10-K 1 mur-20171231x10k.htm 10-K 20171231 10K

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K







(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES



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)



Registrant’s telephone number, including area code:  (870) 862-6411



Securities registered pursuant to Section 12(b) of the Act:





 

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $1.00 Par Value

 

New York Stock Exchange

Series A Participating Cumulative

Preferred Stock Purchase Rights

 

New York Stock Exchange



 

 



Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes     No   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes     No   

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.  Yes     No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).  Yes     No   

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

 

 

 



Large accelerated filer

 

Accelerated filer

 



Non-accelerated filer

 

Smaller reporting company

 



Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes     No   

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (as of June 30, 2017) – $4,189,400,296.

Number of shares of Common Stock, $1.00 Par Value, outstanding at January 31, 2018 was 172,572,873.

Documents incorporated by reference:

Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders on May 9, 2018 have been incorporated by reference in Part III herein.







 


 

 



MURPHY OIL CORPORATION

2017 FORM 10-K

TABLE OF CONTENTS

 



 

 



 

Page Number



PART I

 

Item 1.

Business

Item 1A.

Risk Factors

13 

Item 1B.

Unresolved Staff Comments

20 

Item 2.

Properties

20 

Item 3.

Legal Proceedings

22 

Item 4.

Mine Safety Disclosures

22 



PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22 

Item 6.

Selected Financial Data

24 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

50 

Item 8.

Financial Statements and Supplementary Data

50 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

50 

Item 9A.

Controls and Procedures

50 

Item 9B.

Other Information

50 



PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

51 

Item 11.

Executive Compensation

51 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

51 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

51 

Item 14.

Principal Accounting Fees and Services

51 



PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

52 



 

 

Signatures

56 





 

i

 


 

 

PART I



Item 1. BUSINESS



Summary



Murphy Oil Corporation is a worldwide oil and gas exploration and production company.  As used in this report, the terms Murphy, Murphy Oil, we, our, its and Company may refer to Murphy Oil Corporation or any one or more of its consolidated subsidiaries.

The Company was originally incorporated in Louisiana in 1950 as Murphy Corporation.  It was reincorporated in Delaware in 1964, at which time it adopted the name Murphy Oil Corporation, and was reorganized in 1983 to operate primarily as a holding company of its various businesses.  For reporting purposes, Murphy’s exploration and production activities are subdivided into four geographic segments, including the United States, Canada, Malaysia and all other countries.  Additionally, Corporate activities include interest income, interest expense, foreign exchange effects, the impact of the Tax Cuts and Jobs Act (2017 Tax Act) and administrative costs not allocated to the segments.  The Company’s corporate headquarters are located in El Dorado, Arkansas.

The Company has transitioned from an integrated oil company to an enterprise entirely focused on oil and gas exploration and production activities.  The Company completed the sale of the remaining downstream assets in the United Kingdom (U.K.) during 2015 after selling its U.K. retail marketing assets during 2014.

At December 31, 2017, Murphy had 1,128 employees. 

In addition to the following information about each business activity, data about Murphy’s operations, properties and business segments, including revenues by class of products and financial information by geographic area, are provided on pages 24 through 41,  71 through 73,  104 through 115 and 117 of this Form 10-K report.

Interested parties may obtain the Company’s public disclosures filed with the Securities and Exchange Commission (SEC), including Form 10-K, Form 10-Q, Form 8-K and other documents, by accessing the Investor Relations section of Murphy Oil Corporation’s Website at www.murphyoilcorp.com.



Exploration and Production

The Company explores for and produces crude oil, natural gas and natural gas liquids worldwide.  The Company’s exploration and production management team directs the Company’s worldwide exploration and production activities.  This business maintains upstream operating offices in several locations around the world, with the most significant of these including Houston in Texas, Calgary in Alberta, and Kuala Lumpur in Malaysia.

During 2017, Murphy’s principal exploration and production activities were conducted in the United States by wholly owned Murphy Exploration & Production Company – USA (Murphy Expro USA), in Malaysia, Australia, Brunei, Mexico and Vietnam by wholly owned Murphy Exploration & Production Company – International (Murphy Expro International) and its subsidiaries, and in Western Canada and offshore Eastern Canada by wholly-owned Murphy Oil Company Ltd. (MOCL) and its subsidiaries.  Murphy’s hydrocarbon production in 2017 was in the United States, Canada and Malaysia.

Unless otherwise indicated, all references to the Company’s oil, natural gas liquids and natural gas production volumes and proved crude oil, natural gas liquids and natural gas reserves are net to the Company’s working interest excluding applicable royalties.  Also, unless otherwise indicated, references to oil throughout this document could include crude oil, condensate and natural gas liquids where applicable volumes include a combination of these products.

Total worldwide crude oil and condensate production in 2017 averaged 90,431 barrels per day, a decrease of 13% compared to 2016.  The decrease in 2017 was primarily due to the Syncrude divestiture in mid-2016, lower production from Seal as a result of the divesture in January 2017 and lower production in Malaysia resulting from normal decline.  Excluding Syncrude and Seal, crude oil and condensate production averaged 90,281 barrels per day in 2017 and 95,998 barrels per day in 2016.  Natural gas liquids produced in 2017 averaged 9,151 barrels per day, in line with 2016.  The Company’s worldwide sales volume of natural gas averaged 384 million cubic feet (MMCF) per day in 2017, an increase of 1% from 2016 levels.  The increase in natural gas sales volume in 2017 was primarily attributable to higher volumes at Canada from development of the Tupper, Kaybob & Placid assets, partially offset by lower gas volumes in the United States and Malaysia. Murphy’s worldwide 2017 production on a

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barrel of oil equivalent basis (six thousand cubic feet of natural gas equals one barrel of oil) was 163,536 barrels per day, a decrease of 7% compared to 2016.

Total production in 2018 is currently expected to average between 166,000 and 170,000 barrels of oil equivalent per day (BOED).



United States 

In the United States, Murphy primarily has production of crude oil, natural gas liquids and natural gas from fields in the Eagle Ford Shale area of South Texas and in the deepwater Gulf of Mexico.  The Company produced approximately 54,000 barrels of crude oil and gas liquids per day and approximately 45 MMCF of natural gas per day in the U.S. in 2017.  These amounts represented 54% of the Company’s total worldwide oil and gas liquids and 12% of worldwide natural gas production volumes.

The Company holds rights to approximately 135 thousand gross acres in South Texas in the Eagle Ford Shale unconventional oil and gas play.  Total 2017 production in the Eagle Ford area was 41,500 barrels of oil and liquids per day and approximately 33 MMCF per day of natural gas.  On a barrel of oil equivalent basis, Eagle Ford production accounted for 76% of total U.S. production volumes in 2017.  In 2018, production for the U.S. Onshore business is forecast to be lower and average approximately 40,000 barrels of oil and gas liquids per day and 29 MMCF of natural gas per day.  At December 31, 2017, the Company’s proved reserves for the U.S. Onshore business totaled 185.3 million barrels of crude oil,  40.2 million barrels of natural gas liquids, and 189.2 billion cubic feet of natural gas.

During 2017, approximately 24% of total U.S. hydrocarbon production was produced at fields in the Gulf of Mexico.  Approximately 87% of Gulf of Mexico production in 2017 was derived from five fields, including Dalmatian, Medusa, Kodiak, Front Runner and Thunder Hawk.  The Company holds a 70% operated working interest in Dalmatian in DeSoto Canyon Blocks 4 and 134, a 60% operated interest in Medusa in Mississippi Canyon Blocks 538/582, a 29.1% non-operated interest in Kodiak in Mississippi Canyon Blocks 727/771, and 62.5% operated working interests in the Front Runner field in Green Canyon Blocks 338/339 and the Thunder Hawk field in Mississippi Canyon Block 734.  Total daily production in the Gulf of Mexico in 2017 was 12,400 barrels of liquids and approximately 12 MMCF of natural gas.  Production in the Gulf of Mexico in 2018 is expected to total approximately 13,500 barrels of oil and gas liquids per day and 12 MMCF of natural gas per day.  At December 31, 2017, Murphy had total proved reserves for Gulf of Mexico fields of 42.2 million barrels of oil and gas liquids and 34.1 billion cubic feet of natural gas.  Total U.S. proved reserves at December 31, 2017 were 224.7 million barrels of crude oil, 43.0 million barrels of natural gas liquids, and 223.3 billion cubic feet of natural gas.



Canada 

In Canada, the Company holds one wholly-owned natural gas area (Tupper) in the Western Canadian Sedimentary Basin (WCSB), working interests in the Kaybob Duvernay and liquids rich Placid Montney lands and two non-operated assets – the Hibernia and Terra Nova fields offshore Newfoundland in the Jeanne d’Arc Basin.

The Company has 110 thousand gross acres of Tupper Montney mineral rights located in northeast British Columbia.  In 2016, 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.  Total cash consideration received by Murphy upon closing of the transaction was $414.1 million.  Connected with this sale, the Company entered into a commitment for natural gas processing capacity for minimum monthly payments through 2035.  

In 2016, the Company acquired a 70% operated working interest in Kaybob Duvernay lands and a 30% non-operated working interest in liquids rich Placid Montney lands in Alberta.

In the fourth quarter 2016, the Company entered into an agreement to sell its wholly-owned Seal field located in the Peace River oil sands area of northwest Alberta.  This sale was completed in January 2017 and the Company received net proceeds of $48.8 million.  

Daily production in 2017 in the WCSB averaged 3,700 barrels of oil and gas liquids and approximately 226 MMCF of natural gas, and increase of 195% (excluding Seal and Syncrude divestitures) and 8% versus 2016, respectively.  Oil and natural gas daily production for 2018 in Western Canada, is expected to average 6,500 barrels and approximately 262 MMCF, respectively.  The expected increase in oil production in 2018 arises from continued drilling and development in the Kaybob Duvernay and Placid Montney areas acquired in mid-2016.  The expected

2

 


 

 

increase in natural gas volumes in 2018 is primarily the result of new wells brought on line in the Tupper area and additional capacity at the Tupper West processing facility of 17 MMCFD commencing in late 2017. Total WCSB proved liquids and natural gas reserves at December 31, 2017, were approximately 36.3 million barrels and 1.2 trillion cubic feet, respectively.

Murphy has a 6.5% working interest in Hibernia, while at Terra Nova the Company’s working interest is 10.475%.  Oil production in 2017 was about 8,100 barrels of oil per day for the two offshore Canada fields.   Oil production for 2018 for offshore Canada is anticipated to be approximately 7,400 barrels per day.

The decrease in anticipated 2018 oil production is primarily the result of a planned turnaround at Hibernia. Total proved oil reserves at December 31, 2017 for the two fields were approximately 20.9 million barrels.

In June 2016, MOCL completed the sale of its 5% undivided interest in Syncrude Canada Ltd. (Syncrude) for net proceeds of $739.1 million.



Malaysia

In Malaysia, the Company has majority interests in nine separate production sharing contracts (PSCs).  The Company serves as the operator of all these areas other than the unitized Kakap-Gumusut field.  The PSCs cover approximately 2.67 million gross acres.  In December 2014 and January 2015, the Company sold 30% of its interest in substantially all of its Malaysian oil and gas assets for net proceeds of approximately $1.88 billion.

Murphy has a 59.5% interest in oil and natural gas discoveries in two shallow-water blocks, SK 309 and SK 311, offshore Sarawak.  Approximately 13,500 barrels of oil and gas liquids per day were produced in 2017 at Blocks SK 309/311.  Oil and gas liquids production in 2018 at fields in Blocks SK 309/311 (Sarawak) is anticipated to total about 12,500 barrels per day.



The Company has a gas sales contract for the Sarawak area with Petronas, the Malaysian state-owned oil company, and has an ongoing multi-phase development plan for several natural gas discoveries on these blocks.  The gas sales contract allows for gross sales volumes of 250 MMCF per day through September 2021, but allows the Company to deliver higher sales volumes as requested.  Total net natural gas sales volume offshore Sarawak was about 105 MMCF per day during 2017.  Sarawak net natural gas sales volumes are anticipated to be approximately 102-103 MMCF per day in 2018.

Total proved reserves of liquids and natural gas at December 31, 2017 for Blocks SK 309/311 were 9.8 million barrels and approximately 129 billion cubic feet (BCF), respectively.

In 2006, the Kakap field in Block K was unitized with the Gumusut field in an adjacent block under a Unitization and Unit Operating Agreement (UUOA) between the owners. The Gumusut-Kakap Unit is operated by another company. In the fourth quarter 2016, the owners completed the first redetermination process for a revision to the blocks’ tract participation interest, and the operator of the unitized field sought the approval of Petronas to effect the change in 2017.  In 2016, the Company recorded an estimated redetermination expense of $39.1 million ($24.1 million after taxes) related to an expected revision in the Company’s working interest covering the period from inception through year-end 2016 at Kakap.  In February 2017, the Company received Petronas official approval to the redetermination change that reduced the Company’s working interest in oil operations to 6.67% effective at April 1, 2017. Working interest redeterminations are required at different points within the life of the unitized field.

Following a further Unitization Framework Agreement (UFA) between the governments of Brunei and Malaysia the Company now has a 6.35% interest in the Kakap field in Block K Malaysia as of December 31, 2017. The UFA unitized the Gumusut/Kakap (GK) and Geronggong/Jagus East fields effective November 23, 2017.  In the fourth quarter 2017, the Company recorded an estimated redetermination expense of $15 million ($9.3 million after taxes) related to the Company’s revised working interest.

The Siakap oil field was developed as a unitized area with the Petai field owned by others, and the combined development is operated by Murphy, with a tie-back to the Kikeh field with production beginning in 2014.  Oil production at Block K averaged approximately 20,300 barrels per day during 2017.  Oil production at Block K is anticipated to average approximately 17,700 barrels per day in 2018.  The reduction in Block K Kikeh oil production in 2018 is primarily attributable to overall field decline and reduction in working interest at Kakap as described above.

