10-Q 1 mur-20150930x10q.htm 10-Q 10Q Sept 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015

 

 

 

 

 

 

 

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 Number)

 

 

 

 

 

 

 

 

200 Peach Street      

 

 

71730-7000

P.O. Box 7000, El Dorado, Arkansas              

 

(Zip Code)

(Address of principal executive offices)               

 

 

 

 

 

 

 

 

 

 

(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.
[X] 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).
[X] 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 [X]                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    [X] No 

Number of shares of Common Stock, $1.00 par value, outstanding at September 30, 2015 was 172,024,733

 

 


 

MURPHY OIL CORPORATION

 

TABLE OF CONTENTS

 

 

1

 


 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2015

 

2014*

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

878,667 

 

 

1,193,308 

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

 

 

415,097 

 

 

461,313 

Accounts receivable, less allowance for doubtful accounts of $1,605 in 
   2015 and $1,609 in 2014

 

 

432,791 

 

 

873,277 

Inventories, at lower of cost or market

 

 

 

 

 

 

Crude oil

 

 

53,170 

 

 

51,757 

Materials and supplies

 

 

127,426 

 

 

190,976 

Prepaid expenses

 

 

157,455 

 

 

77,281 

Deferred income taxes

 

 

48,781 

 

 

55,107 

Assets held for sale

 

 

52,416 

 

 

376,130 

Total current assets

 

 

2,165,803 

 

 

3,279,149 

Property, plant and equipment, at cost less accumulated depreciation,
   depletion and amortization of $11,617,367 in 2015 and $9,503,524 in 2014

 

 

10,168,750 

 

 

13,331,047 

Deferred charges and other assets

 

 

293,409 

 

 

62,582 

Assets held for sale

 

 

– 

 

 

50,960 

Total assets

 

$

12,627,962 

 

 

16,723,738 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

12,173 

 

 

465,388 

Accounts payable and accrued liabilities

 

 

1,621,415 

 

 

2,471,897 

Income taxes payable

 

 

7,588 

 

 

59,054 

Liabilities associated with assets held for sale

 

 

10,059 

 

 

151,548 

Total current liabilities

 

 

1,651,235 

 

 

3,147,887 

Long-term debt, including capital lease obligation

 

 

3,327,689 

 

 

2,517,669 

Deferred income taxes

 

 

306,379 

 

 

1,193,864 

Asset retirement obligations

 

 

885,984 

 

 

841,526 

Deferred credits and other liabilities

 

 

428,221 

 

 

441,048 

Liabilities associated with assets held for sale

 

 

– 

 

 

8,310 

Stockholders’ equity

 

 

 

 

 

 

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

 

 

– 

 

 

– 

Common Stock, par $1.00, authorized 450,000,000 shares, issued
   195,055,724 shares in 2015 and 195,040,149 shares in 2014

 

 

195,056 

 

 

195,040 

Capital in excess of par value

 

 

902,241 

 

 

906,741 

Retained earnings

 

 

6,859,542 

 

 

8,728,032 

Accumulated other comprehensive loss

 

 

(621,759)

 

 

(170,255)

Treasury stock, 23,030,991 shares of Common Stock in 2015 and
   17,540,636 shares of Common Stock in 2014, at cost

 

 

(1,306,626)

 

 

(1,086,124)

Total stockholders’ equity

 

 

6,028,454 

 

 

8,573,434 

Total liabilities and stockholders’ equity

 

$

12,627,962 

 

 

16,723,738 

 

*Reclassified to conform to current presentation.

 

See Notes to Consolidated Financial Statements, page 7.

 

The Exhibit Index is on page 33.

