Murphy Oil Corp Q1 FY2024 Earnings Call

Good morning, everyone, and welcome to the First Quarter 2024 Earnings Conference Call and Webcast. I will now hand it over to Kelly Whitley, Vice President of Investor Relations and Communications. Please proceed.

Thank you, Joana. Good morning, everyone, and thank you for joining us on our first quarter earnings call today. Joining us is Roger Jenkins, Chief Executive Officer; along with Eric Hambly, President and Chief Operating Officer; and Tom Mireles, Executive Vice President and Chief Financial Officer. 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 discussion of risk factors, see Murphy's 2023 Annual Report on form 10-K on file with SEC. Murphy takes no duty to publicly update or revise any forward-looking statements. I will now turn the call over to Roger.

Thank you, Kelly. Good morning, everyone, and thanks for listening to our call today. As we turn to Slide 3, I'd like to reiterate our corporate priorities of Delever, Execute, Explore, and Return. We remain firmly on track for achieving our $300 million debt reduction goal in 2024, leading to $1 billion of total long-term bond debt outstanding at the year-end 2024. In the first quarter of 2024, we exceeded production guidance in the Eagle Ford Shale and Tupper Montney with total production of 170,000 barrels equivalent per day at the high end of our guidance range. Murphy's Gulf of Mexico workover program is ongoing. In addition, I'm pleased to report that the Mormont #2 subsea well is back online in the first quarter after equipment repair. We're continuing to progress our well delivery programs. And in the second quarter, we will have a new well at Khaleesi and 23 new operated wells all coming online. In exploration, our operating partner is currently drilling the Ocotillo exploration well in the Gulf of Mexico, and we will move to the orange exploration well immediately following. In the first quarter, Murphy was awarded 6 deepwater blocks from the Gulf of Mexico Federal Lease Sale 261. We're also progressing our exploration plans in Vietnam as we have contracted a rig to spud our exploration program in the beginning of the third quarter. We're pleased to continue our hallmark of consistent returns to our shareholders through buybacks and a long-standing dividend. We've repurchased $50 million of stock in the first quarter at an average price of $39.25 a share. Additionally, as announced in January, we increased our quarterly dividend to $0.30 per share or $1.20 per share annualized, and our Board maintained this level in April, which is back to a 2016 annual level. Our capital allocation focus has been primarily focused on debt reduction since 2020. Between August 2020 and August 2022, we reduced total debt by $730 million. Since announcing the framework in August of '22, we've consistently executed a combination of debt reduction, share repurchases, and dividend increases. Since the year 2020, we've reduced debt by $1.7 billion, repurchased a total of $200 million of stock or 4.7 million shares at an average price of $42.68 a share and raised our quarterly dividend by 140%. In the first quarter of 2024 specifically, we generated sufficient adjusted cash flow to allow us to purchase $50 million of stock and capitalize on the stock price dislocation to oil prices. For 2024, we're solidly on track to achieve our $300 million debt reduction goal and reach Murphy 3.0 of our capital allocation framework, especially with current oil prices. Looking forward to reaching this next step and further increasing shareholder returns to 50% of adjusted free cash flow later this year. On Slide 5, Murphy produced at the high end of guidance at 170,000 barrels equivalent in the first quarter of 2024 with 89,000 barrels of oil per day. We achieved a slight premium to WTI as we realized $78 per barrel, and our realized NGL price was $23 a barrel and Nat Gas was $2.12 per thousand cubic feet. Overall, we generated $746 million of revenue in the quarter, excluding our non-controlling interest. I'll now turn the call over to our Executive Vice President and Chief Financial Officer, Tom Mireles, for an update on our financial results. Tom?

Thank you, Roger, and good morning, everyone. On Slide 5, in the first quarter, Murphy reported $90 million of net income or $0.59 per diluted share and $131 million of adjusted net income or $0.85 per diluted share. We achieved $205 million of adjusted EBITDA due to a combination of strong production and realized prices with $264 million of accrued CapEx, excluding non-controlling interest. Overall, as Roger mentioned previously, we had an outstanding quarter in returns to shareholders as we repurchased $50 million of stock, paid a higher dividend, and increased our cash balance. In total, we returned over 60% of our free cash flow, all while supporting a front-end loaded CapEx plan with approximately 60% of spending in the first half of 2024. On Slide 6, Murphy maintained strong liquidity in the first quarter with $1.1 billion as of March 31, including more than $300 million in cash and equivalents. I'm pleased that during the quarter, we received positive outlooks from both Moody's and Fitch revised from stable outlooks previously, with the corporate ratings affirmed at Ba2 and BB+. At quarter-end, we had $1.3 billion of senior notes outstanding with a long-dated weighted average maturity of nearly 8 years. We remain on track for further debt reduction this year, and I look forward to reaching Murphy 3.0 with total debt of $1 billion before year-end. On Slide 7, at Murphy, we seek to continually minimize our impact on the environment, whether that's using natural gas rather than diesel to fuel our onshore operations or utilizing recycled water for our well completions. We also support the communities in which we work, like the city of Uvalde and South Texas or here in Houston. Because of this service, we have been presented with awards such as the United States President's Volunteer Service Award from the Houston Food Bank, and I look forward to Murphy developing further initiatives to enhance our positive impact. With that, I will turn it over to Eric Hambly, our President and Chief Operating Officer, to discuss our operational updates.

