10-Q 1 mur-20160331x10q.htm 10-Q Q1 2016 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 March 31, 2016



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 incorporation or organization)

 

(I.R.S. Employer Identification Number)



 

 

300 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.
[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 March 31, 2016 was 172,195,169





 


 

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)





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

423,063 

 

 

283,183 

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

 

 

146,087 

 

 

173,288 

Accounts receivable, less allowance for doubtful accounts of $1,605 in 
   2016 and 2015

 

 

521,434 

 

 

522,672 

Inventories, at lower of cost or market

 

 

 

 

 

 

Crude oil

 

 

31,971 

 

 

25,583 

Materials and supplies

 

 

134,775 

 

 

141,205 

Prepaid expenses

 

 

132,190 

 

 

212,962 

Deferred income taxes

 

 

45,498 

 

 

51,183 

Assets held for sale

 

 

263,912 

 

 

38,340 

Total current assets

 

 

1,698,930 

 

 

1,448,416 

Property, plant and equipment, at cost less accumulated depreciation,
   depletion and amortization of $12,438,436 in 2016 and $11,924,193 in 2015

 

 

9,492,348 

 

 

9,818,365 

Deferred charges and other assets

 

 

269,419 

 

 

227,031 

Total assets

 

$

11,460,697 

 

 

11,493,812 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

19,078 

 

 

18,881 

Accounts payable and accrued liabilities

 

 

1,338,177 

 

 

1,643,632 

Income taxes payable

 

 

13,552 

 

 

4,819 

Liabilities associated with assets held for sale

 

 

6,948 

 

 

7,297 

Total current liabilities

 

 

1,377,755 

 

 

1,674,629 

Long-term debt, including capital lease obligation

 

 

3,409,518 

 

 

3,040,594 

Deferred income taxes

 

 

205,913 

 

 

239,811 

Asset retirement obligations

 

 

823,070 

 

 

793,474 

Deferred credits and other liabilities

 

 

439,353 

 

 

438,576 

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 2016 and 2015

 

 

195,056 

 

 

195,056 

Capital in excess of par value

 

 

906,733 

 

 

910,074 

Retained earnings

 

 

5,953,132 

 

 

6,212,201 

Accumulated other comprehensive loss

 

 

(552,875)

 

 

(704,542)

Treasury stock, 22,860,555 shares of Common Stock in 2016 and
   23,021,013 shares of Common Stock in 2015, at cost

 

 

(1,296,958)

 

 

(1,306,061)

Total stockholders’ equity

 

 

5,205,088 

 

 

5,306,728 

Total liabilities and stockholders’ equity

 

$

11,460,697 

 

 

11,493,812 



See Notes to Consolidated Financial Statements, page 7.



The Exhibit Index is on page 31.

2


 

 



Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Thousands of dollars, except per share amounts)







 

 

 

 

 



 

 

 

 

 



 

Three Months Ended

 



March 31,

 



2016

 

2015

 

REVENUES

 

 

 

 

 

Sales and other operating revenues

$

429,094 

 

749,150 

 

Gain on sale of assets

 

22 

 

135,877 

 

Interest and other income

 

1,179 

 

36,720 

 

Total revenues

 

430,295 

 

921,747 

 

COSTS AND EXPENSES

 

 

 

 

 

Lease operating expenses

 

159,103 

 

232,421 

 

Severance and ad valorem taxes

 

12,637 

 

20,791 

 

Exploration expenses, including undeveloped lease amortization

 

26,916 

 

128,734 

 

Selling and general expenses

 

73,507 

 

86,967 

 

Depreciation, depletion and amortization

 

286,149 

 

481,027 

 

Impairment of assets

 

95,088 

 

– 

 

Accretion of asset retirement obligations

 

12,125 

 

11,769 

 

Interest expense

 

32,061 

 

29,470 

 

Interest capitalized

 

(1,841)

 

(1,385)

 

Other expense (benefit)

 

(416)

 

49,681 

 

Total costs and expenses

 

695,329 

 

1,039,475 

 

Loss from continuing operations before income taxes

 

(265,034)

 

(117,728)

 

Income tax benefit

 

(65,549)

 

(121,258)

 

