Financial Instruments and Risk Management | 9 Months Ended |
Sep. 30, 2013 |
Derivative Instruments And Hedging Activities Disclosure [Abstract] | ' |
Financial Instruments and Risk Management | ' |
Note K – Financial Instruments and Risk Management |
Murphy periodically utilizes derivative instruments to manage certain risks related to commodity prices, foreign currency exchange rates and interest rates. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by the Company’s senior management. The Company does not hold any derivatives for speculative purposes, and it does not use derivatives with leveraged or complex features. Derivative instruments are traded primarily with creditworthy major financial institutions or over national exchanges. The Company has a risk management control system to monitor commodity price risks and any derivatives obtained to manage a portion of such risks. For accounting purposes, the Company has not designated commodity and foreign currency derivative contracts as hedges, and therefore, it recognizes all gains and losses on these derivative contracts in its Consolidated Statements of Income. Certain interest rate derivative contracts are accounted for as hedges and the gain or loss associated with recording the fair value of these contracts has been deferred in Accumulated Other Comprehensive Income until the anticipated transactions occur. |
Commodity Purchase Price Risks |
The Company is subject to commodity price risk related to the sales price for crude oil and natural gas it produces worldwide. To manage a portion of this risk, the Company has entered into a series of West Texas Intermediate (WTI) crude oil price swap financial contracts to hedge a portion of its Eagle Ford Shale production from October 2013 through September 2014. Under these contracts, which mature monthly, the Company will pay the average monthly price in effect and will receive the fixed contract prices. WTI open contracts were as follows: |
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Dates | | Volumes | | | Swap Prices | | | | | | | | | | | | | | | | | | | | | | | | | |
(barrels per day) | | | | | | | | | | | | | | | | | | | | | | | | |
October – December 2013 | | | 10,000 | | | $ | 101.55 per barrel | | | | | | | | | | | | | | | | | | | | | | | | | |
January – March 2014 | | | 20,000 | | | $ | 98.47 per barrel | | | | | | | | | | | | | | | | | | | | | | | | | |
April – June 2014 | | | 20,000 | | | $ | 96.48 per barrel | | | | | | | | | | | | | | | | | | | | | | | | | |
July – September 2014 | | | 6,000 | | | $ | 95.27 per barrel | | | | | | | | | | | | | | | | | | | | | | | | | |
In addition, the Company has entered into crude oil swap contracts to hedge about 1,500 barrels per day of Seal heavy oil production during the fourth quarter 2013. The estimated netback price of these contracts is $55.05 per barrel. |
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The impact of marking to market these commodity derivative contracts increased income from continuing operations before taxes by $1.6 million during the nine months ended September 30, 2013. |
The Company’s former U.S. retail marketing subsidiary had ethanol production operations that were subject to commodity price risk related to corn that it purchased for feedstock and also had price risk related to wet and dried distillers grain with solubles that it sold. In 2013 and 2012, the former subsidiary had physical delivery commitment contracts for purchases of corn at fixed prices and had physical delivery commitment contracts for sale of wet and dried distillers gain with solubles at fixed prices. To address the risks associated with these fixed price physical delivery contracts, certain of those contracts were hedged with derivative contracts. The effects of these physical delivery and associated derivative contracts increased income from discontinued operations before taxes by $1.6 million in the nine-month period ended September 30, 2013, and reduced income from discontinued operations before taxes by $38.0 million in the nine-month period ended September 30, 2012. |
Foreign Currency Exchange Risks |
