10-Q 1 mur-20160630x10q.htm 10-Q Q2 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 June 30, 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 June 30, 2016 was 172,199,108.





 


 

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)





 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

267,483 

 

 

283,183 

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

 

 

131,224 

 

 

173,288 

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

 

 

293,312 

 

 

522,672 

Inventories, at lower of cost or market

 

 

 

 

 

 

Crude oil

 

 

8,654 

 

 

25,583 

Materials and supplies

 

 

145,413 

 

 

141,205 

Prepaid expenses

 

 

113,563 

 

 

212,962 

Deferred income taxes

 

 

46,093 

 

 

51,183 

Assets held for sale

 

 

32,113 

 

 

38,340 

Total current assets

 

 

1,037,855 

 

 

1,448,416 

Property, plant and equipment, at cost less accumulated depreciation,
   depletion and amortization of $12,241,549 in 2016 and $11,924,193 in 2015

 

 

8,565,485 

 

 

9,818,365 

Deferred charges and other assets

 

 

311,292 

 

 

227,031 

Total assets

 

$

9,914,632 

 

 

11,493,812 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

20,011 

 

 

18,881 

Accounts payable and accrued liabilities

 

 

843,787 

 

 

1,643,632 

Income taxes payable

 

 

12,816 

 

 

4,819 

Liabilities associated with assets held for sale

 

 

4,135 

 

 

7,297 

Total current liabilities

 

 

880,749 

 

 

1,674,629 

Long-term debt, including capital lease obligation

 

 

2,435,486 

 

 

3,040,594 

Deferred income taxes

 

 

46,749 

 

 

239,811 

Asset retirement obligations

 

 

746,361 

 

 

793,474 

Deferred credits and other liabilities

 

 

633,594 

 

 

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

 

 

914,236 

 

 

910,074 

Retained earnings

 

 

5,895,794 

 

 

6,212,201 

Accumulated other comprehensive loss

 

 

(536,659)

 

 

(704,542)

Treasury stock, 22,856,616 shares of Common Stock in 2016 and
   23,021,013 shares of Common Stock in 2015, at cost

 

 

(1,296,734)

 

 

(1,306,061)

Total stockholders’ equity

 

 

5,171,693 

 

 

5,306,728 

Total liabilities and stockholders’ equity

 

$

9,914,632 

 

 

11,493,812 



See Notes to Consolidated Financial Statements, page 7.



The Exhibit Index is on page 34.

2


 



Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Thousands of dollars, except per share amounts)







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended June 30,



June 30,

 

June 30,



2016

 

2015

 

2016

 

2015

REVENUES

 

 

 

 

 

 

 

 

Sales and other operating revenues

$

411,217 

 

718,621 

 

840,311 

 

1,467,771 

Gain on sale of assets

 

3,809 

 

18,246 

 

3,831 

 

154,123 

Interest and other income

 

22,436 

 

1,423 

 

23,615 

 

38,143 

Total revenues

 

437,462 

 

738,290 

 

867,757 

 

1,660,037 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Lease operating expenses

 

156,530 

 

227,489 

 

315,633 

 

459,910 

Severance and ad valorem taxes

 

13,439 

 

19,043 

 

26,076 

 

39,834 

Exploration expenses, including undeveloped lease amortization

 

37,128 

 

64,959 

 

64,044 

 

193,693 

Selling and general expenses

 

67,113 

 

79,176 

 

140,620 

 

166,143 

Depreciation, depletion and amortization

 

255,239 

 

403,390 

 

541,388 

 

884,417 

Impairment of assets

 

– 

 

– 

 

95,088 

 

– 

Accretion of asset retirement obligations

 

12,346 

 

11,750 

 

24,471 

 

23,519 

Interest expense

 

35,058 

 

30,466 

 

67,119 

 

59,936 

Interest capitalized

 

(608)

 

(1,823)

 

(2,449)

 

(3,208)

Other expense (benefit)

 

(7,516)

 

13,931 

 

(7,932)

 

63,612 

Total costs and expenses

 

568,729 

 

848,381 

 

1,264,058 

 

1,887,856 

Loss from continuing operations before income taxes

 

(131,267)

 

(110,091)

 

(396,301)

 

(227,819)

Income tax benefit

 

(134,172)

 

(21,105)

 

(199,721)

 

(142,363)

Income (loss) from continuing operations

 

2,905 

 

(88,986)

 

(196,580)

 

(85,456)

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

 

25 

 

15,152 

 

708 

 

(2,819)

