10-Q 1 mur-20190331x10q.htm 10-Q Q1-2019 10Q

C





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019



OR



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

For the transition period from              to

Commission file number 1-8590



Picture 3

MURPHY OIL CORPORATION

(Exact name of registrant as specified in its charter)



Delaware

 

 

71-0361522

(State or other jurisdiction of incorporation or organization)

 

 

(I.R.S. Employer Identification Number)

 

 

 

 

300 Peach Street, P.O. Box 7000,

 

 

 

El Dorado, Arkansas

 

 

71731-7000

(Address of principal executive offices)

 

 

(Zip Code)



(870) 862-6411

(Registrant’s telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes    [  ] No



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   [X] Yes    [  ] No 



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



Large accelerated filer [X]                 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    [X] No



Number of shares of Common Stock, $1.00 par value, outstanding at April 30, 2019 was 173,626,998. 



 


 



MURPHY OIL CORPORATION



TABLE OF CONTENTS



 

1

 


 

 

 

PART I – FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS



Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

(Thousands of dollars)





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018 1

ASSETS

 

 

 

 

 

 

Current assets

 

$

 

 

 

 

Cash and cash equivalents

 

 

286,281 

 

 

359,923 

Accounts receivable, less allowance for doubtful accounts of $1,605 in 
   2019 and 2018

 

 

349,768 

 

 

231,686 

Inventories

 

 

77,278 

 

 

80,024 

Prepaid expenses

 

 

45,349 

 

 

34,316 

Assets held for sale

 

 

1,879,568 

 

 

173,865 

Total current assets

 

 

2,638,244 

 

 

879,814 

Property, plant and equipment, at cost less accumulated depreciation,
   depletion and amortization of $8,359,120 in 2019 and $8,070,487 in 2018

 

 

8,559,143 

 

 

8,432,133 

Operating lease assets

 

 

618,123 

 

 

– 

Deferred income taxes

 

 

124,679 

 

 

146,197 

Deferred charges and other assets

 

 

42,928 

 

 

49,435 

Non-current assets held for sale

 

 

– 

 

 

1,545,008 

Total assets

 

$

11,983,117 

 

 

11,052,587 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

679 

 

 

668 

Accounts payable

 

 

475,559 

 

 

348,026 

Income taxes payable

 

 

15,450 

 

 

15,309 

Other taxes payable

 

 

14,283 

 

 

17,649 

Operating lease liabilities

 

 

155,534 

 

 

– 

Other accrued liabilities

 

 

157,031 

 

 

177,948 

Liabilities associated with assets held for sale

 

 

819,694 

 

 

286,458 

Total current liabilities

 

 

1,638,230 

 

 

846,058 

Long-term debt, including capital lease obligation

 

 

3,110,098 

 

 

3,109,318 

Asset retirement obligations

 

 

783,495 

 

 

752,519 

Deferred credits and other liabilities

 

 

471,099 

 

 

624,436 

Non-current operating lease liabilities

 

 

468,427 

 

 

– 

Deferred income taxes

 

 

185,091 

 

 

129,894 

Non-current liabilities associated with assets held for sale

 

 

– 

 

 

392,720 

Equity

 

 

 

 

 

 

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

 

 

– 

 

 

– 

       Common Stock, par $1.00, authorized 450,000,000 shares, issued
          195,083,364 shares in 2019 and 195,076,924 shares in 2018

 

 

195,083 

 

 

195,077 

    Capital in excess of par value

 

 

924,904 

 

 

979,642 

    Retained earnings

 

 

5,627,081 

 

 

5,513,529 

    Accumulated other comprehensive loss

 

 

(580,999)

 

 

(609,787)

    Treasury stock

 

 

(1,217,293)

 

 

(1,249,162)

Murphy Shareholders' Equity

 

 

4,948,776 

 

 

4,829,299 

    Noncontrolling interest

 

 

377,901 

 

 

368,343 

Total equity

 

 

5,326,677 

 

 

5,197,642 

Total liabilities and stockholders’ equity

 

$

11,983,117 

 

 

11,052,587 

1 Reclassified to conform to current presentation (see Note A). 

See Notes to Consolidated Financial Statements, page 7.

2


 

 

 

Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Thousands of dollars, except per share amounts)







 

 

 

 

 



 

Three Months Ended

 



March 31,

 



2019

 

2018 1

 



 

 

 

 

 

Revenues

 

 

 

 

 

     Revenue from sales to customers

$

590,550 

 

396,329 

 

     Loss on crude contracts

 

– 

 

(29,502)

 

     Gain on sale of assets and other income

 

454 

 

7,963 

 

Total revenues

 

591,004 

 

374,790 

 



 

 

 

 

 

Costs and expenses

 

 

 

 

 

     Lease operating expenses

 

131,696 

 

88,833 

 

     Severance and ad valorem taxes

 

10,097 

 

12,157 

 

     Exploration expenses, including undeveloped
       lease amortization

 

32,538 

 

28,738 

 

     Selling and general expenses

 

63,360 

 

48,096 

 

     Depreciation, depletion and amortization

 

229,406 

 

182,743 

 

     Accretion of asset retirement obligations

 

9,340 

 

6,372 

 

     Other expense (benefit)

 

30,005 

 

(11,045)

 

Total costs and expenses

 

506,442 

 

355,894 

 

Operating income from continuing operations

 

84,562 

 

18,896 

 



 

 

 

 

 

Other income (loss)

 

 

 

 

 

     Interest and other income (loss)

 

(4,748)

 

4,587 

 

     Interest expense, net

 

(46,069)

 

(44,541)

 

Total other loss

 

(50,817)

 

(39,954)

 



 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

33,745 

 

(21,058)

 

Income tax expense (benefit)

 

10,822 

 

(111,639)

 

Income from continuing operations

 

22,923 

 

90,581 

 

Income from discontinued operations, net of income taxes

 

49,846 

 

77,672 

 

Net income including noncontrolling interest

 

72,769 

 

168,253 

 

Less: Net income attributable to noncontrolling interest

 

32,587 

 

– 

 



 

 

 

 

 

NET INCOME ATTRIBUTABLE TO MURPHY

$

40,182 

 

