==============================================================================
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, 1999
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
MURPHY OIL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 71-0361522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 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
Number of shares of Common Stock, $1.00 par value, outstanding at March 31,
1999, was 44,958,766.
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<PAGE>
PART I - FINANCIAL INFORMATION
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
<TABLE>
<CAPTION>
(unaudited)
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 15,512 28,271
Accounts receivable, less allowance for
doubtful accounts of $11,045 in 1999
and $11,048 in 1998 243,584 233,906
Inventories
Crude oil and blend stocks 73,935 41,090
Finished products 58,128 49,714
Materials and supplies 37,132 38,973
Prepaid expenses 31,847 32,292
Deferred income taxes 14,461 13,120
--------- ---------
Total current assets 474,599 437,366
Property, plant and equipment, at cost less
accumulated depreciation, depletion and
amortization of $3,009,016 in 1999 and
$2,985,854 in 1998 1,684,130 1,662,362
Deferred charges and other assets 62,755 64,691
--------- ---------
Total assets $2,221,484 2,164,419
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 4 5,951
Notes payable - 1,961
Accounts payable and accrued liabilities 341,557 349,887
Income taxes 23,911 22,951
--------- ---------
Total current liabilities 365,472 380,750
Notes payable 303,048 189,705
Nonrecourse debt of a subsidiary 144,827 143,768
Deferred income taxes 134,846 124,543
Reserve for dismantlement costs 153,971 154,686
Reserve for major repairs 18,116 43,519
Deferred credits and other liabilities 147,174 149,215
Stockholders' equity
Cumulative Preferred Stock, par $100, authorized
400,000 shares, none issued - -
Common Stock, par $1.00, authorized 80,000,000
shares, issued 48,775,314 shares 48,775 48,775
Capital in excess of par value 510,185 510,116
Retained earnings 522,767 545,199
Accumulated other comprehensive income - foreign
currency translation (25,748) (23,520)
Unamortized restricted stock awards (2,189) (2,361)
Treasury stock, 3,816,548 shares of Common Stock
in 1999, 3,824,838 shares in 1998, at cost (99,760) (99,976)
--------- ---------
Total stockholders' equity 954,030 978,233
--------- ---------
Total liabilities and stockholders' equity $2,221,484 2,164,419
========= =========
</TABLE>
See Notes to Consolidated Financial Statements, page 4.
The Exhibit Index is on page 15.
1
<PAGE>
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998*
------- -------
<S> <C> <C>
REVENUES
Crude oil and natural gas sales $ 84,063 80,501
Petroleum product sales 205,147 338,319
Other operating revenues 13,669 20,939
Interest and other nonoperating revenues 1,387 892
------- -------
Total revenues 304,266 440,651
------- -------
COSTS AND EXPENSES
Crude oil, products and related operating expenses 220,015 329,421
Exploration expenses, including undeveloped lease
amortization 26,339 18,054
Selling and general expenses 16,526 16,768
Depreciation, depletion and amortization 46,595 50,272
Provision for reduction in force 1,513 -
Interest expense 5,616 3,876
Interest capitalized (1,145) (2,550)
------- -------
Total costs and expenses 315,459 415,841
------- -------
Income (loss) before income taxes (11,193) 24,810
Federal and state income tax expense (benefit) (3,006) 7,733
Foreign income tax expense (benefit) (1,489) 1,536
------- -------
NET INCOME (LOSS) $ (6,698) 15,541
======= =======
Net income (loss) per Common share - basic $ (.15) .35
======= =======
Net income (loss) per Common share - diluted $ (.15) .35
======= =======
Cash dividends per Common share $ .35 .35
======= =======
Average Common shares outstanding - basic 44,955,013 44,940,128
Average Common shares outstanding - diluted 44,955,013 45,016,395
*Revenues have been reclassified to conform to 1999 presentation.
</TABLE>
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Net income (loss) $ (6,698) 15,541
Other comprehensive income - net gain (loss)
from foreign currency translation (2,228) 6,379
------- -------
COMPREHENSIVE INCOME (LOSS) $ (8,926) 21,920
======= =======
</TABLE>
See Notes to Consolidated Financial Statements, page 4.
2
<PAGE>
Murphy Oil Corporation and Consolidated Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (6,698) 15,541
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation, depletion and amortization 46,595 50,272
Provisions for major repairs 2,416 5,526
Expenditures for major repairs and
dismantlement costs (28,316) (6,126)
Exploratory expenditures charged against income 23,720 15,337
Amortization of undeveloped leases 2,619 2,717
Deferred and noncurrent income tax charges 7,820 3,732
Pretax gains from disposition of assets (61) (484)
Other - net 3,311 2,368
------- -------
51,406 88,883
Net increase in operating working capital
other than cash and cash equivalents (57,362) (19,730)
Other adjustments related to operating activities (3,471) (5,806)
------- -------
Net cash provided (required) by operating
activities (9,427) 63,347
------- -------
INVESTING ACTIVITIES
Capital expenditures requiring cash (94,165) (102,039)
Proceeds from sale of property, plant and equipment 984 1,213
Other investing activities - net (593) (2,296)
------- --------
Net cash required by investing activities (93,774) (103,122)
------- -------
FINANCING ACTIVITIES
Increase in notes payable 111,382 44,982
Increase (decrease) in nonrecourse debt of
a subsidiary (4,888) 2,341
Sale of treasury shares under employee stock
purchase plan 226 184
Cash dividends paid (15,734) (15,733)
------- -------
Net cash provided by financing activities 90,986 31,774
------- -------
Effect of exchange rate changes on cash and
cash equivalents (544) 25
------- -------
Net decrease in cash and cash equivalents (12,759) (7,976)
Cash and cash equivalents at January 1 28,271 24,288
------- -------
Cash and cash equivalents at March 31 $ 15,512 16,312
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Cash income taxes paid, net of refunds $ (3,821) 10,188
Interest paid, net of amounts capitalized 3,004 711
</TABLE>
See Notes to Consolidated Financial Statements, page 4.
