Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

Note L – Financial Instruments and Risk Management

Murphy uses derivative instruments, such as swaps and zero-cost commodity price collar contracts, 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 previously 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 and amortized to the income statement over time. During the nine-month period ended September 30, 2021, the Company redeemed all of the remaining notes due 2022 and expensed the remainder of the previously deferred loss on the interest rate swap of $2.1 million to Interest expense in the Consolidated Statement of Operations.

Commodity Price Risks

The Company has entered into crude oil swaps and collar contracts. Under the swaps contracts, which mature monthly, the Company pays the average monthly price in effect and receives the fixed contract price on a notional amount of sales volume, thereby fixing the price for the commodity sold. Under the collar contracts, which also mature monthly, the Company purchased a put option and sold a call option with no net premiums paid to or received from counterparties. Upon maturity, collar contracts require payments by the Company if the NYMEX average closing price is above the ceiling price or payments to the Company if the NYMEX average closing price is below the floor price.

At September 30, 2021, volumes per day associated with outstanding crude oil derivative contracts and the weighted average prices for these contracts are as follows:

	September 30, 2021
	2021		2022
NYMEX WTI swap contracts:
Volume per day (Bbl):	45,000		20,000
Price per Bbl:	$	42.77	$	44.88
NYMEX WTI collar contracts:
Volume per day (Bbl):	—		16,000
Price per Bbl:
Ceiling:	$	—	$	71.83
Floor:	—		60.38

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 derivatives outstanding at September 30, 2021 and 2020.

At September 30, 2021 and December 31, 2020, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

	September 30, 2021			December 31, 2020
(Thousands of dollars)	Asset (Liability) Derivatives			Asset (Liability) Derivatives
Type of Derivative Contract	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity swaps	Accounts receivable	$	—	Accounts receivable	13,050
	Accounts payable	(312,448)		Accounts payable	(89,842)
	Deferred credits and other liabilities	(41,645)		Deferred credits and other liabilities	(12,833)
Commodity collars	Accounts receivable	—		Accounts receivable	—
	Accounts payable	(15,929)		Accounts payable	—

For the three-month and nine-month periods ended September 30, 2021 and 2020, 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)			Gain (Loss)
(Thousands of dollars)	Statement of Operations Location	Three Months Ended September 30,			Nine months ended September 30,
Type of Derivative Contract		2021		2020	2021	2020
Commodity swaps	(Loss) gain on derivative instruments	$	(43,235)	(5,290)	(483,865)	319,502
Commodity collars	(Loss) gain on derivative instruments	(15,929)		—	(15,929)	—

Fair Values – Recurring

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

The carrying value of assets and liabilities recorded at fair value on a recurring basis at September 30, 2021 and December 31, 2020, are presented in the following table.

	September 30, 2021					December 31, 2020
(Thousands of dollars)	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets:
Commodity swaps	$	—	—	—	—	—	13,050	—	13,050
	$	—	—	—	—	—	13,050	—	13,050
Liabilities:
Commodity collars	$	—	15,929	—	15,929	—	—	—	—
Nonqualified employee savings plan	17,180		—	—	17,180	14,988	—	—	14,988
Commodity swaps	—		354,093	—	354,093	—	102,675	—	102,675
Contingent consideration	—		—	238,115	238,115	—	—	133,004	133,004
	$	17,180	370,022	238,115	625,317	14,988	102,675	133,004	250,667

The fair value of commodity (WTI crude oil) derivative contracts in 2021 and 2020 were based on active market quotes for WTI crude oil.  The before tax income effect of changes in the fair value of crude oil derivative contracts is recorded in Gain (loss) on derivative instruments in the Consolidated Statements of Operations. 

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 contingent consideration, related to two acquisitions in 2019 and 2018, is valued using a Monte Carlo simulation model. The income effect of changes in the fair value of the contingent consideration is recorded in Other expense (benefit) in the Consolidated Statements of Operations. Contingent consideration is payable annually in years 2022 to 2026.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 September 30, 2021 and December 31, 2020.