Financial Instruments and Risk Management

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

Note L – Financial Instruments and Risk Management

DERIVATIVE INSTRUMENTS – 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 AOCL and amortized to Interest expense over time. In 2021, the Company redeemed all of the remaining notes due 2022, which were associated with the interest rate derivative contracts, 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 December 31, 2021, volumes per day associated with outstanding crude oil derivative contracts and the weighted average prices for these contracts are as follows:

	2022
NYMEX WTI swap contracts:
Volume per day (Bbl):	20,000
Price per Bbl:	$	44.88
NYMEX WTI collar contracts:
Volume per day (Bbl):	25,000
Price per Bbl:
Average Ceiling:	$	75.20
Average Floor:	63.24

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 derivative instruments outstanding as of December 31, 2021 and 2020.  

At December 31, 2021 and 2020, the fair value of derivative instruments not designated as hedging instruments are presented in the following table. See also Note P.  

(Thousands of dollars)	Asset (Liability) Derivatives Fair Value at December 31,
Type of Derivative Contract	Balance Sheet Location	2021		2020
Commodity swaps	Accounts receivable	$	—	13,050
	Accounts payable	(239,882)		(89,842)
	Deferred credits and other liabilities	—		(12,833)
Commodity collars	Accounts receivable	4,280		—
	Accounts payable	(19,533)		—

For the years ended December 31, 2021, 2020, and 2019, 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)
(Thousands of dollars)		Year Ended December 31,
Type of Derivative Contract	Statement of Operations Locations	2021		2020	2019
Commodity swaps	(Loss) gain on derivative instruments	$	(510,596)	202,661	(856)
Commodity collars	(Loss) gain on derivative instruments	(15,254)		—	—

Credit Risks

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