3
<PAGE>
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 1
through 3 of this Form 10-Q report.
NOTE A - INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company presented herein have not
been audited by independent auditors, except for the Consolidated Balance
Sheet at December 31, 1998. 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, 1999, and the
results of operations and cash flows for the three-month periods ended March
31, 1999 and 1998, in conformity with generally accepted accounting
principles.
Financial statements and notes to consolidated financial statements included
in this Form 10-Q report should be read in conjunction with the Company's 1998
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, 1999, are not necessarily indicative of future results.
NOTE B - ENVIRONMENTAL CONTINGENCIES
The Company's operations are subject to numerous laws and regulations intended
to protect the environment and/or impose remedial obligations. The Company is
also involved in personal injury and property damage claims, allegedly caused
by exposure to or by the release or disposal of materials manufactured or used
in the Company's operations. The Company operates or has previously operated
certain sites and facilities, including refineries, oil and gas fields,
service stations, and terminals, for which known or potential obligations for
environmental remediation exist.
Under the Company's accounting policies, a liability for an environmental
obligation is recorded when an obligation is probable and the cost can be
reasonably estimated. If there is a range of reasonably estimated costs, the
most likely amount will be recorded, or if no amount is most likely, the
minimum of the range is used. Recorded liabilities are reviewed quarterly.
Actual cash expenditures often occur one or more years after a liability is
recognized.
The Company's reserve for remedial obligations, which is included in "Deferred
Credits and Other Liabilities" in the Consolidated Balance Sheets, contains
certain amounts that are based on anticipated regulatory approval for proposed
remediation of former refinery waste sites. If regulatory authorities
require more costly alternatives than the proposed processes, future
expenditures could exceed the amount reserved by up to an estimated $3
million.
The Company has received notices from the U.S. Environmental Protection Agency
(EPA) that it is currently considered a Potentially Responsible Party (PRP) at
three Superfund sites and has also been assigned responsibility by defendants
at another Superfund site. The potential total cost to all parties to perform
necessary remedial work at these sites may be substantial. Based on currently
available information, the Company has reason to believe that it is a "de
minimus" party as to ultimate responsibility at the four sites. The Company
does not expect that its related remedial costs will be material to its
financial condition or its results of operations, and it has not provided a
reserve for remedial costs on Superfund sites. Additional information may
become known in the future that would alter this assessment, including any
requirement to bear a pro rata share of costs attributable to nonparticipating
PRPs or indications of additional responsibility by the Company.
Following a compliance inspection in 1998, Murphy's Superior, Wisconsin
refinery received notices of violations of the Clean Air Act from the EPA.
Although the penalty amounts were not listed, the statutes involved provide
for rates of up to $27,500 per day of violation. The Company believes it has
valid defenses to the allegations and plans a vigorous defense. The Company
does not believe that this or other known environmental matters will have a
material adverse effect on its financial condition. There is the possibility
that expenditures could be required at currently unidentified sites, and new
or revised regulatory requirements could necessitate additional expenditures
at known sites. Such expenditures could materially affect the results of
operations in a future period.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
Certain environmental expenditures are likely to be recovered by the Company
from other sources, primarily environmental funds maintained by certain
states. Since no assurance can be given that recoveries from other sources
will occur, the Company has not recognized a benefit for likely recoveries at
March 31, 1999.
NOTE C - OTHER CONTINGENCIES
The Company's operations and earnings have been and may be affected by various
other 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 increases and retroactive tax claims; restrictions on
production; 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 issuance of
oil and gas or mineral leases; laws and regulations intended for the promotion
of safety; governmental support for other forms of energy; and laws and
regulations affecting the Company's relationships with employees, suppliers,
customers, stockholders and others. Because governmental actions are often
motivated by political considerations, may be taken without full consideration
of their consequences, and 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.
The Company and its subsidiaries are engaged in a number of legal proceedings,
all of which the Company considers routine and incidental to its business and
none of which is considered material. In the normal course of its business,
the Company is required under certain contracts with various governmental
authorities and others to provide letters of credit that may be drawn upon if
the Company fails to perform under those contracts. At March 31, 1999, the
Company had contingent liabilities of $43.7 million on outstanding letters of
credit and $25.5 million under certain financial guarantees.
NOTE D - DERIVATIVE INSTRUMENTS
Murphy uses derivative instruments on a limited basis to manage certain risks
related to interest rates, foreign currency exchange rates and commodity
prices. Instruments that reduce the exposure of assets, liabilities or
anticipated transactions to interest rate, currency or price risks are
accounted for as hedges. Gains or losses on derivatives that cease to qualify
as hedges are recognized in income or expense. 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 trading purposes, and it does not use derivatives
with leveraged or complex features. Counterparties to derivative instruments
are either creditworthy major financial institutions or national exchanges.