168,253 

 



 

 

 

 

 

INCOME (LOSS) PER COMMON SHARE – BASIC

 

 

 

 

 

     Continuing operations

$

(0.06)

 

0.52 

 

     Discontinued operations

 

0.29 

 

0.45 

 

         Net Income

$

0.23 

 

0.97 

 



 

 

 

 

 

INCOME (LOSS) PER COMMON SHARE – DILUTED

 

 

 

 

 

     Continuing operations

$

(0.06)

 

0.52 

 

     Discontinued operations

 

0.29 

 

0.44 

 

         Net Income

$

0.23 

 

0.96 

 



 

 

 

 

 

Cash dividends per Common share

 

0.25 

 

0.25 

 



 

 

 

 

 

Average Common shares outstanding (thousands)

 

 

 

 

 

     Basic

 

173,341 

 

172,805 

 

     Diluted

 

174,491 

 

174,620 

 



1 Reclassified to conform to current presentation (see Note A). 

See Notes to Consolidated Financial Statements, page 7.

3


 

 

 





Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(Thousands of dollars)









 

 

 

 

 



 

 

 

 

 



Three Months Ended

 



March 31,

 



2019

 

2018

 



 

 

 

 

 

Net income

$

40,182 

 

168,253 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

Net (loss) gain from foreign currency translation

 

25,449 

 

(52,275)

 

Retirement and postretirement benefit plans

 

2,754 

 

3,170 

 

Deferred loss on interest rate hedges reclassified to interest

  expense

 

585 

 

585 

 

Reclassification of certain tax effects to retained earnings

 

– 

 

(30,237)

 

Other

 

– 

 

(3,737)

 

Other comprehensive income (loss)

 

28,788 

 

(82,494)

 

COMPREHENSIVE INCOME

$

68,970 

 

85,759 

 

See Notes to Consolidated Financial Statements, page 7.

 

4


 

 

 



Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Thousands of dollars)





 

 

 

 

 



 

 

 

 

 



Three Months Ended

 



March 31,

 



2019

 

2018 1

 

Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

$

72,769 

 

168,253 

 

Adjustments to reconcile net income to net cash provided by continuing

  operations activities:

 

– 

 

– 

 

(Income) loss from discontinued operations

 

(49,846)

 

(77,672)

 

Depreciation, depletion and amortization

 

229,406 

 

182,743 

 

Previously suspended exploration costs (credits)

 

13,251 

 

(5)

 

Amortization of undeveloped leases

 

8,045 

 

13,168 

 

Accretion of asset retirement obligations

 

9,340 

 

6,372 

 

Deferred income tax charge (benefit)

 

15,589 

 

(147,716)

 

Pretax (gain) loss from sale of assets

 

(12)

 

339 

 

Mark to market and revaluation of contingent consideration

 

13,530 

 

– 

 

Mark to market of crude contracts

 

– 

 

14,350 

 

Long-term non-cash compensation

 

22,388 

 

14,057 

 

Net (increase) decrease in noncash operating working capital

 

(98,505)

 

(3,553)

 

Other operating activities, net

 

(18,758)

 

(59,449)

 

Net cash provided by continuing operations activities

 

217,197 

 

110,887 

 



 

 

 

 

 

Investing Activities

 

 

 

 

 

Property additions and dry hole costs

 

(270,338)

 

(247,054)

 

Proceeds from sales of property, plant and equipment

 

– 

 

260 

 

Net cash required by investing activities

 

(270,338)

 

(246,794)

 



 

 

 

 

 

Financing Activities

 

 

 

 

 

Capital lease obligation payments

 

(160)

 

– 

 

Withholding tax on stock-based incentive awards

 

(6,991)

 

(6,642)

 

Distribution to noncontrolling interest

 

(18,437)

 

– 

 

Cash dividends paid

 

(43,398)

 

(43,258)

 

Net cash required by financing activities

 

(68,986)

 

(49,900)

 



 

 

 

 

 

Cash Flows from Discontinued Operations

 

 

 

 

 

Operating activities

 

123,469 

 

167,386 

 

Investing activities

 

(26,438)

 

(26,848)

 

Financing activities

 

(2,547)

 

(2,405)

 

Net cash provided by discontinued operations

 

94,484 

 

138,133 

 

Cash transferred from discontinued operations to continuing operations

 

46,080 

 

371,656 

 

Effect of exchange rate changes on cash and cash equivalents

 

2,405 

 

21,051 

 

Net increase (decrease) in cash and cash equivalents

 

(73,642)

 

206,900 

 

Cash and cash equivalents at beginning of period

 

359,923 

 

630,433 

 

Cash and cash equivalents at end of period

$

286,281 

 

837,333 

 

1  Reclassified to conform to current presentation (See Note A).

See Notes to Consolidated Financial Statements, page 7.

5


 

 

 





Murphy Oil Corporation and Consolidated Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(Thousands of dollars)





 

 

 

 

 



 

 

 

 

 



Three Months Ended



March 31,



2019

 

2018

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

$

– 

 

 

– 

Common Stock – par $1.00, authorized 450,000,000 shares, issued 195,083,364
    shares at March 31, 2019 and 195,065,341 shares at March 31, 2018

 

 

 

 

 

Balance at beginning of period

 

195,077 

 

 

195,056 

Exercise of stock options

 

 

 

Balance at end of period

 

195,083 

 

 

195,065 

Capital in Excess of Par Value

 

 

 

 

 

Balance at beginning of period

 

979,642 

 

 

917,665 

Exercise of stock options, including income tax benefits

 

(123)

 

 

(175)

Restricted stock transactions and other

 

(38,732)

 

 

(32,486)

Stock-based compensation

 

8,636 

 

 

6,187 

Adjustments to acquisition valuation

 

(24,519)

 

 

– 

Balance at end of period

 

924,904 

 

 

891,191 

Retained Earnings

 

 

 

 

 

Balance at beginning of period

 

5,513,529 

 

 

5,245,242 

Net income (loss) for the period

 

40,182 

 

 

168,253 

Reclassification of certain tax effects from accumulated other comprehensive loss

 

– 

 

 

