Earnings Call Transcript - MUR Q3 2023

Operator, Operator

Good morning, everyone. Welcome to the Murphy Oil Corporation Third Quarter 2023 Earnings Conference Call and Webcast. I will now hand the conference over to Kelly Whitley, Vice President of Investor Relations and Communications. Please proceed.

Kelly Whitley, Vice President, Investor Relations and Communications

Thank you, operator. Good morning, everyone, and thank you for joining us on our third quarter earnings call today. Joining us is Roger Jenkins, President and Chief Executive Officer; along with Tom Mireles, Executive Vice President and Chief Financial Officer; and Eric Hambly, Executive Vice President, Operations. Please refer to the informational slides we 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, please see Murphy's 2022 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.

Roger Jenkins, President and Chief Executive Officer

Thank you, Kelly. Good morning, everyone, and thank you for listening in to our call today. As we turn to slide 3, I'd like to highlight Murphy's strong value proposition. We're a long-term sustainable company with decades of future drilling in our onshore business and significant running room offshore with exploration upside and low carbon intensity. Offshore, Murphy holds a competitive advantage with our execution capabilities. Murphy continues to generate strong cash flow. We've been able to more than double our long-standing dividend since 2021 as well as significantly reduce debt. Since the end of 2020, we reduced debt by approximately $1.4 billion and paid more than $330 million in dividends. And within the past quarter, we purchased $75 million of stock, all while maintaining our cash balances and replacing reserves. As we move to slide 4, Murphy has remained focused on our priorities to deleverage, execute, explore, and return. I'm excited to say we advanced Murphy 2.0 of our capital allocation framework in the third quarter through share repurchases and the redemption of $249 million of 2025 senior notes, and we remain on track to achieve our $500 million debt reduction goal for the year. Third quarter production of 202,000 barrels equivalent per day again exceeded the upper end of our guidance range with oil production averaging 103,000 barrels per day. Our 2023 onshore program delivered strong well performance improvements with over 50% of our new wells achieving all-time high well performance for their respective areas. I'm pleased to announce today that our Board has sanctioned the Lac Da Vang field development project in Block 15 105, Vietnam. The first oil forecast is in 2026. Also during the quarter, as previously announced, Murphy closed the divestiture of certain noncore assets in Canada, and a portion of those proceeds were redirected to fund our new country entry into Côte d'Ivoire and advance our Lac Da Vang field development project. We have since commenced seismic reprocessing projects in Côte d'Ivoire and the Gulf, and our rig will resume drilling the Murphy-operated OSO-1 number one exploration well in the Gulf of Mexico in the very near term. In the third quarter, we repurchased $75 million or 1.7 million shares outstanding at an average price of $44.53 per share. Additionally, our Board approved a $300 million increase in our share repurchase authorization today, and we have $525 million remaining. I look forward to further progressing through Murphy 2.0 as we continue delivering shareholder returns and reducing debt. On slide five, Murphy produced an average of 202,000 barrels equivalent per day with 51% oil in the quarter. Production was nearly 10,000 barrels equivalent per day above the midpoint of our guidance due to a combination of stronger onshore well performance, lower realized Tupper Montney royalty rates, and the absence of any hurricane events in the Gulf of Mexico. In the quarter, we realized $82.58 per barrel for our oil, while our realized NGL price was just over $21 and natural gas was just over $2 per 1,000 cubic feet. Strong oil pricing, in addition to our production outperformance, led to Murphy generating $900 million in revenue in the quarter, excluding NCI. I'll now turn the call over to our CFO, Tom Mireles, for an update on our financial results.

Tom Mireles, Executive Vice President and Chief Financial Officer

Thank you, Roger, and good morning, everyone. Slide six. Murphy reported $255 million in net income or $1.63 per diluted share in the third quarter and adjusted net income of $249 million or $1.59 per diluted share. Operations remained strong in the quarter, resulting in adjusted EBITDA of $597 million, with minimal accrued CapEx of $162 million, excluding non-controlling interest. Slide seven. As Roger said earlier, we are excited to have executed on Murphy 2.0 of our capital allocation framework. During the quarter, we redeemed $249 million in debt and repurchased $75 million of shares outstanding, as well as paid our quarterly dividend of $0.275 per share. Overall, we returned 106% of our adjusted free cash flow in the third quarter. To further support the framework, our Board has approved an additional $300 million share repurchase program, and we currently have $525 million remaining under that total authorization. As of September 30, we had total debt of $1.6 billion, so we will continue to allocate adjusted free cash flow funds as prescribed in Murphy 2.0 until we reach Murphy 3.0 with $1 billion in total debt. With that, I'll hand the call over to Eric Hambly, our Executive Vice President of Operations, to discuss our operational update.

