Murphy Oil Corporation

Good morning, ladies and gentlemen, and welcome to the Murphy Oil Corporation fourth quarter 2020 earnings conference call. If at any time during this call you need assistance, please press star zero for the operator. I would now like to turn the conference over to Kelly Whitley, Vice President, Investor Relations and Communications. Please go ahead.

Good morning, everyone, and thank you for joining us on our fourth quarter earnings call today. Joining us is Roger Jenkins, President and Chief Executive Officer, along with David Looney, Executive Vice President and Chief Financial Officer, and Eric Hambly, Executive Vice President, Operations. Please refer to the informational slides we have placed on the investor relations section of our website as you follow along with our webcast today. Throughout today's call, production numbers, reserves, and financial amounts are adjusted to exclude non-controlling interest in the Gulf of Mexico. Please keep in mind that some of the comments made during this call will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussions of risk factors, see Murphy's 2019 Annual Report on Form 10-K on file with the SEC. Murphy takes no duty to publicly update or revise any forward-looking statements. I will now turn the call over to Roger Jenkins.

Good morning, Kelly. Thanks, everyone, for calling in today. Before we get started reviewing our 2020 and looking forward day-to-day, I would like to address the recent actions taken by the Biden-Harris administration. Murphy, like all operators across federal lands in the United States, is disappointed but not at all surprised by recent actions. Unfortunately, as a matter of public policy, we believe their efforts is misguided. U.S. emissions peaked over a decade ago in the United States and continue to fall every year. Growth in worldwide greenhouse gas emissions comes primarily from the Far East, Southeast Asia, and Africa. These new initiatives will punish domestic producers and workers but will not lower worldwide emissions. Ironically, any policy that includes the Gulf of Mexico actually hurts the carbon footprint as the Deepwater Gulf has the lowest carbon intensity of all of the E&P business. Last week, the U.S. Department of Interior announced a temporary suspension of delegated authority for 60 days. It is important to note that this order does not limit existing operations under valid leases and provides a method for obtaining necessary approvals. There is potential for delay and consolidation of approval authority. However, to date, we have been pleased with the progress and are moving forward. Murphy is well-positioned to continue execution of our short-term and long-term projects, including Khaleesi Moormount Samurai and our non-operated projects based on approvals in hand, discussions with our regulators, and progress made in the last week obtaining actual approvals to conduct ongoing operations on current leases. We've also seen in the past two weeks over 20 approvals given for work in the Gulf of Mexico to not only us but our peers. Yesterday, the White House announced a pause on new oil and natural gas leasing on federal land and waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices. This action is also not surprising. Existing and ongoing lease work was not included in the announcement. The administration's recent actions have confirmed the viability of our company's strategy and increased the value of our diverse global portfolio. This includes large private U.S. onshore acreage, both onshore and offshore Canada assets, and a robust international exploration portfolio, including offshore Mexico, Brazil, and Vietnam. As you can imagine, there are many pieces here moving forward. We expect once the debt settles that permitting approvals will return to a process we can work with, It's not in the government's best interest to halt operations in the Gulf for a host of financial and legal reasons. Again, we have a diverse portfolio, and all these actions are highly likely to increase oil prices, which would be in our favor over time. That's all I have on this comment today, on these remarks, and we'll turn to slide two. Mercury remains steadfast in our strategy despite the turmoil of 2020, maintaining our diverse portfolio while operating in a safe, sustainable, and fiscally responsible manner. Our capital discipline leads to a targeted, flatter oil production profile with additional free cash flow generation coming from the recently announced Tupper-Montigny development, along with long-term price recovery scenarios. We remain focused on our shareholders through our longstanding dividend, our employees, contractors, and communities by establishing and practicing our successful COVID-19 protocols. Our portfolio continues to span onshore and offshore locations in both U.S. and Canada, which offers many advantages in today's times. And lastly, Murphy remains a strong company-making exploration program on existing acreage in both the Gulf of Mexico and internationally. Slide three. Following the OPEC price war beginning of the COVID-19 global pandemic last year, we focused on a few primary areas to solidify the company and remain competitive over the long term with multi-basin operations. We've completed a significant company-wide reorganization, resulting in reduced G&A costs, as well as lowered our overall cost structure and capital program. Our focus on maximizing free cash flow and maintaining liquidity with the