Murphy Oil Corporation (MUR) Earnings Call Transcript & Summary

Terrific. Well, we're very excited for this 2:00 Eastern Time panel with international diversified E&Ps. The outlook for both international and offshore oil and gas, we have with us 3 leaders from the E&P industry. John Christmann, CEO President of APA Corporation, Neal Shah, CFO of Kosmos Energy; and Roger Jenkins, President and CEO of Murphy Oil. Happy New Year to you all, and thank you so much for being here at the conference.

It's a really important year for each of your organizations as I think about advancing the ball on important assets, whether it's Suriname or Egypt Tortue in West Africa, Brazil, Gulf of Mexico. So there's a lot we can talk about here, but I'm going to turn the floor to each of you to talk about, what is the key strategic focus area for 2022? And how do you think you're differentiated as a value proposition relative to the market and relative to energy? And let's start it off with John here on for APA.

Thank you, Neil, and Happy New Year. I think for APA, what really sets us apart is we're still one of the few diversified global portfolios. We've got optionality across all product lines, oil, gas, both in the U.S. and in the U.K. as well as NGLs. We've got a lot of conventional production. So relatively low decline rates, relatively low maintenance capital. We've been underinvesting in the last couple of years, so we will be moving up to more of a sustaining investment level, which gives us high sustainable free cash flow. We've got a lot of exploration potential, I think, most notably in Suriname and Egypt. We did come into '22 without any hedges. So we're sitting in a pretty good position there. We made great progress on the balance sheet in '21, deleveraging and paying down debt. And then obviously, we announced the Egypt modernization which has been kind of a 2-year process for us where we've been renegotiating our terms there, but we've recently put the -- put that out there, and it's going to be material. And we put out a brand-new framework where we will be returning a minimum of 60% of our free cash flow to investors through share buybacks and the dividends. And we got off to a good start in the fourth quarter, where we repurchased 31.8 million shares. So we're excited about what we have in front of us. We love the cash flow generation capacity of the base business. It's sustainable and pretty substantial and has us trading at a pretty high free cash flow yield. And we've also got some upside catalysts that can come along as well. So we think we're very attractive and unique.

Thank you, John. Roger, for Murphy Oil.

Bob just copy John's speech. We think we're in the same way, this is a little smaller. So I think a keyword that we would have similarities to APA and [indiscernible], word sustainability really is sustainable business to last for a long time, and the cloud production profile to deliver large amounts of free cash flow, which we, of course, have here at Murphy sustainability from an idea of ESG matters where we have very low carbon intensity and find ourselves in the top quartile, especially in oil-weighted peers in that front. Of course, looking forward to '22, we're going into the year very strongly positioned, and we coming off with a focus on delevering, executing and exploring those 3 simple tenants. That's been something we've been settling to investors for '21. We'll be doing that again in '22. We had delevering in 2021 were suggesting around $300 million. We anticipate to do that again this coming year '22 as a minimum. From an execution standpoint, we're all putting on a big field in the Gulf of Mexico, where we built a large showing production facility that's being more offshore today and completing the wells, and that's going along extremely well on an execution front. On the exploration side, we're very soon despite a very large well in Brazil, a very large resource size -- similar resource size from John portfolio operated by ExxonMobil, very excited about that. So sustainable from a long-term free cash flow providing business sustainability from delevering. We have great execution coming up very well in that. The key wells to explore and then converting our EV debt to equity. I'm pleased how that's going and that's our setup for '22.

Thank you Roger, and Neal Shah at Kosmos.

Thanks, Neil. Yes. I think Kosmos is different in terms of we do have a collection of world-class offshore assets. where we do expect to see pretty significant production growth of around 40% from '21 to the end of '23. And what we believe are structurally tighter markets for both oil and LNG. So we have this significant discovered gas resource base in Mauritania, Senegal. And in '22, we plan to develop continue to develop on that. And as we deliver that, we believe we can unlock significant material value within our existing portfolio. And then we have that complemented clearly with the high-margin cash flow from our existing producing oil assets, which have ability to both fund all that growth in more tend to Senegal and at the same time, delever the balance sheet. So we are in a different place than a lot of other upstream companies and that we're growing. We're growing pretty substantially with a low-cost, lower carbon production base and our focus on providing a world and the energy that it needs in a way aligned with the just energy transition. So yes, we look forward to very much in the next '22 and '23.

