Murphy Oil Corporation (NYSE:MUR) Q2 2023 Earnings Call Transcript

Murphy Oil Corporation (NYSE:MUR) Q2 2023 Earnings Call Transcript August 3, 2023

Murphy Oil Corporation beats earnings expectations. Reported EPS is $0.79, expectations were $0.75.

Operator: Hello and good morning, ladies and gentlemen, and welcome to the Murphy Oil Corporation’s Second Quarter 2023 Earnings Conference Call and Webcast. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Kelly Whitley, Vice President, Investor Relations and Communications. Kelly, please go ahead.

Kelly Whitley: Thank you, operator. Good morning, everyone, and thank you for joining us on our second quarter earnings call today. Joining us is Roger Jenkins, President and Chief Executive Officer; along with Tom Mireles, Executive Vice President, Chief Financial Officer; and Eric Hambly, Executive Vice President, Operations. Please refer to the informational slides we placed on the Investor Relations section of our website as you follow along with our webcast today. Throughout today’s call, production numbers, reserves and financial amounts are adjusted to exclude noncontrolling interest in the Gulf of Mexico. Slide 2. Please keep in mind that some of the comments made during this call will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause the actual results to differ. For further discussion of risk factors, see Murphy’s 2022 annual report on Form 10-K on file with the SEC. Murphy takes no duty to publicly update or revise any forward-looking statements. I will now turn the call over to Roger Jenkins. Roger?

Roger Jenkins: Thank you, Kelly. Good morning, everyone, and thank you for listening to our call today. If we turn to Slide 3, Murphy continues to deliver strong value proposition. Our ongoing execution excellence ensures that we remain a long-term sustainable company. We operate safely with a focus on continual improvement in our carbon emissions intensity. Our offshore competitive advantage is reinforced with our significant recent project success at Khaleesi/Mormont Samurai fields in the Gulf of Mexico. Murphy also has a diverse exploration portfolio and recently expanded with our new country entry into Cote d’Ivoire. We continue to generate strong cash flow, and we have been able to more than double our long-standing dividend from 2021 as well as significantly reduced debt over the last 24 months.

On to Slide 4. Our stated priorities of delever, execute, explore and return remain our focus as we advance through 2023. We’re in excellent shape to advance Murphy 2.0 or our capital allocation framework with a targeted debt reduction goal of $500 million in the second half of the year as well as stock buybacks. The goal of Murphy 2.0 will be enhanced by using proceeds from our noncore asset divestiture in Canada. We continue to execute our priorities operationally as production exceeds the upper end of production range due to strong well performance in the second quarter or the second quarter in a row rather, in addition to our highest oil production rate in two years. The team brought online a total of 27 operated onshore wells across the Eagle Ford Shale and Tupper Montney in the second quarter at or ahead of plan and also completed Gulf Mexico facility maintenance ahead of schedule.

Additionally, I’m pleased that we received government approval for the lockdown field development plan in Vietnam this quarter. Regarding our exploration strategy in the second quarter, we initiated a new country entry into Cote d’Ivoire. We’re also progressing plans to resume drilling on the Murphy-operated Oso exploration well in the Gulf of Mexico late in the third quarter with consistent operational performance and decreasing CapEx for the rest of the year, free cash flow generate will support our strategy to return funds to shareholders through our capital allocation framework. On the Slide 5, a strong quarter for us. In the second quarter, we had 184,000 equivalents per day and exceeded guidance by over 6,000 barrel equivalents from a better-than-expected well performance, plus 1,400 barrels equivalent per day from lower realized Tupper Montney royalty rates.

Oil production of 99,000 barrels equivalent today, which was some 5,000 barrels per day above guidance grew by 10% over the second quarter of 2022, reflecting production beats and our oil-weighted Eagle Ford Shale and Gulf of Mexico assets. We realized $73.54 per barrel for our oil, while our realized NGL price was $19 per barrel and nat gas for Murphy was $1.92 per 1,000 cubic feet for the quarter. Now I’m going to turn the call over to our CFO, Tom Mireles for an update on our financials and sustainability efforts.

Tom Mireles: Thank you, Roger, and good morning, everyone. Slide six. Net income in the second quarter totaled $98 million or $0.62 per diluted share. Including after-tax adjustments, adjusted net income was $124 million or $0.79 per diluted share. These amounts were impacted by $116 million of exploration expense during the quarter, including noncontrolling interest. This was primarily comprised of $54 million net to Murphy in drybulk costs for the Chinook number 7 exploration well, as well as a $17 million write-off of the previously suspended Cholula exploration well and $10 million in seismic costs for the Cote d’Ivoire new country injury. Murphy’s strong operational performance generated cash from operations, including noncontrolling interest of $470 million.

