Murphy Oil Update

Murphy Oil (MUR) had a bad week last week.  Last Wednesday it reported lousy second quarter earnings:

“Murphy Oil Corp.’s second-quarter profit fell sharply as costs surged and the company took loss from discontinued operations. The El Dorado, Ark., company spun off its U.S. retail marketing business last year and now focuses mainly on gas-and-oil extraction in the U.S., Canada and Malaysia. For the most recent period, Murphy posted a net profit of $129.4 million, or 72 cents a share, down from $402.6 million, or $2.12 a share, a year ago. Earnings from continuing operations fell to $142.7 million, or 79 cents a share, compared with year-ago results of $259.9 million, or $1.37 cents a share. Excluding certain items, including mark-to-market loss on crude oil derivative contracts and other items, adjusted per-share earnings from continuing operations fell to 90 cents from $1.38 a share. Revenue edged up nearly 2% to $1.35 billion. Analysts polled by Thomson Reuters had expected profit of $1.21 a share and revenue of $1.42 billion. Looking ahead, Murphy Oil said it expects total annual world-wide production of about 220,000 to 225,000 barrels of oil equivalent a day, primarily reflecting reductions at two properties and revisions for further production risks.”

MUR missed badly on its profit per share ($0.72 vs. $1.21) as costs surged and the company took losses from discontinued operations. The costs of drilling in Malaysia surged and two prospects in Southeast Asia were abandoned as dry holes. On another matter, Murphy announced that its subsidiary, Murco Petroleum Ltd., has agreed to sell its Milford Haven refinery and terminal assets to Klesch Refinery Ltd. Milford Haven is in Wales, about 250 miles west of London. The transaction should be completed by Oct. 31, pending regulatory approval. Murphy will improve its stock valuation by shedding its refinery and retail assets.

S&P Capital IQ places a 12-month target at $62.00. Its assessment: “Our risk assessment reflects our view of MUR’s moderate financial policies and operations in a volatile, cyclical and capital-intensive segment of the energy industry. We believe its low reserve-to-production ratio limits its operating flexibility, increasing dependence on long-term projects.”

At the moment of this writing, MUR trade at $61.80. It has fallen below its 200-day moving average of $62.37. According to Market Edge, support exists at $60.09.   The club purchased the security at $57.43.

Recommendation: Stay the course. I think we need to give MUR time to complete the sale of all its retail gasoline business. Oil exploration is risky, but MUR is among the cheapest of the Oil & Gas Exploration & Production firms in its peer group. That should provide some safety going forward. However, if Mark can identify a long term technical support level for the stock, I wouldn’t oppose placing a stop-loss order at that price to protect us from steep losses over the long term.


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