The Company has a Block K natural gas sales contract with Petronas that calls for gross sales volumes of up to 120 MMCF per day.  Gas production in Block K will continue until the earlier of lack of available commercial quantities

3

 


 

 

of associated gas reserves or expiry of the Block K production sharing contract.  Natural gas production in Block K in 2017 totaled 8 MMCF per day.  Daily gas production in 2018 in Block K is expected to average about 5-6 MMCF per day.  Total proved reserves booked in Block K at the end of 2017 were 42.4 million barrels of crude oil and about 24.3 billion cubic feet of natural gas.

The Company also has an interest in deepwater Block H offshore Sabah.  In early 2007, the Company announced a significant natural gas discovery at the Rotan well in Block H.  The Company followed up Rotan with several other nearby discoveries.  Murphy’s interests in Block H range between 42% and 56%.  Total gross acreage held by the Company at the end of 2017 in Block H was 679 thousand gross acres.  In early 2014, Petronas and the Company sanctioned a Floating Liquefied Natural Gas (FLNG) project for Block H, and agreed terms for sales of natural gas to be produced with prices tied to an oil index.  First production is currently expected at Block H in mid-2020.  At December 31, 2017, total natural gas proved reserves for Block H were approximately 335.2 billion cubic feet.

The Company had a 42% interest in a gas holding area covering approximately 1,854 gross acres in Block P.  This interest expired in January 2018.

In November 2017, the Company acquired a 59.5% working interest in Sarawak SK405B PSC. The block SK405B is approximately 2,305 square kilometers (890 square miles) and has water depths in the range from 10 to 50 meters (33 to 164 feet).  Under the terms of the PSC, the Company will operate the block with a participating interest of 59.5%.

In February 2016, the Company acquired a 40% working interest in Block Deepwater SK2A PSC, offshore Sarawak. The Company operates the block with a commitment to acquire and process new 3D seismic. The commitment was fulfilled during 2016. A decision to enter the next phase of the PSC, involving a one-well commitment, will be made in the future. This block includes 609 thousand gross acres.

In February 2015, the Company acquired a 50% interest in Block SK 2C, offshore Sarawak.  The Company operates the block that carried one well commitment during the one year initial exploration period.  The exploration well was drilled in 2015, and the first exploration period was extended for a further eighteen months.  In 2016, the Company elected not to enter the next exploration period. The block was relinquished with the exception of an application made for a gas holding area comprising the Paus gas and oil discovery. The Company holds an 80% working interest in the gas holding area application, which is under consideration by government authorities.

In May 2013, the Company acquired an interest in shallow-water Malaysia Block SK 314A.  The PSC covered a three-year exploration period.  The Company’s working interest in Block SK 314A is 59.5%.  This block includes 488 thousand gross acres.  The Company has a 70% carry of a 15% partner in this concession through the minimum work program.  The first two exploration wells were drilled in 2015 and the third well in 2016.  The Company has successfully secured an annexation of an open area in Sarawak to SK314A to complete the remaining fourth and fifth exploration commitment wells.



Australia

In Australia, the Company holds six offshore exploration permits and serves as operator of four of them.

In December 2017, Murphy signed a farm-in agreement to acquire a 40% non-operated interest in AC/P21 in the Vulcan Basin, offshore Western Australia. Acquisition of multiclient 3D seismic commenced over the permitted area in December 2017. The permit comprises approximately 165 thousand acres and expires in June 2019.

In March 2015, Murphy was awarded the AC/P59 license, another acreage position in the Vulcan Basin.  The block covers approximately 288 thousand gross acres.  The exploration requires 3D seismic reprocessing, which was completed in 2016.  The permit expires in 2021.

In April 2014 and June 2014, Murphy was awarded licenses AC/P57 and AC/P58 in the Vulcan Basin.  The blocks cover approximately 82 thousand and 692 thousand gross acres, respectively.  These exploration permits require 3D seismic reprocessing and a gravity survey that were completed in 2017.  The permits expire in 2020.

The Company was awarded permit EPP43 in the Ceduna Basin, offshore South Australia, in October 2013.  The Company operates and holds a 50% working interest in the concession covering approximately 4.08 million gross acres.  The exploration permit has commitments for 2D and 3D seismic, which was completed in the first half of 2015 and processed in 2016.  This permit expires in 2020.

In November 2012, Murphy acquired a 20% non-operated working interest in permit WA-408-P in the Browse Basin.  The permit comprised approximately 417 thousand gross acres.  Murphy drilled two wells in

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2013.  The first well found hydrocarbon but was deemed commercially unsuccessful and was written off to expense.  The second well was also unsuccessful, and costs were expensed in 2013.  Although extended in 2016, the  permit was released in 2017.

The Company also acquired permit WA-481-P in the Perth Basin, offshore Western Australia, in August 2012.  All commitments were fulfilled in 2015. In 2016, the Company’s working interest was sold to another company.

In May 2012, Murphy was awarded permit WA-476-P in the Carnarvon Basin, offshore Western Australia.  The Company formerly held 100% working interest in the permit which covers 177 thousand gross acres.  The permit had a primary term work commitment consisting of seismic data purchase and geophysical studies.  All primary term commitments were completed.  This permit was released in 2017.

The Company’s first permit in Australia was acquired in 2007.  It consisted of a 40% interest in Block AC/P36 in the Browse Basin.  Murphy renewed the exploration permit for an additional five years, and in that process relinquished 50% of the gross acreage.    In 2012, Murphy increased its working interest in the remaining acreage to 100% and subsequently farmed out a 50% working interest and operatorship.  The license now covers 482 thousand gross acres and expires in 2019.  The existing work commitment includes further geophysical work.



Brunei

In late 2010, the Company entered into two production sharing agreements for properties offshore Brunei.  The Company had a 5% working interest in Block CA-1 and a 30% working interest in Block CA-2.  In 2015, the Company exercised a preemptive right that increased its working interest in Block CA-1 to 8.051%.  The CA-1 and CA-2 blocks cover 1.44 million and 1.49 million gross acres, respectively.  Four exploration wells were drilled in Block CA-1 and six exploration wells were drilled in Block CA-2 by the end of 2017.  

The Jagus East discovery in Block CA-1 now forms part of a unitized field with the GK Unit in Malaysia. On November 23, 2017, both the governments of Brunei and Malaysia signed a UFA (see Malaysia section above). Following this unitization the Company’s working interest in the Brunei section of the Kakap field will be adjusted. 

The Company has a 30% non-operating working interest in Block CA-2.  In December 2014, the authority PetroleumBrunei approved a gas marketing plan which sets an eight-year gas holding period until December 2022. The consortium is presently carrying out a concept select study to assist in commercial discussions.



Vietnam

In November 2012, the Company signed a PSC with Vietnam National Oil and Gas Group and PetroVietnam Exploration Production Company (PVEP), where it acquired a 65% interest and operatorship of Blocks 144 and 145.  The blocks cover approximately 6.56 million gross acres and are located in the outer Phu Khanh Basin.  The Company acquired 2D seismic for these blocks in 2013 and undertook seabed surveys in 2015 and 2016. The commitment of acquiring, processing and interpreting six hundred square kilometers (600 km2) of 3D seismic has been extended to 2019.

In June 2013, the Company acquired a 60% working interest and operatorship of Block 11-2/11 under another PSC.  The block covers 677 thousand gross acres.  The Company acquired 3D seismic and performed other geological and geophysical studies in this block in 2013.  This concession carries a three-well commitment. The first exploration well was drilled in 2016 and the second and third wells were drilled in 2017.  These wells discovered hydrocarbons, and a commercial assessment is ongoing.

In August 2015, the Company signed a farm-in agreement to acquire 35% of Block 15-1/05. PVEP is currently the operator of the block and the exploration phase expires December 2018.  The exploration license calls for one exploration well commitment, which is planned to be drilled in 2018.   Murphy is working with its partners on the Block 15-1/05 LDV discovery for a Declaration of Commerciality in 2018.

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Mexico 

In December 2016, Murphy and joint venture partners were the high bidder on Block 5, which was offered as part of Mexico’s fourth phase, Round one deepwater auction (Round 1.4).  Murphy was formally awarded the block in March 2017.   Murphy is the operator of the Block with a 30% working interest.  Block 5 is located in the deepwater Salinas basin covering approximately 640,000 gross acres (2,600 square kilometers) and water depths in this block range from 2,300 to 3,500 feet (700 to 1,100 meters).  The initial exploration period for the license is four years and includes a work program commitment of one well.  Murphy currently plans to drill an exploration well on this block in late 2018.



Brazil

In September 2017, the Company entered into a farm-in agreement with Queiroz Galvão Exploração e Produção S.A. (QGEP) to acquire a 20% working interest in Blocks SEAL-M-351 and SEAL-M-428, located in the deepwater Sergipe-Alagoas Basin, offshore Brazil. QGEP retained a 30% working interest in the blocks and, in a separate but related transaction, ExxonMobil Exploração Brasil Ltda. (an affiliate of ExxonMobil Corporation) farmed into the remaining 50% working interest as the operator.

In addition, Murphy and its co-venturers were the high bidder in Brazil’s Round 14 lease sale for Blocks SEAL-M-501 and SEAL-M-503, which are adjacent to SEAL-M-351 and SEAL-M-428.  ExxonMobil will operate the block and Murphy has a 20% working interest.  ExxonMobil Exploração Brasil Ltda has a 50% working interest and QGEP will retain a 30% working interest in the blocks.

Murphy’s total acreage position in Brazil is 746,000 gross acres over the four highly prospective blocks, offsetting several major Petrobras discoveries, with no well commitments. The Company’s total commitment is approximately $18 million, which includes signature bonuses and seismic costs, $6.4 million of which was paid in 2017, with the remainder to be paid in 2018.



Ecuador

Murphy sold its 20% working interest in Block 16, Ecuador in March 2009.  In October 2007, the government of Ecuador passed a law that increased its share of revenue for sales prices that exceed a base price (about $23.36 per barrel at December 31, 2008) from 50% to 99%.  The government had previously enacted a 50% revenue sharing rate in April 2006.  The Company initiated arbitration proceedings against the government in one arbitral body claiming that the government did not have the right under the contract to enact the revenue sharing provision.  In 2010, the arbitration panel determined that it lacked jurisdiction over the claim due to technicalities.  The arbitration was refiled in 2011 before a different arbitral body and the arbitration hearing was held in late 2014.  On February 10, 2017, the arbitration panel issued its final decision and awarded Murphy the sum of $31.3 million.  Under the rules of the arbitral tribunal, there are very limited procedural or jurisdictional grounds under which a final award can be set aside.  However, a party may seek to set aside a final award via a proceeding in Netherlands district court located in The Hague.  In May 2017, Ecuador instituted such a proceeding.  Murphy has filed its opposition and the matter is pending.

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Proved Reserves



Total proved reserves for crude oil, natural gas liquids and natural gas as of December 31, 2017 are presented in the following table.







 

 

 

 

 

 



 

 

 

 

 

 



 

Proved Reserves



 

Crude

 

Natural Gas

 

 



 

Oil

 

Liquids

 

Natural Gas



 

 

 

 

 

 

Proved Developed Reserves:

 

(MMBOE)

 

(BCF)

     United States

 

126.3 

 

23.3 

 

127.7 

     Canada

 

21.9 

 

1.0 

 

547.0 

     Malaysia

 

37.3 

 

0.3 

 

144.6 

              Total proved developed reserves

 

185.5 

 

24.6 

 

819.3 

Proved Undeveloped Reserves:

 

 

 

 

 

 

     United States

 

98.4 

 

19.7 

 

95.6 

     Canada

 

29.6 

 

4.6 

 

665.5 

     Malaysia

 

14.6 

 

 –

 

346.7 

              Total proved undeveloped reserves

 

142.6 

 

24.3 

 

1,107.8 

              Total proved reserves

 

328.1 

 

48.9 

 

1,927.1 



Murphy Oil’s total proved reserves and proved undeveloped reserves increased during 2017 as presented in the table below:





 

 

 

 



 

 

 

 



 

Total

 

Total Proved



 

Proved 

 

Undeveloped

(Millions of oil equivalent barrels)

 

Reserves

 

Reserves

     Beginning of year

 

684.5 

 

341.1 

     Revisions of previous estimates

 

(5.6)

 

2.0 

     Extensions and discoveries

 

71.3 

 

61.1 

     Improved recovery

 

2.0 

 

 –

     Conversions to proved developed reserves

 

 –

 

(52.9)

     Purchases of properties

 

5.8 

 

0.4 

     Production

 

(59.7)

 

 –

     End of year

 

698.3 

 

351.7 





During 2017, Murphy’s proved reserves increased by 13.8 million barrels of oil equivalent (mmboe).  The most significant additions to total proved reserves related to drilling, well performance, and re-allocation of capital to higher performing drilling areas in the Eagle Ford Shale area of South Texas that added 30.7 MMBOE, Montney gas area of Western Canada that added 25.8 MMBOE, and in the Kaybob Duvernay and Placid Montney areas in Canada that added 7.7 MMBOE.  Drilling and well performance in the Gulf of Mexico added 3.4 mmboe.  At December 31, 2017, Murphy acquired increased working interests in two fields located in the Gulf of Mexico, adding 4.8 MMBOE.  In 2017, Murphy’s proved reserves in Malaysia were reduced by 3.5 MMBOE following the results of a non-operated field equity redetermination. 