Income (loss) from continuing operations

 

(199,485)

 

3,530 

 

Income (loss) from discontinued operations, net of income taxes

 

683 

 

(17,971)

 

NET LOSS

$

(198,802)

 

(14,441)

 

PER COMMON SHARE – BASIC

 

 

 

 

 

Income (loss) from continuing operations

$

(1.16)

 

0.02 

 

Loss from discontinued operations

 

– 

 

(0.10)

 

Net loss

$

(1.16)

 

(0.08)

 

PER COMMON SHARE – DILUTED

 

 

 

 

 

Income (loss) from continuing operations

$

(1.16)

 

0.02 

 

Loss from discontinued operations

 

– 

 

(0.10)

 

Net loss

$

(1.16)

 

(0.08)

 

Average Common shares outstanding

 

 

 

 

 

Basic

 

172,114,012 

 

177,734,159 

 

Diluted

 

172,114,012 

 

178,241,616 

 





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

 



March 31,

 



2016

 

2015

 



 

 

 

 

 

Net loss

$

(198,802)

 

(14,441)

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

Net gain (loss) from foreign currency translation

 

148,669 

 

(298,595)

 

Retirement and postretirement benefit plans

 

2,516 

 

3,294 

 

Deferred loss on interest rate hedges reclassified to interest expense

 

482 

 

482 

 

Other comprehensive income (loss)

 

151,667 

 

(294,819)

 

COMPREHENSIVE LOSS

$

(47,135)

 

(309,260)

 



See Notes to Consolidated Financial Statements, page 7.

 

4


 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Thousands of dollars)





 

 

 

 



 

 

 

 



Three Months Ended



March 31,



2016

 

2015

OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(198,802)

 

(14,441)

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

 

 

 

 

(Income) loss from discontinued operations

 

(683)

 

17,971 

Depreciation, depletion and amortization

 

286,149 

 

481,027 

Impairment of assets

 

95,088 

 

– 

Amortization of deferred major repair costs

 

2,002 

 

2,108 

Dry hole costs

 

(69)

 

78,629 

Amortization of undeveloped leases

 

10,469 

 

21,606 

Accretion of asset retirement obligations

 

12,125 

 

11,769 

Deferred and noncurrent income tax benefits

 

(85,683)

 

(184,186)

Pretax gains from disposition of assets

 

(22)

 

(135,877)

Net (increase) decrease in noncash operating working capital

 

(104,347)

1

258,807 

Other operating activities, net

 

27,085 

 

(3,569)

Net cash provided by continuing operations activities

 

43,312 

 

533,844 

INVESTING ACTIVITIES

 

 

 

 

Property additions and dry hole costs

 

(210,029)

 

(823,840)

Proceeds from sales of property, plant and equipment

 

33 

 

417,242 

Purchase of investment securities2

 

(49,277)

 

(265,739)

Proceeds from maturity of investment securities2

 

86,983 

 

301,464 

Other investing activities, net

 

(21,658)

 

(226)

Net cash required by investing activities

 

(193,948)

 

(371,099)

FINANCING ACTIVITIES

 

 

 

 

Borrowings of debt

 

371,000 

 

155,000 

Repayments of debt

 

– 

 

(450,000)

Capital lease obligation payments

 

(2,690)

 

(2,471)

Withholding tax on stock-based incentive awards

 

(1,052)

 

(8,976)

Cash dividends paid

 

(60,267)

 

(62,287)

Other financing activities, net

 

– 

 

(108)

Net cash provided (required) by financing activities

 

306,991 

 

(368,842)

CASH FLOWS FROM DISCONTINUED OPERATIONS

 

 

 

 

Operating activities

 

2,312 

 

(64,859)

Investing activities

 

– 

 

46 

Changes in cash included in current assets held for sale

 

(2,312)

 

64,707 

Net decrease in cash and cash equivalents of discontinued operations

 

– 

 

(106)

Effect of exchange rate changes on cash and cash equivalents

 

(16,475)

 

(6,103)

Net increase (decrease) in cash and cash equivalents

 

139,880 

 

(212,306)

Cash and cash equivalents at January 1

 

283,183 

 

1,193,308 

Cash and cash equivalents at March 31

$

423,063 

 

981,002 







12016 balance includes payments for deepwater rig contract exit of $253.2 million.

