Murphy Oil Corporation (MUR) Earnings Call Transcript & Summary

Great. Thank you. Roger, great to be with you. Thanks for spending a little bit of time on the conversation this morning. What I thought we would do in this is, I throw the floor over to you, just talk a little bit about what you're trying to accomplish. And as you're now looking into a new year, what the business mission is, what the focus will be. Just any general or specific thoughts you want to just convey about what you all are working to accomplish now. You've clearly accomplished a lot. What you accomplished and what you're looking to accomplish as we go into '21, Roger?

What I've been doing -- what I'd like to do, John, if you don't mind. I know what you want in that. But I have our slide deck, and I'm going to do a very brief walk through that accomplishes what you want. So that will take 10 minutes.

So that will be lovely.

On Page 3 of our deck, of course, Murphy's long corporate history. We've been in business for a long time, public since '56, incorporated for 70 years and business for 100 years. So we've seen our share of issues up and down in this industry, very experienced company, very experienced successful family ownership in our company. Main thing for us this year is continue with what we're doing, where we have high margins and high prices. And when prices return, we'll be well positioned. We want to keep our liquidity the same at the end of the year as it was beginning of the year, which is around $300 million of cash and an undrawn revolver working toward that, pleased with that direction. Working safely and efficiently. We've done a lot of work on sustainability, and we'll talk about that briefly in just a few minutes. We're also very proud of our COVID response. We have [ half of ] the incidence of COVID offshore Gulf. Our COVID in the offshore environment is very difficult to make your goals on work, offset a very difficult hurricane season. To have that without the COVID, it was incredible by my team. On Page 4, just 1 second. This is the first time in the history of our company to have 1 office. 1 office, 1 mission, 1 team altogether. We've had corporate offices. We've closed 2 offices this year, reduced hundreds of people and our G&A for next year will be $100 million less than 2019, which is significant for us. We've changed our strategy statement up a bit to represent what we're doing. In some of the things you talked about, you'll find foresight, discipline, sustainability. We're a differentiator in exploration in our company. We have a diverse mix. You'll very rarely find Murphy with 1 kind of vendor, 1 kind of pipe, 1 kind of oil, 1 kind of diff, 1 kind of thing. I have this view that if you just do 1 thing and only 1 thing, then the only thing you can really do is go faster for the rest of your career. So we have partnered. We're a successful partner with many people. We're partnered with a great asset in the Gulf with Chevron. Working with Chevron in some other exploration opportunities in the Gulf. We're partnering with ExxonMobil in Brazil, which is a key differentiator for our company as well. On Page 7, lot of flexibility for us. Bond market is doing very well. Our yield to our senior notes have greatly recovered here, have no liquidity concerns and a nice bond profile there and an undrawn. And also the key differentiator for our market cap and our rating is an unsecured revolver. So we have enormous flexibility in our company on the size of the revolver and the security, which we provided none and it goes into late 2023, that's 3 years from today. As we look on Page 10 in sustainability, a lot of more disclosure. Massive amounts of disclosure following all the frameworks. Noted by some of our larger investors, had some very good feedback with both BlackRock and Fidelity on this matter. We do very well in governance at our company. We have a carbon intensity gold set to 2030. And you'll find, if you read the details of the report and the details of other sustainability reports of our peers, people are striving to get to where we are now. And the reason that is, is the offshore Gulf of Mexico is the lowest carbon intensity in the E&P, and by a long margin. And also, you see in the Gulf, a lease sale even post Biden election of $120 million spend on lease sale just recently after the election. So people feel they're going to be able to work there. They wouldn't have spent that. But if you follow the money, the Gulf of Mexico, that is Total, BP, Shell, and all the major European players who -- and Equinor, who supposedly want less carbon, some of which say they're going out of the oil business, but they're still drilling in the Gulf and working in the Gulf because it's super economic and lowest carbon intensity areas. So people are still locking for that business. Our Eagle Ford business is performing very well. On Slide 15, our decline rates of our base decline is probably lower. We talked about that on our last quarterly call. That's going very, very well for us. Our Canada business, our Duvernay business had some good prices recently with the diffs spreading out a little bit now, but it's completely derisked and doing very well. And what's really changing in the company is the view of the Tupper Montney. Our strong gas prices there are much stronger than the hub. Diff to hub has disappeared. The production there is declining in that business. There are going to be more coal switching. A lot of macro work done by TCPL there. We got LNG coming there in the next few years. And this is turning to a very interesting situation for us to work in this another basin with super low subsurface risk. Again, a situation