EUR 850.00 For Business Accounts Only

Morningstar | Murphy Completes JV Deal with Petrobras. See Updated Analyst Note from 31 Jan 2019

Murphy delivered production of 176 mboe/d in the fourth quarter, which was 4% higher sequentially and also 4% higher year over year. This excludes 5 mboe/d attributable to a noncontrolling interest, pursuant to the firm’s recent joint venture deal with Petrobras (which closed part way through the quarter). The transaction will combine the partners’ Gulf of Mexico assets, leaving Murphy with an 80% stake in the joint venture. Though the deal cost Murphy a little under $900 million, after closing adjustments, it immediately adds about 40 mboe/d to the firm’s production stack, generating excess cash flows that the firm plans to redeploy in the Eagle Ford Shale and also across its exploration portfolio.

As we have previously commented, Murphy is more dependent on offshore exploration than many U.S. upstream firms, as it has much less than 10 years of inventory remaining in the Karnes County hotspot of its flagship asset in the Eagle Ford Shale. That said, the company’s most recent batch of Eagle Ford wells were all drilled outside Karnes, in the Catarina area (Dimmit County). These wells yielded an average 30-day initial production rate of 860 boe/d, which is consistent with a $40 WTI breakeven--less impressive than Karnes, but still highly competitive, even at current oil prices. We expect the Eagle Ford portion of the 2019 capital budget to be distributed evenly between these areas. However, with $470 million earmarked for Eagle Ford drilling and completions, with 90 wells planned, we surmise that the firm is now paying roughly $5.2 million per well, which is higher than our previous model. Thus, we have lowered our fair value estimate to $22 per share.