Thanks, to all of 3 of you. So that's a great place to start, which is on the individual assets. And John, a big announcement here over the last month in Egypt and update on the PSC modernization. Talk to us about what it means for your company and translate this into cash flow? What does it mean for the free cash flow of the business?

Well, I mean, Neil, when you look at Egypt, it's a place we've been for a quarter of a century. And what we've basically done is we've spent the last 2 years modernizing, which is basically setting us up for the next quarter century. It lets us return Egypt to be in the most attractive place to our portfolio to put capital. It's going to put us on a trajectory to really return Egypt to growth. It's a win-win for the country and for us. There's a lot of mechanics, but ultimately, it increases our netbacks. It's let us recover $900 million of backlog costs over the next 5 years. And it's going to increase the overall operating cash flow about $400 million on a year-over-year basis. So it's exciting. And I think the other factor with it is, is it's going to let us return Egypt to growth, which is what the country wants. So you get the double whammy there, and it's been a long time coming. And we're glad to have it announced. We've gone from 5 rigs to 11. We'll be taking that up to 15. And everything we're funding there will be generated out of free cash flow from Egypt. So it's actually free cash flow accretive to us, and we're going to be able to grow our volumes there. So it is a true win-win and some that's good for the people in Egypt as well.

To your point, capital spending is moving higher associated with it. But net your free cash flow is moving up as CapEx increases our lower than recent cash.

Correct.

As you think about Egypt, what are the next steps for you out there in terms of actually growing into this program?

I mean we're most of the way there. We started middle of last year when we kind of had a meeting of the minds. It just took over 6 months to kind of get through the approval process. But we started increasing the rig count in good faith. We ended the year at 11 rigs. We're there now. We'll add another couple of rigs over the next couple of quarters and probably end the year at about 15. So we're well on our way. The nice thing is, is we've just shot 2.5 million acres with a brand-new kind of state-of-the-art 3D and added some new concessions. We've got a big playground and we'll be drilling a lot of what I'll call low-risk development wells as well as some exploration wells there that -- and it's a little different from the unconventional plays in the U.S. because their conventional type rock where you set up a down default block of the seals. You'll drill a well. You may have 6, 7, 8, 9, 10 development wells but it may also set up 4 similar plays along that same geologic feature. So good visibility into the inventory, probably the best visibility we've ever had, is we've now got a handful of years and a lot of running room. So -- and the other factor is we've got a big production base, a lot of infrastructure. So it's easy to add on. It just -- it's a matter of getting it and executing. And we will be merging our 2 joint venture companies into one and working on ways to find efficiencies there. But it's something we're really excited about, and we're well on our way with the ramp. So it's not like we've got to do a lot more there. It's just going to be getting after it and execute.

Thanks, John. Well, let's stay in Africa but move further west and talking about Mauritania and Senegal with Kosmos and Neal, Tortue is one of the largest projects that are in flight as it relates to LNG. And it's a hard time to build anything with COVID going on. Give us a state of play in terms of project construction? And when do you expect it to be in service?

Yes, it has been a an interesting time period to build a global project such as Tortue. But we, along with BP have continued to make really good progress. We ended the year around 70% complete what still first gas expected in the third quarter of next year, which is exciting. So we made a lot of progress on the key work streams, particularly in '21, it was around getting sufficient concrete case tons for the breakwater to allow for the insulation kit to be installed behind it later this year. And importantly, recently, all of the 8 topside modules that are required for the FPSO have been lifted on onto that piece, derisking sort of Sailaway later this year. So again, I think from an overall project perspective, it's not easy, but we're hitting the milestones we need to. In terms of costs, we did have some global supply chain issues, which impacted us by around sort of 15% on the project, which included COVID disruptions, labor shortages, service costs, et cetera. But I think the amount that we've sort of covered within that now gives us sort of exposure or cover on that. And so yes, I think from that perspective, I think we're pretty well covered and it is just down to execution and not just getting Phase 1 across but in also progressing Phase 2. So that we can provide more of the gas as quickly as we can as cost competitively as okay.

