Murphy Oil Corporation (MUR) Earnings Call Transcript & Summary

Okay. I think we're going to get started. I want to welcome everyone to the 25th Annual Energy Vail Summit, and special thanks to everyone coming given the heightened volatility and concerns with the coronavirus. Before our first speaker, I did want to say, at the request of a number of presenters in attendees, that this is a -- it is perfectly okay just to say hello and not shake hands. Hopefully, everyone has hand sanitizers, but we want everyone to be comfortable. With that, I'm going to give elbow bump to Roger Jenkins, who's our first presenter, the President and CEO with Murphy. So with that, I'll hand it off to Roger.

Thank you, Bill. Good morning, everyone, and thanks for attending our discussion this morning. It's great to be at Crédit Suisse in their 25th anniversary. I'm glad to be here and glad to work with Bill and his team as usual. Naturally, I'll be making some forward-looking statements today. This is our safe harbor agreement that's found on our website as we do in all of these presentations. This morning, I'll go through a typical agenda we use in all of our conferences: a company update, onshore and offshore portfolios and some look at our exploration. We have this year an exciting exploration program and some looking ahead at the end of the presentation. And I'm quite proud to be at Murphy Oil Corporation. This is our 70th year of incorporation. We've incorporated in 1950 and publicly traded since 1956. We've been in business for about 100 years and a very, very successful family and very, very successful company. What I want to do today, instead of go through this list, just kind of point out some uniqueness about our company and that we have a very significant onshore business, a flat producing offshore business that delivers significant amounts of cash flow, have a strong balance sheet. We have historically rewarded shareholders very well through a high dividend and also timely buybacks without ever issuing equity since going public. And we have a unique business, the right kind of balance sheet, the right kind of assets and are poised to do well in any type of environment. This is a slide from our 2019 earnings call earlier in January. We have produced 173,000 last year, had a significant change in our portfolio. We're a company that generates very high margins and high EBITDA per barrel due to our high pricing advantages. We had a very good year in supporting shareholders and a very good year in relative total shareholder return, and we've been that way for 3 or 4 years now and also had a nice year of share buybacks through a change of our portfolio that allowed us to do that, along with a significant dividend. We transformed our company a lot in the last few years, and I'll be talking about that in a few moments, fill a lot of deals without ever issuing equity, without ever really changing the capital structure and positioned ourselves in a better way going forward for a profitable business as we move into this new area. This is a slide that's dated. Of course, prices have come down recently with the coronavirus outbreak, but you'll always find Murphy at a very, very high realized price. This is a comparison to many of our peers. We're usually top quartile on this, right near the top. And our Eagle Ford and Gulf of Mexico positions are uniquely placed with very, very high-quality oils that are sold in those markets, both of them delivering in the 30s on EBITDA per BOE when the price is right and a very significant piece. That's where our significant capital goes in the Eagle Ford and the Gulf, and these 2 places provide a lot of optionality for us on a price situation. So it's very unique for our company size. This is something I'm very proud of in my time at Murphy's, continuing history of replacing our reserves. I believe replacing reserves is a hallmark of being a long-term successful company, which we are. We now have around 800 million proven, and this is after several significant deals of selling a large resource in Malaysia and then buying in the Gulf of Mexico on top of a prior purchase in 2018, leaving us at 800 million. As you can see on the scale on the bottom right on the graph, we're now back to where we were years ago from an offshore perspective with very high-quality reserves. We are uniquely positioned with 57% of our reserves is liquid. And I think also advantageous for Murphy is only 7% NGL. We're really not an NGL player and caught up in that situation. So organic reserves replacement, 172%; continuing improvement in F&D and very well positioned in this regard. The next couple of slides are some things I want to point out, again, with the uniqueness of Murphy and the kind of crowd we hang out with in our peer group. I believe, which no press around this, it's all cash flow basis, cash flow, CapEx, cash flow, CapEx. That's every analyst's report, everything that we talk about. But I think we need to step back sometimes and realize that many of my peers have