At March 31, 1999 and 1998, Murphy had interest rate swap agreements with
notional amounts totaling $100 million that serve to convert an equal amount
of variable rate long-term debt to fixed rates. The swaps mature in 2002 and
2004. The swaps require Murphy to pay a weighted-average interest rate of
6.46% over their composite lives and to receive a variable rate, which
averaged 4.98% at March 31, 1999. Using the accrual/settlement method of
accounting, the Company records the net amount to be received or paid under
the swap agreements as part of "Interest Expense" in the Consolidated
Statements of Income. If the Company terminates an interest rate swap prior
to maturity, any cash paid or received as settlement would be deferred and
recognized as an adjustment to "Interest Expense" over the shorter of the
remaining life of the debt or the remaining contractual life of the swap.
The Company periodically uses crude oil swap agreements to reduce a portion of
the financial exposure of its U.S. refineries to crude oil price movements.
Unrealized gains or losses on such swap contracts are generally deferred and
recognized in connection with the associated crude oil purchase. If
conditions indicate that the market price of finished products would not
allow for recovery of the costs of the finished products, including any
unrealized loss on the crude oil swap, a liability is provided for the
nonrecoverable portion of the unrealized swap loss. The Company records
pretax operating results associated with crude oil swaps in "Crude Oil,
Products and Related Operating Expenses" in the Consolidated Statements of
Income. At March 31, 1999, the Company was a party to crude oil swap
agreements for a total notional volume of one million barrels that mature in
2002. At termination, the swaps require Murphy to pay an average crude oil
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE D - DERIVATIVE INSTRUMENTS (CONTD.)
price of $16.29 a barrel and to receive the average of the near-month NYMEX
West Texas Intermediate (WTI) crude oil prices during the three-month maturity
period. No crude oil swaps were outstanding at March 31, 1998.
At March 31, 1998, the Company had a forward foreign currency exchange
contract that served to fix the U.S. dollar cost for Canadian dollar
nonrecourse debt associated with the Company's investment in the Syncrude
project. The currency exchange contract matured and the related debt was
retired in December 1998. During the life of the contract, the Company
recorded the unrealized difference between the contract exchange rate and the
actual exchange rate in the Consolidated Balance Sheet as an adjustment to
"Nonrecourse Debt of a Subsidiary" with the offset to "Accumulated Other
Comprehensive Income."
NOTE E - EARNINGS PER SHARE
Net income (loss) was used as the numerator in computing both basic and
diluted income (loss) per Common share for the three months ended March 31,
1999 and 1998. Reconciliations of the weighted-average shares outstanding for
these computations are shown in the following table.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Reconciliation of Shares Outstanding Three Months Ended
March 31,
-----------------------------------------------------------------
(Weighted average shares) 1999 1998
-----------------------------------------------------------------
<S> <C> <C>
Basic method . . . . . . . . . . . . . . 44,955,013 44,940,128
Dilutive stock options . . . . . . . . . - 76,267
-----------------------------------------------------------------
Diluted method 44,955,013 45,016,395
=================================================================
</TABLE>
The computation of 1999 diluted earnings per share in the preceding table did
not consider any of the 1,371,839 shares of outstanding stock options at March
31, 1999, because the effects of these options would have reduced the
Company's loss per share. In the 1998 period, 393,000 shares of the total
1,071,689 shares of outstanding stock options at the period-end were not
considered in the computation of diluted earnings per share because the
effects of these options would have improved the Company's earnings per share.
Such options outstanding at March 31, 1999, had exercise prices ranging from
$34.55 to $65.49 a share (with an average of $45.69 a share) and remaining
lives of .8 to 9.8 years (with an average of 7.9 years).
NOTE F - PROVISION FOR REDUCTION IN FORCE
In early 1999, the Company offered enhanced voluntary retirement benefits to
eligible exploration, production and administrative employees in its New
Orleans and Calgary offices and severed certain other employees. As a result
of this reduction in force, the Company recorded a "Provision for Reduction in
Force" of $1.5 million, $1 million after taxes, in the Consolidated Statement
of Income for the three months ended March 31, 1999.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTD.)