NET LOSS (INCOME)

$

2,930 

 

(73,834)

 

(195,872)

 

(88,275)

PER COMMON SHARE – BASIC

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.02 

 

(0.51)

 

(1.14)

 

(0.48)

Income (loss) from discontinued operations

 

 -

 

0.09 

 

 -

 

(0.02)

Net income (loss)

$

0.02 

 

(0.42)

 

(1.14)

 

(0.50)

PER COMMON SHARE – DILUTED

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.02 

 

(0.51)

 

(1.14)

 

(0.48)

Income (loss) from discontinued operations

 

 -

 

0.09 

 

 -

 

(0.02)

Net income (loss)

$

0.02 

 

(0.42)

 

(1.14)

 

(0.50)

Average Common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

172,196,914 

 

174,488,842 

 

172,149,791 

 

176,343,309 

Diluted

 

172,799,827 

 

174,488,842 

 

172,149,791 

 

176,343,309 



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

 

Six Months Ended

 



June 30,

 

June 30,

 



2016

 

2015

 

2016

 

2015

 

Net income (loss)

$

2,930 

 

(73,834)

 

(195,872)

 

(88,275)

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Net gain (loss) from foreign currency translation

 

13,222 

 

31,981 

 

161,891 

 

(266,614)

 

Retirement and postretirement benefit plans

 

2,513 

 

2,695 

 

5,029 

 

5,989 

 

Deferred loss on interest rate hedges reclassified to interest expense

 

481 

 

481 

 

963 

 

963 

 

Other comprehensive income (loss)

 

16,216 

 

35,157 

 

167,883 

 

(259,662)

 

COMPREHENSIVE INCOME (LOSS)

$

19,146 

 

(38,677)

 

(27,989)

 

(347,937)

 



See Notes to Consolidated Financial Statements, page 7.

 

4


 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Thousands of dollars)





 

 

 

 



 

 

 

 



Six Months Ended



June 30,



2016

 

2015

OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(195,872)

 

(88,275)

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

 

 

 

 

(Income) loss from discontinued operations

 

(708)

 

2,819 

Depreciation, depletion and amortization

 

541,388 

 

884,417 

Impairment of assets

 

95,088 

 

– 

Amortization of deferred major repair costs

 

3,798 

 

3,404 

Dry hole costs

 

14,270 

 

99,023 

Amortization of undeveloped leases

 

25,419 

 

45,825 

Accretion of asset retirement obligations

 

24,471 

 

23,519 

Deferred and noncurrent income tax benefits

 

(316,201)

 

(194,240)

Pretax gains from disposition of assets

 

(3,831)

 

(154,123)

Net (increase) decrease in noncash operating working capital

 

(86,793)

1

107,171 

Other operating activities, net

 

12,349 

 

(14,329)

Net cash provided by continuing operations activities

 

113,378 

 

715,211 

INVESTING ACTIVITIES

 

 

 

 

Property additions and dry hole costs

 

(604,587)

 

(1,433,615)

Proceeds from sales of property, plant and equipment

 

1,153,325 

 

423,106 

Purchase of investment securities2

 

(651,218)

 

(629,763)

Proceeds from maturity of investment securities2

 

701,378 

 

663,343 

Other investing activities, net

 

(7,640)

 

(20,568)

Net cash provided (required) by investing activities

 

591,258 

 

(997,497)

FINANCING ACTIVITIES

 

 

 

 

Borrowings of debt

 

– 

 

823,000 

Repayments of debt

 

(600,000)

 

(450,000)

Capital lease obligation payments

 

(5,172)

 

(4,703)

Purchase of treasury stock

 

– 

 

(250,000)

Withholding tax on stock-based incentive awards

 

(1,138)

 

(8,976)

Cash dividends paid

 

(120,535)

 

(124,581)

Other financing activities, net

 

– 

 

(152)

Net cash required by financing activities

 

(726,845)

 

(15,412)

CASH FLOWS FROM DISCONTINUED OPERATIONS

 

 

 

 

Operating activities

 

5,185 

 

(85,445)

Investing activities

 

– 

 

5,322 

Changes in cash included in current assets held for sale

 

(5,185)

 

89,226 

Net increase in cash and cash equivalents of discontinued operations

 

– 

 

9,103 

Effect of exchange rate changes on cash and cash equivalents

 

6,509 

 

4,555 

Net decrease in cash and cash equivalents

 

(15,700)

 

(284,040)

Cash and cash equivalents at January 1

 

283,183 

 

