Murphy Oil Corporation (MUR) Earnings Call Transcript & Summary

Good morning. Again, welcome to JPMorgan's Seventh Annual Energy Conference. I'm Arun Jayaram, who's the E&P and oilfield service analyst at the firm. We're delighted to have Murphy Oil to present this morning and CEO, Roger Jenkins, who's been the CEO since 2013.

Yes.

Roger, we thank you for your continued support. I think you've been here all 7 years. So we really appreciate your strong support. We're going to do a little fireside chat with Roger. But before that, I thought I'd yield the floor to Roger to maybe give a brief overview and intro on Murphy Oil.

Thank you, Arun. We're doing extremely, extremely well at our company right now. People that follow our story, it's in 3 different fronts. We -- we're a big offshore player. We're the fifth largest operator in the Gulf of Mexico, and we made some purchases offshore a couple of years ago. They've been well paid out with their incredible returns on these purchases. And with that became -- had an offshore development, which is our suit is incredible, top of the house offshore execution. We put this facility in place called King’s Quay, and we're flowing 3 fields, 2 of which we bought, 1 of which we discovered through exploration. The platform is running like nothing I've ever seen in my career, and I have a 39-year career working in the Gulf. Our Eagle Ford Shale wells, best wells we've ever had, and the wells are drilling in the Montney are turning out incredibly well, too. So our 3 simple areas where we produce, onshore Canada, primarily the Montney, the Eagle Ford Shale, which we've developed ourselves and owned and produced for 12 years and a big position in the Gulf of Mexico. And we're doing extremely well and the execution of what we're doing and our focus on delevering is well in play. Oil is still over $100 today. And it's the only thing -- the only thing remotely out of line in any way is our equity price. And everything is in great shape with us.

Great. Roger, can you give some insights on this year's program? You talked about getting the development project up and running on time, on budget. So give us a sense of this year's kind of capital allocation program as well as your thoughts on over the next couple of years, you've unveiled kind of a plan that goes over a multiyear time period.

This year, we have the highest CapEx we'll have in the company and what we forecast today in a long time. That's another great advantage to Murphy as we come into a period of hedges running off production increase due to offshore real net income happening in the second quarter, significantly so and beyond. And when we look at the CapEx level, we had a big, I think, $360 million of CapEx for the Gulf to put this big project on the umbilicals, the pipelines, the wellheads. And we still have the drillship there completing wells. But next year will be $100-something million there in the Gulf West. We are doing other things besides King’s Quay. Samurai, we're drilling a well at Dalmatian. It's a very, very high-margin field for us as well as 2 wells we're drilling with a new partner that's very active and back in the game as OXY, who's managing Anadarko and become a great partner in working at Lucius, one of the highest margin fields anywhere because it has negative operating expenses there. So from the capital allocation, we will be dropping and we've disclosed a $650 million average CapEx that we stuck with on our earnings call, as you may recall in transcript. We stated through inflation that could go up $40 million. That $650 million could become $690 million. I still think that's very well-positioned. And so we're looking at '23 being an incredible year of EBITDA and cash flow and well positioning us for all the needs that we have to support our shareholders and equitize our enterprise value significantly into a multiple that will return, and that would be a great time to enter into the stock.

Okay. One of the unique aspects of the Murphy story is exploration. You wouldn't have this facility at King’s Quay unless you're doing some exploring and you have a global footprint. So as a generalist here, could you give us -- could you provide some details on your exploration strategy and where you're focused on today?