Thank you, Tom. On Slide 10, our Eagle Ford Shale wells performed above expectations in the first quarter, achieving total production of 29,000 barrels of oil equivalent per day with 86% liquids volumes. Our operating partner brought online 4 Tilden wells during the quarter, while Murphy progressed our 20 well-operated drilling program for the year as planned. We are on track to bring 7 operated Catarina wells online in the second quarter, plus an additional 4 non-operated Tilden wells. On Slide 11, in the Tupper Montney, Murphy produced 348 million cubic feet per day and progressed our 2024 well delivery program with 13 wells that are either now producing or will be online in the near term. This will complete our plans for the year. We are excited to announce that Murphy has joined the Rockies LNG partnership, which may create future LNG opportunities for our Tupper Montney acreage as projects in the area near completion. This partnership is comprised of Western Canadian natural gas producers, driving LNG export optionality, and we are eager to be a part of it. Murphy maintains a strong price diversification strategy mitigating against AECO price exposure. For the first quarter, we sold approximately half of our natural gas volumes at the Chicago, Dawn, Malin, Emerson, Henry Hub, and Ventura price points. On Slide 12, our Kaybob Duvernay asset produced 4,000 barrels of oil equivalent per day with 68% liquids in the first quarter of 2024. We progressed our development program for the year and have 3 operated wells coming online in the second quarter as planned. On Slide 13, our Gulf of Mexico assets produced 73,000 barrels of oil equivalent per day with 82% oil volumes. This production was impacted by approximately 13,000 barrels of oil equivalent per day of planned downtime events during the quarter. Murphy is advancing our development program for the year, and we look forward to bringing online the sizable Khaleesi #4 well in the second quarter as we found approximately 200 feet of net pay when drilling. We're also progressing the drilling of a new well at our Mormont field, which is scheduled to come online in the third quarter. Additionally, our operating partner has brought online wells at the St. Malo and Lucius field during the quarter. In offshore Canada, we produced 6,000 barrels of oil equivalent per day in the first quarter according to plan. On Slide 14, during the first quarter, we completed the zone changes on the Marmalard #1 and #2 wells as planned as well as the subsea equipment repair at Mormont #2. Murphy also initiated work on the Neidermeyer #1 well workover with the plan now updated to drilling a sidetrack well, which will delay the online date to the third quarter of 2024. Our workover expenses, which are included in our lease operating expenses totaled $50 million for the first quarter with $65 million forecast for the second quarter. This figure includes the cost of the Neidermeyer sidetrack well. Additional work is planned later this year at the Dalmatian #2 well for the subsurface safety repair as well as the non-operated Kodiak #3 well stimulation and zone addition. On Slide 15, in Vietnam, we have been progressing our plans for our Lac Da Vang Field Development Project, including advancing major contracts this year. We look forward to beginning drilling our development wells in 2025 and remain on schedule for achieving first oil in late 2026. On Slide 17, in the Gulf of Mexico, we're excited to begin our 2024 exploration program. Our operating partner is currently drilling the Ocotillo exploration well. Immediately following this well, the rig will shift to drill the nearby orange exploration well. These 2 Miocene prospects are located near existing infrastructure and could be brought online quickly if either is a discovery. Also in the first quarter, we expanded our portfolio and were awarded 6 deepwater blocks from the Gulf of Mexico federal lease sale 261. On Slide 18, we're continuing preparations for our Vietnam exploration program later this year and are excited to have contracted a rig which is currently drilling in country. Murphy will first spud the Hai Su Vang exploration well in Block 15 217 in the third quarter and target a mean to upward gross resource potential of 170 million to 430 million barrels of oil equivalent. The rig will then move to drill the Lac Da Hong exploration well in Block 15 105, targeting a mean to upward gross resource potential of 65 million to 135 million barrels of oil equivalent. We look forward to seeing the results of these wells as they provide the potential to create a more sizable business in Vietnam. On Slide 19, our seismic reprocessing work continues to progress for our acreage in Côte d'Ivoire, and we are pleased with the multiple opportunities available across exploration play types. Importantly, ENI recently announced positive results from its Murene1 exploration well on the Calao discovery nearby. Murphy is excited at this news, and I note that our block CI 502 in particular is very near this discovery. In general, our Côte d'Ivoire acreage position is now bookended by 2 significant ENI discoveries. We will continue to progress our analysis of the data as it comes in with the final seismic data due by year-end 2024. And with that, I will turn it back to Roger.

