Murphy Oil Corporation (MUR) Earnings Call Transcript & Summary

Yes. Good morning, Arun Jayaram again from JPMorgan's E&P team. Up next, join me in welcoming Murphy Oil Corporation's President and CEO, Roger Jenkins. Roger was elected President and CEO of the company in 2013. He's been with the company over the last 20 years. He built a great business in Malaysia. And over the last couple of years, he's overseen a dramatic portfolio transformation with the company, selling Malaysia a few years ago and adding some assets in the Gulf of Mexico, which is Murphy's backyard. They also have an interesting growth project in the deepwater Gulf of Mexico that I'm sure Roger is going to speak about this morning. He's an LSU Tiger, and I had to add that, Roger. And with that, I'll turn it over to you for some prepared comments. And then at the end of this, I'll ask you, we'll do a quick Q&A session. Roger?

Thank you, Arun, and I am an LSU Tiger, bet on that. Welcome, everyone, this morning to our presentation. It's honored to be at JPMorgan, one of our long-term bankers, and people we work with for a long time and glad to be at JPMorgan, look forward to it being live in the future. On Page 2 is our agenda today, talk a little bit about our overview of our company and why invest in our company and the key priorities that we have in our company that we outlined in our first quarter results, some look at high level of our portfolio and looking ahead in our business. Naturally, today I will be making forward-looking statements as we go forward in this presentation, it would be common in this type of work. On Page 3, the way to think of Murphy Oil Company is that we simply produce in 3 areas. We produce in U.S. onshore in Texas on private lands in Eagle Ford Shale. We've been there for over 10 years. We make -- we want to keep that production flat at near 30,000 barrels a day, we have identified key prospects in that business to drill, in 5 locations to drill. We produce in onshore Canada, very significant business there as to our dry gas in the Montney and our fully delineated Duvernay shale business. And we operate in the offshore Gulf of Mexico. We're the fifth largest operator with many locations and projects, 3 big projects coming on. And we also, on top of all that, have a unique exploration business that's very large and vast and is going to be accomplished here, we're going to start off with 2 big wells this year. One way to think about it again is these onshore assets in both Canada and Eagle Ford are run by one singular team in one building here in Houston, post a major reorg in our company a year ago, almost today. And our offshore business has been a long-standing offshore operator all over the world, as Arun mentioned. And in our exploration portfolio we drilled wells, is exactly like what we've been executing for a long time. From a production reserve basis, we made 155,000 BOEs a day in the first quarter, midpoint of our guidance, in which we're doing very well, in the second quarter 164,000, we have a pie graph outlining that for you on Page 3. We have about 700 million barrels of reserves in our business. And why Murphy Oil have a list of attributes here about investing in our company and then some backup slides, following that this morning. Our 3 producing areas combined has low carbon intensity in our business. We described carbon as low, going lower. We're very, very well positioned there. We have a high potential exploration business that we have at Murphy. And on top of that, a very unique first-class industry-leading execution ability to deliver these projects on time, on schedule, no matter what circumstance and also provide a lot of leadership and guidance to non-op partners. We're a strong generator of free cash flow. All of our assets are making free cash flow this year on top of the capital, and everything that we're doing in the Gulf of Mexico. We have a unique ability to move this capital as needed through different circumstances. Key things about Murphy that differentiate us is 2 things. We have a long history of paying dividends. And we're not a newcomer to dividend. We've been paying a dividend here for 60 years. We also have very large ownership at the Board level, 1 of the top 2 in all of the industry today, which we're quite proud of. And these are the unique factors around investing in our company. On Page 5, naturally will be part of the energy transition as we see now that there's demand growing for cleaner energy. We have low carbon intensity now. Regulations and cost structure could be a situation with low intensity and low carbon will be advantaged, and we are being advantaged in that way as well. And we are very well positioned with our assets