Eric Hambly, Executive Vice President of Operations

Thank you, Tom, and good morning, everyone. Slide nine. Murphy’s Eagle Ford Shale assets produced 38,000 barrels of oil equivalent per day with 88% liquids in the third quarter, exceeding guidance by 1,200 barrels of oil equivalent per day. As planned, we brought online seven operated wells, with four wells in Catarina and three wells in Tilden. Three non-operated Tilden wells are planned for the fourth quarter. We've seen great results from our wells this year, particularly as we return to the Tilden area for the first time since 2019 and applied the revised completion design. Overall, more than 40% of our 2023 new wells are top 30 performers in our portfolio on a 100 to 180-day cumulative oil basis. In particular, the Jambers wells in Tilden that came online midyear continue to significantly outperform at twice our pre-drill forecast, while our third quarter wells have produced in line with plan after adjusting for lateral length. Slide 10. In the Tupper Montney, Murphy achieved record quarterly production of 414 million cubic feet per day in the third quarter. There was no new well activity as all 2023 planned wells came online in the first half of the year. We continue to see record production levels, and Murphy was recently highlighted as having two of the top 10 and four of the top 15 natural gas wells in all of Canada in an external report. Internally, eight wells had each achieved an average IP30 of more than 18 million cubic feet per day in 2022 and 2023, and two wells have each achieved a new company record IP30 of more than 21 million cubic feet per day. Additionally, 80% of our 2023 wells are top 15 all-time performers in Murphy's history based on their IP30s. Needless to say, we are excited about the results we have achieved from our revised completion design in this area. Slide 11. Murphy produced 5,000 barrels of oil equivalent per day with 67% liquids in the third quarter. As announced in September, we closed the divestiture of a non-core portion of our operated Kaybob Duvernay asset, as well as our entire non-operated position in Placid Montney for $103 million in net cash proceeds. The divested assets produced approximately 1,700 barrels of oil equivalent per day with 39% oil. Post close, we maintained nearly 500 future locations in the Kaybob Duvernay and are able to maintain base production through various optimization initiatives. Slide 13. We produced 89,000 barrels of oil equivalent per day with 81% oil across our offshore assets in the third quarter. Our operated development and tieback projects continue to progress, with the new Dalmatian #1 well in DeSoto Canyon 90 now online and drilling underway for the Marmalard #3 well in Mississippi Canyon 255, ahead of first oil in the first quarter of 2024. The two non-operated Lucious wells are moving forward and are forecast to come online in mid-2024. Our non-operated major projects are also advancing, with the Terranova Asset Life Extension project anticipated to return to production by year-end and the St. Malo Waterflood project working toward first water injection in 2024. Slide 14. We have had two mechanical issues occur at separate operated fields in the Gulf of Mexico this year. The Dalmatian #2 well had a problem earlier this year with the subsurface safety valve, while the Neidermeyer #1 well encountered mechanical issues in the third quarter. We have workovers planned for both wells next year and anticipate the wells will resume production by mid-2024. Additionally, the non-operated Lucious #9 well workover is scheduled for the fourth quarter of 2023, with the well forecast to return to production in the first quarter of 2024. The previously disclosed non-operated Kodiak #3 well stimulation and zone addition is scheduled for mid-2024. And with that, I will turn it back to Roger.