The Company is subject to foreign currency exchange risk associated with operations in countries outside the United States. Short-term derivative instruments were outstanding at September 30, 2013 and 2012 to manage the risk of certain future income taxes that are payable in Malaysian ringgits. The equivalent U.S. dollar values of Malaysian ringgit derivative contracts open at September 30, 2013 and 2012 were approximately $76.0 million and $97.6 million, respectively. Short-term derivative instrument contracts totaling $28.0 million U.S. dollars were also outstanding at September 30, 2013 to manage the risk of certain U.S. dollar accounts receivable associated with sale of crude oil production in Canada. The impact from marking to market these foreign currency derivative contracts reduced income from continuing operations before taxes by $4.1 million for the nine-month period ended September 30, 2013 and increased income from continuing operations before taxes by $3.1 million for the nine-month period ended September 30, 2012. |
At September 30, 2013 and December 31, 2012, the fair value of derivative instruments not designated as hedging instruments are presented in the following table. |
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| | September 30, 2013 | | | December 31, 2012 | | | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | | Asset (Liability) Derivatives | | | Asset (Liability) Derivatives | | | | | | | | | | | | | | | | | | | | | |
Type of Derivative Contract | | Balance Sheet Location | | Fair Value | | | Balance Sheet Location | | Fair Value | | | | | | | | | | | | | | | | | | | | | |
Commodity | | Accounts receivable | | $ | 1,385 | | | Accounts receivable | | $ | 3,043 | | | | | | | | | | | | | | | | | | | | | |
Commodity | | Accounts payable | | | (1,138 | ) | | Accounts payable | | | (102 | ) | | | | | | | | | | | | | | | | | | | | |
Foreign exchange | | Accounts payable | | | (4,096 | ) | | Accounts payable | | | (1,031 | ) | | | | | | | | | | | | | | | | | | | | |
For the three-month and nine-month periods ended September 30, 2013 and 2012, the gains and losses recognized in the Consolidated Statements of Income for derivative instruments not designated as hedging instruments are presented in the following table. |
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| | | | Gain (Loss) | | | | | | | | | | | | | | | |
(Thousands of dollars) | | Statement of Income | | Three Months Ended | | | Nine Months Ended | | | | | | | | | | | | | | | |
September 30, | September 30, | | | | | | | | | | | | | | |
Type of Derivative Contract | | Location | | 2013 | | | 2012 | | | 2013 | | | 2012 | | | | | | | | | | | | | | | |
Commodity | | Sales and other operating revenues | | $ | (1,305 | ) | | | 0 | | | | (1,305 | ) | | | 0 | | | | | | | | | | | | | | | |
Commodity | | Discontinued operations | | | 2,980 | | | | (40,241 | ) | | | 1,604 | | | | (37,978 | ) | | | | | | | | | | | | | | |
Foreign exchange | | Interest and other income | | | (2,557 | ) | | | 6,585 | | | | (6,703 | ) | | | 15,782 | | | | | | | | | | | | | | | |
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| | | | $ | (882 | ) | | | (33,656 | ) | | | (6,404 | ) | | | (22,196 | ) | | | | | | | | | | | | | | |
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Interest Rate Risks |
The Company had ten-year notes totaling $350 million that matured on May 1, 2012. The Company expected to replace these notes at maturity with new ten-year notes, and it therefore had risk associated with the interest rate related to the anticipated sale of these notes in 2012. To manage this risk, in 2011 the Company entered into a series of derivative contracts known as forward starting interest rate swaps that matured in May 2012. The Company utilized hedge accounting to defer any gain or loss on these contracts associated with the payment of interest on these anticipated notes in 2012 through 2022. During the nine-month periods ended September 30, 2013 and 2012, $2.3 million and $1.1 million, respectively, of the deferred loss on the interest rate swaps were charged to income. The remaining loss deferred on these matured contracts at September 30, 2013 was $25.6 million, which is recorded, net of income taxes of $9.0 million, in Accumulated Other Comprehensive Income in the Consolidated Balance Sheet. |
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The Company expects to charge approximately $0.7 million of this deferred loss to income in the form of interest expense during the remaining three months of 2013. |
The Company carries certain assets and liabilities at fair value in its Consolidated Balance Sheets. The fair value hierarchy is based on the quality of inputs used to measure fair value, with Level 1 being the highest quality and Level 3 being the lowest quality. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1. Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants. |