So as I said earlier, from an operational perspective, it's real simple, onshore Canada gas, Eagle Ford Shale heavily oil weighted and a significant production level in the Gulf. The exploration is big in the Gulf of Mexico. We have over 20 prospects they're ready to drill there. What we try to do at Murphy is in that exploration and we've worked all over the world, we know every basin. We've contained our company into North and South America primarily. So the acreage position we have in the Gulf is mimicked with the exact size of acreage in offshore Mexico. These blocks are very big in only 1 block. So we would have probably 14 prospects there. And then our acreage in Brazil is a duplicate again of the mall. So we have 3 Gulf of acreage, both in Brazil, Mexico and Gulf. When you're in the exploration business, and do it, you will come and go with different types of projects. The last couple of years has been with allocating around 10% of our CapEx so that while we delever and put our platforms on, et cetera. It just so happened that, that shook out capital allocation to be large, large prospects with super major partners. It's also a credit to our company that supermajors want to partner with us, both Chevron and Exxon, as we have such a long-term reputation of working and being a good partner with them. Now we're turning into a different phase of exploration as we operate and control the wells, control the permitting, control the rig, controlling the spud date. That's very advantageous to us because we have outstanding execution record. So we'll be drilling a well in Mexico. We'll be looking into a 2-well program starting late in the year in the Gulf, very nice prospects that we've developed. Our Samurai fields are big success with exploration for this with another field found on top of Samurai in the development. And then we do have -- so we have Brazil, Mexico, Gulf and 1 outlying area Vietnam. We were so big in Malaysia for so long and so successful in Asia that we have outstanding reputation there. And this is an area where now PetroVietnam and PetroVietnam exploration production want investment there. We have 100 million-barrel field to divest that to develop. And so what it gives me is always a place to move under a regulatory matter to go back to there with jack-up drilling, shallow, inexpensive wells into a field that we've already delineated. And it always gives me a backup place. You'll never find Murphy with 1 pipe, 1 vendor 1 kind of execution because we can move globally, not near like we used to. We were in many, many places. But we always have something to go to pull a great deal out of a bad situation on regulatory, which comes and goes.

Yes. Roger, as you particularly post the start-up of Khaleesi/Mormont/Samurai, your free cash flow is going to -- has inflected higher. Could you talk about some of the priorities of the excess free cash flow? I know you've increased the dividend recently, but maybe talk about some of the priorities.

Right now, as we disclosed well over a year ago was this plan and we stopped quite accurately to this plan as to production and CapEx and our focus on to delever, execute and explore. The execution has been outstanding by my teams in both onshore and offshore that allow for the delevering to take place because we can't execute at these high prices and get the barrels on earlier, you can't make it. So delevering remains a big focus for us and we have been increasing our dividend. So we still remain in a delevering increasing the dividend situation. But with any type of oil price at all, we will then have enormous free cash flow on top of that, you asked a question here about that it's $5.5 billion. It's $500 million more than our equity today. One of the questions that you had prepared, which you're not asking are you asking tricky questions. But so -- which is fine. I can -- any of your questions, Arun. So now we will be moving toward a lack of a better word, framework. But when you talk about that word framework, you're talking to a publicly traded company for 71 years. You're talking about a company that's returned $3 billion to shareholders in 9 years that have done significant base dividend and buybacks before. So why wouldn't our Board with a lot of ownership at the Board not want significant buybacks and a base dividend again. That's where we will probably go to. And so what that allows for but when we go along that March, we have to work with our Board about what is a debt level we want to have. We can tell you what our debt level is, and you can model all the free cash flow, and we have a history of base dividends and repurchasing in our company. So what we're looking at today is a number that would allow us to have onetime debt EBITDA at $40 oil, which backs into our business about $850 million of debt. I'm the longest running CEO in Murphy history nonfamily and I do that because I don't get ahead of my board on that, Arun. That's how you do that job. That's how you make it. So we have to work with them on that, which I'm a significant shareholder and a Board member and looking forward to that discussion. So you have to start with -- we said we're going to delever, then how far do you want to delever down to? Then when you reach that delevering, the free cash flow will be between base and buybacks because that would be a good place to go and maintain liquidity in what we need to do. So that's where we're heading, and it forecasts today to reach [ $850 million ] in a year. And then that -- but I do believe that while we may set that delevering goal, there's a way to have additional returns to shareholders along the way tied to different debt levels. And we're modeling and working on that. It's very hard right now.

Okay. And let me -- I think it is an important question. Any thoughts on the free cash flow potential of Murphy over the next 3 years, '22, '23?

We have a question in there, it's through '24, right? It's $5.5 billion.

Yes, $5.5 billion.

At much lower prices, $75 or $70. In a $75 world in '23 and $70 in '24, it's 4-point-something. So it's significant. And what I can't emphasize enough is in the offshore business, it's a big -- it's rare, a company of our size to do these big offshore projects and maybe a lack of understanding of that due to such shale focus for the past decade. We've already produced 2 million barrels there and at margins in the $80 range minimum after everything all in. And so our subsurface and our knowledge and our completions, these are completions like a frac as well. They're a frac pack. They're different type of technology. So we are understanding the subsurface. We're understanding the execution, and we have the fourth well is coming on probably today and 3 wells to go. And it's incredible, Arun, honestly.

So just to summarize, Roger, you have an $850 million debt target.