around Murphy where we win different things, and we can move capital and do different things. We have incredible capital efficiency there. Working a lot on hedging there to protect that future cash flow. We can turn this business into a cash flow and net income making business because the wells are so good there, working a lot on that and have done well in that in the past. On Page 20, we have a lot of short-term projects going in the Gulf going extremely well. Calliope is a well we purchased in the LLOG purchase. That's now completely tied in subsea and working to put that to a BP platform today. The Kodiak rig is on location and well was drilled early in the year. And the completion was put off due to capital constraints by all the parties. Rigs on location will do that as the well has a lot of pay in it. It says in the slide deck that 2 wells at Lucius. These are drilled, of course, now by OXY. OXY is reorganized in a new team. Lucius is performing well, and we've drilled 2 exceptional wells. Now, John, you got to remember, you're still in the oil business and you got to drill oil wells with a lot of pay. And Kodiak has a lot of pay and the 2 wells at Lucius have a lot of pay. Turning on to the next page, it's St. Malo drilling one of the most pay I've ever seen in a well in my career on a producer in the first well of that campaign. And then an associated water injection well at St. Malo has the subsurface results that we need. So we got to find oil. We got to find the subsurface results, and we got to continue. St. Malo is a great project for us. Other projects are doing very well. Khaleesi/Mormont/Samurai is on tune to be -- on target to be mid-'22. Nothing has changed. We're the only company work through COVID in South Korea and the only company to work at the Hyundai yard with our protocols. And the way we executed that plan, we're quite proud of that. We're probably one of the only deepwater projects in the world on schedule post COVID. And the King's Quay facility is practically built now, it's over 84% complete. So these things are going -- we're doing very well because of our outstanding work on COVID. What differentiates us is exploration. On Page 25, we did go to a lease sale recently. We talked about that more on our call in January. We continue to add to our acreage in different areas. There is a new interesting area here called Oso, where we've got some acreage with some competition, have 2 or 3 really nice prospects there. The big deal for us coming up will be Brazil on Page 27. The rig schedule's now firm, the rig to drill the original part of the work for Exxon. Exxon's drilling in a pre-salt in these large blocks, expensive blocks that they purchased. We're not involved in that. But the rig is there. And that rig schedule is now getting firm for our second half to drill a well -- a well or 2 in the acreage that we own. And of course, this is a big deal for us in massively large prospects with a lot of upside. Exploration on the prior page in Mexico, learning a lot from the successful wells around us. And working down maybe thinking about some larger prospects there that are derisked by the success around us. So diff exploration, ability to move into different parts of the E&P portfolio are our big differentiator. On Page 31, and I'm wrapping up, John, I know you're chomping at the bit. I can see. [indiscernible] We're in good shape on our guidance for the fourth quarter, midpoint of that guidance. Feel good about that. I think there's some confusion out there about storms. And I think the storms that come by by the time our call. So we're not -- we don't have additional to that. We just have the typical ups and downs of our business. We feel good about our production. We feel good about our 2020 CapEx. We feel very good about what we disclosed. We prefer and, as usually do, disclose our budget in late January on our quarterly call. We've signaled that our budget would be near what we have our midpoint on, that's firm, that would be around $700 million. We've signaled that our production would be 150, 160, feel very good about that. We feel very good about free cash flow to cover our capital there and in current prices covering our dividend. So we're very comfortable about what we've been saying. We don't see any significant changes in that. Naturally, you have the budget booked 4 inches away from you right here, John. But I'm not sharing all that today. It's not an appropriate setting to share all that. But I feel good about what we said we were going to do and what we're working on and in good shape and the business is running well and working during COVID. And we're doing a good job and have a great team. So we'll go from there and open it up to you for questions.

Right. Roger, that's great. And you've touched on a bunch of the questions I would ask. But I will touch on them a little bit more. One observation I'll make, if you'll permit me, we've done -- we're doing more and more work with ExxonMobil, Chevron, and working with Royal Dutch Shell now and BP, and we'll be working with Total in the not-too-distant future in terms of our research effort. And then you're right about what you said. I guess, you reinforced the idea that really away from ExxonMobil, specific to the Gulf of Mexico years ago, all those business models are very focused on -- and a continued focus on the U.S. Gulf of Mexico and in deepwater regions. And obviously, they have global portfolios, global opportunity set. So it does reaffirm the idea there's a lot of economic yield and resource evolution that continues to be the case in the U.S. Gulf of Mexico. You're seeing that play through in these business models.