support of crude oil hedges and natural gas forward sale contracts led to the sanctioning of the low-risk Tupper Mountain development and reduced capital allocation toward growing shale oil production. Additionally, we continue to support development plans for both long-term deepwater gulf projects as well as our international exploration program. Slide 4. Mercury produced an average of 149,000 barrels equivalent to date per day in the fourth quarter. These volumes include impacts totaling nearly 4,000 barrels equivalent from two subsidy equipment issues, with production expected to restart in the first quarter, 2021. The unplanned events in the Gulf of Mexico were partially offset by strong North America onshore performance. Our cash capex totaled $111 million for the quarter, inclusive of $1 million in NCI spending, On an accrued basis, CapEx totaled 130 million net to Murphy, excluding Kings Key. Prices continue to improve in the fourth quarter with oil realizations at an average of $42, the highest, of course, seen since quarter one, and natural gas at $2.36 per thousand cubic feet, also far ahead of prior quarters. On slide five, our full year 2020 production averaged 164,000 barrels of oil per day, It was a dynamic year and we experienced a record-breaking hurricane season following historically low prices resulting in industry-wide production shut-ins for a short period. Overall for the year, we averaged nearly $38 per barrel for realized oil prices with $1.85 per 1,000 cubic feet for natural gas. Cash capex of the year totaled $7.60, which included $23 million of NCI capex. On accrued basis, CapEx totaled $712 million, excluding King's Key and NCI spending, as per our guidance. On reserves, on slide six, approved reserve base remains sizable at year-end 2020, with $697 million of barrels of oil equivalent, comprised of 41% liquids and 51% approved developed. Approved reserve life is maintained at more than 11 years. Overall, our total approved reserves were 13% lower from the year end 2019 due to two primary events. The first was a combination of lower SEC crude oil prices, along with Murphy's shift in focus away from oil shale production growth, which resulted in transfer of Eagleford Shale and K-Bar Duvernay PUDs to probable reserves. The change in capital allocation of the current five-year plan reduced PUDs by over 100 million barrels equivalent. Separately, the sanction of the Tupper Mountain development in the fourth quarter resulted in the conversion of probable reserves and contingent resources to proven undeveloped, totaling nearly 100 million barrels equivalent. On page seven, While total approved reserves are lower year over year, our North American onshore approved plus probable resource remain near 2.5 billion barrels or equivalent. We maintain the ability to rebook our onshore shale puds with a justly capital plan in the future if we decide to do so. As the reserve transfers were based on capital timing and not some surface risk. As in any resource booking, it would also depend on prices, cost structure at the time, and a five-year planning cycle change. Overall, Murphy continues to hold more than 3,400 undrilled locations across onshore North America. Further, our U.S. onshore Eagleford Shale position is located on private lands. I'm now going to turn it over to David Looney, our CFO, and let him update us on some financial information. David. Thank you, Roger, and good morning. Slide eight. Murphy reported a net loss of $172 million, or a $1.11 net loss per diluted share for the fourth quarter of 2020. After-tax adjustments, including but not limited to a non-cash mark-to-market loss on crude oil derivative contracts and contingent consideration totaling $159 million, resulted in an adjusted net loss of $14 million, or or a $0.09 adjusted net loss per diluted share. Slide 9. Improving commodity prices led to further strengthening in revenue for the quarter. Overall, our net cash provided by continuing operations rose to $225 million in the fourth quarter, including a $13 million cash outflow from a working capital increase. When combined with property additions and dry hole costs of $135 million, including $38 million for Kings Key, we had positive free cash flow of $90 million in the quarter. Regarding Kings Key, the producer and owner groups continue to make good progress on the array of legal documents, and we look forward to a closing, possibly within the next few weeks. For full year 2020, our net cash from continuing operations of $803 million included a $39 million outflow from working capital. Property additions and dry hole costs of $859 million, including Kingskey spending of $113 million, resulted in a negative free cash flow of $56 million for the year. If we exclude the Kingskey expenditures for the year, we would have had positive free cash flow of more than $55 million. We continue to maintain a high level of liquidity with $1.7 billion at year end, including $311 million of cash and equivalents at December 31st. With our focus on cost reduction measures throughout 2020, we've achieved significantly lower G&A with an approximately 40% reduction in full year costs from 2019. Lastly, Murphy continues to protect its future cash flow with the addition of 21 and 22 crude oil hedges, as well as fixed price forward sales contracts for a portion of our Tupper Motney production through 2024. Slide 10. Liquidity remains a key focus for Murphy, and our balance sheet remains strong, with $1.4 billion available