Murphy Oil Corporation (MUR, Financial) announced last month that its net income was $129.4 million ($0.72 per diluted share) in the 2014 second quarter, down from $402.6 million ($2.12 per diluted share) in the second quarter 2013. Income from continuing operations in the 2014 second quarter was $142.7 million ($0.79 per diluted share) compared to $259.9 million ($1.37 per diluted share) earned in the second quarter a year ago.
Adjusted earnings, which exclude both the results of discontinued operations and certain other items that affect comparability of results between periods, in the second quarter of 2014 was $161.7 million ($0.90 per diluted share). This was a decrease of $100 million ($0.48 per diluted share) compared to the prior year's quarter. Adjusted earnings were lower in the 2014 quarter compared to the prior year primarily due to higher exploration expenses, higher extraction costs in Malaysia associated with several new field start ups, lower realized oil and natural gas sales prices for Sarawak production, unfavorable effects in the U.S. from commodity contracts, and higher financing costs. Realized Sarawak oil and gas prices in the current quarter were negatively impacted by larger revenue sharing payments required under the production sharing contracts.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for continuing operations totaled $792.3 million in the second quarter 2014, down from $850.7 million in the second quarter of 2013. EBITDA per barrel of oil equivalent sold was $40.20 in the 2014 quarter compared to $44.95 in the 2013 quarter. EBITDA was lower in 2014 mostly due to higher exploration costs, increased revenue sharing in Malaysia and the effects of oil commodity contracts.
Second quarter 2014 highlights:
- Set a quarterly production record from continuing operations of more than 210,000 barrels of oil equivalent per day (boepd).
- Produced an Eagle Ford Shale (EFS) quarterly record of 52,814 net boepd up 6% from first quarter 2014 and 33% from second quarter 2013
- Achieved first production at the Dalmatian project in the Gulf of Mexico (GOM) with both wells performing above expectations
- Reduced lease operating expenses per barrel of oil equivalent (boe) for global operations by 8% in the first half of 2014 compared to the first half of 2013
- Added 100 million boe of proved reserves at mid-year and remain on track for reserve replacement in excess of 150% for the fourth straight year
- Initiated a $125 million share repurchase of Company Common stock approved by the Board of Directors on May 14, 2014, bringing the total stock repurchases since October 2012 to approximately 18 million shares
Roger W. Jenkins, President and Chief Executive Officer, commented, "We continue to make progress on three fronts: profitable production and reserves growth, execution at EFS, and lowering operating expenses. Production growth in the second half of the year is supported by completing all of the Siakap North-Petai well work, full start up of the Dalmatian field, the addition of 97 new EFS wells through mid-year, completion of Syncrude unplanned maintenance, further progress in the start up efforts at the non-operated Kakap-Gumusut field, and the addition of seven wells through the first half of this year in our Sarawak oil projects. We are pleased with all facets of EFS execution, especially supply cost reductions and well downspacing results. Once again we will more than replace our production in 2014 and our overall operating expenses continue to trend down this year even with the initial start up of several fields."
Operations Summary
Production
Second quarter production averaged 210,191 boepd. This was approximately 3% below our guidance of 217,000 boepd for the quarter. The shortfall for the quarter was primarily attributed to the global offshore business in Malaysia with lower oil and gas volumes related to a well operational delay on Kikeh, continued unplanned downtime at a third party methanol plant that processes Kikeh associated gas, a rig mobilization delay at a Sarawak oil platform, and various downtime events at shallow- and deep-water facilities.
Based on production levels in the just completed second quarter as well as early in the third quarter, the company is now revising its projected full year 2014 production to a range of 220,000 to 225,000 barrels of oil per day. Several factors led to this reduction, including slower than expected recovery at Syncrude following unscheduled maintenance downtime in the second quarter, an unplanned short-term outage at the Kikeh production facility, and revisions for further risking of production through third-party operated facilities. The mid-point of the new range would represent an 8% increase from 2013 production levels.
North America Onshore
In the Eagle Ford Shale, second quarter production, which was comprised of 90% liquids, averaged 52,814 boepd net, up from 49,634 boepd in the prior quarter as we brought 53 new wells on line. We are operating eight drilling rigs and four completion spreads across the play and expect to bring on a total of 200 wells (including non-operated locations) this year. Downspacing across the play continues to deliver expected results and we are testing the further upside potential in the Upper Eagle Ford Shale zone which could yield 600+ additional well locations beyond the 1,500+ locations remaining to be drilled in the Lower Eagle Ford Shale. We are in advanced stages of negotiating two separate pipeline arrangements in our Karnes and Tilden areas of the EFS to transport up to 28,000 bopd net to market. This will reduce our exposure to trucking operations and improve overall reliability while maintaining our price advantage through the segregation of our premium quality crude oil in these dedicated systems.
In the Tupper area in Western Canada, we are moving forward with our plan to "drill to fill" our existing gas plant capacity with three rigs in operation to deliver 20 wells online by year-end. We have completed 7 new wells using our new completion and choke management strategies and we are seeing positive results. We expect this new strategy will yield EUR (Estimated Ultimate Recovery) increases in the play. We are currently processing approximately 60 million cubic feet per day (mmcfd) of third party gas in the Montney.
Global Offshore
In the Gulf of Mexico, we started up both high rate Dalmatian wells this quarter with better than planned results. The two wells, where we hold a 70% working interest, have the capability to deliver a combined rate in excess of 20,000 boepd gross with approximately 50% liquids. A third well is planned to be added to the project in Dalmatian South in Desoto Canyon Block 134 by early 2016. We will also add a fourth development well for Dalmatian at Desoto Canyon Block 4. We are moving forward with our expansion plans at Medusa in Mississippi Canyon where we operate with a 60% working interest. This development consists of drilling two wells later this year with a subsea tieback to the Medusa facility and first production in 2015.
In Malaysia, we were set back in our Kikeh field development plans by a previously reported rig fire earlier this year and a single well operational delay. The operational challenges are now resolved and the well work continues to plan. At Siakap North-Petai, where we hold a 32% working interest, we have completed the final two production wells with the field now flowing at approximately 33,000 bopd gross. Final commissioning of the Kakap-Gumusut main project, where we have a 14% working interest, progressed in the second quarter and we now see this field starting up late in the third quarter. In shallow water offshore Sarawak, we incurred a delay with mobilization of a jack-up rig resulting in a longer than planned platform shut-in at the beginning of the second quarter. This work has been completed and we have since brought three new wells online with above plan rates. We expect to add 9 more wells through the end of this year in our Sarawak oil developments.
Exploration
In the GOM, drilling operations continue on the Titan prospect in Desoto Canyon Block 178 as a small oil accumulation was encountered in the original wellbore in the planned objective and costs have been suspended. We are currently sidetracking the well to test a 130 million barrel gross mean prospect in an adjacent fault block.
In other exploration drilling, the Hon Khoai prospect in Vietnam and the Serai-1 well and associated sidetrack testing the Bawang Putih prospect in Indonesia were plugged and abandoned as dry holes with a total of $16.5 million expensed in the second quarter. The Indonesia wells will carry an expense of approximately $7.9 million in the third quarter.