2


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Thousands of dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

REVENUES

 

 

 

 

 

 

 

 

Sales and other operating revenues

$

665,589 

 

1,431,007 

 

2,133,360 

 

4,070,120 

Gain (loss) on sale of assets

 

60 

 

(133)

 

154,183 

 

(5,130)

Interest and other income

 

49,300 

 

2,163 

 

87,443 

 

3,468 

Total revenues

 

714,949 

 

1,433,037 

 

2,374,986 

 

4,068,458 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Lease operating expenses

 

183,826 

 

265,518 

 

643,736 

 

813,638 

Severance and ad valorem taxes

 

14,265 

 

28,574 

 

54,099 

 

83,793 

Exploration expenses, including undeveloped
  lease amortization

 

58,149 

 

117,433 

 

251,842 

 

390,711 

Selling and general expenses

 

71,791 

 

82,960 

 

237,934 

 

269,986 

Depreciation, depletion and amortization

 

433,706 

 

499,151 

 

1,318,123 

 

1,354,393 

Impairment of assets

 

2,300,974 

 

– 

 

2,300,974 

 

– 

Accretion of asset retirement obligations

 

11,918 

 

12,600 

 

35,437 

 

36,992 

Interest expense

 

32,009 

 

34,970 

 

91,945 

 

101,625 

Interest capitalized

 

(1,864)

 

(5,323)

 

(5,072)

 

(19,244)

Other expense

 

18,192 

 

662 

 

81,804 

 

1,297 

Total costs and expenses

 

3,122,966 

 

1,036,545 

 

5,010,822 

 

3,033,191 

Income (loss) from continuing operations
  before income taxes

 

(2,408,017)

 

396,492 

 

(2,635,836)

 

1,035,267 

Income tax expense (benefit)

 

(820,935)

 

125,435 

 

(963,298)

 

452,255 

Income (loss) from continuing operations

 

(1,587,082)

 

271,057 

 

(1,672,538)

 

583,012 

Loss from discontinued operations, net of taxes

 

(8,344)

 

(25,350)

 

(11,163)

 

(52,639)

NET INCOME (LOSS)

$

(1,595,426)

 

245,707 

 

(1,683,701)

 

530,373 

PER COMMON SHARE – BASIC

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(9.22)

 

1.52 

 

(9.55)

 

3.25 

Loss from discontinued operations

 

(0.04)

 

(0.14)

 

(0.07)

 

(0.29)

Net income (loss)

$

(9.26)

 

1.38 

 

(9.62)

 

2.96 

PER COMMON SHARE – DILUTED

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(9.22)

 

1.51 

 

(9.55)

 

3.23 

Loss from discontinued operations

 

(0.04)

 

(0.14)

 

(0.07)

 

(0.29)

Net income (loss)

$

(9.26)

 

1.37 

 

(9.62)

 

2.94 

Average Common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

172,205,433 

 

177,535,503 

 

175,047,295 

 

179,259,573 

Diluted

 

172,205,433 

 

178,856,078 

 

175,047,295 

 

180,578,085 

 

 

See Notes to Consolidated Financial Statements, page 7. 

3


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,595,426)

 

245,707 

 

(1,683,701)

 

530,373 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

Net loss from foreign currency translation

 

(195,440)

 

(192,329)

 

(462,054)

 

(195,374)

Retirement and postretirement benefit plans

 

3,116 

 

1,505 

 

9,105 

 

3,996 

Deferred loss on interest rate hedges reclassified
   to interest expense

 

482 

 

484 

 

1,445 

 

1,450 

Other comprehensive loss

 

(191,842)

 

(190,340)

 

(451,504)

 

(189,928)

COMPREHENSIVE INCOME (LOSS)

$

(1,787,268)

 

55,367 

 

(2,135,205)

 

340,445 

 

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,

 

2015

 

2014

OPERATING ACTIVITIES

 

 

 

 

Net income (loss)

$

(1,683,701)

 

530,373 

Adjustments to reconcile net income (loss) to net cash provided by
  continuing operations activities:

 

 

 

 

Loss from discontinued operations

 

11,163 

 

52,639 

Depreciation, depletion and amortization

 