around energy transition. On Page 6, we have low carbon intensity in our business. We're lowering it 15% to 20% by 2030. This has been disclosed. We're realizing low costs from this as we're doing fuel replacement, natural gas recycling-produced water, electrification in our onshore business. I just mentioned a few minutes ago that our deepwater assets are greatly positioned, has the lowest carbon intensity in all of E&P. And we're evaluating further decarbonization in our new sustainability report to be filed in the third quarter around methane intensity and involving 0 routine flaring and all these matters we'll be working on as we move forward. And we're a top quartile in emission intensity of oil-weighted peers based on our 2020 data. On Page 7, naturally, there are many advantages to being -- as to your corporate longevity about being a sustainable company where you recruit the top people, maintain high levels of shareholder support that we have, we'll have healthier credit ratings by being sustainable and be able to have higher returns with our low carbon emissions business. On the left-hand side of this page, on Page 7 shows from disclosed targets where Murphy is, you can see that we're very positioned especially for a mid for a company that's oil weighted. On Page 8, I've spoken already today about our Vantage exploration portfolio. Arun mentioned that earlier in his report and discussion. On the right-hand side of the page really shows where Murphy really contributes is through our execution ability. This is a picture of the King’s Quay floating production system in Korea with the banner hanging in the stage, and this is the sale away ceremony that took place last week, perfectly on schedule and executed during COVID. I think one of the finest days in Murphy history is to build and maintain the schedule now for the oil rebound that we have to build this during COVID in a foreign country with our outstanding team that we have there. On Page 9 is more numerical facts around the ideas of significant dividend payments and our significant ownership and all the billions of dollars that we've returned to shareholders. Again, you can see a vision where that will come back with our ownership and our history of major returns to shareholders throughout our history, especially over the last 10 years, and our ownership buoys that effect. If you look at our priorities on Page 11 in the first quarter earnings release. We outlined 3 distinct priorities that we're totally focusing our business on. This would be around delevering our business and improving our balance sheet, executing all of our capital and having capital efficiency being very high and also exploring. At the end of 2020, we did have some revolver balance in our company that was totally repaid in the first quarter, and we set a goal of reducing debt, some $200 million further throughout this year, and that was at an oil price in early May. Naturally, oil prices are much higher. We anticipate that to be increasing. We'll be discussing that further in the second quarter as to strip prices at that time. On execution, an outstanding year for us, not only at King’s Quay execution and all of our deepwater, all of our onshore wells are under budget and faster than planned. Big first quarter exceeding guidance -- exceeding oil guidance despite a major storm in the Eagle Ford Shale winter storm that came through Texas. And all of our projects through all this have maintained schedule. Big wells being drilled this year. Silverback operated by Chevron is drilling ahead in the Gulf of Mexico today. In the third quarter, we await a spud of a significant exploration opportunity, Cutthroat being operated by ExxonMobil. On Page 12, new to this quarter, what's been going on. As I mentioned, 2 or 3 times now, King’s Quay is doing extremely well and on schedule, but Moorings offshore are installed to attach that vessel to the sea floor, practically finished there. Our drilling -- development drilling continues to progress well and doing extremely well in that regard. On the regulatory front, in the Gulf of Mexico a Federal judge stopped the pause of leasing put forward by the current administration. We're very glad about that, Murphy's very active in the lobbying efforts around offshore regulation, and we continue to see support, legally strong legal support for the leases we own and operate for our ability to lease in the future. On the right-hand side of the page, we saw last week where Suncor has announced to us, Suncor and Cenovus will be going forward at Terra Nova. This is impaired in the first quarter because there wasn't a deal on the table at the time. And all the parties are in agreement and in principle to go forward. Negotiation