1,193,308 

Cash and cash equivalents at June 30

$

267,483 

 

909,268 







12016 balance includes payments for deepwater rig contract exit of $261.8 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)









 

 

 

 

 



 

 

 

 

 



 

 

 

 

 



Six Months Ended



June 30,



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 June 30, 2016 and June 30, 2015

 

 

 

 

 

Balance at beginning of period

 

195,056 

 

 

195,040 

Exercise of stock options

 

– 

 

 

16 

Balance at end of period

 

195,056 

 

 

195,056 

Capital in Excess of Par Value

 

 

 

 

 

Balance at beginning of period

 

910,074 

 

 

906,741 

Exercise of stock options, including income tax benefits

 

– 

 

 

(376)

Restricted stock transactions and other

 

(10,078)

 

 

(38,032)

Stock-based compensation

 

14,454 

 

 

24,285 

Other

 

(214)

 

 

(65)

Balance at end of period

 

914,236 

 

 

892,553 

Retained Earnings

 

 

 

 

 

Balance at beginning of period

 

6,212,201 

 

 

8,728,032 

Net loss for the period

 

(195,872)

 

 

(88,275)

Cash dividends

 

(120,535)

 

 

(124,581)

Balance at end of period

 

5,895,794 

 

 

8,515,176 

Accumulated Other Comprehensive Loss

 

 

 

 

 

Balance at beginning of period

 

(704,542)

 

 

(170,255)

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

 

161,891 

 

 

(266,614)

Retirement and postretirement benefit plans, net of income taxes

 

5,029 

 

 

5,989 

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

 

963 

 

 

963 

Balance at end of period

 

(536,659)

 

 

(429,917)

Treasury Stock

 

 

 

 

 

Balance at beginning of period

 

(1,306,061)

 

 

(1,086,124)

Purchase of treasury shares

 

– 

 

 

(250,000)

Sale of stock under employee stock purchase plans

 

334 

 

 

246 

Awarded restricted stock, net of forfeitures

 

8,993 

 

 

29,056 

Balance at end of period – 22,856,616 shares of Common Stock in
   2016 and 22,303,782 shares of Common Stock in 2015, at cost

 

(1,296,734)

 

 

(1,306,822)

Total Stockholders’ Equity

$

5,171,693 

 

 

7,866,046 



See Notes to Consolidated Financial Statements, page 7.

6


 

Table of Contents

 

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 sold its interest in a Canadian synthetic oil operation in the second quarter of 2016.  The Company acquired 70% interest in Duvernay Shale and a 30% interest in liquids rich Montney properties during the second quarter 2016.



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 June 30, 2016 and December 31, 2015, and the results of operations,  cash flows and changes in stockholders’ equity for the interim periods ended June 30, 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 six-month period ended June 30, 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 June 30, 2016, the Company had total capitalized exploratory well costs pending the determination of proved reserves of $128.1 million.  The following table reflects the net changes in capitalized exploratory well costs during the

six-month periods ended June 30,  2016 and 2015.







 

 

 

 

 



 

 

 

 

 

(Thousands of dollars)

2016

 

 

2015

Beginning balance at January 1

$

130,514 

 

 

120,455 

Additions pending the determination of proved reserves

 

800 

 

 

1,620 

Other adjustments

 

(3,205)

 

 

– 

Balance at June 30

$

128,109 

 

 

122,075 



 

7

 


 

Table of Contents

 

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.







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

June 30,



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

$

63,617 

 

 

 

$

217 

 

 

One to two years

 

– 

 

– 

 

– 

 

 

32,192 

 

 

Two to three years

 

31,627 

 

 

– 

 

 

27,842 

 

 

– 

Three years or more

 

32,865 

 

 

– 

 

 

61,824 

 

 



$

128,109 

 

11 

 

 

$

122,075 

 

10 

 



Exploratory well costs capitalized more than one year at June 30, 2016 are in Brunei, and development options are under review for these multiple gas discoveries.



In April 2016, a Canadian subsidiary of the Company signed a purchase and sale agreement for the sale of its five percent, non-operated working interest in Syncrude Canada Ltd.  (“Syncrude”) asset to Suncor Energy Inc. (“Suncor”), subject to closing adjustments.  The sale was completed in June 2016 and the Company received net cash proceeds of $739.1 million.  The Company recorded an after-tax gain of $71.7 million in the second quarter of 2016 associated with the Syncrude divestiture.