The carrying value of assets and liabilities recorded at fair value on a recurring basis at September 30, 2013 and December 31, 2012 are presented in the following table. |
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| | September 30, 2013 | | | December 31, 2012 | |
(Thousands of dollars) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivative contracts | | $ | 0 | | | | 1,385 | | | | 0 | | | | 1,385 | | | | 0 | | | | 3,043 | | | | 0 | | | | 3,043 | |
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Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonqualified employee savings plans | | $ | (12,219 | ) | | | 0 | | | | 0 | | | | (12,219 | ) | | | (10,293 | ) | | | 0 | | | | 0 | | | | (10,293 | ) |
Commodity derivative contracts | | | 0 | | | | (1,138 | ) | | | 0 | | | | (1,138 | ) | | | 0 | | | | (102 | ) | | | 0 | | | | (102 | ) |
Foreign currency exchange derivative contracts | | | 0 | | | | (4,096 | ) | | | 0 | | | | (4,096 | ) | | | 0 | | | | (1,031 | ) | | | 0 | | | | (1,031 | ) |
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| | $ | (12,219 | ) | | | (5,234 | ) | | | 0 | | | | (17,453 | ) | | | (10,293 | ) | | | (1,133 | ) | | | 0 | | | | (11,426 | ) |
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The fair value of West Texas Intermediate (WTI) crude oil contracts was based on active market quotes for WTI crude oil. The fair value of Canadian crude oil contracts was based on active market quotes for Western Canadian Sour crude oil. The fair value of commodity derivative contracts for corn and wet and dried distillers grain was determined based on market quotes for No. 2 yellow corn. The fair value of foreign exchange derivative contracts was based on market quotes for similar contracts at the balance sheet date. The income effect of changes in fair value of crude oil derivative contracts is recorded in Sales and Other Operating Revenues in the Consolidated Statements of Income and the effect of changes in fair value of foreign exchange derivative contracts is recorded in Interest and Other Income. The nonqualified employee savings plan is an unfunded savings plan through which participants seek a return via phantom investments in equity securities and/or mutual funds. The fair value of this liability was based on quoted prices for these equity securities and mutual funds. The income effect of changes in the fair value of the nonqualified employee savings plan is recorded in Selling and General Expenses. |
The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists. No offsetting of assets and liabilities on derivative contracts occurred at September 30, 2013. Derivative assets and liabilities which have offsetting positions at December 31, 2012 are presented in the following tables. |
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| | Gross Amounts | | | Gross Amounts | | | Net Amounts of | | | | | | | | | | | | | | | | | | | | | |
of Recognized | Offset in the | Assets Presented | | | | | | | | | | | | | | | | | | | | |
| Consolidated | in the Consolidated | | | | | | | | | | | | | | | | | | | | |
| | Assets | | | Balance Sheet | | | Balance Sheet | | | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivatives | | $ | 3,111 | | | | (2,169 | ) | | | 942 | | | | | | | | | | | | | | | | | | | | | |
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| | Gross Amounts | | | Gross Amounts | | | Net Amounts of | | | | | | | | | | | | | | | | | | | | | |
of Recognized | Offset in the | Liabilities Presented | | | | | | | | | | | | | | | | | | | | |
Liabilities | Consolidated | in the Consolidated | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet | Balance Sheet | | | | | | | | | | | | | | | | | | | | |
(Thousands of dollars) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity derivatives | | $ | 2,271 | | | | (2,169 | ) | | | 102 | | | | | | | | | | | | | | | | | | | | | |
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All commodity derivatives above with offsetting positions were corn-based contracts associated with the Company’s former U.S. ethanol plants. Net derivative assets in the table above are included in Accounts Receivable presented in the table on page 13 and on the Consolidated Balance Sheet; likewise, net derivative liabilities in the above table are included in Accounts Payable in the table on page 13 and are included in Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet. Separate derivative agreements existed for each of the ethanol plants. These contracts permitted net settlement and the Company generally availed itself of this right to settle net. |