2Investments 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)









 

 

 

 

 



 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2016

 

2015

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 March 31, 2016 and
   195,042,460 shares at March 31, 2015.

 

 

 

 

 

Balance at beginning of period

 

195,056 

 

 

195,040 

Exercise of stock options

 

– 

 

 

Balance at end of period

 

195,056 

 

 

195,042 

Capital in Excess of Par Value

 

 

 

 

 

Balance at beginning of period

 

910,074 

 

 

906,741 

Exercise of stock options, including income tax benefits

 

– 

 

 

(367)

Restricted stock transactions and other

 

(9,972)

 

 

(37,771)

Stock-based compensation

 

6,759 

 

 

11,867 

Other

 

(128)

 

 

(15)

Balance at end of period

 

906,733 

 

 

880,455 

Retained Earnings

 

 

 

 

 

Balance at beginning of period

 

6,212,201 

 

 

8,728,032 

Net loss for the period

 

(198,802)

 

 

(14,441)

Cash dividends

 

(60,267)

 

 

(62,287)

Balance at end of period

 

5,953,132 

 

 

8,651,304 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

Balance at beginning of period

 

(704,542)

 

 

(170,255)

Foreign currency translation gain (loss), net of income taxes

 

148,669 

 

 

(298,595)

Retirement and postretirement benefit plans, net of income taxes

 

2,516 

 

 

3,294 

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

 

482 

 

 

482 

Balance at end of period

 

(552,875)

 

 

(465,074)

Treasury Stock

 

 

 

 

 

Balance at beginning of period

 

(1,306,061)

 

 

(1,086,124)

Sale of stock under employee stock purchase plans

 

197 

 

 

79 

Awarded restricted stock, net of forfeitures

 

8,906 

 

 

28,796 

Balance at end of period – 22,860,555 shares of Common Stock in
2016 and 17,073,445 shares of Common Stock in 2015, at cost

 

(1,296,958)

 

 

(1,057,249)

Total Stockholders’ Equity

$

5,205,088 

 

 

8,204,478 



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 March 31, 2016 and December 31, 2015, and the results of operations,  cash flows and changes in stockholders’ equity for the interim periods ended March 31, 2016 and 2015, 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 2015 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 period ended March 31, 2016 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 March 31, 2016, the Company had total capitalized exploratory well costs pending the determination of proved reserves of $129.6 million.  The following table reflects the net changes in capitalized exploratory well costs during the

three-month periods ended March 31, 2016 and 2015.







 

 

 

 

 



 

 

 

 

 

(Thousands of dollars)

2016

 

 

2015

Beginning balance at January 1

$

130,514 

 

 

120,455 

Additions pending the determination of proved reserves

 

– 

 

 

141 

Other adjustments

 

(886)

 

 

– 

Balance at March 31

$

129,628 

 

 

120,596 

 

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.







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31,



2016

 

2015

(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

$

65,136 

 

 

 

$

– 

 

– 

 

– 

One to two years

 

– 

 

– 

 

– 

 

 

32,192 

 

 

Two to three years

 

31,627 

 

 

– 

 

 

33,744 

 

 

Three years or more

 

32,865 

 

 

– 

 

 

54,660 

 

 

– 



$

129,628 

 

13 

 

 

$

120,596 

 

 



Exploratory well costs capitalized more than one year at March 31, 2016 are in Brunei.  Development options are under review for these multiple gas discoveries in Brunei.



During the first quarter of 2016, declines in crude oil and natural gas prices from year end 2015 provided indications of possible impairments in certain of the company’s producing properties.  As a result of management’s assessments, the Company recognized pretax non-cash impairments charges of $95.1 million to reduce the carrying value of its Terra Nova field offshore Canada and for Western Canada onshore heavy oil producing properties 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 region. 



During the first quarter 2015, the Company completed the sale of 10% 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 $199.5 million on the sale in the first quarter of 2015.



 



8


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note C – 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 and results subsequent to the sale are related to winding up of these operations.