We're looking at that, which is achieved by calculating the one time at 40.

Okay. And then along the way, you see the potential, again, not getting ahead of your board, but to potentially to look at shareholder returns beyond the base dividend.

Correct.

Okay. Fair. Okay.

And we're targeting historic levels of dividends. We haven't got that framed up yet, but it's easy to know we were $1 before COVID share, and we were $1.40 max in 2014. That was all the way through mid-'16 actually.

Okay. Got it. One of the other opportunities that we've cited in our work, Roger, is you've had a successful joint venture agreement with Petrobras, which has served you well. You're a good countercyclical investor in those properties. There is news that Petrobras may be looking to divest that position in your joint venture. Can you give us an update on that process?

Well, actually, Petrobras has disclosed, they're doing that through a press release in some format. They hired a banking firm to help them do that. What it is, when we negotiated the purchase of that, which has well been paid out, it was really an all-time M&A deal for us. It came with a big advantage. If they sell the remaining piece, then we have a preferential right to review their -- whatever their deal is, both the sale agreement and the price. Of course, that's a big advantage to look and see what people are doing with that. And we will be doing that. It's not a fast process, the way they work this. They do not really have a presence in Houston anymore, it's worked in Rio through their business development team. And they'll be working through that, hopefully, in the late summer. That could be something we could review and we have an ample period of time to review it, which is good. It's very positive. And then we'll make that call. So it's very simple. We will buy it at a good price or we will pass at a very high price that will mark our Gulf very high. So it will be 1 of those 2, Arun.

Okay. Good. Good. Just a net-net or nitpick is on the 1Q call, I mean, this was previously disclosed when you did the deals, but you had some contingent payments regarding the Petrobras deal and LLOG. Can you provide an update on those? And are there any other potential contingent payments associated with those 2 deals?

Really, the word contingent payment is a wrong, is a wrong term for the deal. The way these deals are set up, both of them, we have a very experienced senior business development team that works closely with me in Houston, one of the most leading experienced guys in the industry doing that. And we like to have revenue sharing contracts at the end of a deal. So what we do is we negotiate with the person, give them a payment and work hard on a negotiation not to give them all the money. So then we pick a revenue which is tied to production, subsurface risk and price. When we hit the revenue threshold, we share that with them. So it was a payment over several years. For 2020, there would be no payment. So we -- oil prices when we bought it were lower. So we're far better off by handling it this way. But when things pay out and they perform very well, and we placed on them, though the advantage we placed on them the subsurface risk, regulatory risk, hurricane risk and price risk. It didn't happen and we have to share some of the money with them. And we disclosed in the call the exact number, but it's going to be happening in March of '23, and that should be the end of it. But what people need to understand about that is it's a positive to pay it because the projects worked. And we didn't pay them the money upfront. So if you discount the contingent payment back to something that's already paid out, it's incredibly advantageous by our we're quite proud of the payments. So that just means they're successful. So these are paid out with hundreds of barrels to go of resource and just a home run ball for us.

Okay. Let's talk about the portfolio. You mentioned you're turning to sales. Maybe today, your fourth well at the Khaleesi/Mormont/Samurai project. In our model, we have those reaching, I think, a net plateau rate of about 23,000 to 24,000 BOEs a day, still a good number.

Absolutely good.

And one of the things you'd trade the market about would be at Samurai, how you could unlock through 1 to 2 development wells, a little bit more resource. Can you give us an update on that?

Well, on our call, we had increased our CapEx primarily for 2 reasons. One was enhanced completions and drilling in our onshore business that are incredibly paying out for us today. And the other scope changes around Samurai. So Samurai is a project that we leased originally with Anadarko back in the day, many years ago. We have a discovery there that we drilled and sidetracked and delineated. And then in the drilling of one of the wells, we discovered above the main targets an additional set of pay zones, that's approximately 20 million barrels, early days of additional resources on top of the sanctioned project. And so then we have to decide now we had to spend some additional money to log that pay and to analyze that pay and change the casing program of the well and the timing of the well because we found this additional source. So now it would be a matter of when we want to drill an extra well at Samurai. We want to put our -- we're not even putting our 2 wells on until November. But that's about being in the game and about exploration success in that region because when you set up a field like this with the pipelines, umbilicals and the drilling center. So drilling centers by as big as this hotel with all the pipes and everything in place. So when you drill a well in the middle of the drill center, it's enormous economic because all the other costs are part of the original project. So it's a real nice thing for us and a real positive for our exploration team.

