Financial Instruments and Risk Management

12 Months Ended

Dec. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

Note K – Financial Instruments and Risk Management

DERIVATIVE INSTRUMENTS – Murphy uses derivative instruments to manage certain risks related to commodity prices, interest rates and foreign currency exchange 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 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 Income. As described below, certain interest rate derivative contracts were accounted for as hedges and the gain or loss associated with recording the fair value of these contracts was 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 crude oil it will produce and sell in 2014. 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 January 2014 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 at December 31, 2013 were as follows:

	Volumes
Dates	(barrels per day)		Swap Prices
January – March 2014		20,000	$	98.47 per barrel
April – June 2014		20,000	$	96.48 per barrel
July – September 2014		7,000	$	95.24 per barrel

The fair value of these open commodity derivative contracts was a net asset of $716,000 at December 31, 2013. At year-end 2012, the Company was party to corn and related products derivative contracts related to formerly owned ethanol production facilities that had a fair value equal to a net asset of $2,941,000.

Foreign Currency Exchange Risks – The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S. At December 31, 2013 and 2012, short-term derivative instruments were outstanding in Canada for approximately $32,300,000 and $154,000,000, respectively, to manage the currency risk associated with U.S. dollar accounts receivable balances associated with sale of Canadian crude oil in both years and a U.S. dollar intercompany accounts receivable balance at year-end 2012. The fair values of open foreign currency derivative contracts were liabilities of $26,000 at December 31, 2013 and $1,031,000 at December 31, 2012.

At December 31, 2013 and 2012, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

	December 31, 2013								December 31, 2012
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
(Thousands of dollars)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Type of Derivative Contract
Commodity		Accounts Receivable	$	1,970		—		—		Accounts Receivable	$	3,043		Accounts Payable	$	102
Foreign exchange		—		—		Accounts Payable	$	1,038		—		—		Accounts Payable	$	1,031

For the years ended December 31, 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.

	Year Ended December 31, 2013					Year Ended December 31, 2012
(Thousands of dollars)	Location of Gain (Loss) Recognized in Income on Derivative		Amount of Gain (Loss) Recognized in Income on Derivative			Location of Gain (Loss) Recognized in Income on Derivative		Amount of Gain (Loss) Recognized in Income on Derivative
Type of Derivative Contract
Commodity		Sale and Other Operating Revenues	$	2,104			—		—
Commodity		Discontinued Operations		(1,604	)		Discontinued Operations	$	(38,283	)
Foreign exchange		Interest and Other Income (Loss)		(5,162	)		Interest and Other Income (Loss)		14,156
			$	(4,662	)			$	(24,127	)

Interest Rate Risks – In 2011 the Company entered into a series of derivative contracts known as forward starting interest rate swaps to manage interest rate risk associated with $350,000,000 of notes to be sold in 2012. These interest rate swaps matured in May 2012. Under hedge accounting rules, the Company deferred a loss on these contracts to match the payment of interest on these notes through 2022. During 2013 and 2012, $2,963,000 and $1,852,000 of the deferred loss on the interest rate swaps was charged to interest expense in the Consolidated Statement of Income. There was no Income Statement impact in 2011 associated with accounting for these interest rate derivative contracts. The remaining loss deferred on these matured contracts at December 31, 2013 was $24,815,000, which is recorded, net of income taxes of $8,698,000, in Accumulated Other Comprehensive Income in the Consolidated Balance Sheet. The Company expects to charge approximately $2,963,000 of this deferred loss to income in the form of interest expense during 2014.

CREDIT RISKS – The Company’s primary credit risks are associated with trade accounts receivable, cash equivalents and derivative instruments. Trade receivables arise mainly from sales of oil and natural gas in the U.S., Canada and Malaysia, and sale of petroleum products to a large number of customers in the United Kingdom. The credit history and financial condition of potential customers are reviewed before credit is extended, security is obtained when deemed appropriate based on a potential customer’s financial condition, and routine follow-up evaluations are made. The combination of these evaluations and the large number of customers tends to limit the risk of credit concentration to an acceptable level. Cash equivalents are placed with several major financial institutions, which limit the Company’s exposure to credit risk. The Company controls credit risk on derivatives through credit approvals and monitoring procedures and believes that such risks are minimal because counterparties to the majority of transactions are major financial institutions.