written off significant parts of their company now leaving this, of course, with a very high ROCE because of these significant write-downs. We have people in Perry, over 50% of their market cap quite often and also impaired so much money that's almost impairing 2 or 3 Murphys every now and then and this is just in '16. And with the prices ahead, what will happen to this now? And I think that Murphy is very well positioned in this. I think this is a hallmark of being a great company, a long-term company. It's not writing down significant amounts of assets. And you see in the group in the quartile that we reside some very perceived to be high-quality -- an oil high-quality companies and something that's important to me and our Board. Another thing that we've dug around here and found is we're very, very good on debt to EBITDAX compared to many successful peers as well. This is on the fourth quarter annualized, which would not be the case today. But everyone would move to the right, if you will. And Murphy is again in a very, very nice peer group and very unique for our size in both the impairment situation and in the balance sheet situation. Another slide around Murphy is what I think, if you talk about overspending, you really need to keep consistent levels of cash. If you have consistent levels of cash, you must not be overspending. So we had significant cash on the balance sheet for a period of time, looking for the right kind of deal, purchased the MP GOM deal, which is the Petrobras deal in the Gulf, and sold out of Malaysia and moved back into the Gulf in a larger way, all while returning to shareholders a significant amount of money, a very large dividend, repositioned the company, all while keeping the cash balances the same without any equity being used and all this transformation, which I think is unique as well. We at Murphy, along with many peers, are focused on ESG, really stepping up our game here. We have had an HSE Committee on our Board, all the way back to 1994. We also have a very, very high score in governance, one of the highest governance scores allowed by ISS. We issued our sustainability report last year. We'll be coming out with that again this year with much more disclosure, following all of the SASB guidelines and the requirements by BlackRock and those type of disclosures, looking forward to that as we're very well positioned. As we get into ESG and other matters, we consider ourself a company totally focused on safety of our employees and our contractors. Some very, very nice situations in our company has to do with safety performance. On the environmental side last year, it was an incredible year for us with only one recordable spill in our entire business, and we handle around 350,000 water and hydrocarbons every day on a gross basis. We have halved our greenhouse gas emissions by the change in our portfolio from Malaysia to the Gulf of Mexico. The Gulf of Mexico has a very low-emissions situation. And we're improving our business in the Eagle Ford. We're taking climate into all of our planning and assessments, and that we have now halved this and looking forward for further improvement and goal setting as we move forward. We look now on our onshore business. It's a business we've been in for over 10 years, around 125,000 acres in Eagle Ford. I mean 3 main areas: Karnes, Catarina and Tilden. We describe here what I consider a conservative spacing around all the locations we have available in the business, have over 500 million barrels of 2P here. We have 290 million barrels of proven reserves here, BOE. Another thing unique in our 10-K, as you will find, is you'll see that all of our reserves for 2019 are practically all were third-party audited and have a very, very low percent of agreement there, meaning we're in full agreement with our auditors, so we're quite focused on reserves and feel good about that. Murphy is also very uniquely positioned with our EURs of our well going up in Eagle Ford, not the case for all operators, and happy about that, happy with our work that we have going forward there. As we look at 2020, this is right out of our earnings guidance, $680 million budget here, very high number of wells being delivered for Murphy, 97 operated wells and a significant amount of non-op wells drilled by BPX in the Karnes area. We're greatly looking forward to these. They're in the middle of execution now. They're doing very well. BPX is bringing a lot to the table, and we've had a great relationship with them as they purchase these assets from BHP and now are in full execution mode in their office. All of our first quarter wells are online, and we're doing very well at drilling and completing our second quarter wells already. And the drilling of that is going well, and we're -- feel we're executing well in Eagle Ford. One thing about part of our Eagle Ford, if we go back to this slide and look at the Catarina, we have 35 wells in the Catarina area coming up this year and 10 already flowing, and it's a significant amount of our