Roger Jenkins, President and Chief Executive Officer

Thank you, Eric. We're excited to announce that our Board has approved the development of the loan field Block 15-1/05 in Vietnam, with the first oil expected in 2026. The development will take place in phases until 2029 to ensure efficient use of capital, aiming for 100 million barrels of oil equivalent based on estimated recoverable resources. We project gross production between 30,000 to 40,000 barrels equivalent per day, with 10,000 to 15,000 barrels equivalent net to Murphy. The field is predominantly oil and currently fetching a premium over Brent oil prices in the area. Moreover, during the quarter, Murphy has been evaluating commercial viability and development concepts for the PON discovery in Block CI-103, which has been appraised with several wells by a previous operator. According to our agreement, we aim to submit a viable field development plan by the end of 2025. Looking at Vietnam, we have two planned wells next year that offer promising exploration opportunities. The Lac Da Hong exploration well in Block 15-1/05 is near our Lac Da Trang field and is estimated to have a gross resource potential of 65 million to 135 million barrels of oil equivalent. Meanwhile, in Block 15-2/17, we're set to drill the Hai Su Vang exploration well, which has a gross resource potential of 170 million to 430 million barrels equivalent. Both prospects benefit from the infrastructure of the Lac Da Trang field. We're also pleased to have started initial work in Côte d’Ivoire in the third quarter by reprocessing seismic data across four of the five blocks, and we're eager to explore opportunities in this country. In the Gulf of Mexico, we're preparing to resume drilling the Murphy-operated Oso 1 exploration well in Atwater Valley 138, targeting a gross resource potential of 155 million to 320 million barrels of oil equivalent. Regarding our guidance, for the fourth quarter, we expect production between 181,500 and 189,500 barrels of oil equivalent per day, with 51% being oil. This estimate accounts for 2,000 barrels of oil equivalent per day of planned downtime mainly onshore, influenced by our front-end-heavy capital program designed to maximize free cash flow. Our fourth quarter outlook also reflects the loss of production from a well in the field that was generating 4,000 barrels of oil equivalent per day before it was shut in late in the third quarter. For the full year 2023, we're raising our production guidance to a range of 185,000 to 187,000 barrels of oil equivalent per day, which is a 3,000 barrels per day increase in our midpoint. This figure consists of 53% oil and 59% liquids. We are maintaining our capital expenditure guidance of $950 million to $1.025 billion, excluding $49 million for acquisition-related costs. We also have a structured capital allocation framework, allowing for additional shareholder returns beyond the base dividend, while targeting a long-term debt level of $1 billion. Currently, we have $525 million remaining in our authorized share repurchase programs. Since the introduction of this capital allocation framework, we have returned an additional $15 million annually to shareholders through increased dividends and repurchased $75 million of our stock, alongside reducing nearly $750 million of debt. We are optimistic about continuing our progress and rewarding our long-term shareholders. Since announcing our multi-year plan in January, we've had significant achievements, including the approval of the Lac Da Trang field development in Vietnam and our entry into Côte d’Ivoire. As we finalize our annual capital planning, we will evaluate our long-term strategy to integrate these developments and provide updates in January. However, our strategy of maintaining capital discipline while achieving modest production growth remains unchanged. As we wrap up today’s call, I want to emphasize that our company is in a strong position given our capital discipline and the higher oil prices we've seen in recent years, with around $1.4 billion in debt reduction since the end of 2020. We have a significant inventory of well locations for future North American onshore activities across multiple basins, and we are strategically expanding our international exploration and development efforts while continuing to invest in the Gulf of Mexico. Finally, I'd like to express my gratitude to our dedicated employees for their hard work this quarter, and I look forward to a successful end to the year. We'll now take your questions. Thank you.

Operator, Operator

Thank you. Now we will begin the question-and-answer session. Your first question comes from the line of Bert Barnes from Truist. Your line is open.

Bert Barnes, Analyst

Hey. Good morning, Roger.

Roger Jenkins, President and Chief Executive Officer

Good morning, Bert.

Bert Barnes, Analyst

Good to see you, and I hope to see you this year.

Roger Jenkins, President and Chief Executive Officer

Yes.

Bert Barnes, Analyst

It looks like your Gulf of Mexico volumes kind of helped drive part of that 3Q beat, and outperformed your guidance. I was just wondering if you could talk about maybe your future exploration prospects that you have in the field, maybe after those so well, and maybe if you also plan to participate in future lease sales as well?

Roger Jenkins, President and Chief Executive Officer

Thank you for that question. I really appreciate that about our Gulf business, a solid part of our company where we've been in this business since 1950. We, of course, will be active in all these sales going forward. We're in the middle of that right now. We are participating primarily next year in two very significant wells in Vietnam now that we have our Vietnam field development plan approved at the LDV field, and these are very large prospects and very nice, lower-risk and lower-cost wells. While participating, we haven't had our budget finalized, but we're highly likely to participate in a non-op well with one of our partners in the Gulf, and we're viewing another opportunity on some of our prospects at this time. So we will be active in exploration and active in lease sales, but also we bring to the table a long level of experience working internationally. Murphy is a sought-after company to work internationally because we move faster. It's very critical to us where we enter a country, and we bring a competitive advantage that countries want in Murphy. We have two really nice positions now internationally. We're doing really well and are well positioned in the Gulf and internationally right now, which is a differentiator for Murphy Oil Corporation. Thank you for that question.