NOTE G - BUSINESS SEGMENTS
<TABLE>
<CAPTION>
Three Mos. Ended March 31, 1999
Total Assets -------------------------------
at March 31, External Interseg. Income
(Millions of dollars) 1999 Revenues Revenues (Loss)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exploration and production*
United States $ 394.6 32.9 7.4 (4.7)
Canada 622.1 26.7 8.3 .2
United Kingdom 308.8 23.1 - 1.5
Ecuador 59.6 4.7 - 1.0
Other 9.7 .6 - (1.2)
- ---------------------------------------------------------------------------
Total 1,394.8 88.0 15.7 (3.2)
- ---------------------------------------------------------------------------
Refining, marketing and
transportation
United States 477.6 162.6 1.0 -
United Kingdom 193.8 45.9 - 1.3
Canada 58.5 6.4 .1 1.6
- ---------------------------------------------------------------------------
Total 729.9 214.9 1.1 2.9
- ---------------------------------------------------------------------------
Total operating segments 2,124.7 302.9 16.8 (.3)
Corporate and other 96.8 1.4 - (6.4)
- ---------------------------------------------------------------------------
Total consolidated $2,221.5 304.3 16.8 (6.7)
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Mos. Ended March 31, 1998
-------------------------------
External Interseg. Income
(Millions of dollars) Revenues Revenues (Loss)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and production*
United States $ 41.9 10.3 7.0
Canada 19.6 11.6 .5
United Kingdom 21.9 - .6
Ecuador 5.7 - 1.4
Other .8 - (3.5)
- ---------------------------------------------------------------------------
Total 89.9 21.9 6.0
- ---------------------------------------------------------------------------
Refining, marketing and
transportation
United States 268.8 .5 6.0
United Kingdom 74.1 - 4.5
Canada 7.0 - 1.9
- ---------------------------------------------------------------------------
Total 349.9 .5 12.4
- ---------------------------------------------------------------------------
Total operating segments 439.8 22.4 18.4
Corporate and other .9 - (2.9)
- ---------------------------------------------------------------------------
Total consolidated $ 440.7 22.4 15.5
===========================================================================
</TABLE>
*Additional details about results of operations are presented in the tables on
page 13.
NOTE H - SUBSEQUENT EVENTS
In April 1999, the Company sold $250 million of 7.05% notes due in 2029. The
Company will use the net proceeds of approximately $247 million from these
notes to repay outstanding indebtedness under existing credit facilities.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Murphy's loss before special items in the first quarter of 1999 totaled $5.7
million, $.13 a diluted share, compared to net income of $15.5 million, $.35 a
diluted share, in the first quarter a year ago. The net loss in the current
quarter totaled $6.7 million, $.15 a diluted share, and included an after-tax
charge of $1 million, $.02 a diluted share, for a reduction in force.
The Company's worldwide downstream operations earned $2.9 million in the
current quarter compared to $12.4 million a year ago, as margins in both the
United States and the United Kingdom were under pressure throughout the
quarter. Exploration and production operations reported a loss of
$3.2 million in the current quarter compared to earnings of $6 million a year
ago, with an 18% increase in crude oil production more than offset by a 9%
decline in average worldwide crude oil sales prices, a 21% reduction in U.S.
natural gas sales prices and a 45% increase in exploration expenses.
Exploration and production operations in the United States reported a loss of
$4.7 million compared to earnings of $7 million in the first quarter of 1998.
Operations in Canada earned $.2 million compared to $.5 million a year ago,
and U.K. operations earned $1.5 million in the current quarter, up from $.6
million. Operations in Ecuador earned $1 million in the first quarter of 1999
compared to $1.4 million a year ago. Other international operations reported
a loss of $1.2 million compared to a $3.5 million loss a year earlier. The
Company's worldwide crude oil and condensate sales prices averaged $10.57
a barrel in the current quarter compared to $11.65 a year ago. Crude oil and
condensate prices averaged $11.70 a barrel in the United States and $10.92 in
the United Kingdom, decreases of 20% and 22%, respectively. In Canada, sales
prices averaged $11.31 a barrel for light oil, down 15%; $8.25 for heavy oil,
up 61%; $12.38 for offshore oil, down 5%; and $12.62 for synthetic oil, down
18%. The average sales price in Ecuador was $7.06 a barrel, down 19%. Total
crude oil and gas liquids production averaged 63,555 barrels a day compared to
54,059 in the first quarter of 1998. The increase was due to production from
new fields in the United Kingdom and Canada and higher synthetic oil
production in Canada. Natural gas sales prices in the United States averaged
$1.84 a thousand cubic feet (MCF) in the current quarter compared to $2.33 a
year ago. Natural gas sales prices in Canada averaged $1.55 an MCF, an
increase of 40%. Total natural gas sales averaged 251 million cubic feet a
day compared to 249 million a year ago. Sales of natural gas in the United
States averaged 177 million cubic feet a day, down from 189 million in the
first quarter of 1998. Canadian natural gas sales averaged 54 million cubic
feet a day in the current quarter, up 17%. Exploration expenses totaled
$26.3 million in the current quarter compared to $18.1 million a year ago.
The tables on page 13 provide additional details of the results of exploration
and production operations for the first quarter of each year.
Refining, marketing and transportation operations in the United States broke
even during the first quarter of 1999 compared to earning $6 million a year
ago. Operations in the United Kingdom earned $1.3 million in the current
quarter compared to $4.5 million in the first quarter of 1998. Earnings from
purchasing, transporting and reselling crude oil in Canada were $1.6 million
in the current quarter compared to $1.9 million in the first quarter of 1998.
Refinery crude runs were 91,213 barrels a day compared to 167,031 in the first
quarter of 1998, and refined product sales were 117,398 barrels a day
in 1999, down from 174,027 a year ago. Crude runs and product sales for the
current quarter were both adversely affected by a scheduled turnaround at the
Company's Meraux, Louisiana refinery.
Corporate activities, which include interest income and expense and corporate
overhead not allocated to operating functions, reflected a loss before special
items of $5.4 million in the current quarter compared to a loss of $2.9
million in the first quarter of 1998. The increased loss was primarily due to
higher interest expense net of amounts capitalized.
