EUR 850.00 For Business Accounts Only

Morningstar | MUR Updated Star Rating from 02 May 2019

Murphy delivered total production of 192 mboe/d in the first quarter (including production from assets to be divested but excluding volumes attributable to a noncontrolling interest). This was well below guidance of 198-200 mboe/d, due to a variety of operational issues in the North American region. A 10-well Eagle Ford pad experienced a significant execution delay that also impacted adjacent producing wells that were shut in while the new wells were fracked. In Canada, there were weather-related shut-ins as well as midstream specification constraints capping Duvernay output, and offshore production in the Gulf of Mexico was impacted by a one-time royalty adjustment (as well as lower-than-expected output at several smaller fields).

Whether management expects these issues to affect full-year output is unclear, as the company is no longer giving full-year volume guidance. The royalty adjustment in the Gulf of Mexico is likely to persist, and management acknowledges that the Canadian midstream constraint will prevent the firm from flowing a three-well pad in the Simonette area for the duration of the year. Weather issues and fracking delays are more likely to be transient, though either could crop up periodically (weather is a year-round risk for Murphy, as its Eagle Ford operations are vulnerable to hurricanes while its entire U.S. onshore business can be impacted by winter freezes).

The good news is that the firm was able to materially improve its cost structure in the Gulf of Mexico, which is likely to be a major growth engine for the company going forward. Lease operating expenses fell to $8.10/barrel of oil equivalent during the first quarter. The firm also announced successful exploration tests in offshore Mexico and Vietnam.

We plan to incorporate these operating and financial results in our model shortly, but after this first look our fair value estimate and no-moat rating remain unchanged.