After accounting for net property additions and acquisitions, we had adjusted cash flow of $121 million. This amount reflects $28 million in total contingent consideration payments made during the second quarter, $25 million of which was related to the one-year anniversary of first oil at King’s Key. All of our obligations have now been fulfilled related to the two Gulf of Mexico acquisitions in 2018 and 2019. Slide seven. I’m pleased to say our fifth annual sustainability report was just released, which includes enhanced disclosures surrounding our actions towards reducing emissions intensity, improving water recycling, continued strong governance oversight and an ongoing focus to positively impact the communities around us. Of note, in 2022, we recorded our lowest emissions intensities for greenhouse gas, methane and flaring since 2013.

We have also achieved our highest water recycling ratio in company history across our onshore assets. Lastly, we have received a number of awards and recognitions for our dedicated service to the communities as we continuously strive to make it better. With that, I will turn it over to Eric Hambly, our Executive Vice President of Operations, to discuss our operational update.

Eric Hambly: Thank you, Tom, and good morning, everyone. Slide nine. In the Eagle Ford Shale, Murphy produced 35,000 barrels of oil equivalent per day in the second quarter with 89% liquids weighting. A total of 17 operated wells were brought online as planned across Catarina and Tilden, and we have seen them outperform expectations due to our optimized completion design. Of the 2 Tilden pads that began producing in the quarter, four wells are outperforming their pre-drill forecast by 100%, with the other four wells producing in line with forecast. Overall, these eight Tilden wells have an average IP30 of 1,200 barrels of oil equivalent per day with 85% oil. For the third quarter, we plan to bring online seven operated wells in Catarina and Tilden and two nonoperated wells in Tilden.

Slide 10. Murphy produced 341 million cubic feet per day in the Tupper Montney and brought online 10 wells during the second quarter. Of that amount, seven were originally planned for the third quarter, but were brought online early. We applied our learnings from our Eagle Ford Shale completions design in the Tupper Montney this quarter on the most recent seven wells and through activities such as real-time frac optimization, we have seen incredible results. These wells are achieving some of the highest IP30 rates in Murphy history with all seven wells averaging approximately 17 million cubic feet per day. Even more encouraging, two wells have achieved a new Murphy IP30 record of more than 21 million cubic feet per day. We look forward to applying these learnings on the remaining well in 2023 and as we plan for our 2024 drilling program.

Slide 11. We are excited to announce today, that we have signed a purchase and sale agreement to sell a noncore portion of our onshore Canadian assets to a private company. Under the terms of the agreement, the buyer will pay Murphy CAD 150 million at closing in an all-cash transaction, subject to customary closing adjustments and conditions. The transaction has a March 1, 2023 effective date, and we anticipate closing will occur in the third quarter of 2023. The assets to be divested include the Saxon and Simonette areas of Kaybob Duvernay, where Murphy holds a 70% working interest as operator, as well as Murphy’s 30% working interest in Placid Montney assets operated by Athabasca Oil Corporation. Also, included are batteries pipelines and the assumption of related processing and marketing contracts.

The combined assets, currently produce 1,700 barrels of oil equivalent per day, NedlMurphy and consists of 39% oil. Net proved reserves were 5.3 million barrels of oil equivalent as of December 31, 2022, also included our 250 gross drilling locations or 138 net locations across the two areas. After closing, Murphy will have approximately 488 gross drilling locations with an average 75% oil weighting remaining in the Kaybob Duvernay, all of which are operated with a 70% working interest. We will have no remaining position in the Placid Montney. Slide 13. We continue to see outstanding performance from our offshore wells, particularly at Khaleesi, Mormont and Samurai. Combined, our offshore assets produced 86,000 barrels of oil equivalent per day in the second quarter with 80% oil weighting and production 3% above guidance.

Looking to our tieback projects in the third quarter, we will focus on completing the Murphy-operated Dalmatian number one well before moving to spud the Marmalard number three development well late in the quarter. Additionally, our operating partners continue to progress to St. Malo Waterflood and Terra Nova projects. Slide 14. Murphy recently received final approval on our field development plan for the Lac Da Fang field in Block 15, 105 in Vietnam. This is a discovered field with multiple penetrations in well tests, and we estimate 80 million to 100 million barrels of oil equivalent gross resource. Murphy will continue to advance the field development plan ahead of final project sanctioning later this year. We also look forward to additional future exploration within this block as there are multiple prospects that we find attractive.

And with that, I will turn it back to Roger.