continues to move forward. Again, repeating the execution around one of our key priorities, continue to execute all the wells we're supposed to have in the second quarter on time or earlier and production guidance, no problem anyway with Murphy as to tackle storms or any other matter. As you walk through our portfolio on Page 14, we have a very outstanding onshore business. We operate again in Tupper Montney and Duvernay in Canada and in Eagle Ford Shale, well positioned for natural gas, only 5 miles from the pipeline entry to LNG headed West. Very nice oil-weighted Eagle Ford business that has high cash flows and with oil price increasing in this way, a significant reserve base and identified locations that are shown in this back of this deck around the spacing and the details around every location is known in our business. On Page 15, a significant Gulf of Mexico asset base here, low carbon intensity, very low. We're a top 5 operator in the Gulf. We've been working in the Gulf of Mexico since 1950s. This, of course, is extremely high margin, St. Malo being one of the highest margin fields in the world. Ample blocks, we disclosed all of our locations that we can drill here in the future and our platforms in a very strong Gulf of Mexico business that we built post the exit of Malaysia. Again, high potential exploration business, great focus program going forward, 3 to 5 wells a year, reduced risk with some of the key outstanding explorers in the world, company-making potential in Gulf, in Mexico and in Brazil, significantly so in Brazil. We target all of these wells at their mean size, have low F&D in the $12 range, which will ultimately lead to DD&A, which ultimately give very, very high returns for our shareholders. As we look ahead on Page 18, our 2021 CapEx program, of course, is being maintained. The midpoint of that is $700 million. So very well positioned there. Almost high for our CapEx is for our long-term projects in the Gulf of Mexico, will not flow until next year. And have capital allocated variously across our 2 businesses in onshore with the Eagle Ford having a larger segment. High levels of production here in cash flow. I'm very, very pleased with our plan and our guidance and everything going forward. On Page 19, this is a slide we disclosed in our first quarter results. On the left-hand side of the page is our delevering, executing and exploring part of our business. We have average capital through this period disclosed here, a small CAGR really coming out of the Montney, maintaining our oil production in the Eagle Ford and the Gulf of Mexico. Flat over a long period of time, which will lead to a large amount of delevering, especially at these current oil prices. We're forecasting to half our debt to $1.4 billion at only $60 oil going forward. naturally higher oil prices would move that to the left. Once that's behind us, we have a series of capital allocation decisions, which would include increasing our dividend, which can easily take place with the number of shares that we have, at only 154 million shares we can reduce debt further very easily by 2024 at $70 oil and fund exploration success that's setting up to be perfectly timed with our delevering at this time. And we'll be able to be on the aggressive side of A&D opportunities because we will be delevered and also very amply positioned to execute more capital into our outstanding onshore assets, if needed at that time as well and set up a long-term, very successful business that we'll be able to return a lot of cash to shareholders. On Page 20, I just can't reiterate enough our delevering, executing and exploring tenets of our priorities that we have for the year as we look at the longer term here to half our debt by 2024 at conservative prices today. Moving forward, all of our Gulf of Mexico projects continue to have incredible capital efficiency and uptime in our onshore business. We always have a strong safety and environmental record at Murphy, one of the strongest years we've ever had on that front. Big wells to drill and exploration. On Page 21, again, we're a low carbon company. We're an exploration outfit that has incredible execution ability. We have free cash flow across our business and focused on flatter production with free cash flow. We have a large history of paying dividends here, and we'll continue with that effort and strong ownership, almost second to none really in the ownership at the Board level, which gives us great support for all shareholders. And that's all I have today Arun. I would be glad to take your questions or those from other parties. And thank you so much. Appreciate it. I think you're muted there Arun, still can't hear you, I am sorry. There you go, I hear you now.