And Neal, quantify this for us when Tortue Phase 1 does come online, what does this represent in terms of incremental cash flow for the company? And what could base to me?

Yes. And so we typically look at it in sort of the combination of Phase 1 and Phase 2, given the cash from Phase 1 will get the free cash will get used to fund Phase 2 in essence. But what we've said is basically, when Phase 1 and Phase 2 are on 1, you should get around $150 million to $200 million of free cash flow at sort of a, call it, around a $7-ish gas price for 20 years on average. So it gives us a nice long sort of perpetual cash flow stream, and it actually only develops a very small portion of the overall resource. So there will be additional phases of Tortue, there will be additional phases of the other gas that gets developed alongside of that. But right now, we're just -- we're focused on making we're getting the Phase 1 and Phase 2 of the graph.

Great. And Roger let's return to you on the Gulf of Mexico. Before we shift the conversation to exploration. You've got some big projects that are in flight and are turning into cash flow shortly. Give us the state of play on what those represent for the company.

Well, it's a very unique situation for us. We're very happy with our back are key focus areas to delever, execute control and execution and in for that and our team was able to execute during the COVID flawlessly to build a very large floating production system in Korea. So that all the way around and put in offshore exactly on schedule to totally to COVID. I'm quite proud of that. We're looking for that and we discover the first half of '22. The facilities in the field today have been [indiscernible] with the board and so large project into pipelines. We have a rig there, completing our first well and it will be a long-term project at Flowback this year, big health and oil production in '23, of course, and allow us to be a quite sustainable gold business in the 75% to 80% range for several years. And that goes with our flat is business and our Montney business will lead us to get a bit of free cash flow. Obviously, almost on free cash flow as we can do to lever. And we feel now that we can accomplish our delevering goals, having our debt by 24%, that's probably accelerating, of course, need no special increase in prices from your firm. And through that, we believe now we can increase dividends through the delevering period, and get back to where we were going down the road and looking in that work more. And the sculp projects a big part of that, and we're very pleased that project to come on and eliminate [indiscernible] for a while.

Let's shift to exploration and what you guys to try to help us as an investment community, think about how to value exploration. I think it's one of the challenges we often have, especially in a world where investors, not necessarily our view, but investors are increasingly concerned about the terminal value for oil more so than gas. And so elongated exploration, elongated projects that tie up capital versus the return of that free cash flow is not something that's being rewarded by the market right now. Do you think that the investment community has the strong and that there is value in exploration? Maybe I'll turn it to you, John, to kick off with any thoughts.

No. It's a great question, and I think it does kind of capture most sentiment today, but I think that most that understand the business, have a true handle on what demand for oil and gas is, have a handle on how quickly you really can transition have a feel for, that's where there might be the best opportunity right now to create some long-term substantial returns, right? Because there's great opportunity. I mean there's no doubt we need to continue exploring. And we're going to need oil and gas for the next several decades. There's no doubt about it. And there's countries that are motivated like Suriname and Guyana to have their hydrocarbons produced. And there's no reason why they shouldn't be able to have those produced. And we're confident that you're going to get that opportunity. So we're excited about it. I mean you look at that basin today. I think it's proven to be one of the hottest in the world with the results that are coming out of it. We have a very substantial position across 2 blocks of Block 58, where we're partners with Total in Block 53, where we're partners with Petronas and Cepsa. So in a great spot, we've had 4 discoveries with our first 4 wells we drilled, and then we stepped out a significant distance with Bonboni and prove the migrations work and the fluid, the maturities there. So there's a lot of exploration potential. So what we look at it is, while that value is not discounted in the stock today, directly. It is an opportunity to have a material upswing when you can bring what are really material volumes on in the future. And I think that's where you've got a chance to really make some outsized returns over a longer time period. So yes, it's -- we're going to continue to allocate a small portion of our budget into exploration, where you've got high-quality differentiated prospects and projects and we think we have those.

Thanks, John. Roger, you've been very outspoken on this point as well. Do you think the investment community is not given enough credit for exploration? And how do you change that there?

