Financial Instruments and Derivatives

3 Months Ended

Mar. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Financial Instruments and Derivatives

Note K – Financial Instruments and Derivatives

Murphy periodically utilizes 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 primarily with creditworthy major financial institutions or over national exchanges. 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 Income. 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 Income until the anticipated transactions occur.

Commodity Purchase Price Risks

The Company is subject to commodity price risk related to corn that it will purchase in the future for feedstock and to wet and dried distillers grain with solubles that it will sell in the future at its ethanol production facilities in the United States. At March 31, 2013 and 2012, the Company had open physical delivery commitment contracts for purchase of approximately 18.7 million and 11.7 million bushels of corn, respectively, for processing at its ethanol plants. For both periods ending March 31, 2013 and 2012, the Company had open physical delivery commitment contracts for sale of approximately 0.9 million equivalent bushels of wet and dried distillers grain with solubles. To manage the price risk associated with certain of these physical delivery commitments which have fixed prices, at March 31, 2013 and 2012, the Company had outstanding derivative contracts with a net volume of approximately 6.0 million and 11.7 million bushels, respectively, that mature at future prices in effect on the expected date of delivery under the physical delivery commitment contracts. Additionally, at March 31, 2013, the Company had outstanding derivative contracts to sell 2.1 million bushels of corn and buy them back when certain corn inventories are expected to be processed at the Hankinson, North Dakota, and Hereford, Texas facilities. The impact of marking to market these commodity derivative contracts reduced income before taxes by $0.6 million and $0.1 million for the three months ended March 31, 2013 and 2012, respectively.

Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the United States. Short-term derivative instruments were outstanding at March 31, 2013 and 2012 to manage the risk of certain future income taxes that are payable in Malaysian ringgits. The equivalent U.S. dollars of Malaysian ringgit derivative contracts open at March 31, 2013 and 2012 were approximately $274.0 million and $373.6 million, respectively. Short-term derivative instrument contracts totaling $20.0 million and $46.0 million U.S. dollars were also outstanding at March 31, 2013 and 2012, respectively, to manage the risk of certain U.S. dollar accounts receivable associated with sale of crude oil production in Canada. The impact from marking to market these foreign currency derivative contracts reduced income before taxes by $2.7 million for the three-month period ended March 31, 2013 and increased income before taxes by $6.6 million for the three-month period ended March 31, 2012.

At March 31, 2013 and December 31, 2012, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

	March 31, 2013				December 31, 2012
(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 receivable	$	2,158		Accounts receivable	$	3,043
Commodity	Accounts payable		(2,805	)	Accounts payable		(102	)
Foreign currency	Accounts payable		(2,718	)	Accounts payable		(1,031	)

For the three-month periods ended March 31, 2013 and 2012, the gains and losses recognized in the Consolidated Statements of Income for derivative instruments not designated as hedging instruments are presented in the following table.

		Gain (Loss)
(Thousands of dollars) Type of Derivative Contract	Statement of Income Location	Three Months Ended March 31,
		2013			2012
Commodity	Crude oil and product purchases	$	(4,210	)		645
Foreign currency	Interest and other income (loss)		(2,818	)		17,515
		$	(7,028	)		18,160

Interest Rate Risks

The Company had ten-year notes totaling $350 million that matured on May 1, 2012. The Company expected to replace these notes at maturity with new ten-year notes, and it therefore had risk associated with the interest rate related to the anticipated sale of these notes in 2012. To manage this risk, in 2011 the Company entered into a series of derivative contracts known as forward starting interest rate swaps that matured in May 2012. The Company utilized hedge accounting to defer any gain or loss on these contracts associated with the payment of interest on these anticipated notes in 2012 through 2022. During the three-month period ended March 31, 2013, $0.7 million of the deferred loss on the interest rate swaps was charged to income. The remaining loss deferred on these matured contracts at March 31, 2013 was $17.6 million, which is recorded, net of income taxes, in Accumulated Other Comprehensive Income in the Consolidated Balance Sheet. The Company expects to charge approximately $2.2 million of this deferred loss to income in the form of interest expense during the remaining nine months of 2013. There was no impact in the Consolidated Statement of Income during the three-month period ended March 31, 2012 related to these interest rate derivative contracts.

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 March 31, 2013 and December 31, 2012 are presented in the following table.

	March 31, 2013											December 31, 2012
(Thousands of dollars)	Level 1			Level 2			Level 3		Total			Level 1			Level 2			Level 3		Total
Assets
Commodity derivative contracts	$	0			2,158			0		2,158			0			3,043			0		3,043
Liabilities
Nonqualified employee savings plans	$	(10,816	)		0			0		(10,816	)		(10,293	)		0			0		(10,293	)
Foreign currency exchange derivative contracts		0			(2,718	)		0		(2,718	)		0			(1,031	)		0		(1,031	)
Commodity derivative contracts		0			(2,805	)		0		(2,805	)		0			(102	)		0		(102	)
	$	(10,816	)		(5,523	)		0		(16,339	)		(10,293	)		(1,133	)		0		(11,426	)

The fair value of commodity derivative contracts for corn and wet and dried distillers grain was determined based on market quotes for No. 2 yellow corn. The fair value of foreign exchange derivative contracts was based on market quotes for similar contracts at the balance sheet date. The income effect of changes in fair value of commodity derivative contracts is recorded in Crude Oil and Product Purchases in the Consolidated Statements of Income and 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.

The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists. Derivative assets and liabilities which have offsetting positions at March 31, 2013 and December 31, 2012 are presented in the following tables.

	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet			Net Amounts of Assets Presented in the Consolidated Balance Sheet
(Thousands of dollars) At March 31, 2013
Commodity derivatives	$	1,528		(936	)		592
At December 31, 2012
Commodity derivatives	$	1,383		(441	)		942
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet			Net Amounts of Liabilities Presented in the Consolidated Balance Sheet
(Thousands of dollars)
At March 31, 2013
Commodity derivatives	$	325		(43	)		282
At December 31, 2012
Commodity derivatives	$	1,830		(1,728	)		102

All commodity derivatives above are corn-based contracts associated with the Company’s two U.S. ethanol plants. Net derivative assets in the table above are included in Accounts Receivable presented in the table on the prior page and are included in Accounts Receivable on the Consolidated Balance Sheet; likewise, net derivative liabilities in the above table are included in Accounts Payable in the table on the prior page and are included in Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet. Separate derivative agreements exist for each of the ethanol plants and at March 31, 2013 one plant has a net receivable and the other has a net payable for derivative contracts. These contracts permit net settlement and the Company generally avails itself of this right to settle net. At March 31, 2013 cash deposits of $11.6 million related to commodity derivative contracts were reported in Prepaid Expenses in the Consolidated Balance Sheet. These cash deposits have not been used to reduce the reported net liabilities on the corn-based derivative contracts at March 31, 2013.