business. And if we look at here, we're often pulled in and painted into some other peers, I believe, in the Catarina area. Our acreage is uniquely positioned and is a black oil and condensate area. We have the lowest GOR in the area, and we have the highest liquids in the area. So if you look at these peers that work in the Catarina area, and there are many, we're, again, very, very well positioned, and our EURs per well are going up in Catarina. We do not have issues there, and we have a very, very low cost, very shallow acreage to work in, and we're doing very, very well in Catarina. So this is just from the public data of the kind of wells around us and surround us. I think it's important when you look at the details around capital allocation in the Catarina area. Looking into Kaybob, this is an area that we're almost finished with our capital so far this year. We drilled across the entire play. Every well was successful. We're doing very well at lowering costs here at $6.5 million, no problem. During these wells, again, another disclosure around Murphy, a conservative spacing and a detailed amount of locations that we have available. These are real locations mapped and ready to go when needed, and then we continue to outperform here for some very, very good results, especially in the last couple of weeks. This is our plan for this year, $125 million in capital, as you can see on the bottom-right bar. Most of that is behind us now and completed and flowing. And our carry is fulfilled basically now, and that becomes a nonissue going forward. It would just be a typical capital allocation as any other business. And it's a 17-well program, very front-end loaded. And the execution of this has been exceptional and also the results. Montney is a place that, as we know, has been hurting with lower gas prices here. We are very well positioned. It is a place that you can break even on cash flow and have some free cash flow. While we were very near replacing all of our oil reserves, this is a significant booking as well. And we now, with the DD&A lowering here, almost can have net income at these $1.50 type C kind of AECO prices, very unique business, very successful business but hurting, of course, by gas prices. We also feel it's important for us, from an ESG perspective, to have a very large gas resource that can be throttled up as LNG becomes a part of that factor long term with very, very low capital spend required here going forward, and again, a uniquely positioned situation in the Montney for Murphy. Now we go into our offshore business. We've revitalized this business. We're now the fifth largest operator in the Gulf of Mexico through 2 significant trades, if you will, from Malaysia into this. We have 4 large facilities that we operate, giving us a lot of infrastructure to work out of and for other parties, very high-margin business that I've reviewed before and a long runway of projects to do well into '23 and '24 with the type of projects that we purchased from these 2 deals that we did. This is a detailed look at how we're progressing right now in all of our projects. We have both short-term and long-term projects. The Front Runner rig is now -- that well is practically finished this morning. Just reading about it, it's a very, very nice well that we drilled there. That's looking to come online here as planned or earlier. Would then have our cascade well. The workover there is progressing very well to the plan here. Dalmatian workover will follow that. And we have 2 subsea tiebacks, both Calliope and Ourse, that are to be flowing at the end of this year and end of next year. Both of those are working well. And the Ourse well is already drilled and completed. It's just a matter of tying into a nearby BP field. On our 2 -- we have 2 long-term projects -- actually 3, 2 operated, the Khaleesi/Mormont discovery that we purchased from LLOG and the Murphy discovery at Samurai. Both of these are going very well. The facility is being built at Kings Quay in Korea. And the pre-FEED work and the subsea work and the architecture, all that work is complete. These projects are to flow in mid-2022, and both are going very well. St. Malo waterflood is a well being drilled there. That will come on production in late of the year and early next year, and it will be -- have its major first oil from that significant waterflood project out in 2023. This is our slide that we described this business. It's a business that delivers a lot of free cash flow. This is a $55 price. We have an 82,000 barrel a day business in the fourth quarter. We feel we'll leave at the end of this year at 86,000. I don't have a change in that plan. We have our base decline, and we're adding on our short-term projects, our rig products, and we end up at 86,000. And we'll have a large amount of free cash here coming out of this business. It's a big cash flow generator working in the Gulf of Mexico. Again, the wells I've recently reviewed are offered in the list here on Slide 22. We'll move now to exploration, another