Okay. I wanted to ask you about maybe deal flow in the Gulf of Mexico. What are you seeing today? And there are opportunities for Murphy, who is one of the more active players in the Gulf of Mexico today?

Yes, there is more deal flow, and we've seen a couple of -- what we really do at Murphy is we help people do strategic things. Petrobras wanted to leave the Gulf, they want to close their office. They wanted to go back to work primarily in Brazil. They were all over the world, not in Africa and Gulf different place. They wanted to strategically do that. They then had a requirement for the company to do the strategic would be highly, highly safety related as to safety data and regulatory data and reputation and balance sheet for all the liabilities. And that really zeroed in on us. We're now seeing some Asian players, international oil companies wanting to leave. When they want to leave, who would they want to exit with? A person they knew in Asia, a person has a top regulatory, top safety and operation ability. So it brings us a competitive advantage. We're in many and you can see in our slide deck, we're in many fields, a different working interest. So we have all the data, been to every data room and a very experienced team. So we are seeing a bit more of that. They're not enormous deals because we're focusing really on our delevering strategy and setting a debt target first, but there's -- when people do things strategically, it's a different focus and when a private equity has a data room to sell something for a factor of what they paid for it. It's a totally different decision and then we'll be there to help people do that.

Roger, one of the catalysts that we published on is as we think about 2023, you could have a tailwind to your oil volumes in Canada from the life extension project at Terra Nova. Could you describe that project and maybe give us a brief status update?

Yes. Murphy has a long history of work in the East Coast of Canada. We've been a partner in Hibernia, one of the more profitable fields probably in the world, been in there for 25 years, probably. We were an original partner at Terra Nova. It was another unique deal where the government helped in building the FPSO and to have the FPSO built there is before my time at Murphy and I've been here over 20 years. So at the end of the life of the field, there have been different owners. We stayed in the whole time. A couple of super majors left, Suncor and others remain. Then the field was going to be abandoned because of the abandonment liability and different things are overriding the oil price at the time. Government then made a deal with everyone where we took out the super major partners, and they funded a portion of the spending of the project for the project to remain in Newfoundland. When someone adds capital to a major offshore deal and does not have a working interest, it's an enormous. So we talk about all the M&A deals have been very successful in our company. That's probably one of the best ones actually because of that feature. That's again being in the game, being in something, have knowledge of the CapEx in the project. So that's being executed. Now the FPSO has moved to Spain and the work there to refurbish its ongoing that we'll come back to a shoreside in Canada and go offshore in the fall and get online, sometimes around the new year. And so we make about 3,000 barrels a day at Hibernia, and we're thinking this will be in the 7 range, giving us a total of 10. And another unique thing about East Coast of Canada through all these years is a big pricing advantage. It always carries like a 3 to 4 [ diff ] on top of Brent.

Premium?

Yes. So it's a Brent traded barrel, very unique crude quality needed in certain places and very, very profitable price for us.

Great. Last question on offshore. And I did get a couple of questions on the price. I did want to ask you a little bit about this. There's a Wall Street Journal article recently on some emerging regulatory risk in Mexico with Talos Energy, and I just wanted to give your thoughts on the regulatory environment in Mexico. I think here's a little different from what's going on here, but and your comfort level in spending capital in country.

We have not experienced any issues at all in Mexico. We pride ourselves in a way to do the permits. These permits are complex internationally. It requires a lot of information, and we are very good at providing the information properly, and we have our permit to drill today. So I've never -- and we've extended a small field that we developed there called Cholula. We had approval to extend that. We have our blocks extended to exploration period. So we're not seeing a regulatory matter there. We have a contract there, a royalty tax scheme. It's not a PSE. My friend, Tim Duncan, a great CEO and a smart guy. They drilled a big project near the local oil company there. It's on the lease line. You can see in our deck today, those circles over the line. And I don't know anything really about that, but we're not -- our partners are nearby us or Petronas that we know well, Shell that we know well, Eni, Repsol surround us, some of which are our partners there. So I view that as a totally separate matter. And that's how the risk in Mexico today. When you go to develop a discovery there, then that's where the care has to be taken.

Okay. And can you talk a little bit about Tulum, which I believe you're going to be drilling in the third or fourth quarter?

Yes.

I think Shell is drilling a well near you?

[indiscernible] Shell later in the year.

Is there any optimism you have for this well?