It's because it's the best terms in the world. The United States still has the best terms as to taxes. And to royalties, the royalties are set. And you just can't come in and change my royalties. That's really kind of silly. There will be lawsuit city involved in that, if you could imagine. And corporate taxes are low, can be changed, but it's still going to be the best terms in the word. And the royalties in onshore Texas is 25, and the royalties in the Gulf are lower. And also what people often forget about our business, Canada is very low royalty, 4x less than Texas. So again, we're in a lot of places and have good terms. And so that's why they do it. But the carbon focus too is something they've been knowing about a long time. And let me repeat again, I mean the lease sale is now controlled by Equinor, BP and Shell, some of which say they don't want to be in the oil business anymore. They're certainly out drilling in the Gulf today. And if you look at the rigs that are running, the projects, the lease sale, it's European based.

Yes. And it's interesting with BP, they talk about not wanting to be in the business anymore, but they still got $9 billion per annum to perpetuity. Basically, they're looking to capitalizing that upstream business.

Also next door to us in the Eagle Ford is a significant non-op piece of business run by BPX. It's running -- I think we have 50-something non-op wells being completed by BPX this year. We've had great relationship with them as they bought the BHP acreage next door to us in the Eagle Ford as well. So 2 places we work, they're there and they're supposedly leaving. So I don't think they're leaving.

Yes, I reconcile with that. So let's break this down a couple of ways. Let's do it this way. Let's cut it this way. So let's talk about the development efforts of the business model, okay? Obviously, what those are, a lot of onshore also in the Gulf of Mexico. Just your sense of operating capital now as you're looking next year. Again, you mentioned your 4-inch budget, but next to -- you're limited to what you can say in a forum like this. But what do you want to share as far as the operational tempo, non-op, op? In the Eagle Ford, you've got those 4 wells, obviously, in Tupper Montney. You'll complete, I guess, really part of the year. Maybe that's in motion now. Duvernay, Gulf of Mexico, a little bit of that. Let me tag on one thing because, as you know, I get so excited. So let me tag on to one thing, too. And you can't probably say, but Quay monetization. This is obviously, look, we're going through a global pandemic. It kind of shakes things up. And oh, yes, by the way, the comment you made earlier on King's Quay is true. I mean, I see it across all the global business models, almost everything in the Gulf of Mexico is getting deferred about a year anyhow because of COVID-19.

Not us.

I see and not in that instance. So the monetization, any update there as well. So those are a couple of things, please.

Well, the monetization, as I shared in the last quarter, I made a business mistake that I very rarely make and it's talking about business development in a setting like this. Business development can be any kind of business, selling midstream business, selling something. As you know, from all our other prior business development work, which have been very, very successful, by the way, both buying and selling, here, read about it in the paper, no leach, no discussion. This is something that was impacted by COVID, it's impacted by -- there's 6 parties to this agreement. It's a massive agreement. If people dealing with me, I'm the only public company in the deal. So when I speak of it and feel like I have deadlines as to we do in this business, people could want to hurt the deal if they think I need to do it by a certain date. I got very disappointed in that and decided to no longer talk about it again because I'm not doing -- and one of your competitors, they wrote an error field report on this matter around our liquidity. I'm not doing a deal to satisfy you, John, or your competitors around our company that could be a bad deal for my company. I have loads of opportunity to sell this midstream asset because it's executed and it sits behind proven reserves that are third-party often. So I have a lot of flexibility around that. We're very pleased with how it's going. We're just not going to talk about when it's going to happen.

Fair. So the bottom line is there's a dynamic.

If it's fixed and finished and sits on top of proven reserves, the midstream asset will be sold at some point in an appropriate way that I want. So that's just how we're handling that.

Logical. So operational tempo, Gulf of Mexico and then sweeping onshore Eagle Ford.