Thank you, Eric. On Slide 21, for second quarter 2024, we forecast total production of 176,000 to 184,000 equivalents per day with 93,000 barrels of oil during that period. This range is impacted by 2,000 barrels of oil equivalent a day of offshore non-op unplanned maintenance primarily related to a third-party downstream facility, 1,250 barrels equivalent per day of Eagle Ford shale downtime as we have offset frac impacts, and a significant downtime of 11,700 barrels equivalent per day at Tupper Montney for plant maintenance that's ongoing. Murphy plans to spend approximately $325 million of accrued CapEx in the second quarter. For the full year 2024, we're maintaining a production guidance of 180,000 to 188,000 equivalents per day with 52% or 95,000 barrels a day of oil. This guidance is supported by stronger well performance and better results at non-operated offshore fields. We're also maintaining our CapEx range at $920 million to $1.02 billion, excluding non-controlling interest. These ranges will support us in achieving our 2024 debt reduction goal of $300 million, thereby allowing us to reach Murphy 3.0 and enhance our shareholder returns. On Slide 22, effective year-end, our long-term strategy remains unchanged since we first disclosed the refreshed projections following last year's opportunities captured in Vietnam and Côte d'Ivoire to support our new opportunities and long-term oil production growth. We continue to support and grow returns to shareholders during this time. In particular, we'll be executing Murphy 3.0 of our framework after reaching our debt reduction goal this year. Longer term, we plan to reinvest approximately 45% of operating cash flow, enabling us to achieve average production of approximately 210,000 to 220,000 equivalents per day and as always, over 50% oil weighting. Murphy continued generating ample free cash flow to allocate towards further shareholder returns, accretive investments as well as supporting exploration success. Additionally, as part of this plan, we remain committed to achieving metrics that are consistent with an investment-grade rating. And I'm pleased with the rating agency outlook improvements achieved this spring that Tom just spoke of. On Slide 23, I'm glad to have a solid first quarter behind us as we continue to execute our plans for the remainder of the year. Our long history of consistently returning to shareholders will expand as we reach Murphy 3.0 later this year. We're already ahead of the game with share repurchase in the first quarter. Our view of the 2024 debt reduction goal is a given, and we look forward to buying back more stock to enhance shareholder value. Additionally, we have exploration upside with drilling 2 wells in the Gulf of Mexico and 2 wells in Vietnam. Our future is bright, especially when you consider our long runway of Gulf of Mexico projects as well as significant future locations across our North American onshore business and our exploration upside. As we approach annual meeting season, we often benchmark our peer group on 2023 10-K data. In doing so, we find that Murphy is rated 1 or 2 in many categories, a few of those include free cash flow for production, production per adjusted share growth, lowest reinvestment rates, debt reduction, total debt, debt due from 2024 to 2026, debt-to-EBITDA, total cash return per shareholder change year-over-year. And lastly, G&A for EBITDAX. Solid company, solid plan, diverse portfolio, exploration upside, locations, sustainable, and a long history of shareholder returns, that’s Murphy Oil Corporation. As always, I want to thank our outstanding employees for their consistent effort and determination to help us reach all of our goals. With that, that's the end of our prepared remarks today, and we look forward to your questions.

Your first question comes from Neal Dingmann from Truist Securities.

My first question is about shareholder return. You touched on this, but I want to clarify. Specifically, could you or Tom remind me which bonds, if any, you can repay early? More importantly, once you reduce your debt to under $1 billion with Murphy 3.0, besides increasing shareholder returns, could we expect to see more exploration work? What else can we anticipate since your debt will be much more manageable at that point? I want to know if there will be something additional we can expect from the incremental free cash flow besides boosting shareholder returns.