1,318,123 

 

1,354,393 

Impairment of assets

 

2,300,974 

 

– 

Amortization of deferred major repair costs

 

5,450 

 

6,390 

Dry hole costs

 

120,459 

 

203,607 

Amortization of undeveloped leases

 

62,331 

 

55,745 

Accretion of asset retirement obligations

 

35,437 

 

36,992 

Deferred and noncurrent income tax charges (benefits)

 

(975,120)

 

64,557 

Pretax (gains) losses from disposition of assets

 

(154,183)

 

5,130 

Net decrease in noncash operating working capital

 

97,026 

 

6,940 

Other operating activities, net

 

(41,431)

 

17,531 

Net cash provided by continuing operations activities

 

1,096,528 

 

2,334,297 

INVESTING ACTIVITIES

 

 

 

 

Property additions and dry hole costs

 

(1,975,069)

 

(2,806,705)

Proceeds from sales of property, plant and equipment

 

423,842 

 

3,138 

Purchase of investment securities*

 

(865,251)

 

(672,689)

Proceeds from maturity of investment securities*

 

852,394 

 

587,341 

Other investing activities, net

 

(19,538)

 

(19,233)

Net cash required by investing activities

 

(1,583,622)

 

(2,908,148)

FINANCING ACTIVITIES

 

 

 

 

Borrowings of debt

 

885,000 

 

1,050,000 

Repayments of debt

 

(450,000)

 

– 

Capital lease obligation payments

 

(7,156)

 

– 

Purchase of treasury stock

 

(250,000)

 

(375,000)

Withholding tax on stock-based incentive awards

 

(8,976)

 

(6,786)

Cash dividends paid

 

(184,789)

 

(174,248)

Other financing activities, net

 

(153)

 

(1,384)

Net cash provided (required) by financing activities

 

(16,074)

 

492,582 

CASH FLOWS FROM DISCONTINUED OPERATIONS

 

 

 

 

Operating activities

 

(4,866)

 

(83,974)

Investing activities

 

5,343 

 

(12,101)

Changes in cash included in current assets held for sale

 

179,774 

 

103,694 

Net increase in cash and cash equivalents of discontinued operations

 

180,251 

 

7,619 

Effect of exchange rate changes on cash and cash equivalents

 

8,276 

 

(2,484)

Net decrease in cash and cash equivalents

 

(314,641)

 

(76,134)

Cash and cash equivalents at January 1

 

1,193,308 

 

750,155 

Cash and cash equivalents at September 30

$

878,667 

 

674,021 

 

*Investments 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,

 

2015

 

2014

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

$

– 

 

 

– 

Common Stock – par $1.00, authorized 450,000,000 shares,
   issued 195,055,724 shares at September 30, 2015 and
   195,036,689 shares at September 30, 2014

 

 

 

 

 

Balance at beginning of period

 

195,040 

 

 

194,920 

Exercise of stock options

 

16 

 

 

117 

Balance at end of period

 

195,056 

 

 

195,037 

Capital in Excess of Par Value

 

 

 

 

 

Balance at beginning of period

 

906,741 

 

 

902,633 

Exercise of stock options, including income tax benefits

 

(73)

 

 

(11,354)

Restricted stock transactions and other

 

(38,260)

 

 

(27,977)

Stock-based compensation

 

33,925 

 

 

33,291 

Other

 

(92)

 

 

(26)

Balance at end of period

 

902,241 

 

 

896,567 

Retained Earnings

 

 

 

 

 

Balance at beginning of period

 

8,728,032 

 

 

8,058,792 

Net income (loss) for the period

 

(1,683,701)

 

 

530,373 

Cash dividends

 

(184,789)

 

 

(174,248)

Balance at end of period

 

6,859,542 

 

 

8,414,917 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of period

 

(170,255)

 

 

172,119 

Foreign currency translation loss, net of income taxes

 