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 $414.1 million.  A gain on sale of approximately $187 million is being deferred and recognized over the next 20 years in the Canadian operating segment.  The Company amortized $1.8 million of the deferred gain in the second quarter of 2016.  The remaining deferred gain is included as a component of deferred credits and other liabilities on the Company’s consolidated Balance Sheet.



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, the majority of which is unproved.  Under the terms of the joint venture the total consideration amounts to approximately $375 million, of which Murphy paid $206.7 million in cash at closing, subject to normal closing adjustments, and the remaining $168.0 million in the form of a carried interest for a period of up to five years.  The transaction closed in the second quarter of 2016.



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 in the six-month period ended June 30, 2016, to reduce the carrying value to their estimated fair value for its Terra Nova field offshore Canada and its Western Canada onshore heavy oil producing properties.  The fair values were determined by internal discounted cash flow models using estimates of future production, prices from futures exchanges, estimates of future costs, and a discount rate believed to be consistent with those used by principal market participants in the region. 



During the six-month period ended June 30, 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 2015 six-month period.

 



8


 

Table of Contents

 

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 and six-month periods ended June 302016 and 2015 were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months

 

Six Months

 



Ended June 30,

 

Ended June 30,

 

(Thousands of dollars)

 

2016

 

2015

 

2016

 

2015

 

Revenues

$

151 

 

153,107 

 

835 

 

382,496 

 

Income before income taxes

$

25 

 

21,046 

 

708 

 

337 

 

Income tax benefit

 

– 

 

5,894 

 

– 

 

3,156 

 

Income (loss) from discontinued operations

$

25 

 

15,152 

 

708 

 

(2,819)

 



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 June 30, 2016 and December 31, 2015.  







 

 

 

 



 

 

 

 



June 30,

 

December 31,

(Thousands of dollars)

2016

 

2015

Current assets

 

 

 

 

Cash

$

3,007 

 

7,927 

Accounts receivable

 

12,403 

 

12,037 

Other

 

16,703 

 

18,376 

Total current assets held for sale

$

32,113 

 

38,340 

Current liabilities

 

 

 

 

Accounts payable

$

488 

 

2,433 

Accrued compensation and severance

 

– 

 

2,179 

Refinery decommissioning cost

 

3,647 

 

2,685 

Total current liabilities associated with assets held for sale

$

4,135 

 

7,297 

 





9


 

Table of Contents

 

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 June 30, 2016.  In addition, facility fees of 0.30% are charged on the full $2.0 billion commitment.  At June 30, 2016, the company had no borrowings under this committed facility.  The Company also had outstanding letters of credit of approximately $88 million issued under its revolving credit facility at June 30, 2016, which reduced the available borrowing capacity under the agreement.  At June 30, 2016, the Company also had uncommitted credit lines that had an estimated total borrowing capacity of approximately $195 million of which no amounts were outstanding under these uncommitted credit lines.    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 $20.0 million and $202.7 million, respectively, associated with this lease at June 30, 2016.



Note E – Cash Flow Disclosures



Additional disclosures regarding cash flow activities are provided below.





 

 

 

 



 

 

 

 



 



Six Months Ended June 30

(Thousands of dollars)

2016

 

2015

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

 

 

 

 

Decrease in accounts receivable

$

109,105 

 

284,542 

Increase in inventories

 

(4,659)

 

(25,547)

Decrease (increase) in prepaid expenses

 

99,524 

 

(40,191)

Decrease in deferred income tax assets

 

5,564 

 

5,092 

Decrease in accounts payable and accrued liabilities

 

(337,302)

 

(84,781)

Increase (decrease) in current income tax liabilities

 

40,975 

 

(31,944)

Net (increase) decrease in noncash operating working capital

$

(86,793)

 

107,171 

Supplementary disclosures:

 

 

 

 

Cash income taxes paid (refunded), net

$

(4,367)

 

90,419 

Interest paid, net of amounts capitalized

 

52,654 

 

55,658 

Non-cash investing activities:

 

 

 

 

Asset retirement costs capitalized

$

8,693 

 

6,703 

Decrease in capital expenditure accrual

 

165,329 

 

336,952 









10


 

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)



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.



The table that follows provides the components of net periodic benefit expense for the three-month and six-month periods ended June 30, 2016 and 2015.