30,237 

Sale and leaseback gain recognized upon adoption of ASC 842, net of tax impact

 

116,768 

 

 

– 

Cash dividends

 

(43,398)

 

 

(43,258)

Balance at end of period

 

5,627,081 

 

 

5,400,474 



 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

Balance at beginning of period

 

(609,787)

 

 

(462,243)

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

 

25,449 

 

 

(52,275)

Retirement and postretirement benefit plans, net of income taxes

 

2,754 

 

 

3,170 

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

 

585 

 

 

585 

Reclassification of certain tax effects to retained earnings

 

– 

 

 

(30,237)

Other

 

– 

 

 

(3,737)

Balance at end of period

 

(580,999)

 

 

(544,737)

Treasury Stock

 

 

 

 

 

Balance at beginning of period

 

(1,249,162)

 

 

(1,275,529)

Awarded restricted stock, net of forfeitures

 

31,869 

 

 

25,843 

Balance at end of period – 21,456,366 shares of Common Stock in
   2019 and 22,027,336 shares of Common Stock in 2018, at cost

 

(1,217,293)

 

 

(1,249,686)

Murphy Shareholders’ Equity

 

4,948,776 

 

 

4,692,307 

Noncontrolling Interest

 

 

 

 

 

Balance at beginning of year

 

368,343 

 

 

– 

Acquisition closing adjustments

 

(4,592)

 

 

– 

Net income attributable to noncontrolling interest

 

32,587 

 

 

– 

Distributions to noncontrolling Interest Owners

 

(18,437)

 

 

– 

      Balance at end of year

 

377,901 

 

 

– 

Total Equity

$

5,326,677 

 

 

4,692,307 



See Notes to Consolidated Financial Statements, page 7.

 

6


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

Note A – Nature of Business and Interim Financial Statements

NATURE OF BUSINESS – Murphy Oil Corporation is an international oil and gas company that conducts its business through various operating subsidiaries.  The Company primarily produces oil and natural gas in the United States and Canada and conducts oil and natural gas exploration activities worldwide. As of the end of the first quarter 2019 Malaysia was classified as held for sale; and effective January 1, 2019 Malaysia was reported as discontinued operations as the sale represents a strategic shift that has a major effect on the Company’s operations and financial results. Prior periods have been reclassified to conform with the current presentation. See Note E for more information regarding the pending sale of this asset.

INTERIM FINANCIAL STATEMENTS – In the opinion of Murphy's management, the unaudited financial statements presented herein include all accruals necessary to present fairly the Company's financial position at March 31, 2019 and December 31, 2018, and the results of operations, cash flows and changes in stockholders’ equity for the interim periods ended March 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America (U.S.).  In preparing the financial statements of the Company in conformity with accounting principles generally accepted in the U.S., management has made a number of estimates and assumptions related to the reporting of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities.  Actual results may differ from the estimates.

Financial statements and notes to consolidated financial statements included in this Form 10-Q report should be read in conjunction with the Company's 2018 Form 10-K report, as certain notes and other pertinent information have been abbreviated or omitted in this report.  Financial results for the three-months ended March 31, 2019 are not necessarily indicative of future results.



Note B – New Accounting Principles and Recent Accounting Pronouncements

Accounting Principles Adopted

Leases.  In February 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) 2016-02 (Topic 842) to increase transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The main difference between previous Generally Accepted Accounting Principles (GAAP) and this ASU is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.  The company adopted the standard in the first quarter of 2019 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019.  The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets. The adoption of ASU 2016-02 resulted in the recognition of right-of-use assets of $618.1 million, current lease liabilities for operating leases of approximately $155.5 million, non-current lease liabilities of $468.4 million and a cumulative-effect adjustment to credit retained earnings of $116.8 million on its Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations. See Note P for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.

Compensation – Stock Compensation.  In June 2018, the FASB issued an ASU 2018-07 which supersedes existing guidance for equity-based payments to nonemployees and expands the scope of guidance for stock compensation to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees.  As a result, the same guidance that provides for employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements.  The Company adopted this guidance during the first quarter of 2019 and it did not have material impact on its consolidated financial statements.

Recent Accounting Pronouncements

Fair Value Measurement.  In August 2018, the FASB issued ASU 2018-13 which modifies disclosure requirements related to fair value measurement.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Implementation on a prospective or retrospective basis varies by specific disclosure requirement.  Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company is currently assessing the potential impact of this ASU to its consolidated financial statements. 

7

 


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note B – New Accounting Principles and Recent Accounting Pronouncements (Contd.)

Recent Accounting Pronouncements (Contd.)

Compensation-Retirement Benefits-Defined Benefit Plans-General.  In August 2018, the FASB issued ASU 2018-14 which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.  For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and is to be applied on a retrospective basis to all periods presented. The Company is currently assessing the potential impact of this ASU to its consolidated financial statements. 



Note C – Revenue from Contracts with Customers

Nature of Goods and Services

The Company explores for and produces crude oil, natural gas and natural gas liquids (collectively oil and gas) in select basins around the globe. The Company’s revenue from sales of oil and gas production activities are primarily subdivided into two key geographic segments: the U.S. and Canada.  Additionally, revenue from sales to customers is generated from three primary revenue streams: crude oil and condensate, natural gas liquids, and natural gas.

For operated oil and gas production where the non-operated working interest owner does not take-in-kind its proportionate interest in the produced commodity, the Company acts as an agent for the working interest owner and recognizes revenue only for its own share of the commingled production. 

U.S.- In the United States, the Company primarily produces oil and gas from fields in the Eagle Ford Shale area of South Texas and in the Gulf of Mexico.  Revenue is generally recognized when oil and gas are transferred to the customer at the delivery point. Revenue recognized is largely index based with price adjustments for floating market differentials.

Canada- Primarily, long-term contracts in Canada, except for certain natural gas physical forward sales fixed-price contracts, are floating commodity index priced. For the Onshore business in Canada, the recorded revenue is net of transportation and any gain or loss on spot purchases made to meet committed volumes on sales contracts for the month. For the Offshore business in Canada, contracts are based on index prices and revenue is recognized at the time of vessel load based on the volumes on the bill of lading and point of custody transfer.