Murphy’s total proved undeveloped reserves at December 31, 2017 increased 10.6 MMBOE from a year earlier.  The proved undeveloped reserves reported in the table as extensions and discoveries during 2017 were predominantly attributable to two areas – drilling and re-allocation of capital to higher performing drilling areas in the Eagle Ford Shale area of South Texas and the Tupper area in Western Canada.  Both of these areas had active development work ongoing during the year.  The majority of proved undeveloped reserves associated with revisions of previous estimates was the result of higher oil and gas prices extending the economic life of well locations planned for development within the next five years.  The majority of the proved undeveloped reserves migration to the proved developed category are attributable to drilling in Eagle Ford Shale, Malaysia and Tupper.  The Company spent approximately $453 million in 2017 to convert proved undeveloped reserves to proved developed reserves.  The Company expects to spend about $648 million in 2018, $720 million in 2019 and $716 million in 2020 to move

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currently undeveloped proved reserves to the developed category.  The anticipated level of spending in 2018 primarily includes drilling in the Eagle Ford Shale, Kaybob, Placid and Tupper areas.  In computing MMBOE, natural gas is converted to equivalent barrels of oil using a ratio of six thousand cubic feet (MCF) to one barrel of oil.

At December 31, 2017, proved reserves are included for several development projects, including oil developments at the Eagle Ford Shale in South Texas, Montney shale at Tupper, the Kakap, Kikeh, Siakap fields, offshore Sabah, in Malaysia and natural gas developments offshore Sarawak and offshore Block H in Malaysia.  Total proved undeveloped reserves associated with various development projects at December 31, 2017 were approximately 351.7 MMBOE, which represent 50% of the Company’s total proved reserves. 

Certain development projects have proved undeveloped reserves that will take more than five years to bring to production. 

The Company operates deepwater fields in the Gulf of Mexico that have three undeveloped locations that exceed this five-year window.  Total reserves associated with the three locations amount to less than 1% of the Company’s total proved reserves at year-end 2017.  The development of certain of these reserves stretches beyond five years due to limited well slots available, thus making it necessary to wait for depletion of other wells prior to initiating further development of these locations. 

The second project that will take more than five years to develop is offshore Malaysia. The Block H development project has undeveloped proved reserves that make up 8% of the Company’s total proved reserves at year-end 2017.  This operated project will take longer than five years from discovery to be completely developed due to a deferral of development and construction of FLNG facilities operated by another company. Field start up is expected to occur in 2020.



Murphy Oil’s Reserves Processes and Policies

The Company employs a Manager of Corporate Reserves (Manager) who is independent of the Company’s oil and gas operational management.  The Manager reports to the Senior Vice President, Planning & Performance, of Murphy Oil Corporation, who in turn reports to the Chief Financial Officer of Murphy Oil.  The Manager makes annual presentations to the Board of Directors about the Company’s reserves.  The Manager reviews and discusses reserves estimates directly with the Company’s reservoir engineering staff in order to make every effort to ensure compliance with the rules and regulations of the SEC and industry.  The Manager utilizes independent, well known and respected third-party firms to audit reserves.  The Manager coordinates and oversees these third-party audits.  The third-party audits are performed annually and under Company policy generally target coverage of at least one-third of the barrel oil-equivalent volume of the Company’s proved reserves.  The Company reports its internal assessments of proved reserves and only uses the third-party audit results as an independent assessment of its internal computations.  Internal audits may also be performed by the Manager and qualified engineering staff from areas of the Company other than the area being audited by third parties. 

Each significant exploration and production office maintains one or more Qualified Reserve Estimators (QRE) on staff.  The QRE is responsible for estimating and evaluating reserves and other reserves information for his or her assigned area.  The QRE may personally make the estimates and evaluations of reserves or may supervise and approve the estimation and evaluation thereof by others.  A QRE is professionally qualified to perform these reserves estimates due to having sufficient educational background, professional training and professional experience to enable him or her to exercise prudent professional judgment.

This requires a minimum of three years practical experience in petroleum engineering or petroleum production geology, with at least one year of such experience being in the estimation and evaluation of reserves, and either a bachelors or advanced degree in petroleum engineering, geology or other discipline of engineering or physical science from a college or university of recognized stature, or the equivalent thereof from an appropriate government authority or professional organization.

Larger offices of the Company also employ a Regional Reserves Coordinator (RRC) who supervises the local QREs.  The RRC is usually a senior QRE that has the primary responsibility for coordinating and submitting reserves information to senior management.

The Company’s QREs maintain files containing pertinent data regarding each significant reservoir.  Each file includes sufficient data to support the calculations or analogies used to develop the values.  Examples of data included in the file, as appropriate, include:  production histories; pertinent drilling and workover histories; bottom hole pressure data; volumetric, material balance, analogy or other pertinent reserve estimation data; production

8

 


 

 

performance curves; narrative descriptions of the methods and logic used to determine reserves values; maps and logs; and a signed copy of the conclusion of the QRE stating, that in their opinion, the reserves have been calculated, reviewed, documented and reported in compliance with the regulations and guidelines contained in the reserves training manual.  The Company’s reserves are maintained in an industry-recognized reservoir engineering software system, which has adequate access controls to avoid the possibility of improper manipulation of data.  When reserves calculations are completed by QREs and appropriately reviewed by RRCs and the Manager, the conclusions are reviewed and discussed with the heads of the Company’s exploration and production business and other senior management as appropriate.  The Company’s Controller’s department is responsible for preparing and filing reserves schedules within the Form 10-K report.

Murphy provides annual training to all company reserves estimators to ensure SEC requirements associated with reserves estimation and Form 10-K reporting are fulfilled.  The training includes materials provided to each participant that outlines the latest guidance from the SEC as well as best practices for many engineering and geologic matters related to reserves estimation.



Qualifications of Manager of Corporate Reserves

The Company believes that it has qualified employees preparing oil and gas reserves estimates.  Mr. F. Michael Lasswell serves as Corporate Reserves Manager having joined the Company in 2012.  Prior to joining Murphy, Mr. Lasswell was employed as a Regional Coordinator of reserves at a major integrated oil company.  He worked in several capacities in the reservoir engineering department with the oil company from 2002 to 2012.  Mr. Lasswell earned a Bachelor’s of Science degree in Civil Engineering and a Master’s of Science degree in Geotechnical Engineering from Brigham Young University.  Mr. Lasswell has experience working in the reservoir engineering field in numerous areas of the world, including the North Sea, the U.S. Arctic, the Middle East and Asia Pacific.  He is a member of the Society of Petroleum Engineers (SPE), is a past member of its Oil and Gas Reserves Committee (OGRC) and is also co-author of a paper on the Recognition of Reserves which was published by the SPE. Mr. Lasswell has also attended numerous industry training courses.

More information regarding Murphy’s estimated quantities of proved reserves of crude oil, natural gas liquids and natural gas for the last three years are presented by geographic area on pages 106 through 112 of this Form 10-K report.  Murphy has not filed and is not required to file any estimates of its total proved oil or gas reserves on a recurring basis with any federal or foreign governmental regulatory authority or agency other than the U.S. Securities and Exchange Commission.  Annually, Murphy reports gross reserves of properties operated in the United States to the U.S. Department of Energy; such reserves are derived from the same data from which estimated proved reserves of such properties are determined.

Crude oil, condensate and natural gas liquids production and sales, and natural gas sales by geographic area with weighted average sales prices for each of the three years ended December 31, 2017 are shown on pages 30 and 32 of this Form 10-K Report.  In 2017, the Company’s production of oil and natural gas represented approximately 0.1% of worldwide totals.

Production expenses for the last three years in U.S. dollars per equivalent barrel are discussed beginning on page 34 of this Form 10-K report.  For purposes of these computations, natural gas sales volumes are converted to equivalent barrels of oil using a ratio of six MCF of natural gas to one barrel of oil.

Supplemental disclosures relating to oil and gas producing activities are reported on pages 104 through 117 of this Form 10-K report.

9

 


 

 



At December 31, 2017, Murphy held leases, concessions, contracts or permits on developed and undeveloped acreage as shown by geographic area in the following table.  Gross acres are those in which all or part of the working interest is owned by Murphy.  Net acres are the portions of the gross acres attributable to Murphy’s interest.









 

 

 

 

 

 

 

 

 

 

 



Developed

 

Undeveloped

 

Total

Area (Thousands of acres)

Gross

 

Net

 

Gross

 

Net

 

Gross

 

Net

United States  – Onshore

104 

 

91 

 

63 

 

59 

 

167 

 

150 

                       – Gulf of Mexico

14 

 

 

565 

 

303 

 

579 

 

309 

              Total United States

118 

 

97 

 

628 

 

362 

 

746 

 

459 



 

 

 

 

 

 

 

 

 

 

 

Canada – Onshore

86 

 

71 

 

486 

 

345 

 

572 

 

416 

             – Offshore

101 

 

 

43 

 

 

144 

 

10 

              Total Canada

187 

 

79 

 

529 

 

347 

 

716 

 

426 



 

 

 

 

 

 

 

 

 

 

 

Malaysia

257 

 

149 

 

2,417 

 

1,210 

 

2,674 

 

1,359 

Mexico

 –

 

 –

 

636 

 

191 

 

636 

 

191 

Brazil

 –

 

 –

 

746 

 

148 

 

746 

 

148 

Australia

 –

 

 –

 

5,792 

 

2,986 

 

5,792 

 

2,986 

Brunei

 –

 

 –

 

2,935 

 

562 

 

2,935 

 

562 

Vietnam

 –

 

 –

 

7,998 

 

4,937 

 

7,998 

 

4,937 

Spain

 –

 

 –

 

 

 

 

              Totals

562 

 

325 

 

21,689 

 

10,744 

 

22,251 

 

11,069 



Certain acreage held by the Company will expire in the next three years. 



Scheduled acreage expirations in 2018 include 427 thousand net acres in Block 144 in Vietnam; 427 thousand net acres in Block 145 in Vietnam; 266 thousand net acres in Block 15-1/05 in Vietnam; 81 thousand net acres in Block 11-2/11 in Vietnam; 116 thousand net acres in Block CA-1 in Brunei; 15 thousand net acres in Western Canada and 87 thousand net acres in the United States



Acreage currently scheduled to expire in 2019 include 447 thousand net acres in Block CA-2 in Brunei; 140 thousand net acres in Western Canada; 120 thousand net acres in Block AC/P36 in Australia; and 24 thousand net acres in the United States.    



Scheduled expirations in 2020 include 415 thousand net acres in Block AC/P58 in Australia; 101 thousand net acres in Western Canada; 37 thousand net acres in Block 351 in Brazil; 37 thousand net acres in Block 428 in Brazil; and 11 thousand net acres in the United States.

10

 


 

 

As used in the three tables that follow, “gross” wells are the total wells in which all or part of the working interest is owned by Murphy, and “net” wells are the total of the Company’s fractional working interests in gross wells expressed as the equivalent number of wholly-owned wells.  An “exploratory” well is drilled to find and produce crude oil or natural gas in an unproved area and includes delineation wells which target a new reservoir in a field known to be productive or to extend a known reservoir beyond the proved area.  A “development” well is drilled within the proved area of an oil or natural gas reservoir that is known to be productive.

The following table shows the number of oil and gas wells producing or capable of producing at December 31, 2017.









 

 

 

 

 

 

 

 



 

Oil Wells

 

Gas Wells



 

Gross

 

Net

 

Gross

 

Net

Country

 

 

 

 

 

 

 

 

United States

 

908 

 

757 

 

 

Canada

 

34 

 

24 

 

380 

 

315 

Malaysia

 

93 

 

48 

 

55 

 

33 

        Totals

 

1,035 

 

829 

 

441 

 

352 



Murphy’s net wells drilled in the last three years are shown in the following table.









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



United States

 

Canada

 

Malaysia

 

Other

 

Totals



Pro-

 

 

 

Pro-

 

 

 

Pro-

 

 

 

Pro-

 

 

 

Pro-

 

 



ductive

 

Dry

 

ductive

 

Dry

 

ductive

 

Dry

 

ductive

 

Dry

 

ductive

 

Dry

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploratory

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

 

 -

Development

68.7 

 

 -

 

27.2 

 

 -

 

 -

 

 -

 

 -

 

 -

 

95.9 

 

 -

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploratory

 -

 

 -

 

 -

 

 -

 

 -

 

0.7 

 

 -

 

 -

 

 -

 

0.7 

Development

51.5 

 

 -

 

7.0 

 

 -

 

3.0 

 

 -

 

 -

 

 -

 

61.5 

 

 -

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploratory

 -

 

2.2 

 

 -

 

 -

 

2.0 

 

1.2 

 

 -

 

1.2 

 

2.0 

 

4.6 

Development

109.6 

 

 -

 

7.0 

 

 -

 

15.9 

 

 -

 

 -

 

 -

 

132.5 

 

 -





Murphy’s drilling wells in progress at December 31, 2017 are shown in the following table.  The year-end well count includes wells awaiting various completion operations.  The U.S. net wells included below are essentially all located in the Eagle Ford Shale area of South Texas.









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Exploratory

 

Development

 

Total

Country

 

Gross

 

Net

 

    Gross

 

       Net

 

    Gross

 

       Net

United States

 

 -

 

 -

 

18.0 

 

16.8 

 

18.0 

 

16.8 

Canada

 

 -

 

 -

 

17.0 

 

12.3 

 

17.0 

 

12.3 

       Totals

 

 -

 

 -

 

35.0 

 

29.1 

 

35.0 

 

29.1 



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Refining and Marketing – Discontinued Operations

The Company decommissioned the Milford Haven refinery units and completed the sale of its remaining downstream assets in the U.K. in 2015 for cash proceeds of $5.5 million.  The Company has accounted for and reported this U.K. downstream business as discontinued operations for all periods presented.



