Murphy Oil Corporation announced its financial and operating results for the third quarter ended September 30, 2022, including net income attributable to Murphy of $528 million, or $3.36 per diluted share. Excluding discontinued operations and other one-off items, adjusted net income was $290 million, or $1.84 per diluted share.
Unless otherwise noted, the financial and operating highlights and metrics discussed in this commentary exclude noncontrolling interest (NCI).1
THIRD QUARTER HIGHLIGHTS:
- Exceeded upper end of guidance range with production of 188.5 thousand barrels of oil equivalent per day (MBOEPD), with more than 96 thousand barrels of oil per day (MBOPD)
- Continued producing above expectations from the Khaleesi, Mormont, Samurai field development project in the Gulf of Mexico while achieving industry-leading uptime of 96 percent at the operated King’s Quay floating production system (FPS)
- Reduced long-term debt by $248 million and increased dividend to $1.00 per share annualized, in accordance with the previously announced capital allocation framework
SUBSEQUENT TO QUARTER-END HIGHLIGHTS:
- Commenced production from the sixth well in the Khaleesi, Mormont, Samurai field development project in the Gulf of Mexico, with combined gross production of 120 MBOEPD. Completion work continues on the remaining well in the initial seven-well program
- Added Samurai #5 well to the fourth quarter operated Gulf of Mexico drilling program, as a result of the previously announced discovery of additional pay zones in the field
- Announced the redemption of $200 million of 5.75 percent senior notes due 2025, which when completed will achieve the top-end 2022 debt reduction goal of $650 million
“I am very pleased with our outstanding performance this quarter, which led to exceptional financial results, and we continue to focus on our key priorities of Delever, Execute and Explore. We are on track to achieve our 2022 debt reduction goal by the end of the year, and since establishing our delevering priority two years ago, will have repaid $1.0 billion of senior notes. After announcing our capital allocation framework in the previous quarter, we have made great progress as we position the company for the second stage of our framework, known as Murphy 2.0, in 2023 which allows for additional shareholder returns. Our financial success was primarily due to our high-margin, oil-weighted portfolio in the Gulf of Mexico and Eagle Ford Shale,” said Roger W. Jenkins, President and Chief Executive Officer. “In exploration, we are excited about our upcoming operated drilling program as we prepare to spud two wells later this month: Tulum in offshore Mexico and Oso in the Gulf of Mexico.”
THIRD QUARTER 2022 RESULTS
The company recorded net income attributable to Murphy of $528 million, or $3.36 per diluted share, for the third quarter 2022. Adjusted net income, which excludes both the results of discontinued operations and certain other items that affect comparability of results between periods, was $290 million, or $1.84 per diluted share for the same period. The adjusted net income from continuing operations adjusts for the following after-tax items: $189 million non-cash mark-to-market gain on derivative instruments, $25 million non-cash mark-to-market gain on contingent consideration and $26 million of other items. Details for third quarter results can be found in the attached schedules.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) attributable to Murphy was $637 million, or $36.35 per barrel of oil equivalent (BOE) sold. Adjusted earnings before interest, tax, depreciation, amortization and exploration expenses (EBITDAX) attributable to Murphy was $647 million, or $36.90 per BOE sold. Details for third quarter EBITDA and EBITDAX reconciliations can be found in the attached schedules.
Production for the third quarter averaged 188.5 MBOEPD with 51 percent oil and 57 percent liquids. Production was above the top end of guidance due to several factors, including a less active Gulf of Mexico hurricane season and strong well performance in the Eagle Ford Shale, which more than offset 3 MBOEPD of price-related royalty impacts in the Tupper Montney. Details for third quarter production results can be found in the attached schedules.
Murphy had approximately $2.0 billion of liquidity as of September 30, 2022, comprised of the $1.6 billion undrawn senior unsecured credit facility and $466 million of cash and cash equivalents, inclusive of NCI.
As established in Murphy 1.0 of the capital allocation framework, Murphy executed $248 million of debt reduction transactions during the quarter through the redemption of the remaining $42 million of senior notes due 2024, as well as the aggregate tender of $198 million of senior notes due 2025 and 2028, and open market repurchases of $8 million of senior notes due 2042.
As of September 30, 2022, the company’s total debt of $2.0 billion consisted of long-term, fixed-rate notes with a weighted average maturity of 7.5 years and a weighted average coupon of 6.1 percent.
Subsequent to quarter end, Murphy announced the redemption of $200 million of 5.75 percent senior notes due 2025, to occur on November 30, 2022.
“By the end of this year, we will have reduced our total debt to approximately $1.8 billion,” stated Jenkins. “Upon reaching this goal, we can begin Murphy 2.0 of our capital allocation framework in 2023, allowing us to allocate 25 percent of adjusted free cash flow2 to shareholder returns through share repurchases and dividend increases.”
The onshore business produced approximately 110 MBOEPD in the third quarter of 2022, including 36 percent liquids volumes.
Eagle Ford Shale – Murphy produced an average 39 MBOEPD in the third quarter with 73 percent oil volumes and 87 percent liquids volumes. The company executed its third-quarter plan to bring four operated Catarina wells online, as well as three non-operated Tilden wells.
Tupper Montney – In the third quarter, natural gas production averaged 376 million cubic feet per day (MMCFD). Murphy completed its 2022 well delivery program by bringing five operated wells online during the quarter.
Kaybob Duvernay – During the third quarter, production averaged 6 MBOEPD with 78 percent liquids volumes. As previously stated, the three-well 2022 operated program was completed in the first quarter.
Excluding NCI, the offshore business produced 78 MBOEPD during the third quarter, which included 81 percent oil.
