Murphy Oil Corporation (MUR) announced first-quarter 2011 operating earnings of $1.38 per share compared with 77 cents per share in the year-ago quarter. The results of the company surpassed the Zacks Consensus Estimate by 38 cents.

The year-over-year growth in earnings was attributable to a higher average realized crude oil sales price, improved natural gas production volumes, better U.S. refining margins and more favorable foreign currency transaction. These positives were marginally offset by lower crude oil sales volume, a decline in the natural gas sales price in North America and an increase in exploration expenses.

Total Revenue

Murphy’s total revenue for first-quarter 2011 grew 41.9% to $7.35 billion from $5.18 billion reported in the year-ago period. The favorable outcome was driven primarily by improved performance from the Refining and Marketing (R&M) segment of the company, which grew 58.6% year over year.

Reported quarter revenue was lower than the Zacks Consensus Estimate of $7.48 billion.

Segment Details

Exploration and Production: The first quarter 2011 revenue from this division was $1.03 billion, up 5.4% from $0.98 billion in the year-ago quarter. The segment recorded improved performance from its Canadian and Republic of Congo operations, offset marginally by lower contribution from the company’s domestic operations.

Refining and Marketing: The reported quarter’s revenue from this division catapulted 58.6% to $7.8 billion from $4.9 billion in the year-ago quarter. The results were positively impacted by strong contribution from U.S. Refining & Marketing operations and better performance from its U.K. operations.

Corporate: In the first quarter 2011, revenues from Corporate activities were $5.6 million versus a loss of $49.2 million recorded in the year-earlier period.

Quarterly Highlights

Murphy’s total worldwide production in the most recent quarter was 182,152 barrels of oil equivalents per day (boe/d), down 7.2% year over year.

Despite an increase in natural gas production, the decline in crude oil output dragged down the total production of the company.

The decline in crude oil production in the first quarter 2011 was primarily attributable to lower volumes produced at the Kikeh field, offshore Malaysia, plus lower production in the Gulf of Mexico due to delay in permission by U.S. government regulators to drill in that area following the Macondo incident in April 2010.

Natural gas sales volumes improved year over year primarily due to higher natural gas production offshore Sarawak, Malaysia, Tupper area in Western Canada and the Mondo NW field in the Gulf of Mexico.

Exploration expenses during the quarter increased by 45.2% to $96.3 million from $66.3 million recorded in first quarter 2010. Higher dry hole costs, primarily related to unsuccessful offshore drilling in Suriname, elevated seismic acquisition costs in the Mississippi Canyon deepwater area in the Gulf of Mexico and the Eagle Ford Shale area of South Texas and hike in amortization costs associated with the Central Dohuk lease in the Kurdistan region of Iraq were responsible for steeper expenses.

Murphy’s worldwide crude oil and condensate sales prices averaged $86.73 per barrel for the first quarter of 2011 compared with $64.89 per barrel in the first quarter of 2010, reflecting an increase of 33.6%. North American natural gas sales prices declined by 79 cents per thousand cubic feet (MCF) in the quarter to $4.35 per MCF from $5.14 per MCF in the same quarter of 2010. Natural gas produced at fields offshore Sarawak Malaysia was sold at an average of $5.64 per MCF in the first quarter 2011, up from $4.58 per MCF in the first quarter 2010.

Interest expenses of the company at the end of the quarter were $11.7 million versus $14.8 million in the year-ago quarter. The reduction in expenses was due to lower levels of borrowings and higher amounts capitalized for oil and gas development projects.  

Financial Update

Total cash and cash equivalents as of March 31, 2011, were $689.4 million versus $299.9 million as of March 31, 2010.

Long-term debts of the company as of March 31, 2011 were $974.4 million versus $939.4 million as of December 31, 2010.

Total capital expenditure during the first quarter 2011 was $566.6 million versus $524.7 million in first quarter 2010, up 8%.  The growth in capital expenditure mainly stemmed from increased expenditures on international operations.

2011 Guidance

Murphy expects total production in the second quarter 2011 to average 187,000 boe/d and sales volumes to clock 180,000 boe/d.

Murphy expects the full year average production to be 200,000 boe/d.

Murphy expects second quarter 2011 earnings in the range of $1.50 to $1.80 per share. This earnings projection takes into account  the downstream contribution of approximately $55 million, and total exploration expense within a broad range of $75 million to $125 million.

Peer Comparison

BP Plc (BP), which competes with Murphy Oil, reported first-quarter 2011 earnings of $1.69 per American Depositary Share (ADS), well below the Zacks Consensus Estimate of $1.80 as well as the year-earlier profit of $1.78.

BP Plc’s total operating revenue for first-quarter 2011 was $88.3 billion, up 18.7% from $74.4 billion reported in the year-ago period.

Our View

Murphy oil is presently working to expand its operations globally. The company is continuing with its North American oil and natural gas development work in Tupper West and Eagle Ford Shale. Meanwhile the company continues to drill in Wildcat, Indonesia and has plans to start drilling offshore Brunei in the latter half of the year.

We appreciate Murphy’s initiatives to downsize its downstream operations in the U.S. and U.K. with a view to re-focus on its upstream business.

The shares of Murphy retain a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Based in El Dorado, Arkansas, Murphy Oil Corporation engages in the exploration, production, refining and marketing of oil and gas in the U.S. and the U.K.

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