Environmental

Murphy’s businesses are subject to various international, national, state, provincial and local environmental laws and regulations that govern the manner in which the Company conducts its operations.  The Company anticipates that these requirements will continue to become more complex and stringent in the future.

Further information on environmental matters and their impact on Murphy are contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 25 and 49.



Website Access to SEC Reports

Murphy Oil’s internet Website address is http://www.murphyoilcorp.com. Information contained on the Company’s Website is not part of this report on Form 10-K.

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on Murphy’s Website, free of charge, as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC.  You may also access these reports at the SEC’s Website at http://www.sec.gov.

12

 


 

 

Item 1A. RISK FACTORS



Volatility in the global prices of crude oil, natural gas liquids and natural gas can significantly affect the Company’s operating results.

Among the most significant variables affecting the Company’s results of operations are the sales prices for crude oil and natural gas that it produces. The indices against which much of the Company’s production is priced have been significantly lower in the years 2015-2017 (vs. pre-2015 years), and sales prices for crude oil and natural gas can be significantly different in U.S. markets compared to other international markets.

West Texas Intermediate (WTI) crude oil prices averaged approximately $51 in 2017, compared to $43 per barrel in 2016 and $49 per barrel in 2015 (2014 prices averaged $93 per barrel). The closing price for WTI at the end of 2017 was approximately $60 per barrel. As demonstrated by the significant decline in WTI prices in late 2014 and further declines over 2015 and early 2016, prices can be volatile.  In addition, the sales prices for sour crude oils do not always move in relation to price changes for WTI and lighter/sweeter crude oils.  Certain U.S. and Canadian crude oils and all crude oil produced in Malaysia, generally price off oil indices other than WTI, and these indices are influenced by different supply and demand forces than those that affect the U.S. WTI prices. The most common crude oil indices used to price the Company’s crude include Louisiana Light Sweet (LLS), Brent and Malaysian crude oil indices.

The average New York Mercantile Exchange (NYMEX) natural gas sales price was $2.96 per thousand cubic feet (MCF) in 2017, up from $2.48 per MCF in 2016 and $2.61 per MCF in 2015 (2014 prices averaged $4.34 per MCF). The closing price for NYMEX natural gas as of December 31, 2017, was $3.30 per MCF. Certain natural gas production offshore Sarawak have been sold in recent years at a premium to average NYMEX natural gas prices due to pricing structures built into the sales contracts.  Associated natural gas produced at fields in Block K offshore Sabah, representing approximately 6% of the Company’s 2017 natural gas sales volumes, is sold at heavily discounted prices compared to NYMEX gas prices as stipulated in the sales contract.

The Company cannot predict how changes in the sales prices of oil and natural gas will affect its results of operations in future periods. The Company seeks to hedge a portion of its exposure to the effects of changing prices of crude oil and natural gas by selling forwards, swaps and other forms of derivative contracts.  In addition, the Company seeks to maximize realized prices for Canadian gas through a combination of physical forward sales and marketing to a variety of locations.



Low oil and natural gas prices may adversely affect the Company’s operations in several ways in the future.

As noted elsewhere in this report, crude oil prices were lower in the 2015-2017 period versus pre-2015 years.  WTI oil prices averaged approximately $51 per barrel in 2017, but have improved to above $60 per barrel by the end of 2017 and early 2018. Lower oil and natural gas prices adversely affect the Company in several ways:

·

Lower sales value for the Company’s oil and natural gas production reduces cash flows and net income.

·

Lower cash flows may cause the Company to reduce its capital expenditure program, thereby potentially restricting its ability to grow production and add proved reserves. The Company may restrict its capital expenditures to balance its cash positions going forward.

·

Lower oil and natural gas prices could lead to impairment charges in future periods.

·

Reductions in oil and natural gas prices could lead to reductions in the Company’s proved reserves in future years. Low prices could make certain of the Company’s proved reserves uneconomic, which in turn could lead to removal of certain of the Company’s 2017 year-end reported proved oil reserves in future periods. These reserve reductions could be significant.

13

 


 

 

·

Lower oil prices can impact the Company’s financial metrics, and the credit rating agencies tend to lower credit ratings during periods of low commodity prices.  In addition, banks and other suppliers of financing capital generally reduce their lending limits in response to lower oil price environments.  In February 2016, Moody’s Investor Services downgraded the Company’s unsecured notes to a “B1” rating, and in August 2017 subsequently upgraded the Company’s unsecured notes rating to “Ba3” (stable).  In February 2016, Fitch Rating downgraded the Company’s notes to below investment grade, and further downgraded them in August 2017 to “BB” (stable).   Both current ratings by Moody’s Investor Services and Fitch Ratings are below investment grade.  Standard & Poor’s rates the Company’s debt as investment grade at “BBB-”. The Company’s ability to obtain financing is affected by the Company’s debt credit ratings and competition for available debt financing. Any further lowering of the Company’s debt credit ratings could increase the Company’s cost of capital and make it more difficult for the Company to borrow.

·

Lower prices for oil and natural gas could lead to weaker market prices for the Company’s common stock and could cause the Company to lower its dividend.

Certain of these effects are further discussed in risk factors that follow.

Murphy’s commodity price risk management may limit the Company’s ability to fully benefit from potential future price increases for oil and natural gas.

The Company routinely enters into various contracts to protect its cash flows against lower oil and natural gas prices. Because of these contracts, if the prices for oil and natural gas increase in future periods, the Company will not fully benefit from the price improvement on all of its production.



Murphy Oil’s businesses operate in highly competitive environments, which could adversely affect it in many ways, including its profitability, its ability to grow, and its ability to manage its businesses.

Murphy operates in the oil and gas industry and experiences competition from other oil and gas companies, which include state-owned foreign oil companies, major integrated oil companies, private equity investors and independent producers of oil and natural gas. Many of the state-owned and major integrated oil companies and some of the independent producers that compete with the Company have substantially greater resources than Murphy. In addition, the oil industry as a whole competes with other industries in supplying energy requirements around the world. Murphy competes, among other things, for valuable acreage positions, exploration licenses, drilling equipment and human resources.



If Murphy cannot replace its oil and natural gas reserves, it may not be able to sustain or grow its business.

Murphy continually depletes its oil and natural gas reserves as production occurs. In order to sustain and grow its business, the Company must successfully replace the oil and natural gas it produces with additional reserves. Therefore, it must create and maintain a portfolio of good prospects for future reserves additions and production by obtaining rights to explore for, develop and produce hydrocarbons in prospective areas. In addition, it must find, develop and produce and/or purchase reserves at a competitive cost to be successful in the long-term. Murphy’s ability to operate profitably in the exploration and production business, therefore, is dependent on its ability to find, develop and produce and/or purchase oil and natural gas reserves at costs that are less than the realized sales price for these products. In response to lower oil prices in recent years, the Company reduced its exploration program in 2016 and 2017 compared to previous years’ levels, this may reduce the rate at which it is able to replace reserves.  The Company continually reviews opportunities to acquire additional reserves at low cost and in 2016 acquired a 70% operated working interest (WI) of Athabasca Oil Corporation’s (Athabasca) production, acreage, infrastructure and facilities in the Kaybob Duvernay lands, and a 30% non-operated WI of Athabasca’s production, acreage, infrastructure and facilities in the liquids rich Placid Montney lands in Alberta. 



Murphy’s proved reserves are based on the professional judgment of its engineers and may be subject to revision.

Proved reserves of crude oil, natural gas liquids (NGL) and natural gas included in this report on pages 106 through 112 have been prepared by qualified Company personnel or qualified independent engineers based on an unweighted average of crude oil, NGL and natural gas prices in effect at the beginning of each month of the

14

 


 

 

respective year as well as other conditions and information available at the time the estimates were prepared. Estimation of reserves is a subjective process that involves professional judgment by engineers about volumes to be recovered in future periods from underground oil and natural gas reservoirs. Estimates of economically recoverable crude oil, NGL and natural gas reserves and future net cash flows depend upon a number of variable factors and assumptions, and consequently, different engineers could arrive at different estimates of reserves and future net cash flows based on the same available data and using industry accepted engineering practices and scientific methods. Under existing SEC rules, reported proved reserves must be reasonably certain of recovery in future periods.

Murphy’s actual future oil and natural gas production may vary substantially from its reported quantity of proved reserves due to a number of factors, including:

·

Oil and natural gas prices which are materially different from prices used to compute proved reserves

·

Operating and/or capital costs which are materially different from those assumed to compute proved reserves

·

Future reservoir performance which is materially different from models used to compute proved reserves, and

·

Governmental regulations or actions which materially impact operations of a field.

The Company’s proved undeveloped reserves represent significant portions of total proved reserves. As of December 31, 2017, approximately 43% of the Company’s crude oil and condensate proved reserves, 50% of natural gas liquids proved reserves and 57% of natural gas proved reserves are undeveloped. The ability of the Company to reclassify these undeveloped proved reserves to the proved developed classification is generally dependent on the successful completion of one or more operations, which might include further development drilling, construction of facilities or pipelines, and well workovers.

The discounted future net revenues from our proved reserves as reported on pages 116 and 117 should not be considered as the market value of the reserves attributable to our properties. As required by generally accepted accounting principles (GAAP), the estimated discounted future net revenues from our proved reserves are based on an unweighted average of the oil and natural gas prices in effect at the beginning of each month during the year. Actual future prices and costs may be materially higher or lower than those used in the reserves computations.

In addition, the 10% discount factor that is required to be used to calculate discounted future net revenues for reporting purposes under GAAP is not necessarily the most appropriate discount factor based on our cost of capital and the risks associated with our business and the crude oil and natural gas business in general.



Exploration drilling results can significantly affect the Company’s operating results.

The Company drills exploratory wells which subjects its exploration and production operating results to exposure to dry holes expense, which may have adverse effects on, and create volatility for, the Company’s results of operations. In response to lower oil prices, the Company has reduced its exploration program from pre-2015 levels. In 2017 exploration wells were drilled offshore Vietnam and in the Gulf of Mexico. The Company’s 2018 planned exploratory drilling program includes three wells in the Gulf of Mexico, one well in Vietnam and one well in Block 5, Mexico.



Potential federal or state regulations could increase the Company’s costs and/or restrict operating methods, which could adversely affect its production levels.

The Company’s onshore North America oil and gas production is dependent on a technique known as hydraulic fracturing whereby water, sand and certain chemicals are injected into deep oil and gas bearing reservoirs in North America. This process creates fractures in the rock formation within the reservoir which enables oil and natural gas to migrate to the wellbore. The Company primarily uses this technique in the Eagle Ford Shale in South Texas and in Western Canada. This practice is generally regulated by the states, but at times the U.S. has proposed additional regulations under the Safe Drinking Water Act. In June 2011, the State of Texas adopted a law requiring public disclosure of certain information regarding the components used in the hydraulic fracturing process. The Provinces of British Columbia and Alberta have also issued regulations related to hydraulic fracturing activities under their jurisdictions. It is possible that the states, the U.S., Canadian provinces and certain municipalities adopt further laws or regulations which could render the process unlawful, less effective or drive up its costs. If any such action is taken in the future, the Company’s production levels could be adversely affected or its costs of drilling and completion could be increased.

15

 


 

 

In April 2016, the U.S. Department of the Interior’s (DOI) Bureau of Safety and Environmental Enforcement (BSEE) enacted broad regulatory changes related to Gulf of Mexico well design, well control, casing, cementing, real-time monitoring, and subsea containment, among other items. These changes are known broadly as the Well Control Rule, and compliance is required over the next several years. However, some provisions remain for which BSEE future enforcement action and intent are unclear, so risk of impact leading to increased future cost on the Company’s Gulf of Mexico operations remains.

In July 2016, the DOI’s Bureau of Ocean Energy Management (BOEM) issued an updated Notice to Lessees and Operators (NTL) providing details on revised procedures BOEM will be using to determine a lessee’s ability to carry out decommissioning obligations for activities on the Outer Continental Shelf (OCS), including the Gulf of Mexico. This revised policy became effective in September 2016 and institutes new criteria by which the BOEM will evaluate the financial strength and reliability of lessees and operators active on the OCS. If the BOEM determines under the revised policy that a company does not have the financial ability to meet its decommissioning and other obligations, that company will be required to post additional financial security as assurance. In January 2017 BOEM extended the implementation timeline for the NTL by six months for properties which have co-lessees, and in February 2017 BOEM withdrew sole liability orders issued in December 2016 to allow time for the new administration to review the financial assurance program for decommissioning. Although the Company believes the new BOEM policy will likely lead to increased costs for its Gulf of Mexico operations, it does not currently believe that the impact will be material to its operations in the Gulf of Mexico.

In the future, BOEM and/or BSEE may impose new and more stringent offshore operating regulations which may adversely affect the Company’s operations.



Hydraulic fracturing exposes the Company to operational and regulatory risks and third-party claims.

Hydraulic fracturing operations subject the Company to operational risks inherent in the drilling and production of oil and natural gas. These risks include underground migration or surface spillage due to releases of oil, natural gas, formation water or well fluids, as well as any related surface or ground water contamination, including from petroleum constituents or hydraulic fracturing chemical additives. Ineffective containment of surface spillage and surface or ground water contamination resulting from hydraulic fracturing operations, including from petroleum constituents or hydraulic fracturing chemical additives, could result in environmental pollution, remediation expenses and third-party claims alleging damages, which could adversely affect the Company’s financial condition and results of operations. In addition, hydraulic fracturing requires significant quantities of water; the waste water from oil and gas operations is often disposed of through underground injection. Certain increased seismic activities have been linked to underground water injection. Any diminished access to water for use in the hydraulic fracturing process, any inability to properly dispose of waste water, or any further restrictions placed on waste water, could curtail the Company’s operations or otherwise result in operational delays or increased costs.



Climate change initiatives and other environmental rules or regulations could reduce demand for crude oil and natural gas, which may adversely impact the Company’s business.