8


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note C – Revenue from Contracts with Customers (Contd.)

Disaggregation of Revenue

The Company reviews performance based on two key geographical segments and between onshore and offshore sources of Revenue within these geographies.

For the three months ended March 31, 2019 and 2018, the Company recognized $590.6 million and $396.3 million, respectively, from contracts with customers for the sales of oil, natural gas liquids and natural gas. 









 

 

 

 



 

Three Months Ended



 

March 31,

(Thousands of dollars)

 

2019

 

2018

Net crude oil and condensate revenue

 

 

 

 

United States – Onshore

$

133,590 

 

182,650 

                               – Offshore

 

316,023 

 

71,528 

Canada    – Onshore

 

27,344 

 

21,293 

                         – Offshore

 

43,846 

 

54,315 

Other

 

2,852 

 

– 

Total crude oil and condensate revenue

 

523,655 

 

329,786 



 

 

 

 

Net natural gas liquids revenue

 

 

 

 

United States – Onshore

 

6,141 

 

12,134 

                               – Offshore

 

4,176 

 

1,639 

Canada    – Onshore

 

3,458 

 

3,469 

Total natural gas liquids revenue

 

13,775 

 

17,242 



 

 

 

 

Net natural gas revenue

 

 

 

 

United States – Onshore

 

5,864 

 

6,770 

                               – Offshore

 

2,506 

 

2,937 

Canada    – Onshore

 

44,750 

 

39,594 

Total natural gas revenue

 

53,120 

 

49,301 

Total revenue from contracts with customers

 

590,550 

 

396,329 



 

 

 

 

Gain (loss) on crude contracts

 

– 

 

(29,502)

Other operating income

 

442 

 

8,302 

Gain on sale of assets

 

12 

 

(339)

Total revenue

$

591,004 

 

374,790 



Contract Balances and Asset Recognition

As of March 31, 2019, and December 31, 2018, receivables from contracts with customers, net of royalties and associated payables, on the balance sheet from continuing operations, were $266.5 million and $147.6 million, respectively. Payment terms for the Company’s sales vary across contracts and geographical regions, with the majority of the cash receipts required within 30 days of billing. Based on historical collections and ability of customers to pay, the Company did not recognize any impairment losses on receivables or contract assets arising from customer contracts during the reporting periods.

The Company has not entered into any upstream oil and gas sale contracts that have financing components as at March 31, 2019.

The Company does not employ sales incentive strategies such as commissions or bonuses for obtaining sales contracts. For the periods presented, the Company did not identify any assets to be recognized associated with the costs to obtain a contract with a customer.

9


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note C – Revenue from Contracts with Customers (Contd.)

Performance Obligations

The Company recognizes oil and gas revenue when it satisfies a performance obligation by transferring control over a commodity to a customer.  Judgment is required to determine whether some customers simultaneously receive and consume the benefit of commodities. As a result of this assessment for the Company, each unit of measure of the specified commodity is considered to represent a distinct performance obligation that is satisfied at a point in time upon the transfer of control of the commodity.

For contracts with market or index-based pricing, which represent the majority of sales contracts, the Company has elected the allocation exception and allocates the variable consideration to each single performance obligation in the contract. As a result, there is no price allocation to unsatisfied remaining performance obligations for delivery of commodity product in subsequent periods.

The Company has entered into several long-term, fixed-price contracts in Canada. The underlying reason for entering a fixed price contract is generally unrelated to anticipated future prices or other observable data and serves a particular purpose in the company’s long-term strategy. The contractually stated price for each unit of commodity transferred under these contracts represents the stand-alone selling price of the commodity.

As of March 31, 2019, the Company had the following sales contracts in place which are expected to generate revenue from sales to customers for a period of 12 months or more starting at the inception of the contract:







 

 

 

 

 

 

 

 

Current Long-Term Contracts Outstanding at March 31, 2019

Location

 

Commodity

 

End Date

 

Description

 

Approximate Volumes

U.S.

 

Oil

 

Q3 2019

 

Fixed quantity delivery in Eagle Ford

 

4,000 BOED

U.S.

 

Oil

 

Q4 2021

 

Fixed quantity delivery in Eagle Ford

 

17,000 BOED

U.S.

 

Oil, Gas and NGL

 

Q2 2026

 

Deliveries from dedicated acreage in
   Eagle Ford

 

As produced

Canada

 

Gas

 

Q4 2020

 

Contracts to sell natural gas
at Alberta AECO fixed prices

 

59 MMCFD

Canada

 

Gas

 

Q4 2020

 

Contracts to sell natural gas at USD Index
pricing

 

60 MMCFD

Canada

 

Gas

 

Q4 2024

 

Contracts to sell natural gas at USD Index
pricing

 

30 MMCFD

Canada

 

Gas

 

Q4 2026

 

Contracts to sell natural gas at USD Index
pricing

 

38 MMCFD



 

 

 

 

 

 

 

 





Fixed price contracts are accounted for as normal sales and purchases for accounting purposes.









10


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note D – Property, Plant and Equipment

Exploratory Wells

Under FASB guidance exploratory well costs should continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.

At March 31, 2019, the Company had total capitalized exploratory well costs for continuing operations pending the determination of proved reserves of $227.1 million.  The following table reflects the net changes in capitalized exploratory well costs during the three-month periods ended March 31, 2019 and 2018.





 

 

 

 

 



 

 

 

 

 

(Thousands of dollars)

2019

 

 

2018

Beginning balance at January 1

$

207,855 

 

 

155,103 

Additions pending the determination of proved reserves

 

32,416 

 

 

549 

Capitalized exploratory well costs charged to expense

 

(13,145)

 

 

– 

Balance at March 31

$

227,126 

 

 

155,652 

The capitalized well costs charged to expense during the first three months of 2019 included the CM-1X and the CT-1X wells in Vietnam Block 11-2/11. The wells were originally drilled in 2017. There were no capitalized well costs charged to expense during the first three months of 2018.

The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed for each individual well and the number of projects for which exploratory well costs have been capitalized.  The projects are aged based on the last well drilled in the project.





