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Morningstar | Strong 2Q Justifies Fair Value Uptick for Murphy; Shares Still Slightly Overvalued

We are raising our fair value estimate to $28 per share after taking a second look at Murphy's second-quarter earnings. As a reminder, the firm exceeded the high end of guidance with its production for the period, which averaged 171 thousand barrels of oil equivalent per day, 2% higher sequentially and 5% higher year over year. The surprise was attributed to better-than-expected volumes from several fields in the Gulf of Mexico coupled with strong well performance and limited downtime in the Canada onshore region. As a result, 2018 guidance was raised slightly to 168.5-170.5 mboe/d (1 mboe/d at the midpoint).

And after a successful delineation result, the Samurai discovery in the Gulf of Mexico is now thought to contain at least 75 million barrels of oil equivalent. This could open up a new avenue of growth for the company, which has been heavily reliant on its Karnes County Eagle Ford position in the last few years and is starting to run low on inventory there. Finding and development costs at Samurai are expected to come in under $12/boe, making this competitive with (but not better than) shale.

Management still anticipates being free cash flow neutral over the full year, despite a modest deficit of about $60 million in the first half ($35 million of which was related to repatriation taxes). And the firm still envisions growing its production within cash flows over the next four years at a 10%-15% CAGR. These projections are realistic, and consistent with our updated forecasts. However, our bearish outlook for crude prevents us from getting more positive on the name. Our midcycle forecast for West Texas Intermediate crude is unchanged at $55/bbl.