The issue of climate change has caused considerable attention to be directed towards initiatives to reduce global greenhouse gas emissions. An international climate agreement (the “Paris Agreement”) was agreed to at the 2015 United Nations Framework Convention on Climate Change in Paris, France. The Paris Agreement entered into force in November 2016, however, after originally entering the agreement the U.S. administration has subsequently withdrawn from this agreement. The U.S. remains the only country not part of the Paris Agreement. It is possible that the Paris Agreement, if fully implemented, and other such initiatives, including environmental rules or regulations related to greenhouse gas emissions and climate change, may reduce the demand for crude oil and natural gas globally. While the magnitude of any reduction in hydrocarbon demand is difficult to predict, such a development could adversely impact the Company and other companies engaged in the exploration and production business.  The Company continually monitors the global climate change agenda initiatives and plans accordingly based on its assessment of such initiatives on its business.



Capital financing may not always be available to fund Murphy’s activities.

Murphy usually must spend and risk a significant amount of capital to find and develop reserves before revenue is generated from production. Although most capital needs are funded from operating cash flow, the timing of cash

16

 


 

 

flows from operations and capital funding needs may not always coincide, and the levels of cash flow generated by operations may not fully cover capital funding requirements, especially in periods of low commodity prices such as those experienced in recent years. Therefore, the Company maintains financing arrangements with lending institutions to meet certain funding needs. The Company periodically renews these financing arrangements based on foreseeable financing needs or as they expire. The Company has a primary bank financing facility with capacity of $1.1 billion that now matures in August 2021. There is the possibility that financing arrangements may not always be available at sufficient levels required to fund the Company’s activities in future periods. As of December 31, 2017, the Company’s long-term debt was rated “Ba3” (stable) by Moody’s Investor Services and “BB” (stable) by Fitch Ratings. These credit ratings are below investment grade and could adversely affect our cost of capital and our ability to raise debt as needed in public markets in future periods. Additionally, in order to obtain debt financing in future years, the Company may have to provide more security to its lenders.  Below investment grade credit ratings by certain agencies have led to increased debt service costs for certain outstanding notes, and also made it more likely that the Company would have to post collateral such as letters of credit or cash as financial assurance of its performance under certain contractual arrangements. The Company’s primary revolving credit facility requires granting of security by the Company in certain circumstances, which have not occurred at this time.  See further explanation in Note F of the Consolidated Financial Statements. The Company 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.



Murphy has limited or virtually no control over several factors that could adversely affect the Company.

The ability of the Company to successfully manage development and operating costs is important because virtually all of the products it sells are energy commodities such as crude oil, NGL and natural gas, for which the Company has little or no influence on the sales prices or regional and worldwide consumer demand for these products. Changes in commodity prices also impact the volume of production attributed to the Company under production sharing contracts in Malaysia. Economic slowdowns, such as those experienced in 2008 and 2009, had a detrimental effect on the worldwide demand for these energy commodities, which effectively led to reduced prices for oil and natural gas for a period of time. An abundant supply of crude oil in recent years also led to a severe decline in worldwide oil prices. Lower prices for crude oil, NGL and natural gas inevitably lead to lower earnings for the Company. The low crude oil price environment in the 2015-2017 period has caused the Company to reduce spending on certain discretionary drilling programs, which in turn hurts the Company’s future production levels and future cash flow generated from operations. The Company often experiences pressure on its operating and capital expenditures in periods of strong crude oil and natural gas prices because an increase in exploration and production activities due to high oil and gas sales prices generally leads to higher demand for, and consequently higher costs for, goods and services in the oil and gas industry. The increase in oil prices in 2017 has led to some upward inflation pressure in oil field goods and service costs during the year.

Certain of the Company’s major oil and natural gas producing properties are operated by others. Therefore, Murphy does not fully control all activities at certain of its revenue generating properties. During 2017, approximately 14% of the Company’s total production was at fields operated by others, while at December 31, 2017, approximately 9% of the Company’s total proved reserves were at fields operated by others.

Additionally, the Company relies on the availability of transportation and processing facilities that are often owned by others. These third-party systems and facilities may not always be available to the Company, and if available, may not be available at a price that is acceptable to the Company.



Failure of our partners to fund their share of development costs or obtain financing could result in delay or cancellation of future projects, thus limiting our growth and future cash flows.

Some of Murphy’s development projects entail significant capital expenditures and have long development cycle times. As a result, the Company’s partners must be able to fund their share of investment costs through the development cycle, through cash flow from operations, external credit facilities, or other sources, including financing arrangements. Murphy’s partners are also susceptible to certain of the risk factors noted herein, including, but not limited to, commodity price declines, fiscal regime changes, government project approval delays, regulatory changes, credit downgrades and regional conflict. If one or more of these factors negatively impacts a project partners’ cash flows or ability to obtain adequate financing, it could result in a delay or cancellation of a project, resulting in a reduction of the Company’s reserves and production, which negatively impacts the timing and receipt of planned cash flows and expected profitability.

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Murphy’s operations and earnings have been and will continue to be affected by worldwide political developments.

Many governments, including those that are members of the Organization of Petroleum Exporting Countries (OPEC), unilaterally intervene at times in the orderly market of crude oil and natural gas produced in their countries through such actions as changing fiscal regimes (including corporate tax rates), setting prices, determining rates of production, and controlling who may buy and sell the production.

On December 22, 2017, the U.S. enacted into legislation the Tax Cuts and Jobs Act (2017 Tax Act).   For the year ended December 31, 2017, Murphy recorded a tax expense of $274.0 million associated with the 2017 Tax Act. The charge includes the impact of a  deemed repatriation of foreign income and the re-measurement of the future value of deferred tax assets and liabilities. Separately, Murphy expects to receive cash refunds or credits of $29.7 million over the next four years relating to Alternative Minimum Tax (AMT) credits generated in earlier years. Murphy continues to assess the impact of this legislation including, among other things, the carry-forward of 2017 net operating losses, the change to U.S. federal tax rates, the possible limitations on the deductibility of interest paid, the option for expensing of capital expenditures, the migration from a worldwide system of taxation to a territorial system, and the use of new anti-base erosion provisions. The tax expense recorded in 2017 is a reasonable estimate based on published guidance available at this time and is considered provisional. The ultimate impact of the 2017 Tax Act may differ from these estimates due to changes in interpretations and assumptions made by the company, as well as additional regulatory guidance that may be issued. There is substantial uncertainty regarding interpretations and details of certain aspects of the 2017 Tax Act.  The impact of the legislation on our business and on holders of our common shares is uncertain and could be adverse, as well as favorable.  The SEC has permitted U.S. registrants one year to complete and recognize the effects of the 2017 Tax Act. 

As of December 31, 2017, approximately 19% of the Company’s proved reserves, as defined by the SEC, were located in countries other than the U.S. and Canada. In addition, prices and availability of crude oil, natural gas and refined products could be influenced by political unrest and by various governmental policies to restrict or increase petroleum usage and supply. Other governmental actions that could affect Murphy’s operations and earnings include expropriation, tax changes, royalty increases, redefinition of international boundaries, preferential and discriminatory awarding of oil and gas leases, restrictions on drilling and/or production, restraints and controls on imports and exports, safety, and relationships between employers and employees. Governments could also initiate regulations concerning matters such as currency fluctuations, currency conversion, protection and remediation of the environment, and concerns over the possibility of global warming caused by the production and use of hydrocarbon energy.

A number of non-governmental entities routinely attempt to influence industry members and government energy policy in an effort to limit industry activities, such as hydrocarbon production, drilling and hydraulic fracturing with the desire to minimize the emission of greenhouse gases such as carbon dioxide, which may harm air quality, and to restrict hydrocarbon spills, which may harm land and/or groundwater.

Additionally, because of the numerous countries in which the Company operates, certain other risks exist, including the application of the U.S. Foreign Corrupt Practices Act, the Canada Corruption of Foreign Officials Act, the Malaysia Anti-Corruption Commission Act, the U.K. Bribery Act, the Brazil Clean Companies Act, the Mexico General Law of the National Anti-Corruption System, and other similar anti-corruption compliance statutes.

It is not possible to predict the actions of governments and hence the impact on Murphy’s future operations and earnings.



Murphy’s business is subject to operational hazards, security risks and risks normally associated with the exploration for and production of oil and natural gas.

The Company operates in urban and remote, and sometimes inhospitable, areas around the world. The occurrence of an event, including but not limited to acts of nature such as hurricanes, floods, earthquakes (and other forms of severe weather), mechanical equipment failures, industrial accidents, fires, explosions, acts of war, civil unrest, piracy and acts of terrorism could result in the loss of hydrocarbons and associated revenues, environmental pollution or contamination, personal injury, (including death), and property damages for which the Company could be deemed to be liable and which could subject the Company to substantial fines and/or claims for punitive damages.

The location of many of Murphy’s key assets causes the Company to be vulnerable to severe weather, including hurricanes and tropical storms. A number of significant oil and natural gas fields lie in offshore waters around the

18

 


 

 

world. Probably the most vulnerable of the Company’s offshore fields are in the U.S. Gulf of Mexico, where severe hurricanes and tropical storms have often led to shutdowns and damages. The U.S. hurricane season runs from June through November. Although the Company maintains insurance for such risks as described elsewhere in this Form 10-K report, due to policy deductibles and possible coverage limits, weather-related risks are not fully insured.  The Company has in the past experienced operational delays in Malaysia due to tropical storms in the South China Sea.

In addition, the Company has risks associated with cybersecurity attacks. Although the Company maintains processes and systems to monitor and avoid damages from security threats, there can be no assurance that such processes and systems will successfully avert such security breaches. A successful breach could lead to system disruptions, loss of data or unauthorized release of highly sensitive data. This could lead to property or environmental damages and could have an adverse effect on the Company’s revenues and costs.



Murphy’s insurance may not be adequate to offset costs associated with certain events and there can be no assurance that insurance coverage will continue to be available in the future on terms that justify its purchase.

Murphy maintains insurance against certain, but not all, hazards that could arise from its operations. The Company maintains liability insurance sufficient to cover its share of gross insured claim costs up to approximately $500 million per occurrence and in the annual aggregate. Generally, this insurance covers various types of third-party claims related to personal injury, death and property damage, including claims arising from “sudden and accidental” pollution events. The Company also maintains insurance coverage with an additional limit of $400 million per occurrence ($850 million for Gulf of Mexico claims not related to a named windstorm), all or part of which could be applicable to certain sudden and accidental pollution events. These policies have deductibles ranging from $10 million to $25 million. The occurrence of an event that is not insured or not fully insured could have a material adverse effect on the Company’s financial condition and results of operations in the future.



Lawsuits against Murphy and its subsidiaries could adversely affect its operating results.

The Company is involved in numerous lawsuits seeking cash settlements for alleged personal injuries, property damages and other business-related matters. Certain of these lawsuits will take many years to resolve through court proceedings or negotiated settlements. None of the currently pending lawsuits are considered individually material or aggregate to a material amount in the opinion of management.



The Company is exposed to credit risks associated with sales of certain of its products to third parties and associated with its operating partners.

Although Murphy limits its credit risk by selling its products to numerous entities worldwide, it still, at times, carries substantial credit risk from its customers. For certain oil and gas properties operated by the Company, other companies which own partial interests may not be able to meet their financial obligation to pay for their share of capital and operating costs as they come due. The inability of a purchaser of the Company’s oil or natural gas or a partner of the Company to meet their respective payment obligations to the Company could have an adverse effect on Murphy’s future earnings and cash flows.



Murphy’s operations could be adversely affected by changes in foreign currency conversion rates.

The Company’s worldwide operational scope exposes it to risks associated with foreign currencies. Most of the Company’s business is transacted in U.S. dollars, and therefore the Company and most of its subsidiaries are U.S. dollar functional entities for accounting purposes. However, the Canadian dollar is the functional currency for all Canadian operations.

In certain countries, such as Canada and Malaysia significant levels of transactions occur in currencies other than the functional currency. In Malaysia, such transactions include tax and other supplier payments, while in Canada, certain crude oil sales are priced in U.S. dollars. In late 2016, Malaysian authorities altered the local currency rules such that 75% of the proceeds of export oil and gas sales must be converted to local currency when received; plus, beginning in 2017, resident suppliers of goods and services to the Company must be paid in local currency.

This exposure to currencies other than the functional currency can lead to impacts on consolidated financial results from foreign currency translation. Exposures associated with current and deferred income tax liability and asset

19

 


 

 

balances in Malaysia are generally not hedged. A strengthening of the Malaysian ringgit against the U.S. dollar would be expected to lead to currency gains in consolidated operations; losses would be expected if the ringgit weakens versus the dollar.   In Canada, currency risk is often managed by selling forward U.S. dollars to match the collection dates for crude oil sold in that currency. On occasions the Canadian business may hold assets or incur liabilities denominated in a currency which is not Canadian dollars which could lead to exposure to foreign exchange rate fluctuations. See also Note L in the Notes to Consolidated Financial Statements for additional information on derivative contracts.



The costs and funding requirements related to the Company’s retirement plans are affected by several factors.

A number of actuarial assumptions impact funding requirements for the Company’s retirement plans. The most significant of these assumptions include return on assets, long-term interest rates and mortality. If the actual results for the plans vary significantly from the actuarial assumptions used, or if laws regulating such retirement plans are changed, Murphy could be required to make more significant funding payments to one or more of its retirement plans in the future and/or it could be required to record a larger liability for future obligations in its Consolidated Balance Sheet.



Item 1B. UNRESOLVED STAFF COMMENTS

The Company had no unresolved comments from the staff of the U.S. Securities and Exchange Commission as of December 31, 2017.