The results of operations associated with discontinued operations for the three-month periods ended March 31, 2016 and 2015 were as follows:







 

 

 

 

 



 

 

 

 

 



 

 

 



Three Months

 



Ended March 31,

 

(Thousands of dollars)

 

2016

 

2015

 

Revenues

$

683 

 

229,389 

 

Income (loss) before income taxes

$

683 

 

(20,709)

 

Income tax benefit

 

– 

 

(2,738)

 

Income (loss) from discontinued operations

$

683 

 

(17,971)

 



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 March  31, 2016 and December 31, 2015.  







 

 

 

 



 

 

 

 



March 31,

 

December 31,

(Thousands of dollars)

2016

 

2015

Current assets

 

 

 

 

Cash

$

5,615 

 

7,927 

Accounts receivable

 

12,403 

 

12,037 

Other

 

19,194 

 

18,376 

Total current assets held for sale

$

37,212 

 

38,340 

Current liabilities

 

 

 

 

Accounts payable

$

1,837 

 

2,433 

Accrued compensation and severance

 

1,976 

 

2,179 

Refinery decommissioning cost

 

3,135 

 

2,685 

Total current liabilities associated with assets held for sale

$

6,948 

 

7,297 

 





9


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note D – Financing Arrangements and Debt



The Company has a $2.0 billion committed credit facility with a major banking consortium that expires in June 2017.  Borrowings under the facility bear interest at 1.45% above LIBOR based on the Company’s current credit rating as of March 31, 2016.  In addition, facility fees of 0.30% are charged on the full $2.0 billion commitment.  At March 31, 2016, the company had borrowings of $925 million under this committed facility.  At March 31, 2016, the Company also had uncommitted credit lines that had an estimated total borrowing capacity of approximately $82 million of which $46 million was outstanding under these uncommitted credit lines.    The Company also had outstanding letters of credit of approximately $88 million issued under its revolving credit facility at quarter end 2016, which reduced the available borrowing capacity under the agreement.    If necessary, the Company believes it could borrow funds under all or certain of these uncommitted lines with various financial institutions in future periods.    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 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 $19.1 million and $206.7 million, respectively, associated with this lease at March 31, 2016.



Note E – Cash Flow Disclosures



Additional disclosures regarding cash flow activities are provided below.





 

 

 

 



 

 

 

 



 



Three Months Ended March 31

(Thousands of dollars)

2016

 

2015

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

 

 

 

 

Decrease in accounts receivable

$

2,354 

 

302,602 

Decrease (increase) in inventories

 

1,667 

 

(60,562)

Decrease (increase) in prepaid expenses

 

98,888 

 

(6,825)

Decrease in deferred income tax assets

 

6,134 

 

5,040 

Decrease in accounts payable and accrued liabilities

 

(225,309)

 

(17,281)

Increase in current income tax liabilities

 

11,919 

 

35,833 

Net (increase) decrease in noncash operating working capital

$

(104,347)

 

258,807 

Supplementary disclosures:

 

 

 

 

Cash income taxes paid, net of refunds

$

(7,865)

 

28,280 

Interest paid, net of amounts capitalized

 

1,849 

 

(64)



 

 

 

 

Non-cash investing activities:

 

 

 

 

Asset retirement costs capitalized

$

3,723 

 

6,380 

Decrease in capital expenditure accrual

 

81,858 

 

239,572 















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



The table that follows provides the components of net periodic benefit expense for the three-month period ended March 31, 2015.







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2016

 

 

2015

 

2016

 

2015

Service cost

$

3,153 

 

 

5,081 

 

 

673 

 

 

828 

Interest cost

 

5,608 

 

 

7,950 

 

 

1,108 

 

 

1,192 

Expected return on plan assets

 

(5,385)

 

 

(8,687)

 

 

– 

 

 

– 

Amortization of prior service cost

 

319 

 

 

195 

 

 

(21)

 

 

(21)

Amortization of transitional asset

 

– 

 

 

271 

 

 

– 

 

 

– 

Recognized actuarial loss

 

3,529 

 

 

3,891 

 

 

39 

 

 

195 

Curtailments

 

822 

 

 

– 

 

 

(19)

 

 

– 

Net periodic benefit expense

$

8,046 

 

 

8,701 

 

 

1,780 

 

 

2,194 



 

 

 

 

 

 

 

 

 

 

 



Curtailment expense for the three months ended March 31, shown in the table above relate to restructuring activities in the U.S. undertaken by the Company in the first quarter 2016.  During the three-month period ended March 31, 2016, the Company made contributions of $3.5 million to its defined benefit pension and postretirement benefit plans.  Remaining required funding in 2016 for the Company’s defined benefit pension and postretirement plans is anticipated to be $10.3 million.