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31,



2019

 

2018

(Thousands of dollars)

Amount

 

No. of Wells

 

No. of Projects

 

Amount

 

No. of Wells

 

No. of Projects

Aging of capitalized well costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Zero to one year

$

78,016 

 

 

 

$

13,642 

 

 

One to two years

 

– 

 

– 

 

– 

 

 

27,757 

 

 

Two to three years

 

27,270 

 

 

 

 

49,642 

 

 

Three years or more

 

121,840 

 

 

 

 

64,611 

 

 

– 



$

227,126 

 

 

 

$

155,652 

 

11 

 

Of the $149.1 million of exploratory well costs capitalized more than one year at March 31, 2019, $57.0 million is in Brunei, $64.9 million is in Vietnam, and $27.3 million is in the U.S.  In all geographical areas, either further appraisal or development drilling is planned and/or development studies/plans are in various stages of completion. 

Divestments

In 2016, a Canadian subsidiary of the Company completed a divestiture of natural gas processing and sales pipeline assets that support Murphy’s Montney natural gas fields in the Tupper area of northeastern British Columbia.  Total cash consideration received upon closing was $414.1 million.  A gain on sale of approximately $187.0 million was deferred, up to December 31, 2018, and was being recognized straight line over the life of the contract in the Canadian operating segment. The remaining deferred gain of $116 million, net of tax, was included as a component of Deferred credits and other liabilities in the Company’s Consolidated Balance Sheet as of December 31, 2018. As required by ASC 842, the previously deferred gain related to the sale and leaseback transaction have been transferred to equity upon adoption, lowering liabilities but increasing retained earnings by approximately $116 million, net of tax. The Company amortized approximately $1.9 million of the deferred gain during the first three months of 2018.



11


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note D – Property, Plant and Equipment (Contd.)

Acquisitions

In 2016, a Canadian subsidiary of Murphy Oil acquired a 70% operated working interest (WI) in Athabasca Oil Corporation’s (Athabasca) production, acreage, infrastructure and facilities in the Kaybob Duvernay lands, and a 30% non-operated WI in Athabasca’s production, acreage, infrastructure and facilities in the liquids rich Placid Montney lands in Alberta, the majority of which was unproved.  As part of the transaction, Murphy agreed to pay an additional $168.0 million in the form of a carried interest on the Kaybob Duvernay property.  As of March 31, 2019, $124.0 million of the carried interest had been paid.  The remaining carry is to be paid over a period through 2019.

Other

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 operators. The Gumusut-Kakap Unit is operated by another company.  In the fourth quarter 2016, the operators 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 tax) 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’ approval to the redetermination change that reduced the Company’s working interest in oil operations to 6.67% effective April 1, 2017.  Working interest redeterminations are required at different points within the life of the unitized field.  Following a partial payment, the remaining redetermination liability of $17.3 million was included as a component of Liabilities associated with held for sale in the Company’s Consolidated Balance Sheet as of March 31, 2019.

Following a further Unitization Framework Agreement (UFA) between the governments of Brunei and Malaysia, the Company now has a 6.37% interest in the Kakap field in Block K Malaysia.  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 liability of $15.0 million related to Company’s revised working interest, which was included as a component of Liabilities associated with held for sale in the Company’s Consolidated Balance Sheet as of March 31, 2019.



Note E – Discontinued Operations and Assets Held for Sale



On March 21, 2019, Murphy Oil Corporation announced that a subsidiary had signed a sale and purchase agreement to divest the fully issued share capital of its two primary Malaysian subsidiaries, Murphy Sabah Oil Co., Ltd. and Murphy Sarawak Oil Co., Ltd., to a subsidiary of PTT Exploration and Production Public Company Limited (PTTEP). PTTEP will pay Murphy $2.127 billion in an all-cash transaction, payable upon closing and subject to customary closing adjustments, plus up to a $100 million bonus payment contingent upon certain future exploratory drilling results prior to October 2020.



The transaction has an effective date of January 1, 2019, with the closing expected to occur by the end of the second quarter 2019. Closing of the transaction is subject to customary conditions precedent including, among other things, necessary regulatory approvals. Murphy will exit the country of Malaysia.



The Company has accounted for its Malaysian exploration and production operations, along with the former U.K., U.S. refining and marketing operations as discontinued operations for all periods presented.  The results of operations associated with discontinued operations for the three-month period ended March 31, 2019 and 2018 were as follows:





 

 

 

 

 



Three Months Ended

 



March 31,

 

(Thousands of dollars)

 

2019

 

2018

 

Revenues

$

195,412 

 

210,815 

 

Costs and expenses

 

 

 

 

 

     Lease operating expenses

 

62,716 

 

47,610 

 

     Depreciation, depletion and amortization

 

31,353 

 

47,991 

 

     Other costs and expenses (benefits)

 

13,080 

 

(2,451)

 

Total costs and expenses

 

88,263 

 

117,665 

 

Income tax expense

 

38,417 

 

39,993 

 

Income from discontinued operations

$

49,846 

 

77,672 

 



12


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note E – Discontinued Operations and Assets Held for Sale (Contd.)

The following table presents the carrying value of the major categories of assets and liabilities of the Malaysian exploration and production and the U.K. refining and marketing operations reflected as held for sale on the Company’s Consolidated Balance Sheets at March 31, 2019 and December 31, 2018.