under our $1.6 billion senior unsecured credit facility, as well as $311 million of cash and equivalents as of December 31st. We reiterate our goal of reducing our total debt level over time with excess cash flow. This reduced leverage will give us even more resilience through the inevitable commodity price cycles to come. With that, I'll now turn it back over to Roger. Thank you, David. On slide 12, as a company, we're responsible to the environment, employees and our stakeholders. We have a long history of protecting all, in part due to our strong internal governance processes. I'm particularly proud of how quickly the team established COVID-19 protocols to maintain safe offshore operations with zero downtime or disruptions due to those efforts. Murphy achieved another year of low metrics, including 46% reduction year-over-year in total recordable incidents, expanded our internal diversity inclusion practices and programs, and maintained a program to aid impacted employees in times of need through our Disaster Relief Foundation, which we used this summer with hurricane relief on the Louisiana coast. Our operations teams continue their work on minimizing our environmental impact, such as building a new produced water handling system to recycle water in our sanctioned Tupper Montany project, as well as utilizing bi-fuel hydraulic frac spreads on all well completions in Canada, which results in considerable CO2 emissions reductions. While smaller changes individually, they add up to a larger impact over time. On slide 13 on sustainability, last fall we released our 2020 sustainability report, which features expanded disclosures and metrics. A key highlight is our goal of reducing greenhouse gas emissions intensity by 15% to 20% by 2030 from 2019. The report also outlines diversity disclosures, workforce development, employee engagement programs, Murphy's also expanded our HSE board committee to include oversight of corporate responsibility. We formed an ESG executive committee and created a new director of sustainability role. We've taken many steps and we continue to evolve and advance our sustainability efforts. On slide 15 on the Eagleford Shale business, we produced 31,000 barrels equivalents per day in the fourth quarter, comprised of 71% oil. For the full year, production averaged 36,000 barrels equivalent per day. with $197 million of capex, which includes near $50 million for field development as well. We brought online 25 operated and 10 non-operated wells earlier in that year. The team continued their efforts on improving well performance and high-grading production enhancing projects through facility and artificial lift optimization. Murphy's seeing an average base decline rate of 24% for all wells drilled prior to 21, which, in our view, is very well positioned. On slide 16, on the K-Bob DuVernay project, the company produced 10,000 barrels equivalent of oil per day in the fourth quarter, comprised of 75% liquids, and averaged 11,000 barrels equivalent per day for the full year. Overall, Murphy spent $94 million in CapEx during the year, including Placid Motney, Reagan Online's 16 operated wells in KBOB, and 10 non-operated wells in Placid. Also in 2020, Murphy completed its drilling program to hold all acreage, resulting in full discretionary future development. Most notable in the second quarter in the KBOB East 15-19 pad, which is achieving significant results as our best well in KBOB Duvernay so far, ranking in the top 2% of all Murphy unconventional wells. Overall, it's competitive with our top producing wells in Carnes County and the Eagleford Shale. Slide 17 in the Tupper Montany would produce $234 million per day in the fourth quarter and average $238 million cubic feet per day full year 2020. Approximately $14 million of capex was spent during the year to drill four wells with completions planned this year and ongoing. Additionally, the Tupper Montany plant expansion was completed during the fourth quarter. Since our last earnings call, Murphy has added significant fixed price forward sale contracts at EcoHub through 2024, which combined with improving basis differentials and higher prices, as well as higher EURs can lead to stronger free cash flow generation. Slide 19, the Gulf of Mexico. Our assets there produced 63,000 barrels equivalent of oil per day in the fourth quarter, comprised of 78% oil. Production volumes were impacted by nearly 4,000 barrels of oil equivalent per day on unplanned downtime due to two subsea equipment issues, in addition to previously guided hurricane downtime in the fourth quarter. Four-year 2020 production averaged 70,000 barrels of pollutant per day. Short-term projects continue to progress with operated cali-epilim scheduled for first oil in the second quarter, non-operated wells in various stages of completions and tie-ins, and we expect oil to begin flowing in the first half of the year to plant. In the Gulf of Mexico slide 20 on major projects, we remain on schedule with Kingskey construction at 90% complete and drilling beginning in the second quarter for Coliseum-Walmont Samurai development. The non-operated St. Malo water flood continues to move forward with completions on the first producer well underway and preparations being made for drilling a second injector well as well as beginning of a producer well workover. On slide 22, in exploration, we participated in the latest OCS Gulf of Mexico lease sale during the fourth quarter, and we were awarded and fully awarded