I thought the moderator has unmuted me, because I wasn't muted on my own.

So Roger, let me start about the near-term performance. You talked about reiterating your guide. You had a good first quarter. So can you just give us a little bit of a sense, it seems like there's a little bit of operating momentum at the company? What's driving that? I know you had some successful delineation results or appraisal results at Lucius, but give us a sense of what's driving some of the recent performance.

Thanks, Arun, for that question around our performance and very, very like to highlight how much the company has changed in the last year. We had a corporate office in El Dorado that's closed. I moved that down here, 1 team, 1 heartbeat would be an LSU Tiger type of thing to say Arun. Closed our office in Calgary, a new operating team, 1 senior leader in Eric Hambly of operations, a lot of focus during the downturn on data, data cleansing, data work around fracking, data work around running the Duvernay and the Eagle Ford and Tupper together with 1 team. A lot of work on downtime in the field and work in the Eagle Ford. This has gone extremely well, and our data management around fracking and real-time fracking changes on the fly, by looking back hundreds and hundreds and hundreds of wells in the past in both the Eagle Ford and Tupper areas allowed us to have incredible well results this year. And a new organization, a new leader in the Eagle Ford has really worked on compressor downtime and some various things. We brought this data into and expanded our remote operating center that we have here in the Duvernay. We're running both Canada and Eagle Ford from that today, where we're putting people on the most outstanding wells to return to production and working those problems. So just having an outstanding year, also that usually coincides with outstanding safety and we continue to do that. And in our Gulf business, we've always been a great executor in the Gulf, we're very leading player in that regard. It's a real old term tenant of our company, and that's going extremely well for us. Just having a good year and 1 team and 1 building and really going well for us right now, everything.

Okay. I know earlier this year, Roger, you have a rig now for the Khaleesi, Mormont, Samurai project. Can you talk a little bit about how that project is kind of moving forward? And I believe it's a mid-2022 kind of start date, but just give us a sense of how that project is going?

It's going extremely well for us. What slide is that, Page 40 outlines the progress there. We've updated that since the first quarter because we finished a well at Samurai. The rig came perfectly on schedule. We drilled the well at Samurai right where we supposed to. We've moved the well to Khaleesi. We're drilling ahead on it today. The moorings are being installed, all the gears being lined up to complete the wells. Most of Khaleesi, Mormont wells are already drilled and cased pay, which we just have to complete the well, floating production system doing extremely well. Execution, it's just a great project and one of the best we've had so far and lined up at your conference to flow a year from today. Arun.

Great. Great. Well, we look forward to that, hopefully in person.

Anticipate that.

You touched upon Terra Nova. You got some partner agreement and kind of move forward. Give us a sense of what that means for Murphy?

Well, thank you, Arun, for that question on Terra Nova. We know it's again -- it's a real backup around all that is we help people do strategic things here at Murphy. And there's been some super major moves that are unique and sometimes we're a part of that going forward. Terra Nova has been a very successful business in our company achieving more than $1.6 billion of free cash flow over the last 20-something years. And so we know Terra Nova well. We know the reserves at Terra Nova. There is an asset life extension to go forward there, during COVID got delayed because the ship is supposed to go to Spain. Exxon determines they no longer want to go forward. Chevron was with them in a very small percentage. So there are some people wanting to leave, and some people wanting to stay. The government wanted the project to go forward. Suncor has made this announcement. Suncor is our representative in dealing with the government, a major Canadian company. They're doing a really good job at protecting the life extension project. And we're really laying back and we're going to say that we've made an agreement in principle. We will be increasing our working interest that will be as shown in Suncor on level of capital from the government, really not wanting to get ahead of all of that at this time. And I just would consider our position well positioned. I'm very happy about the project and the returns going forward. In our long-range plans that we discussed and have discussed for the last 6 months, Terra Nova was always in that plan to be executed at a certain level. And I wouldn't anticipate major changes at all in our CapEx around that at this time. And really glad with our new partners, glad about the project. We feel we'll be able to work with the partners now more closely and bring in some of our outstanding execution ability to work with Suncor, a great partner. And that we're very excited about Terra Nova. And just proves that if you're in the game, you do these outstanding execution, build in offshore, you're able to participate in things that are unique to you and make a lot of returns for our shareholders.

I got a follow-up. You mentioned that you're going to be increasing your working interest. Can you talk a little bit about that mechanism?

There are people exiting and there are people that are remaining. So naturally, the ones that are remaining would have to increase.

Fair enough. Fair enough. I want to switch gears and talk a little bit about exploration, Roger. We put out a piece every Monday called Well Watcher. It's been dominated by onshore well watching, but we have -- do have our eyes on a couple of wells that you, one that you talked about Silverback as well as Cutthroat in Brazil. So could you give us a little sense around -- maybe starting in the Gulf of Mexico with Silverback, I think you farmed into that with Chevron and give us a little bit of a geological lesson this morning on what you guys are looking for, is this the Cretaceous play?