 

 

 

 



 

 

 

 



 

March 31,

 

December 31,

(Thousands of dollars)

 

2019

 

2018

Current assets

 

 

 

 

Cash

$

93,072 

 

44,669 

Accounts receivable

 

98,268 

 

103,158 

Inventories

 

8,881 

 

7,887 

Prepaid expenses and other

 

28,248 

 

18,151 

Property, Plant, and Equipment, net

 

1,316,985 

 

 

Deferred income taxes and other assets

 

214,103 

 

 

Operating lease asset

 

120,011 

 

 

Total current assets associated with assets held for sale

 

1,879,568 

 

173,865 

Non-current assets

 

 

 

 

Property, Plant, and Equipment, net

 

– 

 

1,325,431 

Deferred income taxes and other assets

 

– 

 

219,577 

Operating lease asset

 

– 

 

– 

Total non-current assets associated with assets held for sale

$

– 

 

1,545,008 

Current liabilities

 

 

 

 

Accounts payable

$

209,012 

 

203,236 

Other accrued liabilities

 

50,524 

 

55,273 

Current maturities of long-term debt

 

10,067 

 

9,915 

Taxes payable

 

35,032 

 

18,034 

Current operating lease liabilities

 

45,982 

 

– 

Long-term debt

 

115,264 

 

 

Asset retirement obligation

 

279,784 

 

– 

Non-current operating lease liabilities

 

74,029 

 

 –

Total current liabilities associated with assets held for sale

$

819,694 

 

286,458 

Non-current liabilities

 

 

 

 

Long-term debt

 

– 

 

117,816 

Asset retirement obligation

 

– 

 

274,904 

Total non-current liabilities associated with assets held for sale

$

– 

 

392,720 









Note F – Financing Arrangements and Debt

As of March 31, 2019, the Company has a $1.6 billion revolving credit facility (2018 facility). The 2018 facility is a senior unsecured guaranteed facility which expires in November 2023. At March 31, 2019, the Company had outstanding borrowings of $325.0 million under the 2018 facility and $25.0 million of outstanding letters of credit, which reduce the borrowing capacity of the 2018 facility. At March 31, 2019, the interest rate in effect on borrowings under the facility was 4.105%. At March 31, 2019, the Company was in compliance with all covenants related to the 2018 facility.





13


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note G – Other Financial Information

Additional disclosures regarding cash flow activities are provided below.





 

 

 

 

 



Three Months Ended March 31,

 

(Thousands of dollars)

2019

 

2018

 

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

 

 

 

 

 

(Increase) decrease in accounts receivable

$

(112,673)

 

4,227 

 

Decrease in inventories

 

3,930 

 

15,637 

 

(Increase) decrease in prepaid expenses

 

(10,763)

 

3,446 

 

Increase (decrease) in accounts payable and accrued liabilities

 

21,131 

 

(26,908)

 

Increase(decrease) in income taxes payable

 

(130)

 

45 

 

Net (increase) decrease in noncash operating working capital

$

(98,505)

 

(3,553)

 

Supplementary disclosures:

 

 

 

 

 

Cash income taxes paid, net of refunds

$

– 

 

(1,104)

 

Interest paid, net of amounts capitalized of $0 in 2019
and 2018

 

39,024 

 

35,158 

 



 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Asset retirement costs capitalized

$

486 

 

727 

 

(Increase) decrease in capital expenditure accrual

 

(63,328)

 

(17,592)

 



 

 

 

 

 





Note H – Employee and Retiree Benefit Plans

The Company has defined benefit pension plans that are principally noncontributory and cover most full-time employees.  All pension plans are funded except for the U.S. and Canadian nonqualified supplemental plan and the U.S. director’s plan.  All U.S. tax qualified plans meet the funding requirements of federal laws and regulations.  Contributions to foreign plans are based on local laws and tax regulations.  The Company also sponsors health care and life insurance benefit plans, which are not funded, that cover most retired U.S. employees.  The health care benefits are contributory; the life insurance benefits are noncontributory.

The table that follows provides the components of net periodic benefit expense for the three-month periods ended March 31, 2019 and 2018.







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



Pension Benefits

 

Other Postretirement Benefits

(Thousands of dollars)

 

2019

 

 

2018

 

2019

 

2018

Service cost

$

2,062 

 

 

2,255 

 

 

420 

 

 

494 

Interest cost

 

7,151 

 

 

6,737 

 

 

945 

 

 

874 

Expected return on plan assets

 

(6,460)

 

 

(7,506)

 

 

– 

 

 

– 

Amortization of prior service cost (credit)

 

247 

 

 

257 

 

 

(98)

 

 

(10)

Recognized actuarial loss

 

3,514 

 

 

5,215 

 

 

– 

 

 

– 

Net periodic benefit expense

$

6,514 

 

 

6,958 

 

 

1,267 

 

 

1,358 



 

 

 

 

 

 

 

 

 

 

 

The components of net periodic benefit expense other than the service cost component are included in the line item “Interest and other income (loss)” in Consolidated Statements of Operations.

During the three-month period ended March 31, 2019, the Company made contributions of $6.9 million to its defined benefit pension and postretirement benefit plans.  Remaining funding in 2019 for the Company’s defined benefit pension and postretirement plans is anticipated to be $25.6 million. 

14


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note I – Incentive Plans

The costs resulting from all share-based and cash-based incentive plans payment transactions are recognized as an expense in the Consolidated Statements of Operations using a fair value-based measurement method over the periods that the awards vest.

The 2017 Annual Incentive Plan (2017 Annual Plan) authorizes the Executive Compensation Committee (the Committee) to establish specific performance goals associated with annual cash awards that may be earned by officers, executives and certain other employees.  Cash awards under the 2017 Annual Plan are determined based on the Company’s actual financial and operating results as measured against the performance goals established by the Committee. 

The 2018 Long-Term Incentive Plan (2018 Long-Term Plan) authorizes the Committee to make grants of the Company’s Common Stock to employees.  These grants may be in the form of stock options (nonqualified or incentive), stock appreciation rights (SAR), restricted stock, restricted stock units (RSU), performance units, performance shares, dividend equivalents and other stock-based incentives.  The 2018 Long-Term Plan expires in 2028.  A total of 6,750,000 shares are issuable during the life of the 2018 Long-Term Plan, with annual grants limited to 1% of Common shares outstanding; allowed shares not granted in an earlier year may be granted in future years. 

The Company also has a Stock Plan for Non-Employee Directors that permits the issuance of restricted stock, restricted stock units and stock options or a combination thereof to the Company’s Non-Employee Directors.

