 

On February 4, 2014, the Committee granted stock options for 772,900 shares at an exercise price of $55.82 per share.  The Black-Scholes valuation for these awards was $12.84 per option.  The Committee also granted 464,300 performance-based RSU and 233,400 time-based RSU on that date.  The fair value of the performance-based RSU, using a Monte Carlo valuation model, ranged from $33.90 to $51.30 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 $55.82 per share.    Additionally, on February 4, 2014, the Committee granted 183,200 SAR and 170,900 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.    On February 5, 2014, the Committee granted 43,848 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 fair value of these awards was estimated at $55.20 per unit.

 

Beginning January 1, 2014, all stock option exercises are non-cash transactions for the Company.  The employee will receive net shares, after applicable withholding taxes, upon each exercise.  Cash received from options exercised under all share-based payment arrangements for the nine-month period ended September 30, 2013 was $2.8 million.  The actual income tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements totaled $3.8 million and $6.3 million for the nine-month periods ended September 30, 2014 and 2013, respectively.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

(Thousands of dollars)

2014

 

2013

Compensation charged against income before tax benefit

$

45,373 

 

 

51,085 

Related income tax benefit recognized in income

 

14,036 

 

 

14,945 

 

 

 

Note I – Earnings per Share

 

Net income 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, 2014 and 2013.  The following table reconciles the weighted-average shares outstanding used for these computations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Weighted-average shares)

2014

 

2013

 

2014

 

2013

Basic method

177,535,503 

 

186,938,328 

 

179,259,573 

 

188,914,000 

Dilutive stock options and restricted stock units

1,320,575 

 

1,399,183 

 

1,318,512 

 

1,331,166 

   Diluted method

178,856,078 

 

188,337,511 

 

180,578,085 

 

190,245,166 

 

The following table reflects certain options to purchase shares of common stock that were outstanding during the 2014 and 2013 periods but were not included in the computation of diluted EPS above because the incremental shares from assumed conversion were antidilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

Antidilutive stock options excluded from diluted shares

 

1,998,009 

 

 

1,165,464 

 

 

1,855,667 

 

 

941,155 

Weighted average price of these options

$

58.53 

 

$

54.56 

 

$

58.80 

 

$

54.40 

 

12


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note J – Income Taxes

 

The Company’s effective income tax rate generally 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 2014 and 2013, the Company’s effective income tax rates were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

 

Three months ended September 30

31.6 

%

 

42.8 

%

Nine months ended September 30

43.7 

%

 

44.6 

%

 

The effective tax rates for most periods presented exceeded 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 three-month period ended September 30, 2014 was below the U.S. statutory tax rate due to a $34.3 million U.S. tax benefit associated with costs in Kurdistan recognized upon wind-up of operations in that country.  Excluding the benefit for Kurdistan, the effective tax rate for the three-month period ended September 30, 2014 was 40.3%.

 

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, 2014, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows: United States – 2010; Canada – 2008; United Kingdom – 2012; and

Malaysia – 2007.

 

 

Note KFinancial 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 gains and 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 asset of $6.2 million at September 30, 2014. 

13


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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 United States.  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.

 

14


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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.

 

 

15


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note L – Accumulated Other Comprehensive Income

 

The components of Accumulated Other Comprehensive Income (Loss) (AOCI) on the Consolidated Balance Sheets at December 31, 2013 and September 30, 2014 and the changes during the nine-month period ended September 30, 2014 are presented net of taxes in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

Loss on

 

 

 

 

Foreign

 

Retirement and

 

Interest

 

 

 

 

Currency

 

Postretirement

 

Rate

 

 

 

 

Translation

 

Benefit Plan

 

Derivative

 

 

(Thousands of dollars)

 

Gains (Losses)1

 

Adjustments1

 

Hedges1

 

Total1

Balance at December 31, 2013

$

305,192 

 

(116,956)

 

(16,117)

 

172,119 

Components of other comprehensive income (loss):

 

 

 

 

 

 

 

 

Before reclassifications to income

 

(195,374)

 

306 

 

– 

 

(195,068)

Reclassifications to income

 

– 

 

3,690 

2

1,450 

3

5,140 

Net other comprehensive income (loss)

 

(195,374)

 

3,996 

 

1,450 

 

(189,928)

Balance at September 30, 2014

$

109,818 

 

(112,960)

 

(14,667)

 

(17,809)

 

1All amounts are presented net of income taxes.

2Reclassifications before taxes of $5,637 for the nine-month period ended September 30, 2014 are included in the computation of net periodic benefit expense.  See Note G for additional information.  Related income taxes of $1,947 for the nine-month period ended September 30, 2014 are included in Income tax expense.

3Reclassifications before taxes of $2,222 for the nine-month period ended September 30, 2014 are included in Interest expense.  Related income taxes of