Yes. Page 49 in our slide deck gives you some details that we've worked out with Chevron, our operator in Silverback. Silverback would be a cretaceous age play laying of course below the lower and mid mass seen which is quite common in Gulf of Mexico. There's a cretaceous high in this region. There is a lot of acreage leased by Chevron, Hess and others in this area. It's not a large area in the Gulf of Mexico. Chevron is a great partner. We're a great friends with Chevron. We work with them in St. Malo. We have a lot of respect for Chevron and worked with them through the years. We were able to farm-in here ground floor at a low working interest. And we would become part of their 12 blocks by that agreement. And then we have the dark blue acreage. So the LLOG assets that we purchased have Miocene Pay and flow very well and make a lot of free cash flow, doing very well. It lays on top of these same structures. So for a 10% working interest, we get to drill the well, and Chevron a great operator with knowledge in this basin, participate in the well and then see how that would impact our blocks for a very de minimis amount of capital. And so that's the well that we're drilling. We're very excited about it. It's a play opening unique new thing in the Gulf. The Gulf is a main play, and then you have the Wilcox play like at St. Malo and others, anchor and then this will be a new play in the cretaceous age rocks in the Gulf.

Okay. Is this the second well that's been drilled by industry? I remember Galapagos deep, I believe, was another.

That was drilled earlier to the south by us.

Okay. Great. Mexico, you have a discovery offshore Mexico called Cholula. I think that was renamed at some point. But can you provide where Mexico kind of sits in, and we'll go back to -- I'd be remiss if we didn't go back to Brazil as well. But maybe start with Brazil, I'm sorry.

No problem. Arun, I'll touch on both of them. Thank you for that. We're really excited about Brazil. This is a project we've worked for a long time with Exxon and our other partner Enauta in Brazil, a Brazilian company. Built a large acreage position, offsetting some major fields that have been for sale and have data rooms for a long time. We're very aware of that data. And so looking forward to drilling the wells, of course, there's more than 1 prospect here, and the Cutthroat well has been identified as a partnership, is the first well going forward. It's a very low-cost well for us because it's not very big, as you would find in some of the Gulf of Mexico opportunities, such as Silverback. It's a very large project. This would be our sizing at 0.5 billion to 1 billion barrel-type prospect. Of course, we're excited to work with ExxonMobil, the experience holder in this region around at similar plays, out through in South America. And that's a big well, and we're very excited about being a part of it. And we have a role in working with Exxon today in the subsurface, long-term relationship here at their headquarters in Houston, and it is a big well and we're very excited about that.

Okay. And you said that you may spud the well in the third quarter, Exxon operator?

They're operating some other wells in another part of Brazil, and that's how we were able to move to this area.

Okay. And how do you -- I mean, do we have other discoveries in the area, a play opener, but give us a sense of Cutthroat and the opportunity for success here?

Cutthroat is laying very near the orange blobs on Page 50 Arun. So it would be a very similar outlay to those large discovered fields that would be similar source rocks and depth in that region.

Okay. Moving back to Mexico, Cholula. What are your plans to appraise or delineate this previous discovery off from Mexico?

We haven't approved -- thank you for that question, Arun. We have a delineation program that's approved, like ring-fenced, if you will, with the government regulators in Mexico. And -- but as we were working to move into that, we've had a lot of success by ENI and Repsol on a new trend of some subsalt opportunities in the Miocene, it would be very similar looking to a Gulf of Mexico prospect. And that is becoming so attractive that we're moving to that drilling over that delineation. We want to have a large discovery in the subsalt of Mexico and tie Cholula into that, and so the other way around. So we have 2 or 3 opportunities. There's in our slide deck that you see on Page 52. You see that these Chinwol and Polok wells that are drilled by other operators. Now we have people to our north, I believe, to be shale drilling north of us, and we're in the middle of a very successful play. And it's come to the forefront as a more attractive, larger opportunity for us and our partners to drill next year.