Item 2. PROPERTIES

Descriptions of the Company’s oil and natural gas properties are included in Item 1 of this Form 10-K report beginning on page 1.  Information required by the Securities Exchange Act Industry Guide No. 2 can be found in the Supplemental Oil and Gas Information section of this Annual Report on Form 10-K on pages 104 to 117 and in Note E – Property, Plant and Equipment beginning on page 71.

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Executive Officers of the Registrant



Present corporate office, length of service in office and age at February 1, 2018 of each of the Company’s executive officers are reported in the following listing.  Executive officers are elected annually, but may be removed from office at any time by the Board of Directors.



Roger W. Jenkins – Age 56; Chief Executive Officer since August 2013.  Mr. Jenkins served as Chief Operating Officer from June 2012 to August 2013.  Mr. Jenkins was Executive Vice President Exploration and Production from August 2009 through August 2013 and has served as President of the Company’s exploration and production subsidiary since January 2009.



Eugene T. Coleman – Age 59; Executive Vice President since December 2016.  Mr. Coleman has also served as Executive Vice President, Offshore of the Company’s exploration and production subsidiary from 2011 to 2017.



Walter K. Compton – Age 55; Executive Vice President and General Counsel since February 2014.  Mr. Compton was Senior Vice President and General Counsel from March 2011 to February 2014.



John W. Eckart – Age 59; Executive Vice President and Chief Financial Officer since March 2015.  Mr. Eckart was Senior Vice President and Controller from December 2011 to March 2015.



Michael K. McFadyen – Age 50; Executive Vice President since December 2016.  Mr. McFadyen has also served as Executive Vice President, Onshore of the Company’s exploration and production subsidiary from 2011 to 2017.



Christopher D. Hulse – Age 39, Vice President and Controller since June 2017. Mr. Hulse was Vice President, Finance, Onshore from September 2015 to June 2017.



Kelli M. Hammock – Age 46; Senior Vice President, Administration since February 2014.  Ms. Hammock was Vice President, Administration from December 2009 to February 2014.



K. Todd Montgomery – Age 53; Senior Vice President, Planning and Performance since January 2017.  Mr. Montgomery served as Senior Vice President, Corporate Planning & Services from March 2015 to January 2017.



E. Ted Botner – Age 53; Vice President, Law and Secretary since March 2015.  Mr. Botner was Secretary and Manager, Law from August 2013 to March 2015.



Tim F. Butler – Age 55; Vice President, Tax since August 2013.  Mr. Butler was General Manager, Worldwide Taxation from August 2007 to August 2013.



John B. Gardner – Age 49; Vice President and Treasurer since March 2015.  Mr. Gardner served as Treasurer from August 2013 to March 2015.



Barry F.R. Jeffery – Age 59; Vice President, Health, Safety, Environment and Risk Management since June 2017.  Mr. Jeffery was Vice President, Insurance, Security and Risk from July 2015 to June 2017.



Kelly L. Whitley – Age 52; Vice President, Investor Relations and Communications since July 2015.  Ms. Whitley joined the Company in 2015 following 20 years of investor relations experience with exploration and production as well as oil field services companies in the U.S. and Canada.

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Item 3. LEGAL PROCEEDINGS

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 matters referred to in this item is not expected to have a material adverse effect on the Company’s net income or loss, financial condition or liquidity in a future period.



Item 4. MINE SAFETY DISCLOSURES

Not applicable.



PART II



Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock is traded on the New York Stock Exchange using “MUR” as the trading symbol.  There were 2,506 stockholders of record as of December 31, 2017.  Information as to high and low market prices per share and dividends per share by quarter for 2017 and 2016 are reported on page 118 of this Form 10-K report.

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SHAREHOLDER RETURN PERFORMANCE PRESENTATION



The following graph presents a comparison of cumulative five-year shareholder returns (including the reinvestment of dividends) as if a $100 investment was made on December 31, 2012 in the Company, the Standard & Poor’s 500 Stock Index (S&P 500 Index) and, the Company’s peer group.  The companies in the peer group include Anadarko Petroleum Corporation, Apache Corporation, Cabot Oil & Gas Corporation, Chesapeake Energy Corporation, Cimarex Energy Co., Devon Energy Corporation, Encana Corporation, EOG Resources, Inc., Hess Corporation, Marathon Oil Corporation, Newfield Exploration Company, Noble Energy, Inc., Pioneer Natural Resources Corporation, Range Resources Corporation, Southwestern Energy Company and Whiting Petroleum Corporation.  This performance information is “furnished” by the Company and is not considered as “filed” with this Form 10-K report and it is not incorporated into any document that incorporates this Form 10-K report by reference. 



Picture 52







 

 

 

 

 

 

 

 

 

 

 

 



 

2012 

 

2013 

 

2014 

 

2015 

 

2016 

 

2017 

Murphy Oil Corporation

$

100 

 

129 

 

103 

 

47 

 

69 

 

71 

S&P 500 Index

 

100 

 

132 

 

151 

 

153 

 

170 

 

208 

Peer Group

 

100 

 

129 

 

113 

 

70 

 

100 

 

89 



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Item 6. SELECTED FINANCIAL DATA











 

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars except per share data)

 

 

 

 

 

 

 

 

 

 

 

Results of Operations for the Year

 

2017

 

2016

 

2015

 

2014

 

2013

 

Sales and other operating revenues

$

2,097,695 

 

1,809,575 

 

2,787,116 

 

5,288,933 

 

5,312,686 

 

Net cash provided by continuing operations

 

1,129,675 

 

600,795 

 

1,183,369 

 

3,048,639 

 

3,210,695 

 

Income (loss) from continuing operations

 

(310,936)

 

(273,943)

 

(2,255,772)

 

1,024,973 

 

888,137 

 

Net income (loss)

 

(311,789)

 

(275,970)

 

(2,270,833)

 

905,611 

 

1,123,473 

 

Cash dividends – diluted

 

172,565 

 

206,635 

 

244,998 

 

236,371 

 

235,108 

 

Per Common share – diluted

 

 

 

 

 

 

 

 

 

 

 

        Income (loss) from continuing operations

$

(1.81)

 

(1.59)

 

(12.94)

 

5.69 

 

4.69 

 

        Net income (loss)

 

(1.81)

 

(1.60)

 

(13.03)

 

5.03 

 

5.94 

 

Average common shares outstanding (thousands) –    diluted

 

172,524 

 

172,173 

 

174,351 

 

180,071 

 

189,271 

 

Cash dividends per Common share

 

1.00 

 

1.20 

 

1.40 

 

1.325 

 

1.25 

 

Capital Expenditures for the Year 1

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

 

 

 

 

 

 

 

 

        Exploration and production

$

960,870 

 

789,721 

 

2,127,197 

 

3,742,541 

 

3,943,956 

 2

        Corporate and other

 

14,821 

 

21,740 

 

59,886 

 

14,453 

 

22,014 

 



 

975,691 

 

811,461 

 

2,187,083 

 

3,756,994 

 

3,965,970 

 

Discontinued operations

 

– 

 

– 

 

159 

 

12,349 

 

154,622 

 



$

975,691 

 

811,461 

 

2,187,242 

 

3,769,343 

 

4,120,592 

 

Financial Condition at December 31

 

 

 

 

 

 

 

 

 

 

 

Current ratio

 

1.64 

 

1.04 

 

0.83 

 

1.02 

 

1.06 

 

Working capital (deficit)

$

537,396 

 

56,751 

 

(277,396)

 

76,155 

 

222,621 

 

Net property, plant and equipment

 

8,220,031 

 

8,316,188 

 

9,818,365 

 

13,331,047 

 

13,481,055 

 

Total assets

 

9,860,942 

 

10,295,860 

 

11,493,812 

 

16,742,307 

 

17,509,484 

 

Long-term debt

 

2,906,520 

 

2,422,750 

 

3,040,594 

 

2,536,238 

 

2,936,563 

 

Stockholders’ equity

 

4,620,191 

 

4,916,679 

 

5,306,728 

 

8,573,434 

 

8,595,730 

 

        Per share

 

26.77 

 

28.55 

 

30.85 

 

48.30 

 

46.87 

 

Long-term debt – percent of capital employed 3

 

38.6 

 

33.0 

 

36.4 

 

22.8 

 

25.5 

 

Stockholder and Employee Data at December 31

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding (thousands)

 

172,573 

 

172,202 

 

172,035 

 

177,500 

 

183,407 

 

Number of stockholders of record

 

2,506 

 

2,588 

 

2,713 

 

2,556 

 

2,598 

 











1Capital expenditures include accruals for incurred but unpaid capital activities, while property additions and dry holes in the Statements of Cash Flows are cash-based capital expenditures and do not include capital accruals and geological, geophysical and certain other exploration expenses that are not eligible for capitalization under oil and gas accounting rules.

2Excludes property addition of $358.0 million associated with noncash capital lease at the Kakap field.

3Long-term debt – percent of capital employed – total long-term debt at the balance sheet date divided by the sum of total long-term debt plus total stockholders’ equity at that date.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS



Murphy Oil Corporation is a worldwide oil and gas exploration and production company.  A more detailed description of the Company’s significant assets can be found in Item 1 of this Form 10-K report.

Significant Company operating and financial highlights during 2017 were as follows:

·

Income from continuing operations before income taxes of $71.8 million (2016 loss:  $493.1 million)

·

Issued $550 million of 5.75% senior notes due 2025 and repaid $550 million of notes that were to mature in December 2017

·

Produced 163,536 barrels of oil equivalent (BOE) per day

·

Achieved an overall lease operating expense per BOE of $7.89

·

Reduced selling and general expenses by 16% year over year

·

Replaced 123% of total proved reserves

·

Maintained approximately $1.0 billion of cash and short-term securities throughout 2017



Murphy’s continuing operations generate revenue by producing crude oil, natural gas liquids (NGL) and natural gas in the United States, Canada and Malaysia and then selling these products to customers.  The Company’s revenue is highly affected by the prices of crude oil, natural gas and NGL.  In order to make a profit and generate cash in its exploration and production business, revenue generated from the sales of oil and natural gas produced must exceed the combined costs of producing these products, depreciation of capital expenditures, and expenses related to exploration, administration, and for capital borrowed from lending institutions and note holders.

Changes in the price of crude oil and natural gas have a significant impact on the profitability of the Company.  In 2017 liquids represented 61% of total hydrocarbons produced on an energy equivalent basis.  In 2018, the Company’s ratio of hydrocarbon production represented by liquids is expected to be 59%.  When oil-price linked natural gas in Malaysia is combined with oil production, the Company’s 2018 total expected production is approximately 70% linked to the price of oil.  If the prices for crude oil and natural gas are lower in 2018 or beyond, this will have an unfavorable impact on the Company’s operating profits.  As described on page 49, the Company has entered into fixed price derivative swap contracts in the United States that will reduce its exposure to changes in crude oil prices for approximately 44% of its expected 2018 U.S. oil production and holds fixed price forward delivery contracts that will reduce its exposure to changes in natural gas prices for approximately 30% of the natural gas it expects to produce in Western Canada in 2018.  In addition, a further portion of Western Canada gas production is marketed to a variety of locations, diversifying risk further.

Oil prices and North American natural gas prices strengthened in 2017 compared to the 2016 period.  The sales price of a barrel of West Texas Intermediate (WTI) crude oil averaged $50.95 in 2017, $43.32 in 2016 and $48.80 in 2015.  The sales price of a barrel of Platts Dated Brent crude oil increased to $54.28 per barrel in 2017, following averages of $43.69 per barrel and $52.46 per barrel in 2016 and 2015, respectively.  The WTI index increased approximately 18% over the prior year while Dated Brent experienced a 24% increase in 2017.  During 2017 the discount for WTI crude compared to Dated Brent increased compared to the prior year.  The average WTI to Dated Brent discount was $3.33 per barrel during 2017, compared to $0.37 per barrel in 2016 and $3.66 per barrel in 2015.  In early 2018, Dated Brent has been trading at a similar premium to WTI as 2017 average levels.  Worldwide oil prices began to weaken in the fall of 2014 and continued to soften throughout 2015 and into 2016.  The softening of prices beginning in late 2014 and continuing into 2016 caused average oil prices for both 2015 and 2016 periods to be below the average levels achieved in 2017.  Crude oil prices in early 2018 were above the 2017 average prices. 

The NYMEX natural gas price per million British Thermal Units (MMBTU) averaged $2.96 in 2017, $2.48 in 2016 and $2.61 in 2015.  NYMEX natural gas prices in 2017 were 19% above the average price in 2016, with the increase largely due to demand generated by LNG export growth and overland deliveries to Mexico. NYMEX natural gas prices in 2016 were 5% below the average price experienced in 2015, with the price decrease generally caused by domestic production elevating inventories to record levels and much warmer than normal winter season temperatures reducing residential demand.  On an energy equivalent basis, the market continued to discount North American natural gas and NGL compared to crude oil in 2017.  Natural gas prices in North America in 2018 have thus far been above the average 2017 levels due to higher demand and lower inventory levels in both cases.

25

 


 

 



Results of Operations

Murphy Oil’s results of operations, with associated diluted earnings per share (EPS), for the last three years are presented in the following table.







