Despite a strong production profile, we remain on the sidelines on Murphy Oil Corporation (MUR) due to the volatile commodity environment, concerns on the restoration of activities in the Gulf of Mexico and the cautious intermediate-term outlook on the refining industry. We maintain out Neutral recommendation on Murphy shares.
Based in El Dorado, Arkansas, Murphy is a global oil and gas exploration and production company with refining and marketing operations in the U.S. and the U.K. The company conducts its upstream operations in the U.S., Canada, Congo, the U.K. and Malaysia. It also operates in Indonesia, Australia and Suriname.
Murphy possesses one of the best upstream affluence themes among the domestic oil and natural gas integrated companies and independent E&P group. While Murphy’s asset base clearly has a sizable refining footprint, its growth centers on a robust exploration program.
The fascinating exploration line-up has provided Murphy with a magnificent production profile, which translates into a solid EPS-growth opportunity. The company expects production increases in 2011 to primarily come from Tupper West, Sarawak gas and oil from Eagle Ford Shale and Seal.
Murphy continues to progress well with its strategy of exiting its loss-making businesses in order to focus solely on the more profitable businesses to augment results. It is in the midst of divesting its refining business in the U.S. and the U.K., as well as its U.K. marketing assets, while retaining its U.S. retail operations. Its exit from the refining business will help shift focus to its core oil and gas operations, transforming it almost into a pure-play E&P company.
The fourth quarter of 2010 saw Murphy’s earnings dip compared to the Zacks estimates. However, revenues in the quarter outperformed estimates on account of solid performance at the Refining and Marketing segment. Results for full-year 2010 also followed the same trend as in the fourth quarter.
Going forward, Murphy expects total production in the first quarter 2011 to average 185,000 Boe/d and sales volumes during the quarter to average 171,000 Boe/d. For full-year 2011, production is expected to come in the range of 200,000 – 210,000 Boe/d.
Murphy expects first quarter 2011 earnings in the range of 55 cents to 95 cents per share, the upper end being slightly below the Zacks Consensus Estimate of 99 cents. The Zacks numbers for fiscal 2011 and fiscal 2012 are $6.41 and $7.66, respectively.
We like the strategic move taken by Murphy Oil to dispose off some refining assets, which we believe will enable the company to re-focus more on its upstream business. Additionally, we appreciate the initiatives taken by Murphy to reward its shareholders through dividend payments. The annualized dividend of the company for 2010 was $1.05 per share, a hike of 5 cents from the 2009 levels.
However, the volatility in the global prices of oil, natural gas and petroleum products can significantly affect the company’s operating results, in our view. Also, the slow pick-up of activity in the Gulf of Mexico continues to affect Murphy’s offshore business and future plans due to delays in rig operations.
Murphy Oil currently retains a Zacks #2 Rank (short-term Buy rating). On the competitive landscape, the company competes head-to-head with Marathon Oil Corporation (MRO) and Exxon Mobil Corporation (XOM), which also carry the short term Zacks #2 Rank.
MARATHON OIL CP (MRO): Free Stock Analysis Report
MURPHY OIL (MUR): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
Zacks Investment Research