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Morningstar | Murphy Is Expanding Operations in the Gulf of Mexico

Murphy Oil repositioned itself as a pure-play exploration and production company back in 2013, spinning off its retail gas station business and divesting its U.K. refinery. Historically, the company’s capital efficiency was skewed to the weaker end of the peer group range, even after this transformation, though management has narrowed the gap more recently by downsizing the portfolio and shifting capital toward higher-margin North American resource plays.The most attractive development opportunities in Murphy's portfolio are located in the Eagle Ford Shale, which currently accounts for about 40% of the company's proven reserves. Like peers, the firm made considerable progress cutting costs during the recent downturn, and by adopting enhanced completion techniques, it has also boosted initial production rates and projected recoveries. The major downside is that although Murphy's Eagle Ford inventory could last another 10-15 years, only the Karnes County portion can deliver the barnstorming economics that the company is currently enjoying (and that could run out in about five years). Despite recent improvements elsewhere, especially in the Catarina area, the exhaustion of Murphy's Karnes acreage will push up break-evens and erode the company's margins.Management also expects significant growth in the next five years from Murphy’s unconventional acreage in Canada, which could account for more than a third of its production by 2022. But these assets rank below the Eagle Ford on profitability. That means Murphy will need to rely on its offshore portfolio for growth in the long run, which consists primarily of a Murphy-operated joint venture with Petrobras in the Gulf of Mexico (the firm is also pursuing exploration opportunities in Vietnam, Mexico, and possibly Australia). Focusing on the offshore plays to the company's strengths, given its experience in that domain, but offshore economics are rarely more favorable than the the best shale opportunities. Therefore, Murphy is unable to carve out a sustainable cost advantage.