Yes. I mean that's clear. I think what John said, if you really look at the macro and the decades of the requirement of oil and gas, the lack of people doing it today. The lack of success is driving the people with best place to do the best work. And I still feel $2 to $3 NPV per barrel still solid exploration economics. And if you're targeting prospects with the F&D is $10 or less. You continue to find very large fields and drill very large deals with experienced partners you will be very, very successful. Another thing around some of the initial kickoff about expirations. So really, this long cycle has been reduced rightly these dual activity rigs are incredible today. The technology of reflection of pipelines, the time on this project that we purchased it's probably a little over 3 years to first oil. We've seen near John about ExxonMobil, very advanced times of first oil. I have followed John's project [indiscernible], are playing first oil bearing quicker. So that time has reduced greatly lease FDSO economics, rate provides that service, Christmann Street providers -- subs equipment providers incredible rig efficiency. So the moving of the left from the time through discovery by smaller companies that's in order to is really our core competitive advantage. And I think that's boding well to get this compared to maybe starting with a new big section of shale and build that up to 50,000 barrels a day takes a lot of capital in a while, too. So I think the modernization of deepwater execution allows us to compete better with that. And I don't think we have a big upside in exploration in our business.

So let's dig into some of those exploration prospects and let's start with you, Roger, with Cutthroat, when do you expect an update to the market? I recognize it's the call, the operator? And what is your confidence in your vol around success in Brazil?

Well, it's a very nice prospect. You have to look at the back macro picture of that basin. There's some very significant fields already discovered and delineating by Petrobras. In recent Petrobras Analyst Day, they're bringing 2 FPSOs and moved up the development of that area. And very soon and announced that just 2 months ago, we're drilling, of course, an acreage purchase next to that. Of course, we can see a tie of those fields into the area that we have, a very large pumps. They're not independent of each other, working anything that affect invasion had lot of success the barrel discovery we buy. And we're excited to drill this growth, the big name place wells in our slides deck of $500 million to [ billion ] also want to operate review to that perspective of size. And we're real happy to drill it. It's a big well for us. And we're going to be drilling a really nice well in the gold plate on the year and a very nice well in Mexico as well, which we operate, which will allow some of our core confidence in our competitive advantages offshore execution. And allow us to take place there and then work with a major operator in Exxon, of course, with success and those type of plays along that, that segment of geologic formation up and down Latin America and into Brazil. And we're very happy about Neal's big well, and we anticipate will [indiscernible].

Sounds like we should be getting an update here in the next couple of months potentially.

I would say so. It's about as John knows and others, it takes a couple of months to drill these wells. You got to organize what you see and talk about it, and we'll be working to do that.

And John, and Suriname, some really good early success there's -- the more recent data has been a little choppier. I don't know if you agree with that characterization how do you feel about the project and the timing associated with premium.

We feel good, Neil. I mean, first of all, the flow test and buildup at Sapakara South was fantastic. It's 1.3 to 1.5 Darcy rock. It's full to base. It's low GOR oil. So it's right what we're looking for. When you got one well that we validated to connected to. We gave a range of $325 million to $375 million barrels in place, and that's not for the whole play. That's the one well is connected to that. We made it very clear that with additional appraisal wells, we could prove up more volume even within Sapakara South, you've got something to work with, right? So we've moved over. We're drilling Krabdagu now. It's the next well we need to drill. It's a feature that could materially change the scope and scale of what your first FID would look like here. And so it's the well we needed to drill next rather than another appraisal well at Sapakara South. So we're just trying to understand just what we've got to work with there, so you'll know how you want to try to scale something. So it's definitely something with something we're excited about. When you say choppy, this is exploration and appraisal. And we had a well what we did with Total, was we prioritized. We found a lot of different zones, a lot of different fluids. One thing we're doing right now is prioritizing what will be the low GOR black oil reservoirs first. And we had one where you stepped up too far and it was wet, and the other one was a substantial almost 7-kilometer step out. We thought there was a little more risk to it. So it didn't surprise us that the sand was not there. But when you're trying to approve large resources with as fewer wells as possible. Sometimes you may step out a little further than you would otherwise. So by no means impacts the potential right? And so we're excited about it. I mean the exploration well up to the north, we had oil up there and full to base in one of the secondary targets. It just wasn't large enough to call it a commercial discovery but it tells you we've got hydrocarbons in the entire block, right? So -- but it is exploration. And that's why we categorized it as such until we FID a project, it needs to stay in that category, and we're going to be measured and it just takes a little bit longer, but it could be very well worth the wait.

