In a report published Monday, Morgan Stanley analyst Evan Calio downgraded the rating on Murphy Oil Corporation MUR from Equal-Weight to Underweight, while reducing the price target from $50 to $48.
Murphy Oil's share price has declined 19.3 percent this year, as compared to a 10.7 percent decline for the group. "We believe MUR will lag the large cap E&P group whether the oil price recovery follows a V- or a U-shaped trajectory and expect its valuation discount to widen during initial stages of a recovery," analyst Evan Calio wrote.
In the report Morgan Stanley noted that in the event of a V-shaped recovery, investors tend to shift focus from a company's near-term cash flow resiliency and balance sheet preservation to resource life and NAV upside.
"MUR should lag as its short inventory life returns to focus. Assuming normalized 2016+ activity level, ~80% of 2014 actual (8 EF rigs vs. 4 deployed currently), MUR would exit 2015 with just 7 years of Eagle Ford drilling locations vs. a 20 year average inventory for our large cap E&P coverage universe," the report added.
In case of a U-shaped recovery, investors exhibit bias towards E&Ps that are able to maintain production while spending within cash flow, preserving their balance sheet strength for a reacceleration into the upcycle or asset acquisitions. "MUR does not fit these criteria, in our view," Calio pointed out.
A shorter drilling inventory life, a challenged offshore strategy and higher cash burn are expected to restrict the company's performance in the future.
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