FINANCIAL CONDITION
Net cash required by operating activities was $9.4 million for the first three
months of 1999 compared to $63.3 million of cash provided for the same period
in 1998. Changes in operating working capital other than cash and cash
equivalents required cash of $57.4 million in the first quarter of 1999 and
$19.7 million in the 1998 period. The cash results from operating activities
were also reduced by expenditures for refinery turnarounds and abandonment of
oil and gas properties totaling $28.3 million, including $26.1 million for the
Meraux refinery turnaround, in the current quarter compared to $6.1 million a
year ago.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTD.)
FINANCIAL CONDITION (CONTD.)
In addition to the turnaround expenditures in 1999, predominant uses of cash
in both years were for capital expenditures (which, including amounts
expensed, are summarized in the following table) and for dividends of $15.7
million.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Capital Expenditures Three Months Ended March 31,
------------------------------------------------------------------------
(Millions of dollars) 1999 1998
------------------------------------------------------------------------
<S> <C> <C>
Exploration and production . . . . . . . . . . . . . $81.4 92.7
Refining, marketing and transportation . . . . . . . 12.5 9.0
Corporate and other . . . . . . . . . . . . . . . . . .3 .3
------------------------------------------------------------------------
$94.2 102.0
========================================================================
</TABLE>
Working capital at March 31, 1999 was $109.1 million, up $52.5 million from
December 31, 1998. This level of working capital does not fully reflect the
Company's liquidity position, because the lower historical costs assigned to
inventories under LIFO accounting were $39.7 million below current costs
at March 31, 1999.
At March 31, 1999, notes payable of $303.1 million were up $113.4 million due
to additional borrowing for certain oil and gas development projects and other
corporate uses. Long-term nonrecourse debt of a subsidiary was $144.8
million, up slightly from December 31, 1998 due to changes in foreign currency
exchange rates. A summary of capital employed at March 31, 1999 and
December 31, 1998 follows.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Capital Employed March 31, 1999 Dec. 31, 1998
------------------------------------------------------------------------
(Millions of dollars) Amount % Amount %
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes payable . . . . . . . . . . . $ 303.1 22 189.7 14
Nonrecourse debt of a subsidiary . . 144.8 10 143.8 11
Stockholders' equity . . . . . . . . 954.0 68 978.2 75
------------------------------------------------------------------------
$1,401.9 100 1,311.7 100
========================================================================
</TABLE>
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," in June 1998. This statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
Effective January 1, 2000, Murphy must recognize the fair value of all
derivative instruments as either assets or liabilities in its Consolidated
Balance Sheet. A derivative instrument meeting certain conditions may be
designated as a hedge of a specific exposure; accounting for changes in a
derivative's fair value will depend on the intended use of the derivative and
the resulting designation. Any transition adjustments resulting from adopting
this statement will be reported in either net income or other comprehensive
income, as appropriate, as the cumulative effect of a change in accounting
principle. As described under the heading "Quantitative and Qualitative
disclosures about Market Risk" on page 11 of this Form 10-Q report, the
Company makes limited use of derivative instruments to hedge specific market
risks. The Company has not yet determined the effects that SFAS No. 133
will have on its future consolidated financial statements or the amount of the
cumulative adjustment that will be made upon adopting this new standard.
YEAR 2000 ISSUES
GENERAL - Year 2000 issues affect all companies and relate to the possibility
that computer programs and embedded computer chips may be unable to accurately
process data with year dates of 2000 and beyond. Murphy is devoting
significant internal and external resources to address Year 2000 compliance,
and the Company's Year 2000 project (Project) is proceeding well. In 1993,
Murphy began a worldwide business systems replacement project using systems
primarily from J.D. Edwards & Company (Edwards) in the United States and the
United Kingdom, PricewaterhouseCoopers LLP (PW*Sequel) in Canada, and for
exploration and production operations, Applied Terravision Systems Inc.
(Artesia) in the United States and EFA Software Services Ltd. (PRISM) in
Canada. Certain U.S. business software systems developed by the Company will
not be replaced with compliant vendor systems by the Year 2000 and have been
remedied to be Year 2000 compliant. Remaining hardware, software and
facilities are expected to be made Year 2000
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTD.)
YEAR 2000 ISSUES (CONTD.)
compliant through the Project. None of the Company's other information
technology projects are expected to be significantly delayed due to the
implementation of the Project.
PROJECT - The Company has established an Enterprise Project Office (EPO) and
has engaged KPMG LLP to assist with Project management. The Project is
primarily being managed by major operating location. At each location, the
Project is divided into three major components: Computer Hardware,
Applications Software, and Process Control and Instrumentation (Embedded
Technology). The Computer Hardware component consists of computing equipment
and systems software other than Applications Software. Applications Software
includes both internally developed and vendor software systems. Embedded
Technology includes the hardware, software and associated embedded computer
chips (other than computing equipment) that are used in facilities operated by
the Company. The general phases common to all components are: (1)
inventorying Year 2000 items; (2) assigning priorities to identified items;
(3) assessing the Year 2000 compliance of identified items; (4) repairing or
replacing material items that are determined not to be Year 2000 compliant;
(5) evaluating and testing required material items; and (6) designing and
implementing contingency and business continuation plans as necessary.
Material items are those that the Company believes to have safety,
environmental or property damage risks, or that may adversely affect the
Company's ability to process and record revenues if not properly addressed.
The inventorying and priority assessment phases of the Project were completed
during 1998. The remaining four phases of the Project are in progress and are
being performed primarily by employees of the Company, with assistance from
vendors and independent contractors.