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,



Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2016

 

 

2015

 

2016

 

2015

Service cost

$

2,770 

 

 

4,772 

 

 

675 

 

 

828 

Interest cost

 

8,865 

 

 

7,971 

 

 

1,107 

 

 

1,192 

Expected return on plan assets

 

(9,698)

 

 

(8,724)

 

 

– 

 

 

– 

Amortization of prior service cost

 

321 

 

 

198 

 

 

(20)

 

 

(20)

Amortization of transitional asset

 

– 

 

 

274 

 

 

 

 

Recognized actuarial loss

 

3,718 

 

 

3,891 

 

 

36 

 

 

190 



 

5,976 

 

 

8,382 

 

 

1,800 

 

 

2,193 

Special termination benefits

 

– 

 

 

8,606 

 

 

– 

 

 

– 

Curtailments

 

– 

 

 

306 

 

 

– 

 

 

– 

Net periodic benefit expense

$

5,976 

 

 

17,294 

 

 

1,800 

 

 

2,193 



Six Months Ended June 30,



Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2016

 

 

2015

 

2016

 

2015

Service cost

$

5,923 

 

 

9,853 

 

 

1,348 

 

 

1,656 

Interest cost

 

14,473 

 

 

15,921 

 

 

2,215 

 

 

2,384 

Expected return on plan assets

 

(15,083)

 

 

(17,411)

 

 

– 

 

 

– 

Amortization of prior service cost

 

640 

 

 

393 

 

 

(41)

 

 

(41)

Amortization of transitional asset

 

– 

 

 

545 

 

 

 

 

Recognized actuarial loss

 

7,247 

 

 

7,782 

 

 

75 

 

 

385 



 

13,200 

 

 

17,083 

 

 

3,599 

 

 

4,387 

Special termination benefits

 

– 

 

 

8,606 

 

 

– 

 

 

– 

Curtailments

 

822 

 

 

306 

 

 

(19)

 

 

– 

Net periodic benefit expense

$

14,022 

 

 

25,995 

 

 

3,580 

 

 

4,387 



 

 

 

 

 

 

 

 

 

 

 



Curtailment expense for the six months ended June 30,  shown in the table above, relates to restructuring activities in the U.S. undertaken by the Company in the first quarter 2016.  During the six-month period ended June 30, 2016, the Company made contributions of $6.7 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 $6.3 million.

 



11


 

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)



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.  In April 2016, the Company awarded an additional 217,500 time-based RSU.  The fair value of these time-based RSU was estimated based on the fair market value of the Company’s stock on the date of grant, which was $24.075 per share. 



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







 

 

 

 



 

 

 

 



Six Months Ended



June 30,

(Thousands of dollars)

 

2016

 

2015

Compensation charged against income before tax benefit

$

24,288 

 

31,230 

Related income tax benefit recognized

 

8,210 

 

9,691 





12


 

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)



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 and six-month periods ended June 30, 2016 and 2015.  The following table reconciles the weighted-average shares outstanding used for these computations.





 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30,

 

June 30,

(Weighted-average shares)

2016

 

2015

 

2016

 

2015

Basic method

172,196,914 

 

174,488,842 

 

172,149,791 

 

176,343,309 

Dilutive stock options*

602,913 

 

– 

 

– 

 

– 

   Diluted method

172,799,827 

 

174,488,842 

 

172,149,791 

 

176,343,309 





     *Due to a net loss recognized by the Company for the three-month period ended June 30, 2015 and six-month periods ended June 30, 2016 and 2015, 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

 

Six Months Ended



 

June 30,

 

June 30,



 

2016

 

2015

 

2016

 

2015

Antidilutive stock options excluded from diluted shares

 

5,084,395 

 

 

5,988,668 

 

 

5,799,268 

 

 

5,767,975 

Weighted average price of these options

$

54.22 

 

$

53.12 

 

 

50.17 

 

 

53.31 



 



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 and six-month periods in 2016 and 2015, the Company’s effective income tax rates were as follows:





 

 

 

 



 

 

 

 



2016

 

2015

 

Three months ended June 30

102.2%

 

19.2%

 

Six months ended June 30

50.4%

 

62.5%

 



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 both the three-month and six-month periods ended June 30, 2016 was above the U.S. statutory tax rate primarily due to deferred tax benefits recognized related to the Canadian asset dispositions and income tax benefits on investments in foreign areasThe effective tax rate for the three-month period ended June 30, 2015 was less than the U.S. statutory tax rate primarily due to a deferred tax expense associated with an enacted increase in the statutory tax rate in Alberta.  The effective tax rate for the six-month period ended June 30, 2015 was above the U.S. statutory tax rate primarily due to a deferred tax benefit associated with the sale of Malaysian assets, partially offset by other expenses in foreign jurisdictions for which no tax benefits were recognized and the enacted increase in statutory rate in Alberta.