Well, next year, I think the best way to say it, there was a conference last week. We have about, let's say, around $700 million in CapEx. $300 million of it is for what we call the big 3. St. Malo waterflood project with Chevron, we have 2 rigs drilling there a day, drilling producer and injector wells. So, of course, we got to put in infrastructure there and offshore equipment. St. Malo and Samurai -- I mean Samurai -- St. Malo waterflood is around $170 million and then Khaleesi/Mormont and Samurai probably going to be $130 million, $140 million. Samurai, we're 50-50 with a privately held company. And on Khaleesi/Mormont, we're 34%. So we'll be out there drilling in the early spring. We have a rig signed up for that, nice prices and cost savings that are served, and everything is doing very well. So that's going to take an enormous amount of our CapEx. And then in the $170 million for the Eagle Ford kind of thing, we have some DUCs to complete there early on and then drilling. I don't think it will be as front-end loaded as normal. We do have some big non-op program with BPX that I mentioned and some other peers. Several outstanding companies work in the Eagle Ford. We always talk about the Permian, but EOG, Marathon, Encana, Devon. A lot of people work in the Eagle Ford too, John, as you know. So then Canada onshore in the high -- in the 80s, 90s range, probably more weighted toward Tupper maybe than we have in the past. And then some international stuff in Vietnam. So that's kind of the round out of the budget there, but it's going to be probably weighted a little bit overall due to timing and different things, probably no over high for our budget to be spent in the first half of the year, probably almost 60%.

And on the Duvernay, you're really enough lease -- you've accomplished a lease retention of just...

Yes, and the carry. We have enormous asset upward ability there. The wells are doing very, very well. It's one of the leading performers in our company from a production guidance budget basis all year. There's still a lot of capital going in there by others. Canada is really -- Kelly says that everything comes back in style. And so low royalty, we have an administration there who doesn't jack around on fracking and things of that nature. Our capital efficiency there is very high. The rate of return of a Tupper well is over 100% today at 2 40 C. And we have a lot of gas forward sold at 2 40. The production in that country is small, like 13 Bcf, it's fell 5 Bcf. TCPL, a sleeping giant there. We've done a lot of debottlenecking. We couldn't get the gas to storage in summer months. And if you look back over the summer, it didn't have this severe drop that it's had in the past. And actually, the diffs there have been very good. We also have a diversification to sell gas into Malin, into -- or in the California border or Chicago or Iowa. And we've done well there and done well in diversification and hedging there. And the wells are 20 Bcf a piece. And so what we're trying to do there is look at that business a little harder. We talked about that more in the first quarter, keep our Eagle Ford flatter with a lower capital. I think our maintenance CapEx is to be lower there than maybe people may think. And we're trying to make every business free cash flow positive in time. But against your spreadsheet world that you live in, John, when you work offshore and you don't flow until 2022, we don't always look good in your spreadsheet. We have some more in the past. So if we don't put every dollar to the bid, we come up a little bit short in some of your caps. These offshore projects are prolific. They could be set up for the perfect storm of higher oil prices in mid-'22, probably are. We've got low-cost going into them. We have all our costs booked, all of our execution behind us. We've built this big facility in Korea during COVID and we're set up to do well coming on here at Murphy.

It is interesting, too, who you're partnered with. I mean, partnered with ExxonMobil at offshore Brazil, that's about as good as it gets as far as the...

And Chevron. Chevron is a great partner and a great improved partner.

That's what I'm seeing and that's what we're sensing, yes. And mostly in the Gulf, more partnered to Chevron in the Gulf, I guess, but yes.

This is one of the -- the St. Malo project could be one of the highest margin projects in the world. I mean, OpEx there is probably $5 or something like that and a low DD&A. This is a big time project that we bought in the Petrobras joint venture. We're very happy to be a partner of that. We're 20% MP GOMs.

What kind of incremental rate are we talking about? I recall -- and I'm modeling in about 5,000 barrels of an incremental volume wedge associated with St. Malo. Is that about...

That's about right. It's going to flow too in '22. But our good friends at Chevron, a great partner and a great relationship, and I don't like talking about a lot of details around Murphy's production disclosure, neither does Exxon. So -- but we'll make it through that with results, I think.

Shifting to Mexico. One was a down structure to try to find a little water contact was one objective. And also you had a subsalt objective. Will you accomplish both those projects, you think, in '21?

I think this is going to be into the late part of next year drilling there. And to be honest with you, with some success we're seeing and the partners we have there, of course, PETRONAS is one of our partners we know well. Of course, PETRONAS has success elsewhere in Latin America recently, as you know. We're maybe looking at a bigger well that's derisked by the other wells in lieu of drilling next to that other accumulation that we found before. We're finding some very nice subsalt plays there, very nice, very nice-looking international type, size, prospects that we like and leaning toward that at this time. But there's a partner meeting today talking about. So as we get into all these budgets and all my onshore friends love to disclose every little single thing to do, well they don't have international partners and international budget process. I got a different kind of a deal over here at Murphy. And I won't make my partners mad, because we're a good partner.