Bert Barnes, Analyst

Yes. That's great. Look forward to the updates. And then just the second part, I just wanted to make sure I understood the Murphy 2.0 payout. What percentage did you target in 3Q? And maybe is that supposed to be every quarter, or is that more of an annual target for that 25%? And I have a follow-up. Thanks.

Roger Jenkins, President and Chief Executive Officer

I'm going to let our CFO, Tom, walk you through that, gentlemen.

Tom Mireles, Executive Vice President and Chief Financial Officer

Sure. Thanks, Bert. We're really excited to move into this phase of our framework. We see it as involving both timing and execution strategy. On the timing aspect, we are not aiming to be precise on a quarter-to-quarter basis but rather on an annual basis. This approach allows us some flexibility to monitor any discrepancies between our share price and intrinsic value. While we generally adhere to our framework, there may be some variations. Our primary focus is on this as an annual target. Additionally, we need to reduce our debt, and we are committed to achieving the $500 million goal for the year. I feel optimistic about finishing this year on that note, but we also want to consider how best to proceed from there.

Bert Barnes, Analyst

That makes perfect sense. Thanks, guys.

Operator, Operator

Your next question comes from the line of Leo Mariani from ROTH MKM. Your line is open.

Leo Mariani, Analyst

Good morning, Leo. How are you doing?

Tom Mireles, Executive Vice President and Chief Financial Officer

Good morning, Leo. How are you doing?

Leo Mariani, Analyst

Hey. Good morning. Question on fourth quarter CapEx here. Wanted to see if you could kind of help us out in terms of what the ballpark number should be there in 4Q. And you also talked about this $49 million of acquisition-related costs you've had of late. Have those kind of already hit in terms of the balance sheet and the numbers here? Or are those kind of on the come here into 4Q?

Tom Mireles, Executive Vice President and Chief Financial Officer

What was that last part of your question again? The first is CapEx is both up just a second. One more time, Leo, I'm sorry.

Leo Mariani, Analyst

Yes. You mentioned $49 million of kind of acquisition-related costs with some of these new areas where you're entering. Just curious, have those already been incurred? Or are those kind of on the come into the fourth quarter?

Tom Mireles, Executive Vice President and Chief Financial Officer

So those have been behind us primarily. We do have some seismic work that's covered in exploration expense in Côte d'Ivoire pretty much that's over here. So do you have the CapEx, Eric?

Eric Hambly, Executive Vice President of Operations

CapEx for the fourth quarter ought to come in under $200 million.

Tom Mireles, Executive Vice President and Chief Financial Officer

It maintains our guidance. So we don't have that number right handy with us. It adds up to the midpoint of our guidance, and we're in good shape on all that. Our CapEx is lower, and we're in really good shape on free cash flow for the fourth quarter.

Roger Jenkins, President and Chief Executive Officer

Just Leo, just restating, I mean, we're comfortable with the range of CapEx that we've expressed. Obviously, we give a range because we have uncertainty of outcomes primarily in our non-operated business where we have major projects ongoing with fields we don't operate. There's a bit of uncertainty, and that's why we give the CapEx range. But again, we feel really good about our full year CapEx range.

Leo Mariani, Analyst

Okay. And can you provide a little bit more color in terms of the activity in the fourth quarter? Because I know that a handful of kind of non-op Eagle Ford wells, but it sounds like that's de minimis spending. There's nothing really onshore. So what kind of comprises the bulk of those expenditures here in 4Q?

Roger Jenkins, President and Chief Executive Officer

I have a fair account for you, Leo. Yes. As you pointed out, our onshore business, we're essentially done with our program there. We have a little bit of activity from non-operated Eagle Ford that doesn't drive our CapEx too much. We do have a little bit of facility spending. We're doing a number of projects to get ready for our drilling activity in the Eagle Ford and in the Montney in 2024. That's kind of normal for our business. In offshore, we have quite a bit of activity picking up here in the fourth quarter with two rigs working in the St. Malo non-operated project and our resumption of drilling OSO, as well as our ongoing development work that we highlighted at the Marmalard number three well.

Leo Mariani, Analyst

That's helpful, guys. I appreciate that. Regarding the share buyback, it's great to see that you initiated it this quarter. Could you discuss how you are balancing that with debt reduction moving forward?

Roger Jenkins, President and Chief Executive Officer

I'll let Tom go through that, but it's our formula, Leo. We're trying to stay to the formula for the rest of the year, 75-25 split. I don't see coming off that with a little more bias toward getting the debt down at year-end is how we're working it.

Leo Mariani, Analyst

Yeah, any further color to that?