A fourth major component of the Project, which involves the review of third
party suppliers, customers and business partners (Third Parties), is being
managed for all locations by the EPO. This includes the process of
identifying and prioritizing critical Third Parties and communicating with
them about their plans and progress in addressing the Year 2000 problem.
Evaluations of the most critical Third Parties began in the second quarter of
1998 and will continue throughout 1999. Based on the results of evaluations
and other available information, contingency plans are being developed as
necessary to address potential Year 2000 problems related to critical Third
Parties.
A Year 2000 compliant version of Edwards has been fully implemented in the
United States and is approximately 70% complete in the United Kingdom.
Implementation of Edwards is ongoing in the United Kingdom and final phases
are expected to be completed in October 1999. Contingency plans were prepared
in early 1999 to address the possibility that the last phases of the U.K.
implementation will not be achieved by the end of 1999. If implementation is
necessary, the contingency plans call for activation of certain temporary
back-up systems, which could be triggered as late as the third quarter
of 1999. A Year 2000 compliant version of Artesia was implemented in the
United States at the end of 1998 and testing was completed in January 1999.
In Canada, the Company upgraded to a Year 2000 compliant version of PRISM
during the first quarter of 1999, and Year 2000 testing will be completed
in the second quarter of 1999. A compliant version of PW*Sequel is scheduled
to be fully implemented and tested in the second quarter of 1999. Testing of
U.S. offshore production platform systems was essentially completed at March
31, 1999. Exploration system upgrades were released by the vendor in early
1999 and will be installed and tested by the third quarter of 1999. Remedy of
certain internally developed downstream accounting, customer invoicing and
human resources systems in the United States had been completed at December
31, 1998. Upgrading and testing of U.S. refining and marketing systems are
scheduled to be essentially complete by June 30, 1999. The operator at the
Company's jointly owned U.K. refinery is directing that location's Year 2000
action plan and has reported that the plan is scheduled to be completed by
October 31, 1999. Company employees are monitoring the operator's progress
and believe the work is on schedule. Systems at U.K. marketing terminals are
being upgraded to a Year 2000 compliant version; certain terminals have
been upgraded and the remaining locations are scheduled to be completed by
August 1999. Supply and transportation systems in Canada are expected to be
essentially compliant by June 30, 1999.
PROJECT SUMMARY - At April 30, 1999, the overall Project is estimated to be
90% complete. Thus far, no material noncompliant Year 2000 issues have been
discovered that were not identified in the completed Year 2000 inventory.
Most significant components of the Project are expected to be nearly
complete by June 30, 1999. The final stages of the Company's U.K. Edwards
implementation and certain Year 2000
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTD.)
YEAR 2000 ISSUES (CONTD.)
compliance activities at the Company's jointly owned refinery in the United
Kingdom will be completed in the fourth quarter of 1999.
The Company does not expect to develop formal contingency plans for Project
issues that are resolved in accordance with the current schedule. Any
unresolved issues that fall significantly behind schedule or that lead to a
material risk of system failure will be addressed by contingency plans during
1999.
COSTS - The Company's total cost to become Year 2000 compliant is not expected
to be material to its financial position. The most likely estimate of the
total cost of the Project is approximately $5 million, including the costs of
new systems that concurrently provide improved business functionality and Year
2000 compliance. These costs include $2 million for the EPO (including
assessment of Third Parties); the remaining costs are for miscellaneous
hardware replacement, noncompliant system renovations and upgrades, and
Embedded Technology issues. It is reasonably possible that total costs
could exceed the most likely estimate by up to $1 million. Funds for the
Project are primarily obtained from internally generated cash flows. This
cost estimate does not include the Company's potential share of Year 2000
costs that may be incurred by partnerships and joint ventures that the Company
does not operate, except for an estimated $.7 million to make Murphy's jointly
owned U.K. refinery Year 2000 compliant.
The total amount expended on the Project through March 31, 1999 was $2.4
million, including $.8 million in the first three months of 1999. Of this
amount, $1.9 million has been included in selling and general expenses,
including $.3 million in the first three months of 1999. The remaining cost
to complete the Year 2000 Project is estimated to be approximately $2.6
million.
RISKS - Not correcting material Year 2000 problems could result in
interruptions in, or failures of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity or financial condition by impeding
the Company's ability to produce and deliver crude oil, natural gas and
finished petroleum products, and to invoice and collect related revenues from
customers. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from uncertainty about the Year 2000 readiness of critical
Third Parties, the Company is unable to determine at this time whether or not
the consequences of possible Year 2000 failures will materially affect its
results of operations, liquidity or financial condition. The Project is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 issue, and in particular, about the Year 2000 compliance and
readiness of the Company's critical Third Parties. The Company believes that
it is taking reasonable steps to address potentially material Year 2000
failures, and with completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be greatly reduced.
Readers are cautioned that forward-looking statements contained in this Year
2000 section should be read in conjunction with Murphy's disclosures in the
following paragraph of this Form 10-Q report.
FORWARD-LOOKING STATEMENTS
This Form 10-Q report contains statements of the Company's expectations,
intentions, plans and beliefs that are forward-looking and are dependent on
certain events, risks and uncertainties that may be outside of the Company's
control. These forward-looking statements are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results and developments could differ materially from those expressed
or implied by such statements due to a number of factors including those
described in the context of such forward-looking statements as well as those
contained in the Company's January 15, 1997, Form 8-K on file with the U.S.