 

Note G – 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. 



In February 2016, the Committee granted stock options for 862,000 shares at an exercise price of $17.57 per share.  The Black-Scholes valuation for these awards was $5.03 per option.  The Committee also granted 394,000 performance-based RSU and 200,000 time-based RSU in February.  The fair value of the performance-based RSU, using a Monte Carlo valuation model, ranged from $12.21 to $16.34 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 $17.57 per share.  Additionally, the Committee granted 708,200 SAR and 507,470 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 85,679 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 was $19.26 per unit on date of grant.



For 2016 and 2015, stock options exercised  were non-cash transactions, thus there was no income tax benefit realized from option exercises during 2016 and 2015.

11


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note G – Incentive Plans (Cont’d)



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







 

 

 

 



 

 

 

 



Three Months Ended



March 31,

(Thousands of dollars)

 

2016

 

2015

Compensation charged against income before tax benefit

$

9,988 

 

16,315 

Related income tax benefit recognized in income

 

3,251 

 

5,100 









Note H – Earnings per Share



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

three-months ended March 31, 2016 and 2015.  The following table reconciles the weighted-average shares outstanding used for these computations.





 

 

 



 

 

 



Three Months Ended



March 31,

(Weighted-average shares)

2016

 

2015

Basic method

172,114,012 

 

177,734,159 

Dilutive stock options and restricted stock units*

– 

 

507,457 

   Diluted method

172,114,012 

 

178,241,616 





     *Due to a net loss, recognized by the Company for the 2016 period, no unvested stock awards were included in the computation of diluted earnings per share because the effect would have been anti-dilutive.





 

 

 

 

 



 

 

 

 

 



Three Months Ended



 

March 31,



 

2016

 

2015

Antidilutive stock options excluded from diluted shares

 

5,714,823 

 

 

3,314,751 

Weighted average price of these options

$

51.07 

 

$

57.19 







 



12


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note I – Income Taxes



The Company’s effective income tax rate is calculated as the amount of income tax expense divided by income before income tax expense.  For the three-month periods in 2016 and 2015, the Company’s effective income tax rates were as follows:





 

 

 

 



 

 

 

 



2016

 

2015

 

Three months ended March 31

24.7%

 

103.0%

 



The effective tax rates for most periods where earnings are generated, 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.  Conversely, the effective tax rates for most periods where losses are incurred generally are lower than U.S. statutory tax rate of 35% due to similar reasons.  The effective tax rate for the three-month period ended March 31, 2016 was below the U.S. statutory tax rate primarily due to effects of losses incurred in its Canadian operations and exploration and other expenses in certain foreign jurisdictions that have little or no realized tax benefitsThe effective tax rate for the three-month period ended March 31, 2015 was above the U.S. statutory tax rate primarily due to a deferred tax benefit associated with the sale of Malaysian assets.



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 March 31, 2016, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows: United States – 2011; Canada – 2008; Malaysia – 2009; and United Kingdom – 2014.



Note J – 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.



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 March 31, 2016.  The impact from marking to market these commodity derivative contracts decreased the loss before income taxes by $56.8 million for the three-month period ended March 31, 2016.  There were no open derivative contracts at March 31, 2015.



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











 

 

 

 

 



 

 

 

 

 



 

Volumes

 

 

 

At March 31, 2016

 

(barrels per day)

 

Swap Prices

April – December 2016

 

20,000

 

$52.01 

per barrel



 

 

 

 

 



Subsequent to March  31, 2016, the Company entered into an additional 5,000 barrels per day in WTI futures contracts for the second half of 2016 at an average price of $45.30 per barrel.