Okay. Two more questions for you, Roger. One is we've seen a pretty significant M&A cycle, Roger, kind of develop. And I want to get your perspective on this. We've also seen a more recent trend where some of your public company peers have been buying privates. And specific, I was just wondering, we've thought that for Murphy, a couple of areas could make sense. The Eagle Ford Shale and the Gulf of Mexico. But give us a sense of what kind of conversations you're looking at in terms of A&D?

Thank you, Arun, for that question. The way we're thinking about that today, we have to always go back to our priorities of delevering, executing and exploring, which we're in the middle of. So any type of A&D could not substitute for that delevering. There are opportunities that come with EBITDA, if you will, come with free cash flow that would allow the delevering to still take place because the EBITDA multiple to debt would be greatly improved, and actually allow you to be better positioned if they were an oil price collapse in the future. We look at those very seriously and constantly reviewing BD and have done a lot of BD efforts here, but it can get in the way of our delevering because the delevering is where we need to go, where we can be more aggressive in returning cash to shareholders and doing new things in A&D. From the onshore perspective, we do monitor the deals. But if we keep a longer-term flatter business, even past the delevering with all types of free cash flow generation from our new offshore projects and the ability to fund exploration success and return cash to shareholders, we don't need really any locations there. And if we were to buy those locations, we'd have to have capital out the door to buy locations, that probably, quite frankly, after 10 years aren't any better than the ones we have. So we pay attention to it. We look at it. But in the onshore business to acquire something that would be accretive on an EBITDA basis will be quite large and quite expensive. In the offshore business, they always come with EBITDA. EBITDA in a project, EBITDA without a project, things of that nature. There are privates in the Gulf as well. I think the rumor mill of opportunities is increasing. I think the rumors of super majors doing unique things is increasing. The talk in town is increasing. We're happy about that because we like to participate in these unique manners, such as Terra Nova, such as Lucius, such as Petrobras, such as LLOG who was a private partner who wanted to leave. So we're standing by to help people do strategic things here. And quite frankly, we've been successful at it. We're real proud of that, those efforts so far.

It seems like there's a -- there could be some things to look for in terms of the Gulf of Mexico in terms of deal flow.

It's getting better and more interesting, but we've got to focus on this delevering and we are, and that's getting better every day too because we are executing.

Can I ask you one kind of off the wall kind of question, lithium. I know that came up on your last call, but is there anything here? Is this just as a starting point or is this something we should be thinking about.

There's something there. El Dorado in an old boomtown had a big oil discovery in the early 1920s, very successful spindle top type arrangement happened there in 1923. Through all that through the years, there is a brine production of some reservoirs in the very near our corporate headquarters, our former corporate headquarters. We have around 10,000 acres of brine royalty, we've had with a company for a long time, we received revenue from it every year. There's a lot of chemical industry in El Dorado around using this brine for various things. There's a company Standard Lithium out of Canada, a publicly traded company that believes they can extract lithium from this brine water. We already have a royalty on the brine water. We would anticipate some type of other royalty on the lithium going forward. They're in the middle of a pilot. We will be able to see some of that information through the Arkansas Oil and Gas Commission requirements, which is monitoring this. And it's a long-term thing. It's not like Brazil well, part of some of that effect we're in quite frankly, but it's a unique thing. You've been in the business a long time. You have unique assets, you make money from things and things come your way and it's just one of those things in a historic company like Murphy with our 71st year being incorporated, and our 70th year being on the stock exchange and 60 years on NYSE, when you do that, things -- unique things come your way on occasion.

Great. Roger, we're out of time. On behalf of the JPMorgan team, we want to thank you. You were here at our first year, remember back, and I want to thank you for your continued support of our conference. And again, great to have you again this year.

Thank you, Arun. Thank you for the good questions. Glad to be with you today, and thanks a lot for your help and support as well. We'll talk to you soon. Thank you.

Thanks, Roger.