Securities and Exchange Commission.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks associated with interest rates, foreign
currency exchange rates, and prices of crude oil, natural gas and petroleum
products. Murphy makes limited use of derivative financial and commodity
instruments to manage risks associated with existing or anticipated
transactions. All derivatives used for risk management are covered by
operating policies and are closely monitored by the Company's senior
management. The Company does not hold derivatives for trading purposes and it
11
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTD.)
does not use derivatives with leveraged or complex features. Counterparties
to derivative instruments are either creditworthy major financial institutions
or national exchanges.
At March 31, 1999, the Company was a party to interest rate swaps with
notional amounts totaling $100 million that were designed to convert a similar
amount of variable-rate debt to fixed rates. The interest rate swaps mature
in 2002 and 2004. The swaps require the Company to pay an average interest
rate of 6.46% over their composite lives, and at March 31, 1999, the interest
rate to be received by the Company averaged 4.98%. The variable interest rate
received by the Company under each swap contract is repriced quarterly. The
Company considers these swaps to be a hedge against potentially higher future
interest rates. The estimated fair value of these interest rate swaps was a
negative $3.7 million at March 31, 1999.
At March 31, 1999, 88% of the Company's long-term debt had variable interest
rates and 22% was denominated in Canadian dollars. Based on debt outstanding
at March 31, 1999, a 10% increase in variable interest rates would increase
the Company's interest expense over the next 12 months by an estimated $1.6
million after a $.5 million favorable effect of lower net settlement payments
under the aforementioned interest rate swaps. A 10% increase in the exchange
rate of the Canadian dollar versus the U.S. dollar would increase interest
expense by an estimated $.4 million over the next 12 months on Canadian dollar
denominated debt.
At March 31, 1999, the Company was a party to crude oil swap agreements for a
total notional volume of one million barrels that reduce a portion of the
financial exposure of Murphy's U.S. refineries to crude oil price movements.
At termination, the swaps require Murphy to pay an average crude oil price of
$16.29 a barrel and to receive the average of the near-month NYMEX WTI crude
oil prices during the three-month maturity period. Although the estimated
fair value of these crude oil swaps was immaterial at March 31, 1999, a 10%
change in the price of WTI crude oil over the next 12 months would change the
estimated fair value of these swaps by $1.3 million.
12
<PAGE>
<TABLE>
<CAPTION>
OIL AND GAS OPERATING RESULTS (UNAUDITED)
- -----------------------------------------------------------------------------
United Synthetic
United King- Ecua- Oil -
(Millions of dollars) States Canada dom dor Other Canada Total
- -----------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and gas sales and
operating revenues $40.3 22.5 23.1 4.7 .6 12.5 103.7
Production costs 9.6 8.7 9.6 1.6 - 8.7 38.2
Depreciation, depletion
and amortization 15.7 8.9 11.0 2.1 - 1.7 39.4
Exploration expenses
Dry hole costs 13.0 2.0 - - - - 15.0
Geological and geophysical
costs 3.5 2.5 .3 - .7 - 7.0
Other costs .4 .2 .3 - .7 - 1.6
- -----------------------------------------------------------------------------
16.9 4.7 .6 - 1.4 - 23.6
Undeveloped lease
amortization 1.8 .9 - - - - 2.7
- -----------------------------------------------------------------------------
Total exploration
expenses 18.7 5.6 .6 - 1.4 - 26.3
- -----------------------------------------------------------------------------
Selling and general expenses 4.1 1.5 .8 - .3 - 6.7
Income tax expenses (benefits) (3.1) (1.0) (.4) - .1 .7 (3.7)
- -----------------------------------------------------------------------------
Results of operations
(excluding corporate
overhead and interest) $(4.7) (1.2) 1.5 1.0 (1.2) 1.4 (3.2)
=============================================================================
THREE MONTHS ENDED
MARCH 31, 1998
Oil and gas sales and
operating revenues $52.2 18.8 21.9 5.7 .8 12.4 111.8
Production costs 9.9 9.6 7.9 1.8 - 7.1 36.3
Depreciation, depletion
and amortization 18.3 8.7 9.9 2.5 - 1.5 40.9
Exploration expenses
Dry hole costs 5.4 1.0 - - 2.7 - 9.1
Geological and geophysical
costs 2.1 2.0 .3 - .3 - 4.7
Other costs .3 .2 .4 - .7 - 1.6
- -----------------------------------------------------------------------------
7.8 3.2 .7 - 3.7 - 15.4
Undeveloped lease
amortization 1.6 1.1 - - - - 2.7
- -----------------------------------------------------------------------------
Total exploration
expenses 9.4 4.3 .7 - 3.7 - 18.1
- -----------------------------------------------------------------------------
Selling and general expenses 4.1 1.7 .8 - .4 - 7.0
Income tax expenses (benefits) 3.5 (3.3) 2.0 - .2 1.1 3.5
- -----------------------------------------------------------------------------
Results of operations
(excluding corporate
overhead and interest) $ 7.0 (2.2) .6 1.4 (3.5) 2.7 6.0
=============================================================================
</TABLE>
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following a 1998 compliance inspection of the Superior, Wisconsin
refinery, the Company received notices of violations of the Clean Air Act
from the U.S. Environmental Protection Agency. Although the penalty
amounts were not listed, the statutes involved provide for rates of up to
$27,500 per day of violation, and penalties therefore could exceed
$100,000. The Company believes it has valid defenses to the alleged
violations and plans a vigorous defense. While the notices of violation
are preliminary in nature and no assurance can be given, the Company does
not believe that the ultimate resolution of the matter will have a
material adverse effect on the financial condition of the Company.