13


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note J – 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 U.S.  At March 31, 2016 and 2015 short-term derivative instrument were outstanding in Canada for approximately $11.3 million and $15.5 million, respectively, to manage the currency risks of certain U.S. dollar accounts receivable associated with sale of Canadian crude oil.   The worksheet impact from marking to market these foreign currency derivative contracts improved loss before income taxes by $0.3 million and $38 thousand for the three-month periods ended March 31, 2016 and 2015, respectively.



At March 31, 2016 and December 31, 2015, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2016

 

December 31, 2015

(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

 

$

65,518 

 

Accounts receivable

 

$

89,358 

Foreign exchange

 

Accounts receivable

 

 

276 

 

Accounts payable

 

 

29 



For the three-month period ended March 31, 2016 and 2015, 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

(Thousands of dollars)

 

 

 

March 31,

Type of Derivative Contract

 

Statement of Operations Location

 

 

2016

 

2015

Commodity

 

Sales and other operating revenues

 

$

13,189 

 

– 

Foreign exchange

 

Interest and other income

 

 

305 

 

63 



 

 

 

$

13,494 

 

63 



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 three-month periods ended March 31, 2016 and 2015, $0.7 million of the deferred loss on the interest rate swaps was charged to Interest expense in the Consolidated Statement of Operations.  The remaining loss deferred on these matured contracts at March 31, 2016 was $18.1 million, which is recorded, net of income taxes of $6.3 million, in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheet.  The Company expects to charge approximately $2.1 million of this deferred loss to Interest expense in the Consolidated Statement of Operations during the remaining nine months of 2016.





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.

14


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



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



The carrying value of assets and liabilities recorded at fair value on a recurring basis at March  31, 2016 and December 31, 2015 are presented in the following table.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2016

 

December 31, 2015

(Thousands of dollars)

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Foreign currency exchange
        derivative contracts

$

– 

 

276 

 

– 

 

276 

 

– 

 

 

– 

 

– 

 

– 

     Commodity derivative
        contracts

 

– 

 

65,518 

 

– 

 

65,518 

 

– 

 

 

89,358 

 

– 

 

89,358 



$

– 

 

65,794 

 

– 

 

65,794 

 

– 

 

 

89,358 

 

– 

 

89,358 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Nonqualified employee
        savings plans

$

12,628 

 

– 

 

– 

 

12,628 

 

12,971 

 

 

– 

 

– 

 

12,971 

      Foreign currency exchange
        derivative contracts

 

– 

 

– 

 

– 

 

– 

 

– 

 

 

29 

 

– 

 

29 



$

12,628 

 

– 

 

– 

 

12,628 

 

12,971 

 

 

29 

 

– 

 

13,000 





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 in each year 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 while the effects of 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 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 March 31, 2016 and December 31, 2015.



Fair Values – Nonrecurring

As a result of significantly lower commodity prices during the first quarter of 2016, the Company recognized approximately $95.1 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.







 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016



 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

      Canada

 

$

– 

 

– 

 

71,967 

 

167,055 

 

95,088 





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.

15


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note K – Accumulated Other Comprehensive Loss



The components of Accumulated Other Comprehensive Loss on the Consolidated Balance Sheets at December 31, 2015 and March 31, 2016 and the changes during the three-month period ended March 31, 2016 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, 2015

$

(513,004)

 

(179,260)

 

(12,278)

 

(704,542)

Components of other comprehensive income:

 

 

 

 

 

 

 

 

Before reclassifications to income

 

148,669 

 

 

– 

 

148,672 

Reclassifications to income

 

– 

 

2,513 

2

482 

3

2,995 

Net other comprehensive income

 

148,669 

 

2,516 

 

482 

 

151,667 

Balance at March 31, 2016

$

(364,335)

 

(176,744)

 

(11,796)

 

(552,875)



1All amounts are presented net of income taxes.

2Reclassifications before taxes of $3,867 for the three-month period ended March 31, 2016 are included in the computation of net periodic benefit expense.  See Note G for additional information.  Related income taxes of $1,354 for the three-month period ended March 31, 2016 are included in Income tax expense.

3Reclassifications before taxes of $741 for the three-month period ended March 31, 2016 are included in Interest expense.  Related income taxes of $259 for the three month period ended March 31, 2016 are included in Income tax expense.