unique tenet of our strategy and separates Murphy, I think, from many companies at our market cap and size. We'll be targeting 2 to 3 -- probably 3 wells a year every year, around $100 million CapEx. We'll be drilling a 20% working interest well called Mt. Ouray in the Gulf of Mexico in the second quarter. The Cholula play, so we had a discovery in Mexico last year, and we're coming off structure and drilling down-dip into a thickened horizon on one of the pay zones there. That's matched very well with our seismic. We're also very excited about the recent E&I discovery. And of course, the Talos discovery, all in the same type of oil, all in the same age rock, all in the same type of trap and resource. Both of these discoveries are around 15 to 20 miles away from our Cholula area. We'll then move to a significant sub-salt well to be drilled in Mexico called Batopilas. This well will be drilled, spudded really late this year. And in the Sergipe-Alagoas space, and we're working with the operator Exxon there. We're at 20% working interest, a significant, big upside for us in the future. And this well will probably be drilled at this time in 2021, and the planning and the permitting and the procurement is ongoing for the well at this time. Very significant year for us as we get out with our new program, adding acreage also in the Potiguar basin in Brazil. We have 2 significant acreage positions in Brazil, a very large block in Mexico and our long-term business in the Gulf of Mexico. As we look ahead this morning, this is our guidance that we use for our call. This has not been changed, our production and capital guidance. We do have a flexible program. And I went ahead for this conference and disclosed this information when we filed these slides in an 8-K to say that we have specific cuts available if needed. And very soon, we'll have to pull that trigger. It's not very difficult for us to do this. It's a matter of timing and pushing things to the right primarily in the offshore business. This near $55 million type capital reduction will not impact production in 2020, it's more of a sliding or timing of some of the fields to the right. I want to make sure investors knew that we're on top of this, have a plan, have a plan to do more, if needed, if this does not recover or should recover in a U or V shape. Another real important positive for us from a liquidity and cash flow perspective is that we spend a lot of capital in this King's Quay project before we sold that down to ArcLight and the MOU that we filed on the day of our earnings call. That would bring in $125 million, of course, will be needed money at a $45 type world. And this will be closing at the end of this month or early next month. And this is the capital, it would be a credit, if you will, to the capital that we spent in 2019. So in our capital that we disclosed for 2019 have this money already included, and this will to be a rebate, if you will, when they take over ownership of our working interest in that play. As we look at our long-range plan, when we get this virus behind us and get back to what we feel is a mid-level $55 price, which I think is common in the industry today, we do have a significant free cash flow business, very tight to covering our dividend for the first 2 years, but we're also covering a very significant dividend at over $153 million a year. And so it's no easy task to cover that and cover your capital at these prices, but then we build ourself up with our Gulf of Mexico projects and more of a larger position at Eagle Ford. And we have a very large cash flow-providing business at any type of price recovery here over the long haul. This is primarily a plan where our Gulf of Mexico stays flat. Our Canada stays behind to be throttled at another time, and our Eagle Ford plan is growing today. That can, of course, be altered, if needed, for pricing. And then we have all this business without any exploration success at all, and exploration can be a key unique driver on top of all the things that Murphy provides: great balance sheet, great reserve base, great assets and the ability to company change yourself for the cost of one pad of drilling in the Eagle Ford Shale. I think that's the real uniqueness around our company today. So we have transformed our company into an oil-weighted, higher-margin, less cash, tax-paying company on the Gulf Coast in both the Eagle Ford and Gulf, producing high-quality assets with very high prices and premiums. Our Eagle Ford Shale is ramping during this time with the capital that we've outlaid with this year's capital being the highest in the program. That can be changed, of course. We're executing our short-cycle projects. They're going very well from a subsea installation and execution perspective, and that we offer investors a unique company, very large dividend with big exploration upside. And our shareholder priorities and our ESG and everything that we need to be a continued high-quality company being maintained. And that's all we have today, Bill.