Tom Mireles, Executive Vice President and Chief Financial Officer

No, I think that Roger covered it. We have a stated goal of debt reduction this year, and it fits with our priorities for the year of delevering.

Roger Jenkins, President and Chief Executive Officer

Just to be clear though, Leo, we do anticipate stock repurchases in the fourth quarter.

Leo Mariani, Analyst

Okay. Great.

Roger Jenkins, President and Chief Executive Officer

…along with the conduction.

Leo Mariani, Analyst

I appreciate it. Thank you.

Operator, Operator

Thank you. Your next question comes from Charles Meade from Johnson Rice. Your line is open.

Charles Meade, Analyst

Good morning, Roger, to you and the whole Murphy team there.

Roger Jenkins, President and Chief Executive Officer

Good morning, Charles, good to hear from you.

Charles Meade, Analyst

Roger, you mentioned Vietnam briefly earlier in your Q&A, and I would like to hear more about that. Can you describe these two exploration prospects for us? I understand this will be your first activity there. Can you detail what those prospects are like? I believe you said they are relatively low risk; could you provide some numbers regarding that? Additionally, can you confirm whether the $10,000 to $15,000 BOE a day, net to you in 2026, includes any risk from exploration success with these two prospects, or is that based on no activity at all?

Roger Jenkins, President and Chief Executive Officer

No, that is 100% just from the project. Nothing to do with exploration in any number, any forecast, anything with Murphy Oil. I appreciate that question. Vietnam has been a sleeping giant for us. We had it held back for a while, also held back by them. It's come to life with this approval of the field development plan, meaning they're ready to put their money in with us here, PetroVietnam. We've had these nice prospects; one of the prospects represents fractures over carbonate in a very simple geologic setting. One of the wells resembles that which is similar to how the field has laid out, and there's a large stratigraphic trap that has some level of structure to it, also nearby as the room or some very good success by one of our partners in Vietnam that recently drilled a very nice well targeting the same zone. This is a very large prospect that can change our world there and make this a very 30,000, 40,000, 50,000 barrel a day business for us long-term, and we can have some exploration success. As to the risk component, it's not low-risk, but it's lower risk than big sub-salt $100 million wells in the Gulf of Mexico. You're talking about wells type costing with lower risk. In Vietnam, which most people are not familiar with, this is the basin of Vietnam, the multiple platforms, pipelines, infrastructure, FPSOs, and FSOs everywhere here. This would look like a segment of South Louisiana 30 years ago, a lot of production here in shallow water. So this is not like we're in a ranked wildcat country here. So that kind of frames what we're doing in Vietnam, Tom, unless you had follow-on to that, Charles.

Charles Meade, Analyst

Thank you, Roger, for the detailed information. For my second question, I want to discuss Murphy 2.0. While reaching Murphy 2.0 is indeed an achievement, it seems to me like a temporary pause since you might be approaching 3.0 by the time you report your fourth quarter of 2023. This might be true in absolute debt terms, but definitely in terms of net debt. I assume you share this perspective. I’m interested in how much you’ve talked about this with your Board and if there have been any changes in your plans for 2024.

Roger Jenkins, President and Chief Executive Officer

No, we are indeed focused on our own situation. We have a finance committee that reviews our models in detail. Currently, we are working on our budget and integrating it into our new plan. As I mentioned earlier, our overall strategy is expected to yield similar returns over time. Depending on oil prices, we anticipate reaching 3.0 next year and shifting to a 50-50 approach. I believe we should continue to stay on course and maintain our framework to achieve Murphy 3.0 at a 50-50 ratio. We have potential for increased returns and more opportunities ahead of us. We are in a strong position and remain active in the oil sector rather than depleting our assets. We acquired two exceptional assets that leverage our competitive edge in offshore execution. The countries value our presence due to our importance and our ability to act swiftly. We see numerous opportunities ahead. With oil prices above $85, we can quickly transition to 3.0 as you mentioned. We aim to see at least one quarter of each figure before making any changes. Overall, we are in a very favorable position, and I appreciate the great insight you shared this morning.

Charles Meade, Analyst

All right. Well, thank you for the detail, Roger.

Roger Jenkins, President and Chief Executive Officer

Thank you, and good to hear from you.

Operator, Operator

Thank you. And there are no further questions at this time. I would like to turn it back to Roger Jenkins for closing remarks.

Roger Jenkins, President and Chief Executive Officer

Thank you, everyone, for attending our call today. We appreciate we had a really good quarter, one of the best in a long time, and we're looking forward to another one, and we'll talk to you in late January. I appreciate it. Thank you.

Operator, Operator

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.