Gulf of Mexico – Production averaged 76 MBOEPD, consisting of 80 percent oil during the quarter. Murphy closed the previously announced acquisition of an additional 3.4 percent working interest in the non-operated Lucius field, as well as the divestment of its 50 percent working interest in the operated Thunder Hawk field. Murphy also spud the Dalmatian #1 (Desoto Canyon 90) well, reaching total depth after quarter-end with positive results from initial evaluations.
As of the end of the third quarter, five wells from the Khaleesi and Mormont fields were flowing into the Murphy-operated King’s Quay FPS, and the first well from the Samurai field began producing shortly after quarter-end. Combined, these wells continue to exceed expectations and are currently achieving a total gross production rate of approximately 120 MBOEPD, or 32 MBOEPD net, with 85 percent oil. Notably, oil volumes are averaging approximately 20 percent above original projections.
Completion work continues, with the remaining well in the initial seven-well program expected to be online by year-end. Murphy previously disclosed the discovery of new pay zones while drilling in the Samurai field, which led to identifying an additional well opportunity. As a result, the company is preparing to spud the Samurai #5 (Green Canyon 432) well in the fourth quarter.
Canada – Production averaged 2 MBOEPD in the third quarter, comprised of 100 percent oil. The asset life extension project is ongoing for the non-operated Terra Nova floating, production, storage and offloading vessel, and it is anticipated to return to production in early 2023.
Gulf of Mexico – During the quarter, Anadarko US Offshore LLC (Oxy) and Ridgewood Energy Corporation entered into an agreement with Murphy to participate in the Oso-1EXP (Atwater Valley 138) exploration well. Murphy will remain the operator with a 33.34 percent working interest, and the company expects to spud this well in the fourth quarter of 2022.
Mexico – The company continued preparations for the operated Tulum-1EXP (Block 5) exploration well in the third quarter and all permits have been received. Located in the Salina Basin, Murphy holds a 40 percent working interest and plans to spud this well in the fourth quarter of 2022.
Brazil – During the quarter, Murphy assumed Wintershall Dea’s 70 percent working interest in the Potiguar Basin at no cost following the partner’s announcement to exit Brazil. Murphy now holds 100 percent working interest in the three Potiguar Basin blocks and, as previously announced, has been approved as an offshore operator by the Brazilian National Agency of Petroleum, Natural Gas and Biofuels.
REVISED 2022 CAPITAL EXPENDITURE AND PRODUCTION GUIDANCE
Third quarter accrued capital expenditures (CAPEX) of $209 million were in-line with guidance of $205 million, excluding acquisitions.
Murphy is revising its annual 2022 accrued CAPEX guidance, with an 8 percent increase in the midpoint and an adjusted range of $975 million to $1.025 billion, excluding acquisitions. The majority of the $75 million revision is due to operated offshore scope changes, with approximately $40 million of the increase attributable to Gulf of Mexico projects, including the addition of the new Samurai #5 well (Green Canyon 432). Approximately $20 million of the revision is primarily attributable to the Eagle Ford Shale, in particular non-operated activity, with approximately $10 million associated with non-operated Gulf of Mexico activity and $5 million for additional exploration costs.
“Following review of our operational success throughout the year, we elected to commit additional capital to key high-returning, oil-weighted assets. A significant portion of the CAPEX guidance increase is to fund drilling of the new Samurai #5 well after discovering additional pay zones earlier this year. Building on our successful onshore operations, we also elected to participate in additional non-operated Eagle Ford Shale wells, which have had strong results to-date,” stated Jenkins.
Full year 2022 production guidance is being revised to a range of 164 to 172 MBOEPD, with a production mix of approximately 54 percent oil and 60 percent total liquids volumes.
Fourth quarter 2022 production is estimated to be in the range of 173.5 to 181.5 MBOEPD with 55 percent oil volumes. This range is impacted by 9.5 MBOEPD of total offshore downtime, including 1.6 MBOEPD for downstream weather impacts associated with Hurricane Ian, as well as an estimated 10.5 MBOEPD for forecasted Tupper Montney royalties. Both production and CAPEX guidance ranges exclude Gulf of Mexico NCI.
“We have increased oil volumes throughout the year. However, our natural gas volumes going forward will be impacted in the Tupper Montney due to significant royalty increases caused by faster well payouts and higher AECO natural gas prices. While this has a production impact, it is reflected minimally in our cash flow, and we anticipate it will not affect the timing of our capital allocation framework,” stated Jenkins.
“With regards to the Gulf of Mexico, we experienced unplanned downtime early in the fourth quarter; however, most of those issues have already been resolved. Additionally, while Hurricane Ian did not come close to our assets, downstream evacuations caused delays in our maintenance program. Our forecast has also been impacted by the results of the non-operated Kodiak #3 well. The well has performed below expectations, and work plans are being developed by the operator for remediation. Fortunately, outstanding performance at the Khaleesi, Mormont, Samurai field development project partially offsets those impacts,” said Jenkins.
Murphy employs commodity derivative instruments to manage certain risks associated with commodity price volatility and underpin capital returns associated with certain assets.
Murphy utilizes collars to provide hedge protection on 25 MBOPD for full-year 2022 with a weighted average put price of $63.24 per barrel and weighted average call price of $75.20 per barrel.
The company also utilizes swaps to protect 20 MBOPD of full-year 2022 production with an average fixed price of $44.88 per barrel.
Murphy maintains a combination of fixed price forward sales contracts and diversification contracts tied to US pricing points to lessen its dependence on variable AECO prices. These contracts are for physical delivery of natural gas volumes at a fixed price, with no mark-to-market income adjustments. Details for the current fixed price contracts can be found in the attached schedules.