In the first quarter of 2019, the Committee granted 957,600 performance-based RSUs and 327,900 time-based RSUs to certain employees.  The fair value of the performance-based RSUs, using a Monte Carlo valuation model, was $28.09 per unit.  The fair value of the time-based RSUs was estimated based on the fair market value of the Company’s stock on the date of grant.  The fair value of the time-based RSUs granted was $28.16 per unit.  Additionally, in February 2019, the Committee granted 1,025,900 cash-settled RSUs (CRSU) to certain employees.  The CRSUs are to be settled in cash, net of applicable income taxes, and are accounted for as liability-type awards.  The initial fair value of the CRSUs granted in February 2019 was $28.16.  Also in February, the Committee granted 78,716 shares of time-based RSUs to the Company’s non-employee Directors under the 2018 Stock Plan for Non-Employee Directors.  These units are scheduled to vest on the third anniversary of the date of grant. The estimated fair value of these awards was $27.95 per unit on date of grant.

All stock option exercises are non-cash transactions for the Company.  The employee receives net shares, after applicable withholding taxes, upon each stock option exercise. The actual income tax benefit realized from the tax deductions related to stock option exercises of the share-based payment arrangements were immaterial for the three-month period ended March 31, 2019.

Amounts recognized in the financial statements with respect to share-based plans are shown in the following table:







 

 

 

 



 

 

 

 



Three Months Ended



March 31,

(Thousands of dollars)

 

2019

 

2018

Compensation charged against income before tax benefit

$

15,514 

 

7,549 

Related income tax benefit recognized in income

 

2,342 

 

894 

Certain incentive compensation granted to the Company’s named executive officers, to the extent their total compensation exceeds $1.0 million per executive per year, is not eligible for a U.S. income tax deduction under the Tax Cuts and Jobs Act (2017 Tax Act).



15


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note J – Earnings per Share

Net income attributable to Murphy was used as the numerator in computing both basic and diluted income per Common share for the three-month periods ended March 31, 2019 and 2018.  The following table reconciles the weighted-average shares outstanding used for these computations.





 

 

 



 

 

 



Three Months Ended



March 31,

(Weighted-average shares)

2019

 

2018

Basic method

173,341,304 

 

172,805,065 

Dilutive stock options and restricted stock units

1,150,039 

 

1,814,459 

   Diluted method

174,491,343 

 

174,619,524 



The following table reflects certain options to purchase shares of common stock that were outstanding during the periods presented but were not included in the computation of diluted shares above because the incremental shares from the assumed conversion were antidilutive.



 

 

 

 

 



 

 

 

 

 



Three Months Ended



 

March 31,



 

2019

 

2018

Antidilutive stock options excluded from diluted shares

 

3,140,065 

 

 

3,798,792 

Weighted average price of these options

$

46.18 

 

$

50.77 





 

Note K – Income Taxes

The Company’s effective income tax rate is calculated as the amount of income tax expense (benefit) divided by income from continuing operations before income taxes.  For the three-month periods ended March 31, 2019 and 2018, the Company’s effective income tax rates were as follows:



 

 

 



2019

 

2018

Three months ended March 31

32.1%

 

530.2%

The effective tax rates for most periods where earnings are generated, generally exceed the U.S. statutory tax rate due to several factors, including:  the effects of income generated in foreign tax jurisdictions, certain of which have income tax rates that are higher than the U.S. Federal rate; U.S. state tax expense; and certain expenses, including exploration and other expenses in certain foreign jurisdictions, for which no income tax benefits are available or are not presently being recorded due to a lack of reasonable certainty of adequate future revenue against which to utilize these expenses as deductions.  Conversely, the effective tax rates for most periods where losses are incurred generally are lower than U.S. statutory tax rate of 21% due to similar reasons. 

The effective tax rate for the three-month period ended March 31, 2019 was above the U.S. statutory tax rate of 21% primarily due to exploration expenses in certain foreign jurisdictions in which no income tax benefit is available.  These impacts were partially offset by no tax applied to the pre-tax income of the noncontrolling interest in MP GOM.

The effective tax rate for the three-month period ended March 31, 2018 was above the statutory tax rate primarily due to the impact of the IRS’s April 2, 2018 guidance allowing for the preservation of 2017 operating loss carryforwards under the 2017 Tax Act’s taxation of unrepatriated foreign earnings.  The preservation of the tax loss carryforward reduced the deferred tax expense by $156 million and resulted in a $36 million charge to taxes payable for a net $120 million tax benefit.

The Company’s tax returns in multiple jurisdictions are subject to audit by taxing authorities.  These audits often take multiple years to complete and settle.  Although the Company believes that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future years from resolution of outstanding unsettled matters.  As of March 31, 2019, the earliest years remaining open for audit and/or settlement in our major taxing jurisdictions are as follows: United States – 2015; Canada – 2013; Malaysia – 2012; and United Kingdom – 2017.





16


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note L – Financial Instruments and Risk Management

Murphy uses derivative instruments to manage certain risks related to commodity prices, foreign currency exchange rates and interest rates.  The use of derivative instruments for risk management is covered by operating policies and is closely monitored by the Company’s senior management.  The Company does not hold any derivatives for speculative purposes and it does not use derivatives with leveraged or complex features.  Derivative instruments are traded with creditworthy major financial institutions or over national exchanges such as the New York Mercantile Exchange (NYMEX).  The Company has a risk management control system to monitor commodity price risks and any derivatives obtained to manage a portion of such risks.  For accounting purposes, the Company has not designated commodity and foreign currency derivative contracts as hedges, and therefore, it recognizes all gains and losses on these derivative contracts in its Consolidated Statements of Operations.  Certain interest rate derivative contracts were accounted for as hedges and the gain or loss associated with recording the fair value of these contracts was deferred in Accumulated other comprehensive loss until the anticipated transactions occur.

Commodity Price Risks

At March 31, 2019, the Company had no WTI crude oil swap financial contracts outstanding.

At March 31, 2018, the Company had 21,000 barrels per day in WTI crude oil swap financial contracts maturing ratably during the remainder of 2018 at an average price of $54.88Under this contract, which matured monthly, the Company paid the average monthly price in effect and received the fixed contract prices.



Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S. The Company had no foreign currency exchange short-term derivatives outstanding at March 31, 2019 and 2018.

At March 31, 2019 and December 31, 2018, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

March 31, 2019

 

December 31, 2018

(Thousands of dollars)

 

Asset (Liability) Derivatives

 

Asset (Liability) Derivatives

Type of Derivative Contract

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

Commodity

 

Accounts payable

 

$

– 

 

Accounts receivable

 

$

3,837 

For the three-month period ended March 31, 2019 and March 31, 2018 the gains and losses recognized in the Consolidated Statements of Operations for derivative instruments not designated as hedging instruments are presented in the following table.