(462,054)

 

 

(195,374)

Retirement and postretirement benefit plans, net of income taxes

 

9,105 

 

 

3,996 

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

 

1,445 

 

 

1,450 

Balance at end of period

 

(621,759)

 

 

(17,809)

Treasury Stock

 

 

 

 

 

Balance at beginning of period

 

(1,086,124)

 

 

(732,734)

Purchase of treasury shares

 

(250,000)

 

 

(375,000)

Sale of stock under employee stock purchase plans

 

322 

 

 

345 

Awarded restricted stock, net of forfeitures

 

29,176 

 

 

21,185 

Balance at end of period

 

(1,306,626)

 

 

(1,086,204)

Total Stockholders’ Equity

$

6,028,454 

 

 

8,402,508 

 

See Notes to Consolidated Financial Statements, page 7.

6


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Note A – Nature of Business and Interim Financial Statements

 

NATURE OF BUSINESS – Murphy Oil Corporation is an international oil and gas 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months and Nine Months Ended

 

 

September 30, 2015

 

(Thousands of dollars)

 

Impairment
Expense

 

Net of Taxes

 

Gulf of Mexico

$

144,800 

 

94,120 

 

Western Canada – Heavy Oil

 

683,574 

 

495,591 

 

Malaysia

 

1,472,600 

 

946,773 

 

 

$

2,300,974 

 

1,536,484 

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

2015

 

 

2014

Beginning balance at January 1

$

120,455 

 

 

393,030 

Additions pending the determination of proved reserves

 

89,197 

 

 

13,595 

Balance at September 30

$

209,652 

 

 

406,625 

 

7

 


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

2015

 

2014

(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

$

52,249 

 

 

 

$

32,192 

 

 

One to two years

 

32,192 

 

 

 

 

36,676 

 

 

Two to three years

 

27,842 

 

 

– 

 

 

51,898 

 

 

– 

Three years or more

 

97,369 

 

 

 

 

285,859 

 

22 

 

 

$

209,652 

 

13 

 

 

$

406,625 

 

32 

 

 

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.

 

 

8


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

Ended September 30,

 

Ended September 30,

(Thousands of dollars)

 

2015

 

2014

 

2015

 

2014

Revenues

$

(1,342)

 

509,037 

 

381,154 

 

2,752,557 

 

 

 

 

 

 

 

 

 

Loss before income taxes

$

(8,366)

 

(27,163)

 

(8,029)

 

(61,396)

Income tax (benefit) expense

 

(22)

 

(1,813)

 

3,134 

 

(8,757)

Loss from discontinued operations

$

(8,344)

 

(25,350)

 

(11,163)

 

(52,639)

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Thousands of dollars)

2015

 

2014

Current assets

 

 

 

 

Cash

$

20,738 

 

200,512 

Accounts receivable

 

12,067 

 

97,568 

Inventories

 

313 

 

42,161 

Other

 

19,298 

 

35,889 

Total current assets held for sale

$

52,416 

 

376,130 

Non-current assets

 

 

 

 

Property, plant and equipment, net

$

– 

 

50,947 

Other

 

– 

 

13 

Total non-current assets held for sale

$

– 

 

50,960 

Current liabilities

 

 

 

 

Accounts payable

$

2,895 

 

59,023 

Other accrued taxes payable

 

428 

 

40,653 

Accrued compensation and severance

 

3,715 

 

30,872 

Refinery decommissioning cost

 

3,021 

 

21,000 

Total current liabilities associated with assets held for sale

$

10,059 

 

151,548 

Non-current liabilities

 

 

 

 

Deferred income taxes payable

$

– 

 

3,873 

Deferred credits and other liabilities

 

– 

 

4,437 

Total non-current liabilities associated with assets held for sale

$

– 

 

8,310 

 

 

 

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, 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.

