Balanced View on Murphy Oil - Analyst Blog

On Mar 12, we issued an updated research report on Murphy Oil Corporation MUR. This oil & gas company is starting to benefit from its exploration & production activities but at the same is exposed to intense competition coming in from domestic as well as foreign oil and gas operators.

Murphy has presently shifted its bias towards exploration and production activities. As a result it achieved record production in 2013 with a reserve replacement ratio of 240%. The change in its long-term focus also drove the company to spin off its U.S. retail marketing division, Murphy Oil USA, Inc. (Murphy USA).  

We note that the success of any exploration & production biased company depends on its ability to find, develop, produce and purchase oil and natural gas reserves at competitive costs, below the realized sales prices of these products. In order to sustain and expand its business, the company must successfully replace the crude oil and natural gas it produces with additional reserves. Failure on this front will lead to a slowdown in the company's growth.

Murphy's exploration and production activities, spread across different reserve rich regions, insulate the company from a decline in production in any particular region. Ongoing exploration activities in Australia, Cameron, Indonesia, Malaysia, Brunei, Congo, Vietnam, the Gulf of Mexico and the Eagle Ford Shale will sustain its production volumes and generate stable revenues.

However, prices of oil and natural gas are extremely volatile. Since it is difficult to predict the movement of these prices, the operational results of the company can vary widely and can even be disruptive.

Murphy Oil, a Zacks Rank #3 (Hold) stock, expects its worldwide production to average 205,000 barrels of oil equivalents per day (Boe/d) and sales volumes to likely average 196,000 Boe/d in first quarter 2014. In addition, management is committed to increase shareholder value through share buybacks and dividend payments.  In 2013, Murphy paid $235.1 million as cash dividends to its shareholders.

However, operational hazards associated with exploration and production activities and possibility of adverse political developments in countries of operation are possible headwinds.

Key Picks from the Sector

Other companies in the oil and gas sector with a favorable Zacks Rank are Range Resources Corp. RRC, Clayton Williams Energy, Inc. CWEI and Diamondback Energy, Inc. FANG. While Range Resources sports a Zacks Rank #1 (Strong Buy), both Clayton Williams and Diamondback Energy carry a Zacks Rank #2 (Buy).