Very good. Well, I want to round out this conversation on -- so we talked about development, we talked about exploration. With all this cash that's coming in, in a constructive environment, which you do it. And I'm going to start with Neal here. You did a reasonably large transaction with Occidental for the Ghana to increase your Ghana position. How has that integration gone so far? And what do you think it adds to your portfolio?

Yes. I mean, I mean, the great thing is we already on the interest in the asset an so there wasn't really any integration process. We had the same team working a larger working interest and we make a bit more -- we get a bit larger interest in both of our key assets. And so that was a great part about that transaction in terms of -- and not only does it generate a healthy amount of free cash flow, but we got at a very attractive valuation and they'll pay back in a couple of years' time frame, which again, I think was pretty well appreciated from our investors, both on the debt and the equity side. And so it does bolster the amount of cash flow that we have with them, and that was key to sort of ensuring that we had the cash flow from the base business. to fund the remaining amount of our Tortue spend and get that to first gas. And so where we think about our cash flow generation going forward. I think it's pretty clear in terms of the sort of near-term priorities, which is, one, fund the capital in the base business. So the opportunities in Ghana, EG and the Gulf of Mexico, those infill wells that keep production up and actually slightly grow the production base and is our best returning opportunities. And so we'll allocate capital there. We'll allocate capital to support to and advancing our gas discoveries. They're growing gas pieces of our company. And clearly, that's in a very -- it's kind of going to consume some capital in the next sort of year or 18 months, but beyond that, it also becomes quite cash generative. And then lastly, around sort of paying down debt. I think we still -- because we are in a growth phase, we're still not generating the significant amount of cash flow that we expect to 18 months from now. And so in between now and then, we get leverage in the right place, and at the same time, deliver that growth. And we're set up really healthily in a very healthy position to have that conversation around what's the best way to now return that excess cash to shareholders. So it's a little time away. But it's definitely on the horizon.

Yes. Very clear. And John, for you, you commit to allocating a minimum of 60% towards your share repurchases and dividends of your free cash flow. And you got after it in Q4, just talk about as the stock has done well here, you still feel good about leaning into the buyback, and how do you weigh that versus other priorities?

No. There's no doubt we do. I mean, when you look at where our base business, right, the free cash flow yield we're trading at, it's in excess of 20%. So I mean, when you when you look at that, we think the stock is undervalued. We definitely felt strongly about when you announce a buyback, you should get after it. You saw we announced in November that we would be returning a minimum of 60% of our free cash flow to investors through share buybacks and our dividends and obviously, with the 31.8 million shares that we repurchased in Q4 and we've leaned in, and we think it's the right answer. So we're excited about where we are. We think the environment is really constructive. It's the first time I've been in this chair and have seen the volatility we saw just in the last 6 weeks of the year, and we didn't even think about moving our activity set, right? And so it tells you we're in a good place. We can plan our programs and we're still on pace to be able to deliver a lot of free cash flow back to shareholders. And I just want to emphasize at 60% is a minimum. That still gives us 40% to continue to work on debt paydown, which is something we made progress on last year. And we started to ratchet our dividend back up. So I think we're in a position to fully continue to deliver on our promise there.

Yes. Thanks, John. I will round out with you, Roger, you have been very focused on getting leverage lower. I think you're targeting $1.4 billion or lower debt a couple of years out and also you've been focused on growing that fixed dividend. So talk about how you're thinking about allocating capital from here with the business generating a lot of cash.