 

Note L – Environmental and Other Contingencies



The Company’s operations and earnings have been and may be affected by various forms of governmental action both in the United States and throughout the world.  Examples of such governmental action include, but are by no means limited to: tax increases and retroactive tax claims; royalty and revenue sharing increases; import and export controls; price controls; currency controls; allocation of supplies of crude oil and petroleum products and other goods; expropriation of property; restrictions and preferences affecting the issuance of oil and gas or mineral leases; restrictions on drilling and/or production; laws and regulations intended for the promotion of safety and the protection and/or remediation of the environment; governmental support for other forms of energy; and laws and regulations affecting the Company’s relationships with employees, suppliers, customers, stockholders and others.  Because governmental actions are often motivated by political considerations and may be taken without full consideration of their consequences, and may be taken in response to actions of other governments, it is not practical to attempt to predict the likelihood of such actions, the form the actions may take or the effect such actions may have on the Company.



Murphy and other companies in the oil and gas industry are subject to numerous federal, state, local and foreign laws and regulations dealing with the environment. Violation of federal or state environmental laws, regulations and permits can result in the imposition of significant civil and criminal penalties, injunctions and construction bans or delays.  A discharge of hazardous substances into the environment could, to the extent such event is not insured, subject the Company to substantial expense, including both the cost to comply with applicable regulations and claims by neighboring landowners and other third parties for any personal injury and property damage that might result.



The Company currently owns or leases, and has in the past owned or leased, properties at which hazardous substances have been or are being handled. Although the Company has used operating and disposal practices that were standard in the industry at the time, hazardous substances may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where these wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes were

16


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note L – Environmental and Other Contingencies (Contd.)



not under Murphy’s control. Under existing laws the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination.  Certain of these historical properties are in various stages of negotiation, investigation, and/or cleanup and the Company is investigating the extent of any such liability and the availability of applicable defenses.  The Company has retained certain liabilities related to environmental matters at formerly owned U.S. refineries that were sold in 2011.  The Company also obtained insurance covering certain levels of environmental exposures related to past operations of these refineries.  The Company believes costs related to these sites will not have a material adverse affect on Murphy’s net income, financial condition or liquidity in a future period.



During 2015, the Company’s subsidiary in Canada identified a leak or leaks at an infield condensate transfer pipeline at the Seal field in a remote area of Alberta.  The pipeline was immediately shut down and the Company’s emergency response plan was activated.  In cooperation with local governmental regulators, and with the assistance of qualified consultants, an investigation and remediation plan is progressing as planned and the Company’s insurers have been notified.  The Company has not yet established a complete estimate of the costs to remediate the site.  Based on the assessments done to date, the Company recorded $43.9 million in other expense during 2015 associated with the estimated costs of remediating the site.  The Company has spent $31.7 million to date associated with this event.  Further refinements in the estimated total cost to remediate the site are anticipated in future periods, including possible fines from regulators and insurance recoveries.  It is possible that the ultimate net remediation costs to the Company associated with the condensate leak or leaks will exceed the amount of expense recorded through March 31, 2016.



There is the possibility that environmental expenditures could be required at currently unidentified sites, and new or revised regulations could require additional expenditures at known sites. However, based on information currently available to the Company, the amount of future remediation costs incurred at known or currently unidentified sites is not expected to have a material adverse effect on the Company’s future net income, cash flows or liquidity.



Murphy and its subsidiaries are engaged in a number of other legal proceedings, all of which Murphy considers routine and incidental to its business.  Based on information currently available to the Company, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s net income, financial condition or liquidity in a future period.



Note M – Commitments



The Company has entered into forward sales contracts to mitigate the price risk for a portion of its 2016 natural gas sales volumes in Western Canada.  The natural gas sales contracts call for deliveries in 2016 of approximately 59 million cubic feet per day at Cdn $3.19 per MCF.  These natural gas contracts have been accounted for as normal sales for accounting purposes.