 

 

 

 

 

 

 



 

 

Years Ended December 31,

(Millions of dollars, except EPS)

 

 

2017 

 

2016 

 

2015 

Income (loss) from continuing operations before income taxes

 

$

71.8 

 

(493.1)

 

(3,282.3)



 

 

 

 

 

 

 

Net loss

 

$

(311.8)

 

(276.0)

 

(2,270.8)

           Diluted EPS

 

 

(1.81)

 

(1.60)

 

(13.03)



 

 

 

 

 

 

 

Loss from continuing operations

 

$

(310.9)

 

(274.0)

 

(2,255.8)

           Diluted EPS

 

 

(1.81)

 

(1.59)

 

(12.94)



 

 

 

 

 

 

 

Loss from discontinued operations

 

$

(0.9)

 

(2.0)

 

(15.0)

           Diluted EPS

 

 

0.00 

 

(0.01)

 

(0.09)



On December 22, 2017, the U.S. enacted into legislation the Tax Cuts and Jobs Act (2017 Tax Act). For the year ended December 31, 2017, Murphy recorded a tax expense of $274.0 million directly related to the impact of the 2017 Tax Act.   The charge includes the impact of a  deemed repatriation of accumulated foreign earnings and the re-measurement of deferred tax assets and liabilities. Separately, Murphy expects to receive cash refunds or credits of $29.7 million over the next four years relating to Alternative Minimum Tax (AMT) credits generated in earlier years.   Murphy continues to assess the impact of this legislation including, among other things, the carryforward of 2017 net operating losses, refinement of post-1986 accumulated foreign earnings and profits computations, the change to U.S. federal tax rates, the possible limitations on the deductibility of interest expense, the option for expensing of capital expenditures, the migration from a worldwide system of taxation to a territorial system, and the use of new anti-base erosion provisions.   The tax expense recorded in 2017 is a reasonable estimate based on published guidance available at this time and is considered provisional.  The ultimate impact of the 2017 Tax Act may differ from these estimates due to changes in interpretations and assumptions made by the company, as well as additional regulatory guidance.

Murphy Oil’s net loss in 2017 included a tax charge of $274.0 million related to the 2017 Tax Act enacted on December 22, 2017.  Results of continuing operations before taxes in 2017 were improved versus 2016.  In 2017, loss from continuing operations of $310.9 million ($1.81 per dilute share) worsened from a loss of $274.0 million ($1.59 per diluted share) in 2016. The results for 2017 were favorably impacted by higher revenues due to higher realized oil and natural gas sales prices, lower unrealized losses on forward sales commodity contracts, gain on sale of the Seal property in Western Canada, lower lease operating expenses, lower depreciation expense, non-recurring impairment expense in 2016, and lower selling and general expenses, but these were more than offset by higher tax charges (caused by higher pre-tax income and the impact of the 2017 Tax Act), higher exploration expenses, higher other expenses, higher foreign exchange charges, and higher interest expenses. 

In 2017 the Company’s discontinued operations was a loss of $0.9 million.

Murphy Oil’s net loss in 2016 was primarily caused by low realized oil and gas prices that did not fully cover all expenses, which included extraction costs, selling and general expense, net interest expense, impairments and redetermination expense.  Results of continuing operations in 2016 were $1,981.8 million improved over 2015 due to lower impairment expense in 2016, plus lower expenses in 2016 for lease operations, depreciation, exploration, deepwater rig contract exit costs, and administration and no reoccurrence of a deferred tax charge in 2015 associated with a distribution from a foreign subsidiary.  Results in 2016 included a $71.7 million after-tax gain on sale of the Company’s five percent interest in Syncrude, while 2015 results included a $218.8 million after-tax gain on sale of 10% of the Company’s oil and gas assets in Malaysia.  In 2016 and 2015, the Company’s refining and marketing operations generated losses of $2.5 million and $14.8 million, respectively, which led to overall losses from discontinued operations in each year.

Further explanations of each of these variances are found in more detail in the following.



26

 


 

 



Segment Results – In the following table, the Company’s results of operations for the three years ended December 31, 2017, are presented by segment.  More detailed reviews of operating results for the Company’s exploration and production and other activities follow the table.









 

 

 

 

 

 

(Millions of dollars)

 

2017 

 

2016 

 

2015 

Exploration and production – continuing operations

 

 

 

 

 

 

        United States

$

(2.6)

 

(205.4)

 

(615.7)

        Canada

 

112.5 

 

(35.9)

 

(583.4)

        Malaysia

 

224.2 

 

171.1 

 

(653.2)

        Other

 

(37.5)

 

(54.7)

 

(158.6)

             Total exploration and production – continuing operations

 

296.6 

 

(124.9)

 

(2,010.9)

Corporate and other

 

(607.5)

 

(149.1)

 

(244.9)

Loss from continuing operations

 

(310.9)

 

(274.0)

 

(2,255.8)

Loss from discontinued operations

 

(0.9)

 

(2.0)

 

(15.0)

             Net loss

$

(311.8)

 

(276.0)

 

(2,270.8)



Exploration and Production – Exploration and production (E&P) continuing operations recorded a profit of $296.6 million in 2017 compared to a loss of $124.9 million in 2016 and a loss of $2,010.9 million in 2015.  Crude oil price realizations averaged $51.21 per barrel in the current year compared to $42.32 per barrel in 2016, a price increase of 21% year over year.  U.S. natural gas realized price per thousand cubic feet (MCF) averaged $2.49 in the current year compared to $1.89 per MCF in 2016, a price increase of 32% year over year. Canada natural gas realized price per MCF averaged US$1.97 in the current year compared to US$1.72 per MCF in 2016, a price increase of 15% year over year.  Oil and gas production costs, including associated production taxes, on a per-unit basis, were $8.63 in 2017 (2016: $9.44), which together with lower oil and natural gas volumes sold, resulted in $91.3 million lower costs in 2017.


2017 vs 2016 – In 2017 profit from E&P operations of $296.6 million (2016: loss of $124.9 million) improved by $421.5 million. The results for 2017 were favorably impacted by higher revenues due to higher realized oil and natural gas sales prices, gain on sale of the Seal property in Western Canada, lower lease operating expenses, lower depreciation expense, non-recurring impairment expense in 2016, lower selling and general expenses, lower redetermination expense, partially offset by higher exploration expenses and higher other expenses.

Revenues of $2,220.5 million were $415.9 million higher than 2016 as a result of higher realized oil prices and natural gas liquid prices in all operating locations and an unrealized gain of $13.7 million (2016: loss of $125.0 million) on forward commodity price contracts, gain on the sale of Seal property of $129.0 million, offset by lower sales volumes, principally in Malaysia (as a result of natural field decline) and as a result of the sale of the Syncrude asset in Western Canada. The gain on the sale of Seal property of $129.0 million was a result of the sale of this property in January 2017, with the gain based on cash proceeds of $48.8 million and a benefit from the acquirer’s acceptance of abandonment obligations.

Lease operating expenses of $468.4 million were $91.0 million lower in 2017 principally as a result of the disposal of the Syncrude asset in mid-2016, the disposal of Seal property in January 2017 and also lower operating expenses in the Company’s U.S. Onshore business as a result of continued management effort to reduce costs.

Depreciation, depletion and amortization expenses of $939.9 million were $97.4 million lower in 2017 due to the disposal of the Syncrude asset in mid-2016 and lower volumes produced at Block K in Malaysia.

There was no impairment recorded in 2017.  In 2016, impairments expenses were $95.1 million as a result of 2016 impairments on the Company’s Terra Nova field and Seal heavy oil field in Western Canada (now divested) all of which were incurred in the first quarter of 2016 following further price declines from year-end 2015 levels.

Selling and general expenses of $123.7 million were $23.7 million lower in 2017 as a result of cost saving activities in the Company throughout 2017.

Redetermination expense of $15.0 million in 2017 (relating to the unitization of Gumusut/Kakap (GK) and Geronggong/Jagus East fields) was $24.1 million lower than 2016 (see below).  The unitization results in a revised

27

 


 

 

interest in the Kakap field in Block K Malaysia of 6.35%.  Following this unitization the Company’s working interest in the Brunei section of the Kakap field will be adjusted.

Exploration costs of $122.8 million were $20.9 million higher in 2017 due to higher amortization of U.S. leases and higher geological and geophysical expenses in Mexico.

Other expenses of $30.7 million were higher in 2017 by $16.8 million, principally as a result of U.S. drilling inventory write downs to net realizable value.  Income tax charges of $137.1 million were $292.2 million higher than 2016 due to higher profits.  The effective income tax rate of 31.6% for the E&P business was 23.8% different to 2016 on absolute basis as a result of deferred tax benefits related to Canadian dispositions in the earlier year (which increased the 2016 tax credit against a 2016 pretax loss).



2016 vs. 2015Compared to 2015, total sales volumes in 2016 for crude oil, natural gas and natural gas liquids fell 17%.  Oil sale volumes were lower in 2016 primarily due to lower production from the Company’s Eagle Ford Shale field and Syncrude and heavy oil fields in Canada due to well decline and significantly less drilling beginning in the last half of 2015 and continuing into 2016.  Synthetic oil production in Canada decreased due to impacts from the sale of the Company’s interests in Syncrude at the end of the second quarter of 2016 and maintenance work and downtime associated with forest fires in the surrounding area leading up to the disposition.  Heavy oil sales volumes in Canada were lower in 2016 due to well decline and uneconomic wells being shut-in.  Lower oil production and sales in Malaysia in 2016 were primarily attributable to natural well decline in most fields, partially offset by higher production at Kakap.  Natural gas liquid sales volumes decreased primarily due to lower natural gas production in the Eagle Ford Shale.  Natural gas sales volumes decreased in North America due to lower gas volumes in the Gulf of Mexico primarily in the Dalmatian field and lower volumes from the Eagle Ford Shale area in south Texas, offset in part by higher gas production volumes in the Tupper area in Western Canada.  Lower natural gas production in Malaysia was primarily due to higher unplanned downtime, lower net entitlement at Sarawak and more gas injection at Kikeh.

Lease operating expenses of $559.4 million declined $272.9 million in 2016 compared to 2015 essentially due to sale of interest in Syncrude, lower service costs, cost saving initiatives and a lower average foreign exchange rate in Canada. 

Severance and ad valorem taxes of $43.8 million decreased by $22.0 million in 2016 primarily due to lower average realized sales prices for oil and natural gas volumes in the U.S. and lower well valuations due to significantly lower commodity prices.

Exploration expenses of $101.9 million were $369.1 million less in 2016 than the prior year primarily due to lower dry hole costs, lower geological and geophysical costs, lower exploration costs in other foreign areas and lower undeveloped lease amortization.

Selling and general expenses of $147.4 million in 2016 decreased by 17% versus 2015, as the Company implemented further key organizational changes including lowering staffing levels from the end of the prior year.

Depreciation, depletion and amortization expense of $1,037.3 million fell by $570.6 million due to both lower volumes sold and lower per-unit capital amortization rates.  The lower capital amortization rates were primarily the result of impairment charges in the last half of 2015 and first quarter of 2016.

Impairment expense associated with asset writedowns was approximately $95.1 million in 2016 compared to $2.5 billion in 2015.  The decrease was primarily due to the significant 2015 writedowns of assets in oil and natural gas fields offshore Malaysia, the Seal heavy oil field in Western Canada and fields in deepwater Gulf of Mexico due to decline in oil prices.  Impairments in 2016 were at the Company’s Terra Nova field and Seal heavy oil field in Western Canada all of which were incurred in the first quarter of 2016 following further price declines from year-end 2015 levels.

Redetermination expense of $39.1 million ($24.1 million after taxes) in 2016 related to an expected reduction in the Company’s working interest covering the period from inception through year-end 2016 at its non-operated Kakap-Gumusut field in Block K Malaysia.  The final redetermination adjustment will be settled in cash.

Deepwater rig contract exit costs was a benefit of $4.3 million in 2016 due to lower final costs incurred and paid compared to estimated costs of $282.0 million recorded in 2015 for two deepwater rigs that were under contract in the Gulf of Mexico.  Due to capital constraints, these rigs were released before their contract expiration dates and the remaining obligations owed in 2016 under the contracts were expensed in 2015.

28

 


 

 

Other operating expense was $60.4 million lower in the current year primarily due to recording estimated costs of remediating a site at the Seal field in a remote area of Alberta in 2015 and an adjustment of previously recorded exit costs in 2016 associated with ceasing production operations in the Republic of Congo versus a charge in 2015 for uncollectible accounts receivables from partners in the Republic of Congo.

Income tax benefits in 2016 were $155.1 million compared to benefits of $1.1 billion in the prior year.  The benefits reported in 2015 were the result of large pretax losses, a significant portion of which was related to impairments, plus no local income taxes owed on the Malaysia sale and a deferred tax benefit due to the purchaser assuming certain future tax payment obligations upon the Malaysia sale.  The effective tax rate in 2016 was 55.4% up from 35.6% in 2015.  The 2016 period was favorably affected by deferred tax benefits recognized related to the Canadian asset dispositions and income tax benefits on investments in foreign exploration areas.



A summary of oil and gas revenues is presented in the following table.







 

 

 

 

 

 

(Millions of dollars)

 

2017

 

2016

 

2015

United States – Oil and gas liquids

$

913.3 

 

650.7 

 

1,176.9 

                       – Natural gas

 

37.9 

 

35.1 

 

70.4 

Canada – Conventional oil and gas liquids

 

203.7 

 

171.7 

 

181.0 

             – Synthetic oil

 

 –

 

60.7 

 

203.0 

             – Natural gas

 

155.1 

 

130.0 

 

167.7 

Malaysia – Oil and gas liquids

 

639.9 

 

623.7 

 

790.6 

                – Natural gas

 

138.2 

 

127.6 

 

185.4 

    Total oil and gas revenues

$

2,088.1 

 

1,799.5 

 

2,775.0 





29

 


 

 

The following table contains selected operating statistics for the three years ended December 31, 2017.









