Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2015

Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

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.

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

Commodity Purchase Price Risks

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

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

	Volumes
At September 30, 2015	(barrels per day)	Swap Prices
October – December 2015	15,000	$ 63.30	per barrel
At September 30, 2014
October – December 2014	22,000	$ 93.26	per barrel

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

Foreign Currency Exchange Risks

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

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

	September 30, 2015			December 31, 2014
(Thousands of dollars)	Asset (Liability) Derivatives			Asset (Liability) Derivatives
Type of Derivative Contract	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity	Accounts receivable	$	31,999	Accounts receivable	$	23,168
Foreign exchange	Accounts receivable		22	Accounts payable		(25)

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

			Gain (Loss)
		Three Months Ended			Nine Months Ended
(Thousands of dollars)		September 30,			September 30,
Type of Derivative Contract	Statement of Operations Location		2015	2014	2015	2014
Commodity	Sales and other operating revenues	$	39,392	37,305	46,811	(17,150)
Foreign exchange	Interest and other income		33	(838)	47	4,062
		$	39,425	36,467	46,858	(13,088)

Interest Rate Risks

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

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

Fair Values – Nonrecurring

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

	September 30, 2015
						Total
					Net Book	Pretax
					Value	(Noncash)
	Fair Value				Prior to	Impairment
		Level 1	Level 2	Level 3	Impairment	Loss
(Thousands of dollars)
Assets:
Impaired proved properties
Gulf of Mexico	$	–	–	216,602	361,402	144,800
Western Canada		–	–	23,526	707,100	683,574
Malaysia		–	–	1,208,900	2,681,500	1,472,600
	$	–	–	1,449,028	3,750,002	2,300,974

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

Fair Values – Recurring

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

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

	September 30, 2015					December 31, 2014
(Thousands of dollars)	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets:
Foreign currency exchange         derivative contracts	$	–	22	–	22	–	–	–	–
Commodity derivative         contracts		–	31,999	–	31,999	–	23,168	–	23,168
	$	–	32,021	–	32,021	–	23,168	–	23,168
Liabilities:
Nonqualified employee         savings plans	$	12,195	–	–	12,195	14,408	–	–	14,408
Foreign currency exchange         derivative contracts		–	–	–	–	–	25	–	25
	$	12,195	–	–	12,195	14,408	25	–	14,433

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

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

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

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