Note N – Business Segments





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

Three Months Ended

 

Three Months Ended



Total Assets

 

March 31, 2016

 

March 31, 2015



at March 31,

 

External

 

Income

 

External

 

Income

(Millions of dollars)

2016

 

Revenues

 

(Loss)

 

Revenues

 

(Loss)

Exploration and production*

 

 

 

 

 

 

 

 

 

 

United States

$

5,587.1 

 

174.7 

 

(65.6)

 

280.1 

 

(93.9)

Canada

 

2,537.1 

 

106.1 

 

(87.3)

 

152.3 

 

(38.5)

Malaysia

 

2,436.0 

 

148.2 

 

22.3 

 

445.7 

 

223.1 

Other

 

143.6 

 

0.1 

 

(26.2)

 

– 

 

(72.0)

Total exploration and production

 

10,703.8 

 

429.1 

 

(156.8)

 

878.1 

 

18.7 

Corporate

 

719.7 

 

1.2 

 

(42.7)

 

43.6 

 

(15.2)

Assets/revenue/income (loss) from continuing operations

 

11,423.5 

 

430.3 

 

(199.5)

 

921.7 

 

3.5 

Discontinued operations, net of tax

 

37.2 

 

– 

 

0.7 

 

– 

 

(17.9)

Total

$

11,460.7 

 

430.3 

 

(198.8)

 

921.7 

 

(14.4)



*Additional details about results of oil and gas operations are presented in the table on page 24.



17


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 



Note O – New Accounting Principles and Recent Accounting Pronouncements



Leases 

In February 2016, The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to increase transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The main difference between previous generally accepted accounting principles (GAAP) and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.  The new standard is effective for financial statements issued for annual periods beginning after December 15, 2018 and interim periods within those annual periods.  Early adoption is permitted for all entities.  The Company anticipates adopting this guidance in 2019 and is currently evaluating the standard and its impact on its consolidated financial statements and footnote disclosures.



Compensation-Stock Compensation 

In March 2016, the FASB issued an ASU intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification within the statement of cash flows.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted for any entity in any interim period or annual period.  The Company will adopt this guidance in 2017 and is currently evaluating the impact on its consolidated financial statements and footnote disclosures.



Note P – Subsequent Events



In April 2016, a Canadian subsidiary of the Company signed a purchase and sale agreement for the sale of its interest in Syncrude Canada Ltd.  (“Syncrude”) asset to Suncor Energy Inc. (“Suncor”), for approximately C$937 million, subject to closing adjustments.  The company will divest its five percent, non-operated working interest in Syncrude subject to regulatory approval and normal closing conditions, and the sale is anticipated to close in mid-year 2016.



In April 2016, a Canadian subsidiary of the Company completed its transaction to divest natural gas processing and sales pipeline assets that support Murphy’s Montney natural gas fields in the Tupper area of northeastern British Columbia.  Total cash consideration received by Murphy upon closing of the transaction was C$538 million.  The net book value of assets being divested totaling approximately $226.7 million has been classified as current assets held for sale as of March 31, 2016.  The resulting gain on sale will be deferred and recognized over the next 20 years as a reduction of lease operating expense in Canadian “conventional” operating segment consistent with the expected continuing involvement of the subsidiary.



In a separate transaction, the same Canadian subsidiary signed a definitive agreement to acquire a 70 percent operated working interest (WI) of Athabasca Oil Corporation’s (Athabasca) production, acreage, infrastructure and facilities in the Kaybob Duvernay lands, and a 30 percent non-operated WI of Athabasca’s production, acreage, infrastructure and facilities in

the liquids rich Montney lands in Alberta.  Under the terms of the joint venture the total consideration amounts to C$475 million, of which Murphy will pay approximately C$250 million in cash at closing, subject to normal closing adjustments, and

the remaining C$225 million in the form of a carried interest for a period of up to five years.  The transaction is expected to close in the second quarter of 2016.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 



Overall Review



During the first quarter 2016, worldwide benchmark oil and natural gas prices continued to be significantly below average comparable benchmark prices during the first quarter 2015.  These lower oil and natural gas prices have led the Company to incur losses from operations in 2016.  Although the Company continues to aggressively attack its overall cost structure, a continuation of very low commodity prices would continue to lead to adverse effects on the Company’s income and cash flow.



Results of Operations



Murphy’s income by type of business is presented below.