 

 

 

 

 

 

 



 

2017

 

2016

 

2015

 

Net crude oil and condensate produced – barrels per day

 

 

 

 

 

 

 

   United States – Eagle Ford Shale

 

34,649 

 

35,858 

 

47,325 

 

                             Gulf of Mexico

 

11,551 

 

12,372 

 

13,794 

 

   Canada  – onshore

 

3,004 

 

1,046 

 

115 

 

                     offshore

 

8,091 

 

8,737 

 

7,421 

 

                     heavy1

 

150 

 

2,766 

 

5,341 

 

                     synthetic1

 

– 

 

4,637 

 

11,699 

 

   Malaysia1 – Sarawak

 

12,674 

 

13,365 

 

15,249 

 

 Block K

 

20,312 

 

24,619 

 

25,456 

 

         Total crude oil and condensate produced

 

90,431 

 

103,400 

 

126,400 

 

Net crude oil and condensate sold – barrels per day

 

 

 

 

 

 

 

   United States – Eagle Ford Shale

 

34,649 

 

35,858 

 

47,326 

 

                             Gulf of Mexico

 

11,551 

 

12,372 

 

13,794 

 

   Canada  – onshore

 

3,004 

 

1,046 

 

115 

 

                     offshore

 

7,525 

 

8,886 

 

7,151 

 

                     heavy1

 

150 

 

2,766 

 

5,341 

 

                     synthetic1

 

– 

 

4,637 

 

11,699 

 

   Malaysia1 – Sarawak

 

12,454 

 

12,464 

 

16,360 

 

 Block K

 

19,867 

 

24,376 

 

26,583 

 

         Total crude oil and condensate sold

 

89,200 

 

102,405 

 

128,369 

 

Net natural gas liquids produced – barrels per day

 

 

 

 

 

 

 

   United States – Eagle Ford Shale

 

6,867 

 

6,929 

 

7,558 

 

                             Gulf of Mexico

 

947 

 

1,302 

 

1,998 

 

   Canada

 

508 

 

210 

 

10 

 

   Malaysia1 – Sarawak

 

829 

 

786 

 

668 

 

         Total net gas liquids produced

 

9,151 

 

9,227 

 

10,234 

 

Net natural gas liquids sold – barrels per day

 

 

 

 

 

 

 

   United States – Eagle Ford Shale

 

6,867 

 

6,929 

 

7,558 

 

                             Gulf of Mexico

 

947 

 

1,302 

 

1,998 

 

   Canada

 

508 

 

210 

 

10 

 

   Malaysia1 – Sarawak

 

1,048 

 

720 

 

606 

 

         Total net natural gas liquids sold

 

9,370 

 

9,161 

 

10,172 

 

Net natural gas sold – thousands of cubic feet per day

 

 

 

 

 

 

 

   United States – Eagle Ford Shale

 

32,629 

 

35,789 

 

38,304 

 

                             Gulf of Mexico

 

11,901 

 

17,242 

 

49,068 

 

   Canada

 

226,218 

 

208,682 

 

196,774 

 

   Malaysia1 – Sarawak

 

104,616 

 

106,380 

 

121,650 

 

 Block K

 

8,358 

 

10,070 

 

21,818 

 

       Total natural gas sold

 

383,722 

 

378,163 

 

427,614 

 

Total net hydrocarbons produced – equivalent barrels per day2

 

163,536 

 

175,654 

 

207,903 

 

Total net hydrocarbons sold – equivalent barrels per day2

 

162,524 

 

174,593 

 

209,809 

 

Estimated net hydrocarbon reserves – million equivalent barrels2,3

 

698.3 

 

684.5 

 

774.0 

 



1  The Company sold the Seal area heavy oil property in January 2017 and its 5% non-operated interest in Syncrude Canada Ltd. in June 2016.  The Company sold a 10% interest in Malaysia properties in January 2015Production in this table includes production for these sold

  interests through the date of disposition.

2 Natural gas converted on an energy equivalent basis of 6:1.

3 At December 31.



30

 


 

 

The Company’s total crude oil and condensate production averaged 90,431 barrels per day in 2017, compared to 103,400 barrels per day in 2016 and 126,400 barrels per day in 2015.  The 2017 crude oil production level was 13% below 2016. Crude oil production in the United States totaled 46,200 barrels per day in 2017, down from 48,230 barrels per day in 2016.  The decrease in U.S. crude oil production year over year was primarily due to well decline and shut-ins due to weather events which was only partially offset by new drilling.  Heavy crude oil production in Western Canada fell from 2,766 barrels per day in 2016 to 150 barrels per day in 2017, with the reduction attributable to the sale of Seal asset in January 2017.  Crude oil volumes produced offshore Eastern Canada totaled 8,091 barrels per day in 2017, down from 8,737 barrels per day in the previous year. There was no synthetic crude oil production in Canada in 2017 compared to 4,637 barrels per day in 2016 due to the Company selling its 5% interest in Syncrude in June 2016.  Crude oil production offshore Sarawak decreased from 13,365 barrels per day in 2016 to 12,674 barrels per day in 2017.  Block K in Malaysia had crude oil production of 20,312 barrels per day in 2017, down from 24,619 barrels per day in 2016.  Lower oil production in 2017 in Malaysia was primarily attributable to natural well decline at most fields.

The Company’s total crude oil and condensate production averaged 103,400 barrels per day in 2016, compared to 126,400 barrels per day in 2015.  Crude oil production in the United States totaled 48,230 barrels per day in 2016, down from 61,119 barrels per day in 2015.  The 21% decrease in U.S. crude oil production year over year was primarily due to well decline and lower drilling.  Heavy crude oil production in Western Canada fell from 5,341 barrels per day in 2015 to 2,766 barrels per day in 2016 due to wells shut-in and natural well performance decline in the Seal area.  Crude oil volumes produced offshore Eastern Canada totaled 8,737 barrels per day in 2016, up from 7,421 barrels per day in the previous year due to less unplanned maintenance. Crude oil production offshore Sarawak decreased from 15,249 barrels per day in 2015 to 13,365 barrels per day in 2016.  Block K in Malaysia had crude oil production of 24,619 barrels per day in 2016, down from 25,456 barrels per day in 2015.  Lower oil production in 2016 in Malaysia was primarily attributable to natural well decline at most fields, partially offset by higher production at Kakap.

The Company produced natural gas liquids (NGL) of 9,151 barrels per day in 2017, largely in line with 9,227 barrels per day produced in 2016.  Eighty-five percent of the Company’s NGL production in 2017 was derived from Gulf of Mexico and Eagle Ford Shale areas in the United States.

The Company’s NGL production of 9,227 barrels per day in 2016 was down from 10,234 barrels per day in 2015.  The lower NGL volumes of 1,007 barrels per day in 2016 were mostly attributable to decreased natural gas produced from the Eagle Ford Shale and in the Gulf of Mexico.

Worldwide sales of natural gas averaged 383.7 million cubic feet (MMCF) per day in 2017 compared to 378.2 MMCF per day in 2016.  The 2017 increase in natural gas sales volumes is attributable to 8% increase in natural gas production in Canada, primarily in Tupper and Placid areas, offset in part by lower gas production in the Gulf of Mexico and in the Eagle Ford Shale area in United States. 

Worldwide sales of natural gas were 378.2 MMCF per day in 2016, compared to 427.6 MMCF per day in 2015.  Natural gas sales volumes decreased in North America in 2016 compared to 2015 due to lower gas volume in the Gulf of Mexico primarily in the Dalmatian field and lower volume from the Eagle Ford Shale area in south Texas, offset in part by higher gas production volumes in the Tupper area in Western Canada. 

31

 


 

 



The following table contains the weighted average sales prices for the three years ended December 31, 2017.





 

 

 

 

 

 

 



 

2017

 

2016

 

2015

 

Weighted average sales prices

 

 

 

 

 

 

 

Crude oil and condensate – dollars per barrel

 

 

 

 

 

 

 

United States – Eagle Ford Shale

$

50.49 

 

42.11 

 

48.14 

 

    Gulf of Mexico

 

49.24 

 

41.63 

 

46.80 

 

Canada 1 –  onshore

 

46.68 

 

42.01 

 

41.06 

 

   offshore

 

53.39 

 

43.12 

 

50.54 

 

   heavy 2

 

25.12 

 

16.40 

 

23.28 

 

   synthetic 2

 

– 

 

35.59 

 

47.56 

 

Malaysia – Sarawak 3

 

53.26 

 

46.02 

 

50.13 

 

  Block K 3

 

52.72 

 

45.27 

 

51.50 

 

Natural gas liquids – dollars per barrel

 

 

 

 

 

 

 

United States – Eagle Ford Shale

 

17.70 

 

11.51 

 

11.18 

 

    Gulf of Mexico

 

19.57 

 

12.84 

 

12.82 

 

Canada 1

 

25.00 

 

20.63 

 

22.31 

 

Malaysia – Sarawak 3

 

51.00 

 

38.30 

 

50.55 

 

Natural gas – dollars per thousand cubic feet

 

 

 

 

 

 

 

United States – Eagle Ford Shale

 

2.49 

 

1.88 

 

2.24 

 

    Gulf of Mexico

 

2.49 

 

1.92 

 

2.36 

 

Canada 1

 

1.97 

 

1.72 

 

2.35 

 

Malaysia – Sarawak 3

 

3.55 

 

3.21 

 

4.23 

 

     Block K

 

0.24 

 

0.25 

 

0.24 

 





1 U.S. dollar equivalent.

2 The Company sold the Seal area heavy oil property in January 2017 and its 5% non-operated interest in Syncrude Canada Ltd. in June 2016.

3 Prices are net of payments under the terms of the respective production sharing contracts.



The Company’s average worldwide realized sales price for crude oil and condensate was $51.21 per barrel in 2017 compared to $42.38 per barrel in 2016 and $47.99 per barrel in 2015.  The average realized crude oil sales price was approximately 21% higher in 2017 compared to the prior year.  West Texas Intermediate (WTI) crude oil averaged 18% more in 2017 compared to 2016.  Dated Brent and Kikeh oil sold for approximately 24% and 22% higher in 2017, respectively, while Light Louisiana Sweet crude oil sold at 20% above 2016 levels.  The average realized sales prices for U.S. crude oil and condensate amounted to $50.19 per barrel in 2017, 20% higher than 2016.  Heavy oil produced in Canada averaged a sales price of $25.12 per barrel in 2017, a 53% increase from 2016.  The average sales price for crude oil produced offshore Eastern Canada increased 24% to $53.39 per barrel in 2017.  Crude oil sold in Malaysia averaged $52.93 per barrel in 2017, 16% higher than $45.52 in 2016.

The Company’s average worldwide realized sales price for crude oil and condensate was $42.38 per barrel in 2016 compared to $47.99 per barrel in 2015.  The average realized crude oil sales price was 12% lower in 2016 compared to 2015.  WTI crude oil averaged 11% less in 2016 compared to 2015.  Dated Brent and Kikeh oil each sold for approximately 16% less in 2016, while Light Louisiana Sweet crude oil sold at 14% below 2015 levels.  The average realized sales prices for U.S. crude oil and condensate amounted to $41.99 per barrel in 2016, 12% lower than 2015.  Heavy oil produced in Canada averaged $16.40 per barrel in 2016, a 30% decrease from 2015.  The average sales price for crude oil produced offshore Eastern Canada declined 15% to $43.12 per barrel in 2016.  The average realized sales price for the Company’s synthetic crude oil was $35.59 per barrel in 2016, down 25% from the prior year. Crude oil sold in Malaysia averaged $45.52 per barrel in 2016, 11% lower than in 2015.

The average sales price for NGL in 2017 was higher than prices realized during 2016, with a significant increase in prices in the United States.  NGL was sold in the U.S. for an average of $17.93 per barrel in 2017, up 53% from 2016. NGL produced in Malaysia in 2017 was sold for an average of $50.99 per barrel, 33% above the 2016 average of $38.30 per barrel.

32

 


 

 

The average sales price for NGL in 2016 was on par with prices realized during 2015. NGL was sold in the U.S. for an average of $11.72 per barrel in 2016, up 1% from the average price of $11.55 per barrel in 2015.  NGL produced in Malaysia in 2016 was sold for an average of $38.30 per barrel, 24% below the 2015 average of $50.55 per barrel.

North American natural gas prices were also higher in 2017 than during 2016, essentially driven by an overall increase in commodity prices and a colder winter.  The average posted price at Henry Hub in Louisiana was $2.96 per MMBTU in 2017 compared to $2.48 per MMBTU in 2016 and $2.61 per MMBTU in 2015.  In 2017, U.S. natural gas was sold at an average of $2.49 per thousand cubic feet (MCF), a 32% increase compared to 2016.  Natural gas sold in Canada averaged $1.97 per MCF in 2017, up 15% from 2016.  Natural gas sold in 2017 from Sarawak, Malaysia averaged $3.55 per MCF, up 11% from the prior year.

North American natural gas prices were weaker in 2016 than 2015, essentially driven by an unseasonably warm winter demand season. The average posted price at Henry Hub in Louisiana was $2.48 per MMBTU in 2016 compared to $2.61 per MMBTU in 2015 and $4.33 per MMBTU in 2014.  In 2016, U.S. natural gas was sold at an average of $1.89 per MCF, an 18% decrease compared to 2015.  Natural gas sold in Canada averaged $1.72 per MCF in 2016, down 27% from 2015.  Natural gas sold in 2016 from Sarawak, Malaysia averaged $3.21 per MCF, down 24% from the prior year.

Based on 2017 sales volumes and deducting taxes at 35%, each $1.00 per barrel oil sales price fluctuation and $0.10 per MCF gas sales price fluctuation would have affected 2017 revenue from exploration and production operations by $15.9 million and $6.2 million, respectively



Production-related expenses for continuing exploration and production operations during the last three years are shown in the following table.







 

 

 

 

 

 



 

 

 

 

 

 

(Millions of dollars)

 

2017 

 

2016 

 

2015 

Lease operating expense

$

468.4 

 

559.4 

 

832.3 

Severance and ad valorem taxes

 

43.7 

 

43.8