Thanks for that, Neil. I mean it is key for us to delever our company. We've set out a goal of having our debt by 24 naturally is it better in '21 than we thought doing better '22, than we have planned a strip pricing that can easily move to the up quite quickly. Today, as we've been working on our models here with our Board. We believe we can continue to increase our dividend through this period, while delevering because things have changed as to the price, and we haven't changed our activity or any plans of our long-term plan for 2 years and don't plan on doing so. And Murphy has been in New York Stock Exchange for 6 years. 137 companies have done that, and we've been paying the dividend for 60 years and a pretty nice dividend compared to others on a per share basis. And we only have 155 million shares. So increasing the dividend along the way is not to be difficult for us if these products and we want to get back to where we were and we significantly delevered and then be able to explore other options on free cash flow. And then of course, we'll be greatly out during this delevering process with a sustainable business going forward and a big exploration business on side, if you will, and be able to fund it easily within cash flow without trying not to go to banks again over 3 or so that's how we're setting up. And we're very well positioned for the dividend we have and what the dividend will get back to and are delevering this significant and very happy with these plans in despite of production profile in both game that we're all in, is very advantaged to our company, and we're in good shape -- very good shape.

Great. I'll close with questions. Thank you, Roger. For you, John. You have a North Sea position that benefited from, obviously, strong European gas prices. We went through a pretty dramatic period here over the last couple of months in Europe around gas. It's not clear to me that anything has been structurally solved yet other than maybe we've got some mild weather in parts of the globe. But how do you think about global gas? And what are the lessons from the European experience that we, as a global economy, need to take forward to ensure energy security and affordability.

Well, I mean, I think the key there is the world needs reliable low-cost, clean energy, right? And I think oil and gas are part of that solution, and we've been part of that history for a long time. And I think we're going to be part of that for a considerable longer time in the future. So I think what it tells you is this transition isn't something where you just flip a switch and we're going to take hydrocarbons out of our daily lives. And you're seeing that, right, in terms of areas that have gone quicker. Now they're needing to reactivate things and put things back on. So I think it tells you that we've got to -- there's no doubt, we've got to lower our carbon footprint, the burden is on us to do a better job. We need to get cleaner. We need to reduce emissions as an industry. but we also provide a very key piece and the world needs low-cost affordable energy. And let's not forget, there's billions of people out there that don't have access to electricity, or clean fuels for cooking, right, sources for cooking. So I think it tells you that we need to take the burden on us to get cleaner, reduce our emissions, do a better job of telling our story and there's things we can do like we illuminated all routine flaring in the U.S. in the third quarter of 2021, right? We sort of go out there and made some decisions. I think there's things we can do to electrify grids. There's great projects out there that make a lot of sense. But let's face it, we need to be part of the trend, not just a transition may not be the right word. We need to be part of the solution longer term and be realistic on that. And I think we can and will. In fact as an exciting time as people start to realize what they want versus what reality is and what the truth is, right?

Thanks, John. I remember with Neal Shah, debating with them here 5 or 6 years ago about the value of global gas, and I had a view that this would be a market that would perpetually going to be oversupplied, and I was wrong about that. But if you think about for Tortue, Neal coming in, in 2023, so coming in very shortly here. That's going to provide an important amount hydrocarbon to a part of the world that really needs it. So it would strike me that this industry could do a better job of talking about the social value of the resource that you provide. But Neal, any comments about that.

Yes. No, I think that's a good point. And again, it's something that we speak about frequently in terms of the just energy transition in terms of -- similar to the point John was making Africa. There's a number of people -- 750 million people without access to modern electricity and they've contributed less than 1% of global emissions. And so they suffer deeply from energy property and they have an already low carbon footprint. And so we need to work towards a more just transition where they can benefit firstly in their society can benefit off of the resources in those nations. And given our footprint largely in West Africa. That's an important part of what we do. And particularly, as we look at the gas projects in Mauritania, Senegal. I think not only will they transform those countries in terms of the economies in those countries but also provide clean, sustainable power to the people in those countries. And actually, in Senegal, for instance, they're actually using it as a bridge or a alongside solar and wind to expand electricity dolomites. And so these countries want to do the right thing, but every country needs to be on its own journey, and we need to help with them and facilitate that. And so we've got great assets to go do that. And I think we can call them big impact both locally and internationally with that.

Great message to end on a terrific conversation to each of you. big years for all 3 of these companies. And so we look forward to watching the progress unfold.

Great. Thanks, Neil.

Thank you.

Well, Happy New Year. Thank you.

Happy New Year. Thank you.