eight blocks with five prospects at a net cost of approximately $5.3 million. As a result, our Gulf of Mexico interest today totals 126 blocks, spanning more than 725,000 acres with 54 exploration blocks and 15 key prospects at this time. On slide 24 on our capital program, for 2021, Murphy plans to spend $675 million to $725 million and achieve production of 155,000 to 165,000 barrels equivalent per day. For the first quarter, we forecast production of 149,000 to 157,000 barrels of oil equivalent per day. Approximately 47% of our 2021 capex is allocated to offshore Gulf of Mexico, with nearly all dedicated to the major long-term projects that achieved first oil in 2022. Another quarter of our 2021 CAPEX is budgeted for the Eagleford Shale, with the remainder split between onshore Canada and exploration. Overall, we continue to focus on high-margin assets in our oil-weighted portfolio, resulting in free cash flow generation after our dividend. On slide 25, A North American onshore capital budget is $265 million in 2021. It's focused on maintaining flat production in Eagle Creek Shale with $170 million dedicated to bringing home 19 operated wells and 53 non-operated wells, as well as field development, which is 30% of the total spent. Approximately $85 million is earmarked for newly sanctioned Tupper Montney development program to bring 14 wells online during the year. The remaining $10 million of CAPEX supports field development and maintenance in the K-Bob DuVernay and non-operated Placid. Of note, our oil-weighted shale assets maintain a long runway of drilling with more than 1,400 locations in the Eagleford Shale and more than 600 in the K-Bob DuVernay. Slide 26, in the Tupper-Montigny project, we're excited for this opportunity as its development brings to our portfolio. We're seeing lowest basis differentials in five years. Beyond that, we have continual improvement in mercury's well economics and EURs in the area, creating sustainable, attractive cash margins for an asset that also generates the lowest greenhouse carbon intensity in our portfolio. Lastly, the macroeconomics have shifted significantly in our favor in the last few years with additional takeaway capacity, achieving necessary de-bottlenecking work both in west and eastward boundary pipelines, as well as construction beginning on LNG Canada project with the planned in-service state of 2025. Slide 27. The Tupper Montney asset has been a strong, proven resource with rising UURs in recent years and ever-improving cost structure while maintaining very low subsurface risk. They've recently put in place additional fixed-price forward shale contracts. In 2024, they're about protecting future revenue for the project and ensuring cash flow generation. The asset generated free cash flow is approximately $50 million in 2020, which is more than sufficient to cover the cash flow requirements in the next two years as the development is initiated. Overall, the current sanctioned plan requires an average annual capex of $68 million and will generate cumulative free cash flow of approximately $215 million through 2025. Slide 28. In the fourth quarter, we formed into an attractive play-opening trend for a 10% non-operated working interest with Chevron as operator. The first well plan is the Silverback Prospect, and we will provide access, and we will also be provided access to 12 blocks through our participation. Slide 29. We continue to progress our various exploration projects and are excited with the optionality that the non-operated position in Sergipe Alagoas Basin in Brazil provides our company. Murphy is working with partners to mature our drilling inventory and our partner plans to spread the first Brazil well in the second half of 2021. And the Salina Basin in Mexico in slide 30 continue to advance our position there with many leads and prospects here and target spreading the first exploration well in late 21, early 22. Overview of the LRP on slide 32. A long-term strategy of a dynamic plan to maximize cash flow while managing capex after dividend remains unchanged, as does our commitment to a flatter oil production profile. Our Tupper Montney development leads to an approximately 8% CAGR from 21 through 24, while oil growth remains at 3%. Due to this, Murphy will generate 2.3% free cash flow after dividend at our base price scenario, with significant cash flow achieved in a mid-50s oil price recovery scenario, which will achieve a sizable debt reduction. As we begin with our announcement in 2020 for a lower capital program, the average annual capex through 2024 is approximately $600 million, with 2022 being the peak year due to finalizing the major Gulf projects, along with increased Tupper Montney development. Of course, we maintain a portion allocated to our exploration strategy the target of drilling three to five wells per year. Slide 33 is to close out 2020 and lean into 21. Murphy is sticking with our priorities of managing capex to support a flatter production profile, and combined with protective hedges, allows for maximum free cash flow generation, strong liquidity, and debt reduction and long-term price recovery, as well as consistently paying a dividend to our shareholders. Lastly, I want to extend my sincere gratitude to all of our employees for their efforts throughout 2020. And with their dedication and our new plans, we're well positioned heading into 21. I'll now end my remarks today and be glad to turn it over for any questions anyone may have. Thank you.