Thank you for your question, Neal. It's an essential aspect of our strategy. I'll provide a broad overview, and then Tom will discuss the specific bonds. We need to approach this on an annual basis. We are confident, alongside you and your colleagues, that we will successfully eliminate the $300 million of debt. There are subtleties in timing the debt repayment. Additionally, we have set internal goals for stock repurchases. I am eager to buy back stock, and we view the debt as a given. We are already making progress on stock buybacks, following our planned approach, and I expect this to continue even if debt repayment extends into the third quarter. Regarding our long-term objectives, we aim to maintain our current growth plans and remain committed to buying back stock while it is undervalued. As you and your peers are aware, we expect to be ranked #1 in cash flow relative to our market cap through 2026, providing us a significant advantage, which we do not intend to alter at this time. Now, I'll have Tom provide details on the specific notes.

Yes, Neal, we have a little over $300 million to go to reach Murphy 3.0. We've got plenty available in our 2027 notes. Those are callable today, and the balance is around $440 million of 2027 notes. Our 2028 notes will be callable in July of this year. Now you asked about what we can do once we get to Murphy 3.0, and we go into this 50% to shareholders, 50% to the balance sheet. The way we think about that is Murphy 2.0 was more of a defensive move, making sure we've got our balance sheet in a robust shape. Murphy 3.0 gives us a chance to be positioned for more of an offensive move, whether it's dry powder or more opportunities to return to shareholders either through buybacks or even dividends.

I wanted to ask about valuation at a high level. It's noticeable that your company trades lower than others with significantly less production. What is your perspective on this? Do you believe the market is not fully recognizing the value of your stable offshore production? When I analyze your inventory and production, especially regarding your offshore development activities, I am surprised by the discount. I would appreciate your thoughts on why this discount exists, as I find it difficult to understand.

Thanks for that question, Neal. I really appreciate the inquiry. This is my 12th year doing this, and I used to get upset about those matters. However, today, we're just looking to buy back stock, and we're going to buy back stock until we do better. We have our balance sheet in order to do so. I just listed a long list of positives about our company. It’s solid. Can't have those attributes and not be running a good, solid company. I believe it must be the market cap of our company that aligns with all shale companies, and all shale doesn't have a workover. All shales are perfectly organized around a drilling game plan. If we were structured entirely as shale, I could tell you exactly the production by quarter. It's almost better to have the same CapEx every quarter. But if you look at the free cash flow and the uniqueness of our company and the deals we've done and the M&A and opportunities we have, it's because we're in the oil business. We're engaged in different aspects of the business, and we've found ourselves in a situation where growth has slowed. Buying back stock is currently favored, but we're going to maintain the best balance sheet while purchasing stock and going forward with that, especially in 2025, and we expect to improve our valuation from there.

Your next question comes from the line of Leo Mariani from ROTH MTM.

I wanted to touch base on the Gulf of Mexico production here real quick. Behind some of these numbers, I think you guys said you had 13,000 barrels a day equivalent of downtime in the first quarter, 2,000 equivalents of downtime in the second quarter. So I guess that's a plus 11,000 barrel a day improvement in 2Q. But just kind of looking at guidance, it looks like you're guiding up around 4,000 barrels a day. So I just wanted to get a sense of the delta is that just kind of natural declines there in the Gulf.

I'll let Eric handle that for you, Leo, and thank you for that question.

Yes, Leo, thanks very much. We have quite a bit going on with our Gulf of Mexico program this year. We've noted that we have a number of high-rate wells that are not currently producing, particularly the Neidermeyer well that we're working on, which has now become a sidetrack. That's a high-rate well, about 4,000 barrels a day, that should come online early in the third quarter. In addition, mid-year work is going at our non-operated Kodiak and our operated Dalmatian to boost production there. So you should see production rise throughout the year. The Gulf of Mexico production in the first quarter was around 73,000 barrels a day and should increase by 9,000 to 11,000 barrels a day by the end of the last quarter, working to offset declines with new production and restoring previously offline wells.

Okay. That was very helpful in terms of the explanation. And I wanted to also have just kind of a similar line of questioning around the Eagle Ford. It looks like that production ticks down a little bit in the second quarter. You guys cited some maintenance that's ongoing, but could you maybe just kind of discuss how the Eagle Ford production trajectory should play out as we roll into 3Q and 4Q?

Yes. As you noted, we do have a bit of downtime in the second quarter, primarily offset due to fracking impacts because we have an active completion program ongoing. This program continues into the third quarter. The bulk of our operated wells, which generate most of the new production in Eagle Ford, come online in the third quarter. You should see production peak in Eagle Ford in the third quarter and remain relatively similar in the fourth quarter. For the full year, we're predicting about 30,000 barrels a day for the Eagle Ford.

Your next question comes from the line of Tim Rezvan from KeyBanc Capital Markets.