Roger Jenkins: Thank you, Eric. On slide 16, we recently expanded our exploration focus by signing production sharing contracts to secure working interest as operator in five exploration blocks for new country entry into Cote d’Ivoire. We’ll initially hold 85% to 90% working interest with PETROCI holding the remaining working interest in each block. It’s important to note we have no well commitments in the initial two-year exploration phase, which provides us the time to conduct proper geophysical studies over the blocks. Cote d’Ivoire is adjacent to Ghana, which has a large successful Jubilee field as well as a sizable pan development in comparison on the eastern side of Cote d’Ivoire is a discovery called Baleine, which is operated by Eni and considered the largest discovery in the country as well as one of the largest discoveries in industry in recent years.

Shifting West to our acreage in CI-102 as a shallow water historic type opportunities and just to the south in Block CI-531, we have a look like structure to the Baleine field operated by Eni, which is a carbonate discovery, which is a different type of opportunity for Murphy. In CI-103, we hold a long-term undeveloped discovery called Paon, which is appraised with multiple wells by previous operator as well as the agreement on the block, we’ve committed to submitting a viable field development plan by the end of 2025. Lastly, in CI-709, which is a large block with multiple geologic features similar to Jubilee. Overall, this is a very exciting new entry for Murphy. We look forward to the exploration opportunities and will highlight our unique operational abilities.

On slide 17, we completed the drilling Chinook number 7 exploration well in the Gulf of Mexico during the quarter and encountered non-commercial hydrocarbons. Murphy plugged and abandoned the well and expensed $54 million of net dryhole whole costs in the quarter. Late in the third quarter, we plan to resume drilling of the Murphy-operated OSO exploration well in Gulf of Mexico after temporary suspending drilling earlier this year. On slide 19, for the quarter, we forecast production of 188,000 to 196,000 barrels equivalent per day with 99,000 barrels of oil per day. This range includes assumed Gulf of Mexico storm downtime of some 4,600 barrels equivalent per day as well as a total operated planned downtime of 2,900 barrels of oil equivalent per day.

Also in the third quarter, we forecast accrued CapEx of $215 million, excluding acquisition-related costs. For the full year 2023, we are raising our production guidance to 180,000 to 186,000 barrels equivalent per day, which represents a 3,500 barrel per day increase to the midpoint. We forecast producing 53% oil and 59% liquids in this range. Additionally, we are tightening our accrued CapEx guidance with a new range of $950 million to $1.025 billion, excluding $45 million of acquisition-related costs. We remain confident in delivering an 8% oil volume growth and 10% production growth over full year 2022 with lower capital spending. On slide 20, Murphy has a multi-tier capital allocation framework that allows for additional shareholder returns beyond the quarterly dividend, while advancing toward a long-term debt target of $1 billion.

Our Board has authorized an initial $300 million share repurchase program, allowing Murphy to repurchase shares through a variety of methods with no time limit. As of today, we’ve not yet executed any repurchases under this authorization. Since we first announced the capital allocation framework one year ago, I’m pleased that we returned an additional $15 million annually to shareholders through the quarterly dividend increase of $0.0275 per share as well as paid down nearly $500 million of debt. I look forward to progressing Murphy 2.0 with the proceeds on the transaction we announced today and further rewarding our long-term shareholders in the quarters to come. On Slide 21, as we continue our strategy to delever, execute explore and return, we remain focused on reducing debt with adjusted free cash flow.

Approximately 40% of operating cash flow is forecast to be invested annually through 2025. We forecast maintaining an average 55% oil weighting with production averaged 195,000 equivalents per day, representing a combined annual growth rate of 8% through 2025, while also supporting a targeted exploration program. As part of this plan, offshore production will maintain at an average of 90,000 to 100,000 barrels equivalent per day. Longer term, we’re focused on maintaining sustainable business, targeting investment-grade metrics. Average annual production is forecasted approximately 210,000 barrels equivalent per day with 53% oil weighting. Our ongoing reinvestment of approximately 40% of operating cash flow results in ample adjusted free cash flow generation, which we used to fund further debt reductions in our capital allocation framework and enhance total shareholder returns in addition of funding high-returning investment opportunities.

On Slide 22, looking at the second half of the year with our capital program declining, upcoming proceeds from our onshore Canadian diversiture announced today and current oil prices, we’re focused on achieving our $500 million, debt reduction goal and enhancing shareholder returns through buybacks as we advance 2.0 of our capital allocation framework. We look to continue our high-quality execution ability as we complete our onshore well delivery program for the year while also improving base production declines and maintaining high uptime across our portfolio. Ultimately, it’s important to send everyone home at the end of the day, and we’re able to achieve this through a strong ongoing safety culture. We have one remaining operated exploration well in 2023 program, and we’ll resume Oso drilling late in the third quarter.