Yes, you do. Right, right. What -- On kind of a separate note, obviously, environments are very depressed, underscored. Where do you -- Rog, what do you see as far as the environment? I mean, how much -- I mean, basically service cost -- service providers are pricing their services at P&L breakeven or income statement breakeven in the environment versus reinvestment breakeven. How much do you think the cost environment is non sustainable, non enduring? Our sense is that the capital intensity of the industry next year, specifically, given how depressed activity levels are, is probably about 10% to 15% anomalously less capital-intensive because of deflation than maybe what a more mid-cycle outlook would be in '22 and '23 and beyond. Just your sanity check on that, what's your sense?

I think on the drilling and completion side, we've done a lot of work on upgrading our rigs and changing our rig, pump size and all kind of things, changing our oil assembly, changing some casing programs. We've done a lot of work in this break on where we need to be from efficiency. We don't think we'll lose that. And we think that will be 10% to 20% lower. Just on that, they'll stay with us. The drilling costs, we're not seeing that much depressed because the rig rate, we had prior rig commitment. So it really isn't a big shrink on that. Casing goes up and down a good bit. The fracking though is depressed, and we're seeing 15% to 20% less cost or more as you put capital efficiency next year in the fracking. We've made some optimization there on lowering the time it takes to do a stage and all those things and we do that like any other shale player. Doing well in that. But that could be less sticky. But as you look at Murphy -- and another thing people need to realize about our company is that when you look at our budget, the $700 million budget that we talked about for 6 months now, really, if you think about $300 million and something for offshore, their maintenance CapEx to keep that production is quite low. And another, I think, unknown thing, that there's -- '21 is in that range, '22, a little higher than that possibly. But after that, our capital goes way down and we're maintaining a nice business here with a lot of free cash flow when these offshore projects come on. So if there's any stickiness in cost there, it's going to be okay during our shortfalls of high free cash flow, which is '21 to '22. And if the prices go up, then our maintenance CapEx is lower and our capital is lower. And it won't be an impediment on free cash because I'll be doing so well. So it's going to be probably pretty cost saving out there through '22 in my mind, at least mid-'22, I would say. And also, all the good friends with all the mergers are saying they're not going to grow. And if they don't grow and they just have G&A savings, well, they're supposedly not going to drill, and I don't believe that will make it -- they'll make a change in that cost as well.

Yes, that will keep the pressure off of it. You are a natural consolidator in the Gulf. There's moving parts there. I mean, clearly, Exxon, they wanted to retain certain components of that footprint. I mean how do you see the M&A dynamic in terms of the Gulf? Is there -- I mean, I never really liked these questions very well because it's all -- but I mean...

But you say -- John, you said twice that, well, I shouldn't ask you that cash flow budget, and you still did.

You got me.

The M&A market is a lot more interesting than it was. COVID was such an impact on the original work from home and the big shutdowns of April and May and June. And now we come back, we're back in our office working. I think business is coming back. Working remotely, business development sort of -- as I say, on the King's Quay thing, it hurt the deal getting in the room to close because some of the partners wouldn't travel here. Whatever, that's fine. So BD is cranking back up. We always are looking at interesting deals. We very rarely look at onshore anymore. A couple of interesting things, but if you really don't want to have free cash flow, you should buy more onshore. And so we are a consolidator. We're very particular about the returns that we want, and we're constantly reviewing things and we can work and do all kinds of things, operate any kind of facility and we're enormously respected at the regulator. We're one of the highest thought of regulators, by the people who regulate the Gulf due to our safety and all the things that we do well. And so it's a major part of some we review, but we always have around 3 things we're reviewing, and we do it every Wednesday at 2:30 in the afternoon. We're going to meet today or tomorrow.

Great. Well, it's been great being with you. You give me -- you've given the audience and myself a nice lay on the land on what you're doing and where you're going in terms of '21, Roger. And it looks exciting, and I appreciate it. I appreciate you spending some time with me and us this last 30 minutes. Thank you for that.

John, you're well respected here. We like working with you. Appreciate your help. And any time you need us, just get with Kelly and we'll be right there to talk with you or anyone you bring to a call to me -- with me.

I truly appreciate it. Good to see you, Roger. My best.

Okay. Take care. Merry Christmas to you and happy holidays.

Same to you, Merry Christmas to you.