Roger, I would like to dig deeper into the previous question about the Gulf of Mexico. The Neidermeyer wells are clearly very productive, yielding 4,000 barrels a day. You mentioned that the workover activity turned into a sidetrack. Could you provide more details on what changed and whether you anticipate reaching full capacity by early in the third quarter?

Eric can handle that for you. It's just oil field activity occurs, Tim.

Yes. So what happened with that well is during the planned workover, we identified that the issue was a leaking packer. We confirmed early in the work that this was the problem. As we continued the work to pull the packer tubing, we were trying to isolate the lower completion from the upper completion. We faced difficulty isolating the lower completion and concluded that the best path forward for that well would be to sidetrack it, which provides an opportunity for a brand new completion with a very short offset from the existing location. We have sidetracked that well and are encouraged with our findings so far. We plan to move forward with a completion that should provide the best production rate opportunity. It should meet or exceed the output of the previous well.

And one note on that, Tim, it's 4,000 net. These wells we have produce gross amounts of 16,000 to 18,000 barrels a day. These are substantial wells. We maintain ownership of over 30 percent of these operations, so they produce significantly more than 4,000 a day.

Your next question comes from Charles Meade from Johnson Rice.

My first question is about the second quarter capital expenditures. The $325 million estimate is $60 million higher than what I anticipated, and I believe many others did as well. It seems that the main factor driving this is the completion pace in North America, particularly in the U.S., but there is also a lot of activity in the Gulf of Mexico. Are these the primary contributors, or are there other factors affecting what appears to be high capital expenditures?

Thanks for that question, Charles. I'm going to frame it a bit and let Eric give the details. So we've stated all along that over 60% of our CapEx is allocated in the first year, and we're still within 1% of that. The variance is due to timing issues. We've drilled and completed faster in our onshore business and we have non-operated matters, which are similarly timed on the other side, and I'll allow Eric to elaborate on that. So we believe we're still on track. Everything aligns for our debt reduction and efforts to buy back stock. We simply shifted a few percent of the CapEx to the left. That's really no more than that. Eric can provide more details.

Yes. Thanks, Roger. As you noted, most of the change is driven by the timing of our onshore North America drilling completion program. That's over $30 million of the change. So that's shifting work from later in the year to the second quarter. Offshore, an additional $15 million of equipment related to our Coles Mormont program was moved from the fourth quarter into the second quarter during our work on Mormont #2. Other seismic expenditures moved from the first quarter to the second quarter as well due to lower CapEx in the first quarter. So some of the spending we thought would occur for non-drilling and completion related activities, such as seismic and development spending, were pushed from the first quarter 2024 into the second quarter 2024, this accounts for another $11 million or so. So that describes most of the shifts in CapEx spending, primarily due to timing rather than overall changes.

Got it. That is helpful detail. And then, Eric, I want to go back to a comment that you made about this. It seemed like you're pretty positive on this Khaleesi #2 development well, I think it is. And I think you believe I heard you mention that there are over 200 feet of pay. I wonder if you could provide two pieces of context: First, how does that 200 feet or whatever you saw in this most recent well compare to the initial well there? And the second piece is that all in one zone? Or is that across a few different zones? And so, is this going to be a monster one-zone completion? Or is this more typical where you have 60 feet across 3 different zones?

Yes. Thanks for that. I appreciate the opportunity to clarify. This particular well, the Khaleesi #4, was targeting a reservoir that was not part of our original development for the field. As we developed the field, we identified additional opportunities. This well is targeting a shallower reservoir located in an updip position. We encountered this reservoir while drilling deeper zones that were the main targets for our initial field development. This is an additional set of volumes that we've been able to identify after our initial development program, and we’re excited about it. The current discovery is in one zone, and it appears to be a high-quality reservoir that should produce very well for us when it comes online soon. So, if you think about our overall Khaleesi Mormont Samurai development, we had the initial wells and we’ve discussed how they'll perform production-wise. The wells we have coming this year are targeting zones that were not considered in the initial development, allowing us to develop additional volumes that will extend the plateau of our total Khaleesi Mormont Samurai development. From this perspective, we are genuinely enthusiastic. Development has performed exceptionally well, with a fast payout already achieved and additional volumes going forward that will contribute to plateau production extending through 2025 and 2026.

There are no further questions from our phone lines. I would now like to turn the call over to Roger Jenkins for any closing remarks.

I appreciate everyone dialing in today. I had some good dialogue regarding our business. We're very pleased with our operations and look forward to the rest of the year and beyond. I appreciate all the attendance today, and please check in with our Investor Relations team if you have any further questions. Thank you all.

This concludes today's conference call. You may now disconnect.