Murphy and its subsidiaries are engaged in a number of other legal
proceedings, all of which Murphy considers routine and incidental to its
business and none of which is expected to have a material adverse effect
on the Company's financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The Exhibit Index on page 15 of this Form 10-Q report lists the
exhibits that are hereby filed or incorporated by reference.
(b) No reports on Form 8-K have been filed for the quarter covered by
this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MURPHY OIL CORPORATION
(Registrant)
By /s/ Ronald W. Herman
--------------------
Ronald W. Herman, Controller
(Chief Accounting Officer and Duly
Authorized Officer)
May 11, 1999
(Date)
14
<PAGE>
EXHIBIT INDEX
Exhibit
No. Incorporated by Reference to
- ------- -----------------------------
3.1 Certificate of Incorporation of Exhibit 3.1 of Murphy's Form
Murphy Oil Corporation as of 10-K report for the year ended
September 25, 1986 December 31, 1996
3.2 Bylaws of Murphy Oil Corporation Exhibit 3.2 of Murphy's Form
at January 24, 1996 10-K report for the year ended
December 31, 1997
4 Instruments Defining the Rights of
Security Holders. Murphy is party
to several long-term debt instruments
in addition to the ones below, none of
which authorizes securities exceeding
10% of the total consolidated assets of
Murphy and its subsidiaries. Pursuant
to Regulation S-K, item 601(b),
paragraph 4(iii)(A), Murphy agrees to
furnish a copy of each such instrument
to the Securities and Exchange
Commission upon request.
4.1 Credit Agreement among Murphy Oil Exhibit 4.1 of Murphy's Form
Corporation and certain subsidiaries 10-K report for the year ended
and the Chase Manhattan Bank et al as December 31, 1997
of November 13, 1997
4.2 Form of Indenture and Form of Exhibits 4.1 and 4.2 of
Supplemental Indenture between Murphy Murphy's Form 8-K report filed
Oil Corporation and SunTrust Bank, April 29, 1999, under the
Nashville, N.A., as Trustee Securities Exchange Act of
1934
4.3 Rights Agreement dated as of Exhibit 4.1 of Murphy's Form
December 6, 1989, between Murphy Oil 10-K report for the year
Corporation and Harris Trust Company ended December 31, 1994
of New York, as Rights Agent
4.4 Amendment No. 1 dated as of April 6, Exhibit 3 of Murphy's Form
1998, to Rights Agreement dated as of 8-A/A, Amendment No. 1, filed
December 6, 1989, between Murphy Oil April 14, 1998, under the
Corporation and Harris Trust Company Securities Exchange Act of
of New York, as Rights Agent 1934
4.5 Amendment No. 2 dated as of April 15, Exhibit 4 of Murphy's Form
1999, to Rights Agreement dated as of 8-A/A, Amendment No. 2, filed
December 6, 1989, between Murphy Oil April 19, 1999, under the
Corporation and Harris Trust Company Securities Exchange Act of
of New York, as Rights Agent 1934
10.1 1987 Management Incentive Plan as Exhibit 10.2 of Murphy's Form
amended February 7, 1990, retroactive 10-K report for the year ended
to February 3, 1988 December 31, 1994
10.2 1992 Stock Incentive Plan as amended Exhibit 10.2 of Murphy's Form
May 14, 1997 10-Q report for the quarterly
period ended June 30, 1997
10.3 Employee Stock Purchase Plan Exhibit 99.01 of Murphy's
Form S-8 Registration
Statement filed May 19, 1997,
under the Securities Act of
1933
27 Financial Data Schedule for the Filed herewith in electronic
three months ended March 31, 1999 filing
Exhibits other than those listed above have been omitted since they are either
not required or not applicable.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY UNAUDITED FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999, AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS THEN ENDED OF MURPHY OIL
CORPORATION AND CONSOLIDATED SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,512
<SECURITIES> 0
<RECEIVABLES> 254,629
<ALLOWANCES> 11,045
<INVENTORY> 169,195
<CURRENT-ASSETS> 474,599
<PP&E> 4,693,146
<DEPRECIATION> 3,009,016
<TOTAL-ASSETS> 2,221,484
<CURRENT-LIABILITIES> 365,472
<BONDS> 447,875
0
0
<COMMON> 48,775
<OTHER-SE> 905,255
<TOTAL-LIABILITY-AND-EQUITY> 2,221,484
<SALES> 289,210
<TOTAL-REVENUES> 304,266
<CGS> 266,610
<TOTAL-COSTS> 266,610
<OTHER-EXPENSES> 27,852<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,471
<INCOME-PRETAX> (11,193)
<INCOME-TAX> (4,495)
<INCOME-CONTINUING> (6,698)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,698)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
<FN>
<F1>Includes 1,513 provision for reduction in force.
</FN>
</TABLE>