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months

 

 

Ended September 30,

(Thousands of dollars)

2015

 

2014

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

 

 

 

 

Decrease in accounts receivable

$

389,413 

 

29,586 

Increase in inventories

 

(16,607)

 

(3,326)

Increase in prepaid expenses

 

(87,051)

 

(2,235)

Decrease in deferred income tax assets

 

4,863 

 

1,290 

Increase (decrease) in accounts payable and accrued liabilities

 

(134,458)

 

59,369 

Decrease in current income tax liabilities

 

(59,134)

 

(77,744)

Total

$

97,026 

 

6,940 

Supplementary disclosures (including discontinued operations):

 

 

 

 

Cash income taxes paid, net of refunds

$

111,897 

 

438,309 

Interest paid, net of amounts capitalized

 

60,766 

 

44,657 

 

 

 

 

 

Non-cash investing activities, related to continuing operations:

 

 

 

 

Asset retirement costs capitalized

$

55,258 

 

15,509 

Decrease in capital expenditure accrual

 

374,720 

 

106,031 

 

 

 

 

 

 

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.

 

10


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2015

 

 

2014

 

2015

 

2014

Service cost

$

5,898 

 

 

6,208 

 

 

826 

 

 

672 

Interest cost

 

8,972 

 

 

8,239 

 

 

1,192 

 

 

1,278 

Expected return on plan assets

 

(10,471)

 

 

(8,506)

 

 

– 

 

 

– 

Amortization of prior service cost

 

187 

 

 

227 

 

 

(21)

 

 

(20)

Amortization of transitional asset

 

402 

 

 

208 

 

 

 

 

Recognized actuarial loss

 

3,885 

 

 

1,735 

 

 

193 

 

 

59 

Net periodic benefit expense

$

8,873 

 

 

8,111 

 

 

2,192 

 

 

1,990 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2015

 

 

2014

 

2015

 

2014

Service cost

$

15,751 

 

 

19,048 

 

 

2,482 

 

 

2,016 

Interest cost

 

24,893 

 

 

24,707 

 

 

3,576 

 

 

3,833 

Expected return on plan assets

 

(27,882)

 

 

(25,514)

 

 

– 

 

 

– 

Amortization of prior service cost

 

580 

 

 

680 

 

 

(62)

 

 

(61)

Amortization of transitional asset

 

947 

 

 

628 

 

 

 

 

Recognized actuarial loss

 

11,667 

 

 

5,201 

 

 

578 

 

 

177 

 

 

25,956 

 

 

24,750 

 

 

6,579 

 

 

5,969 

Special termination benefits

 

8,606 

 

 

– 

 

 

– 

 

 

– 

Curtailments

 

306 

 

 

– 

 

 

– 

 

 

– 

Net periodic benefit expense

$

34,868 

 

 

24,750 

 

 

6,579 

 

 

5,969 

 

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. 

 

11


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

(Thousands of dollars)

 

2015

 

2014

Compensation charged against income before tax benefit

$

30,722 

 

45,373 

Related income tax benefit recognized in income

 

9,046 

 

14,036 

 

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Weighted-average shares)

2015

 

2014

 

2015

 

2014

Basic method

172,205,433 

 

177,535,503 

 

175,047,295 

 

179,259,573 

Dilutive stock options and restricted stock units*

– 

 

1,320,575 

 

– 

 

1,318,512 

   Diluted method

172,205,433 

 

178,856,078 

 

175,047,295 

 

180,578,085 

 

 

    *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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

Antidilutive stock options excluded from diluted shares

 

5,807,453 

 

 

1,998,009 

 

 

5,770,731 

 

 

1,855,667 

Weighted average price of these options

$

53.13 

 

 

58.53 

 

 

53.25 

 

 

58.80 

 

 

 

 

 

12


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

Three months ended September 30

34.1%

 

31.6%

 

Nine months ended September 30

36.6%

 

43.7%

 

 

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.

13


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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 $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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $12.8 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.

14


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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