Lastly, I’m proud of our two recent announcements of receiving the Lac Da Vang development plan approval and signing new PSCs in Cote d’Ivoire. We have a long history of successfully executing projects while delivering on our free cash flow conventional business, and these opportunities will add to our longevity, both in the near term with Vietnam and longer with exploring and possible development plan off the West Coast of Africa. I’ve to close our call today by thanking our outstanding employees, this great quarter we had and their ongoing dedication of Murphy. It takes every level of the organization to achieve this success, and I appreciate every one of you. And now I’ll turn it back to the operator for our calls, and I appreciate you listening to our prepared remarks this morning.

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Q&A Session

Operator: Thank you, sir. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] The first question we have in the queue today it’s going to be coming from Bert [indiscernible]

Q – Unidentified Analyst: Hi, good morning. Roger and team. Yes, go ahead, operator.

Operator: Go ahead, Charles [ph]. [indiscernible] go ahead

Q – Unidentified Analyst: All right. Thank you. Good morning, guys. I just want to — First of all, it was stronger free cash flow than we were expecting in 2Q. Just trying to square away where the rest of the year the calculation works. So is there still, I think I did the math right, maybe $15 million of acquisitions for the international side and then maybe $10 million for the Gulf of Mexico lease sale. And I think all the contingency payments are gone, but is there any other math in the background that we should be netting against our free cash flow estimates to determine the Murphy 2.0 framework?

Roger Jenkins: Thanks for that question. Really good question. I think the way to feel about to show that is today, we’ve announced that our capital for the year is tightening range. And then on top of that, we have $45 million of additional new business, if you will, that were never in our plans such as achieving field development, Vietnam and signing the new blocks in Cote d’Ivoire, which includes seismic and other activity. So that will be on top of the range of our CapEx is the way to think about it, to take what we spent to date and have that remaining for the rest of the year, of which about a third to a high for that money has been spent so far on the acquisition expenses, and that’s the way to think about the total cash flow for the year.

We really don’t break out the Cote d’Ivoire in the Vietnam due to privacy around what we have, we’re really proud of the deals that we have. So we’re not breaking out what’s what. But that’s the way to think about our capital spending for the rest of the year.

Q – Unidentified Analyst: Okay. And does the Canadian divestiture count towards that calculation or just moves closer to kind of the Murphy 2.0, 3.0 situation?

Roger Jenkins: Thank you for that. That’s a really good point. How we’re assuming this year is we’re bringing that money in. It’s in C dollars, we convert it to US dollars, transported home when needed, and it too will be shared 75-25 through debt and pay down debt and buyback and just come in. If you think about it, really what’s happening here is if you take the acquisitions and add on to our new midpoint, the Canadian proceeds easily handles that, and we’re back square in our debt reduction goal and our debt down. Our debt paydown goal as well as buying back stock, and we’re very excited about that and lower capital spending in the rest of the year. So, it’s in the framework, if you will, as free cash flow to allow for the extra money spent on non-planned new businesses in African Vietnam. And so that’s how we’re thinking about it.

Q – Unidentified Analyst: That’s a great way to think about it. And then just a follow-up on the Canadian sale. Is that all that you guys are looking to sell? Was that opportunistic, or is there any other parts of your maybe non-core positions that you’re looking to let go?

Roger Jenkins: Again, a really good question. I’m glad you pointed that out early in the call. We have a lot of assets. We have a lot of very high-quality onshore oil-weighted assets and also an incredible Montney position you see from Eric’s comments today how great the Montney is doing with 21 million IP 30s this competes with any gas play in North America. On the oil side, we all know that we have a lower volume growth business in onshore, and we have ample locations. And this was also a very good offer. It’s a very good offer if you think about a little over US$100 million, taking away only 5 million barrels of reserves. If you think about the production today at only 39% oil, you think about how much per flowing barrel that is, how much for acre it is, how much locations.

So it’s an incredible offer that we needed to take, because we still have 488 locations to go in Canada, and they’re all weighted at 70% oil, which is just slightly below the Eagle Ford, but the NGL in that region is double the price of NGL in Texas. So these wells are going to be drilled in the 2040s. And we sold them for a really good price to an operator that wants to invest there. We’re very happy about it, but we’re not for sale there. But as we have aging non-core locations and people want to really pay that for us, we’ll take that money and transpose it into things such as think about Code d’Ivore. We have unreal cost entry into many blocks with new opportunities, including a very large opportunity. We have a possible development in Vietnam.

I mean a development in Cote d’Ivoire and in Vietnam we have a development and exploration there. So able to move our business around and take long used onshore locations forward in cash, investing is something where we have great competitive advantage in offshore execution.

Q – Unidentified Analyst: That’s a great update Roger. Thanks.

Roger Jenkins: Thank you.

Operator: The next question in the queue comes from Tim Rezvan with KeyBanc. Your line is open.