Financial Instruments and Risk Management

6 Months Ended

Jun. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

Note L – Financial Instruments and Risk Management

Murphy uses derivative instruments, such as swaps and zero-cost commodity price collar contracts, 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 with creditworthy major financial institutions or over national exchanges such as the New York Mercantile Exchange (NYMEX).  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 Operations.  

Commodity Price Risks

The Company has entered into crude oil swaps and collar contracts. Under the swaps contracts, which mature monthly, the Company pays the average monthly price in effect and receives the fixed contract price on a notional amount of sales volume, thereby fixing the price for the commodity sold. Under the collar contracts, which also mature monthly, the Company purchased a put option and sold a call option with no net premiums paid to or received from counterparties. Upon maturity, collar contracts require payments by the Company if the NYMEX average closing price is above the ceiling price or payments to the Company if the NYMEX average closing price is below the floor price.

At June 30, 2022, volumes per day associated with outstanding crude oil derivative contracts and the weighted average prices for these contracts are as follows:

	2022
NYMEX WTI swap contracts:
Volume per day (Bbl):	20,000
Price per Bbl:	$	44.88
NYMEX WTI collar contracts:
Volume per day (Bbl):	25,000
Price per Bbl:
Average Ceiling:	$	75.20
Average Floor:	$	63.24

Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S. The Company had no foreign currency exchange derivatives outstanding at June 30, 2022 and 2021.

At June 30, 2022 and December 31, 2021, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

(Thousands of dollars)	Asset (Liability) Derivatives Fair Value
Type of Derivative Contract	Balance Sheet Location	June 30, 2022		December 31, 2021
Commodity swaps	Accounts payable	$	(239,382)	(239,882)
Commodity collars	Accounts payable	(146,780)		(19,533)
Commodity collars	Accounts receivable	—		4,280

For the three-month and six-month periods ended June 30, 2022 and 2021, the gains and losses recognized in the Consolidated Statements of Operations for derivative instruments not designated as hedging instruments are presented in the following table.

		Gain (Loss)			Gain (Loss)
(Thousands of dollars)	Statement of Operations Location	Three Months Ended June 30,			Six months ended June 30,
Type of Derivative Contract		2022		2021	2022		2021
Commodity swaps	Loss on crude contracts	$	(46,552)	(226,245)	$	(202,911)	(440,630)
Commodity collars	Loss on crude contracts	(56,516)		—	(220,934)		—

Fair Values – Recurring

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 June 30, 2022 and December 31, 2021, are presented in the following table.

	June 30, 2022					December 31, 2021
(Thousands of dollars)	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets:
Commodity collars	$	—	—	—	—	—	4,280	—	4,280
	$	—	—	—	—	—	4,280	—	4,280
Liabilities:
Commodity swaps	$	—	239,382	—	239,382	—	239,882	—	239,882
Commodity collars	—		146,780	—	146,780	—	19,533	—	19,533
Contingent consideration	—		—	244,226	244,226	—	—	196,151	196,151
Nonqualified employee savings plan	17,167		—	—	17,167	16,962	—	—	16,962
	$	17,167	386,162	244,226	647,555	16,962	259,415	196,151	472,528

The fair value of commodity (WTI crude oil) swaps was based on active market quotes for WTI crude oil.  The fair value of commodity (WTI crude oil) collars was determined using an option pricing model. The before tax income effect of changes in the fair value of crude oil derivative contracts is recorded in Loss on crude contracts in the Consolidated Statements of Operations. 

The contingent consideration, related to 2018 and 2019 U.S. Gulf of Mexico acquisitions, is valued using a Monte Carlo simulation model. For the six months ended June 30, 2022 and 2021, the pre-tax income effect of changes in the fair value of the contingent consideration was an expense of $129.8 million and $76.7 million respectively and is recorded in Other operating expense in the Consolidated Statements of Operations. In the six months ended June 30, 2022, the pre-tax income effect of changes in the fair value of the contingent consideration exclude cash payments of $81.7 million, which reduced the value of the contingent consideration liability. Contingent consideration is payable annually in years 2022 to 2026.

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 pre-tax income effect of changes in the fair value of the nonqualified employee savings plan is recorded in Selling and general expenses in the Consolidated Statements of Operations. 

The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists. There were no offsetting positions recorded at June 30, 2022 and December 31, 2021.