 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Gain (Loss)



 

 

 

Three Months Ended

(Thousands of dollars)

 

 

 

March 31,

Type of Derivative Contract

 

Statement of Operations Location

 

 

2019

 

2018

Commodity

 

Gain (loss) on crude contracts

 

$

– 

 

(29,502)

Interest Rate Risks

Under hedge accounting rules, the Company deferred the net cost associated with derivative contracts purchased to manage interest rate risk associated with 10-year notes sold in May 2012 to match the payment of interest on these notes through 2022.  During each of the three-month periods ended March 31, 2019 and 2018, $0.7 million of the deferred loss on the interest rate swaps was charged to Interest expense in the Consolidated Statement of Operations.  The remaining loss (net of tax) deferred on these matured contracts at March 31, 2019 was $7.3 million, which is recorded, net of income taxes of $1.9 million, in Accumulated other comprehensive loss in the Consolidated Balance Sheet.  The Company expects to charge approximately $2.2 million of this deferred loss to Interest expense, net in the Consolidated Statement of Operations during the remaining nine months of 2019.

Fair Values – Recurring

The Company carries certain assets and liabilities at fair value in its Consolidated Balance Sheets.  The fair value hierarchy is based on the quality of inputs used to measure fair value, with Level 1 being the highest quality and Level 3 being the lowest quality.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are observable inputs other than quoted prices included within Level 1.  Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.

17


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

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

Fair Values – Recurring (Contd.)

The carrying value of assets and liabilities recorded at fair value on a recurring basis at March 31, 2019 and December 31, 2018 are presented in the following table.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2019

 

December 31, 2018

(Thousands of dollars)

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Commodity derivative contracts

$

– 

 

– 

 

– 

 

– 

 

– 

 

 

3,837 

 

– 

 

3,837 



$

– 

 

– 

 

– 

 

– 

 

– 

 

 

3,837 

 

– 

 

3,837 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Nonqualified employee
        savings plans

$

15,436 

 

– 

 

– 

 

15,436 

 

13,845 

 

 

– 

 

– 

 

13,845 

    Contingent consideration

 

– 

 

– 

 

61,260 

 

61,260 

 

– 

 

 

– 

 

47,730 

 

47,730 



$

15,436 

 

– 

 

61,260 

 

76,696 

 

13,845 

 

 

– 

 

47,730 

 

61,575 

The fair value of WTI crude oil derivative contracts in 2018 were based on active market quotes for WTI crude oil.  The fair value of foreign exchange derivative contracts in each year was based on market quotes for similar contracts at the balance sheet dates.  The income effect of changes in the fair value of crude oil derivative contracts is recorded in Gain (loss) on crude contracts in the Consolidated Statements of Operations, while the effects of changes in fair value of foreign exchange derivative contracts is recorded in Interest and other income.  The nonqualified employee savings plan is an unfunded savings plan through which participants seek a return via phantom investments in equity securities and/or mutual funds.  The fair value of this liability was based on quoted prices for these equity securities and mutual funds.  The income effect of changes in the fair value of the nonqualified employee savings plan is recorded in Selling and general expenses in the Consolidated Statements of Operations. 



The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists.  There were no offsetting positions recorded at March 31, 2019 and December 31, 2018.



Subsequent to the balance sheet date, the Company has entered into derivative instruments to manage certain risks related to commodity prices.



Note M – Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss on the Consolidated Balance Sheets at December 31, 2018 and March 31, 2019 and the changes during the three-month period ended March 31, 2019 are presented net of taxes in the following table.



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

 

 

 

Deferred

 

 



 

 

 

Retirement

 

Loss on

 

 



 

Foreign

 

and

 

Interest

 

 



 

Currency

 

Postretirement

 

Rate

 

 



 

Translation

 

Benefit Plan

 

Derivative

 

 

(Thousands of dollars)

 

Gains (Losses)

 

Adjustments

 

Hedges

 

Total

Balance at December 31, 2018

$

(419,852)

 

(182,036)

 

(7,899)

 

(609,787)

2019 components of other comprehensive income (loss):

 

 

 

 

 

 

 

 

Before reclassifications to income and retained earnings

 

25,449 

 

– 

 

– 

 

25,449 

Reclassifications to income

 

– 

 

2,754 

1

585 

2

3,339 

Net other comprehensive loss

 

25,449 

 

2,754 

 

585 

 

28,788 

Balance at March 31, 2019

$

(394,403)

 

(179,282)

 

(7,314)

 

(580,999)

1 Reclassifications before taxes of $3,530 are included in the computation of net periodic benefit expense for the three-month period ended March 31, 2019.  See Note H for additional information.  Related income taxes of $776 are included in Income tax expense (benefit) for the three-month period ended March 31, 2019.

2 Reclassifications before taxes of $741 are included in Interest expense, net, for the three-month period ended March 31, 2019.  Related income taxes of $156 are included in Income tax expense (benefit) for the three-month period ended March 31, 2019.  See Note L for additional information.



18


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)

 

Note N – Environmental and Other Contingencies

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

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

The Company currently owns or leases, and has in the past owned or leased, properties at which hazardous substances have been or are being handled.  Although the Company has used operating and disposal practices that were standard in the industry at the time, hazardous substances may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where these wastes have been taken for disposal.  In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes were not under Murphy’s control.  Under existing laws the Company could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination.  Certain of these historical properties are in various stages of negotiation, investigation, and/or cleanup and the Company is investigating the extent of any such liability and the availability of applicable defenses.  The Company has retained certain liabilities related to environmental matters at formerly owned U.S. refineries that were sold in 2011.  The Company also obtained insurance covering certain levels of environmental exposures related to past operations of these refineries.  The Company has not retained any environmental exposure associated with Murphy’s former U.S. marketing operations.  The Company believes costs related to these sites will not have a material adverse effect on Murphy’s net income, financial condition or liquidity in a future period.

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

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











19


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)