Well, I've been a good bit of success on a trend, as you can see in our slide deck, a trend of Samurai little successful wells, trending on a sedimentary fairway sub-salt, it would look very, very similar to a 1990 well in the Gulf of Mexico. It looks just like if you put in the wall, you could tell no difference. And it's a really nice looking prospect. We have 3 or 4 or 5 follow-ons to it. It's 150 million to 300 million barrels will be very economic. And we're on a trend and with a lot more seismic data as we worked our block through the years and developed this really nice prospect with a good bit of follow-on behind it. So to be -- it's tested successfully south of us in Mexico, you have to turn where you are to South, offshore is north further which is unique. And then on the other side, Shell, we'll be drilling later this year, and it will be book ended then and we have a well-positioned.

What type of water depth, is this ultra-deepwater or deepwater?

Mexico is a lot shallow than what's drilled in the Gulf today. It's probably not even 4,000 feet. We don't -- deepwater is not 4,000 feet anymore.

Yes. And then just finally, in the Gulf of Mexico, I believe you're going to be drilling exploration well maybe next year?

We have 2 nice situations in the Gulf. We have a project area called OSO that we've built up on our own following some practices we have around some older wells drilled by super majors and you're buying the past. Very excited about that, very excited about bringing partners into that, which is always a good sign. When we did the deal with Petrobras with that became a project called Cascade Chinook that has its own FPSO out there also very high margins there. So we've been produced about 10,000 to 11,000 barrels a day for a good while. There is a prospect -- an exploration prospect of another side of a fault block in that field that has not been drilled. And when we became partners at St. Malo and we start understanding the Wilcox play, which we don't normally play, a lot of successful production areas are on the other side of a downthrown side of a fault throughout the Wilcox. So getting into the St. Malo field helped us understand that better. And we have a very nice prospect again in the top of our infrastructure where the drill center already is. So it's a key well for us, a very, very nice opportunity and the other well following in OSO, a well in Mexico. And this is for not great percent of our capital. The drilling costs are still not extensive in that game because the deepwater rigs are super-efficient too. So all this whole time that shale has been greatly improved and unmanageable efficiency. The offshore rigs are there as well.

Okay. As you're thinking about kind of capital allocation next year, what are your thoughts on some of your short-cycle opportunities between the Eagle Ford, the Duvernay as well as in the Montney?

We look for our capital to be lower that we talked about a few minutes ago. And what we're really trying to do is keep the Eagle Ford in a flat production with high free cash flow. We are growing our Montney into a plant facility that will hold 500 million a day, and we'll get there in about a year. It will only require a little more than $100 million of CapEx, which we already have spent this year the same, and that will kind of max out because we don't have any more facility to take it. So next year, we'll feel that and then low, low maintenance CapEx to keep it full because the wells are so profound. And our Eagle Ford business is going and we will be having some projects in the Gulf Coast we're drilling [indiscernible] well we're drilling these Lucius wells to keep our Gulf production averaging 85% over 3 years next year will be the highest year. And so then we have -- we're trying to fight the CapEx. We have so many opportunities, both in Gulf but not really looking to grow the onshore out of what I just said. So the opportunities also in offshore, you can have timing constraints on leases and various things. So that's where we're focusing on for additional capital allocation and trying to keep our CapEx at pre-described level so we can have this once in a lifetime to greatly delever very fastly and get to returning back to our historic levels of dividend and repurchasing that we have -- that we want to do.

Okay. We have a couple of minutes left. So if anyone in the audience would like to ask a question, please raise your hand.

Yes, ma'am?

Just wait for the mic.

Given your experience all over the world, not just in the U.S., I would love to know your perspective on this administration's relationship with oil and gas versus what you've seen.

You're right. I'm real experience to [ mark ] for a long time, never really consider that, things come and go and these things about the focus against our industry now. I just let that go by me. I've seen it come and go through the years. It's much more profound now. But at the end of the day, oil is $105 today. Next year at $75 oil, we can make over $2.2 billion of EBITDA today. And we can also pivot out of here to explore and develop because we've done so all over the world. So we see these measures make oil go higher. And for a unique period of time, it's going to be very, very positive for our company. And I just try not to get caught up in that and do our budgeting, keep our budget and our plans on tack and just let the $100 oil roll, and we'll be in an incredible position in just a few months, better than we are today, which is good.

Roger, I'm getting the -- we're out of time. Really appreciate your time, really appreciate it. Thank you, sir. Great to see you.

Okay.