We have time for questions.

Maybe I'll start off with the first one, Roger. If you could reference the ability to cut $55 million spending if prices stay weak. Could you talk a little bit about how long prices would have to stay there before you would make that move? And then also it seemed like most of the cut was on infrastructure and exploration spending. And I know there's no impact to 2020, but would there be any impact to the 2021 production if you were to...

We probably will be moving toward this very soon. And this type of cut, it's not a difficult cut to do. We're already a range of how to do it. It's a matter of slowing some projects. We had a nice budget, if you will, to do these projects, but we can cut that and probably be moving to do so. I would say in our earnings call will be a time to catch up on when we have capital changes and see what happens between now and then. We've done some very, very early work on '21. This has only been going on a couple of weeks, this major collapse in oil prices. And the way I look at it today is that more than likely, we can continue to cover our dividend and our capital for the next 2 years in a $50 world. And if we get on to these cuts and do some more lower CapEx for next year in order to do that, we'd probably be looking at a production level in the lower quadrant of our current yearly guidance of 2020. And -- but that's some very, very early preliminary numbers that we have. But we're in pretty good shape to cover CapEx and dividend with the King's Quay money coming in, which we'll need now, with -- if this price stays. Another thing we have to all keep in mind about the prices, Bill, as you know, is the first 3 months of the year already booked and behind us. So you start talking about a $45 world, you have to be $43 every day going forward from today going forward. So our -- we're now trading April now. And our February prices were over $51 in the Gulf and the Eagle Ford realized. So this euphoria about this constant collapse requires a lot of significant problems ahead to get to $45 or even a $47 number for the rest of the year. And then we have the high price advantage, which I think is helpful too because $2 or $3 here or there makes a lot of difference when you're working in this type of problem. And also when we say cover our CapEx and dividend, we pay a large dividend. So we're not -- I laugh at these guys saying they increased their dividend 20%, and it's $0.30 a share or something like that. I mean I pay $1 a share. And so we're a different cap.

Yes. The collapse in oil prices also presents opportunities on the A&D front, and you've been a consolidator in the Gulf of Mexico. Could you talk a little bit about if you're seeing improved opportunities and where those opportunities might be, whether they're in the Gulf or if they're in the onshore U.S., and how you're looking at that?

We're not really interested in opening up any new front. So the war in our onshore business, we have 3 big significant positions that we bought very inexpensively. And you never really see high-quality Eagle Ford that's at our old percent -- at our liquids percent coming to market, quite frankly. People ask us about that all the time. In the Gulf of Mexico, when you have this type of issue, the first thing you want to look at is what is my strip returns after I wash through the 2P of the seller? Well, most seller today is going to be looking at $44 strip, and that's not what he's interested in. And I think this type of thing has to work its way out to see how long it will last for a seller to change to get into that mode. That this is a collapse, I better get out because it's just $62 on January 4. And it's going to be hard for a seller mentality to go off a $55 price, I think. And you start with strip, and they won't like it if you start with strip. So I don't see that changing now. But give us 6 months of this, things could change.

For sure. And then I'm a believer we're going to move back to mid-50s when the virus is behind us.

We did, though.

So maybe we'll stop talking about $45 oil. But could you talk -- and you referenced $1.4 billion in free cash flow over the next 5 years. How do you look at the avenues to returning that cash? Like what is the appropriate dividend? How do you look at dividend policy and..

Well, I think if you have a long-term dividend, like we do, should try to increase your dividend, and it's not a large amount of money for us to increase our dividend. You can go up like $6 million to $7 million, $10 million, bought us a lot of dividend increase for me. Because I bought back so many shares from 192 million shares when I started to 153 million shares today. So we'd like to do that, and we're looking to do that before this came along. And I think the way I look at it is that Mexico and Brazil are very unique exploration opportunities for us. And then when we get through that in about a year from now, well into that, and we get into that next series of the free cash flow from the assets that we own and the reserves are third-party verified and everything in our asset base should be executable, then it'll be a time do I need that for exploration success. I might need that to return to shareholders, both through paying down debt and to shareholders. We'd also like to get our debt lower. And so it would be a matter of splitting that free cash flow going forward between those 2 entities or hopefully spending on a big project in Brazil that will ultimately lead to a lot of free cash flow and a lot of help for our company.

Okay. Are there any questions from the crowd for Roger? All right. If not, please join me in thanking Murphy.

Thank you.