Financial Instruments and Risk Management

12 Months Ended

Dec. 31, 2016

Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

Note L – Financial Instruments and Risk Management

DERIVATIVE INSTRUMENTS – Murphy uses derivative instruments to manage certain risks related to commodity prices, interest rates and foreign currency exchange 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 gain or loss associated with recording the fair value of these contracts was deferred in Accumulated Other Comprehensive Loss until the anticipated transactions occur.

Commodity Purchase Price Risks – The Company is subject to commodity price risk related to crude oil it produces and sells.  During 2016, the Company had West Texas Intermediate (WTI) crude oil price swap financial contracts to economically hedge a portion of its United States production for 2016 and 2017.  Under these contracts, which matured monthly, the Company paid the average monthly price in effect and received the fixed contract prices.  At December 31, 2016, the Company had 22,000 barrels per day in WTI crude oil swap financial contracts maturing ratably during 2017.  At December 31, 2016, the fair value of WTI contracts of $48,900,000was included in accounts payable.  The impact of marking to market these 2017 commodity derivative contracts increased the loss before income taxes by $47,703,000 for the year ended December 31, 2016.

During 2015, the Company had WTI crude oil price swap financial contracts to hedge a portion of its United States production for 2015.  At December 31, 2015, the Company had 20,000 barrels per day in WTI crude oil swap financial contracts maturing ratably during 2016.  At December 31, 2015, the fair value of WTI contracts of $89,400,000was included in accounts receivable.  The impact of marking to market these commodity derivative contracts reduced the loss before income taxes by $77,300,000 for the year ended December 31, 2015.

Foreign Currency Exchange Risks – The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S.  At December 31, 2016 and 2015, short-term derivative instruments were outstanding in Canada for approximately $14,200,000 and $4,800,000, respectively, to manage the currency risk of U.S. dollar accounts receivable balances associated with sale of Canadian crude oil in both years.  The fair values of open foreign currency derivative contracts were liabilities of$73,000 at December 31, 2016 and$29,000 at December 31, 2015.

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

	December 31, 2016				December 31, 2015
	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
(Thousands of dollars)	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value
Type of Derivative Contract
Commodity	–	–	Accounts Payable	$48,864	Accounts Receivable	$89,358	–	–
Foreign exchange	–	–	Accounts Payable	$73	–	–	Accounts Payable	$29

For the years ended December 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.

	Year Ended December 31, 2016			Year Ended December 31, 2015
(Thousands of dollars)	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Derivative	Amount of   Gain (Loss) Recognized      in Income        on Derivative
Type of Derivative Contract
Commodity	Sale and Other Operating Revenues	$	(63,412)	Sale and Other Operating Revenues	$	129,064
Foreign exchange	Interest and Other Income		26,714	Interest and Other Income		(4)
		$	(36,698)		$	129,060

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 $350,000,000 of notes that were sold in 2012.  These interest rate swaps matured in May 2012.  Under hedge accounting rules, the Company deferred a loss on these contracts to match the payment of interest on these notes through 2022.  During each of the three years ended December 31, 2016, $2,963,000 of the deferred loss on the interest rate swaps was charged to interest expense in the Consolidated Statements of Operations.  The remaining loss deferred on these matured contracts at December 31, 2016 was $15,926,000, which is recorded, net of income taxes of $5,574,000, in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets.  The Company expects to charge approximately $2,963,000 of this deferred loss to Interest expense in the Consolidated Statements of Operations during 2017.

CREDIT RISKS – The Company’s primary credit risks are associated with trade accounts receivable, cash equivalents and derivative instruments.  Trade receivables arise mainly from sales of oil and natural gas in the U.S., Canada and Malaysia, and cost sharing amounts of operating and capital costs billed to partners for oil and natural gas fields operated by Murphy.  The credit history and financial condition of potential customers are reviewed before credit is extended, security is obtained when deemed appropriate based on a potential customer’s financial condition, and routine follow-up evaluations are made.  The combination of these evaluations and the large number of customers tends to limit the risk of credit concentration to an acceptable level.  Cash equivalents are placed with several major financial institutions, which limit the Company’s exposure to credit risk.  The Company controls credit risk on derivatives through credit approvals and monitoring procedures and believes that such risks are minimal because counterparties to the majority of transactions are major financial institutions.