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 June 30, 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.

13


 

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)



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 June 30, 2016 and 2015.  The impact from marking to market these commodity derivative contracts increased the loss before income taxes by $2.6 million for the six-month period ended June 30, 2016 and reduced the loss before income taxes by $7.4 million for the six-month period ended June 30, 2015.



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











 

 

 

 

 



 

Volumes

 

 

 

At June 30, 2016

 

(barrels per day)

 

Swap Prices

July – December 2016

 

25,000

 

$50.67 

per barrel

January – December 2017

 

7,000

 

$50.16 

per barrel

At June 30, 2015

 

 

 

 

 

July – September 2015

 

15,000

 

$62.84 

per barrel

October – December 2015

 

15,000

 

$63.30 

per barrel



Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S.  At June 30, 2016 and 2015 short-term derivative instruments were outstanding in Canada for approximately $5.8 million and $8.0 million, respectively, to manage the currency risks of certain U.S. dollar accounts receivable associated with sale of Canadian crude oil.  The impact from marking to market these foreign currency derivative contracts was insignificant for the six-month periods ended June 30, 2016 and 2015, respectively.



After signing an agreement to sell its five percent non-operated working interest in Syncrude, the Company’s Canadian subsidiary entered into forward sales contracts for C$1.0 billion at a fixed rate to lock in the U.S. dollar value of the proceeds and protect the Company from exposure to weakening of the Canadian dollar.  Upon completion of the sale and settlement of the forward sale contracts, the Company recognized income of approximately $26.8 million in the second quarter of 2016 due to weakening of the Canadian dollar subsequent to entering into the contracts.



At June 30, 2016 and December 31, 2015, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

June 30, 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

 

$

1,709 

 

Accounts receivable

 

$

89,358 

Foreign exchange

 

Accounts payable

 

 

(1)

 

Accounts payable

 

 

(29)



14


 

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)



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



For the three-month and six-month periods ended June 30, 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

 

Six Months Ended

(Thousands of dollars)

 

 

 

June 30,

 

June 30,

Type of Derivative Contract

 

Statement of Operations Location

 

 

2016

 

2015

 

2016

 

2015

Commodity

 

Sales and other operating revenues

 

$

(47,738)

 

7,419 

 

(34,549)

 

7,419 

Foreign exchange

 

Interest and other income

 

 

26,481 

 

(49)

 

26,786 

 

14 



 

 

 

$

(21,257)

 

7,370 

 

(7,763)

 

7,433 



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 six-month periods ended June 30, 2016 and 2015, $1.5 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 June 30, 2016 was $11.3 million, which was recorded, net of income taxes of $6.1 million, in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheet.  The Company expects to charge approximately $1.5 million of this deferred loss to Interest expense in the Consolidated Statement of Operations during the remaining six 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.



The carrying value of assets and liabilities recorded at fair value on a recurring basis at June 30, 2016 and December 31, 2015 are presented in the following table.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



June 30, 2016

 

December 31, 2015

(Thousands of dollars)

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Commodity derivative
        contracts

 

– 

 

1,709 

 

– 

 

1,709 

 

– 

 

 

89,358 

 

– 

 

89,358 



$

– 

 

1,709 

 

– 

 

1,709 

 

– 

 

 

89,358 

 

– 

 

89,358 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Nonqualified employee
        savings plans

$

13,256 

 

– 

 

– 

 

13,256 

 

12,971 

 

 

– 

 

– 

 

12,971 

      Foreign currency exchange
        derivative contracts

 

– 

 

 

– 

 

 

– 

 

 

29 

 

– 

 

29 



$

13,256 

 

 

– 

 

13,257 

 

12,971 

 

 

29 

 

– 

 

13,000 



15


 

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)



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



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 June 30, 2016 and December 31, 2015.



Fair Values – Nonrecurring

As a result of significantly lower commodity prices in early 2016, the Company recognized $95.1 million in pretax noncash impairment charges related to producing properties during the six-month period ended June 30, 2016.  The fair value information associated with these impaired properties is presented in the following table.







 

 

 

 

 

 

 

 

 

 

 



 

June 30, 2016



 

 

 

 

 

 

 

 

 

 

Total



 

 

 

 

 

 

 

 

Net Book

 

Pretax



 

 

 

 

 

 

 

 

Value

 

(Noncash)



 

Fair Value

 

Prior to

 

Impairment



 

 

Level 1

 

Level 2

 

Level 3

 

Impairment

 

Loss

(Thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

Assets: