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We have maintained our Neutral recommendation on Murphy Oil Corporation (MUR - Analyst Report). The reiteration is primarily based on the company’s strong financial position and significant progress in domestic as well as international offshore drilling activities. However, volatile commodity pricing and uncertainty associated with drilling results may to some extent temper these positives. Murphy Oil currently has a Zacks Rank #3 (Hold).

Why the Reiteration?

Murphy Oil had cash balance of approximately $1.1 billion as of Mar 31, 2013 and net cash provided by operating activities of $0.9 billion during the first three months of 2013. Strong financial condition enables the company to spend $4.3 billion under the 2013 capital spending program, including $4.1 billion for exploration and production activities primarily in the U.S., Australia, Brunei, Cameroon and Malaysia.

We believe these ventures will play an important role in boosting the company’s forthcoming operational performance while providing a good production profile.

Murphy Oil is selling its UK upstream businesses and going to spin-off its U.S. downstream subsidiary, Murphy Oil USA, Inc. to an independent entity. The divestiture will let the company to have a deeper focus on its existing assets and add new ones to drive further value, and the spin-off will enable both the companies to assign resources and redeploy existing capital as per their own market conditions and priorities.

However, prices of Murphy Oil’s primary products are often quite volatile. An economic slowdown can largely affect the worldwide demand for energy commodities, resulting in reduced prices for oil, natural gas and refined products. The volatility in commodity prices can significantly affect the company’s operating results.

Other Stocks to Consider

The other stocks in the sector that are worth considering include Abraxas Petroleum Corp. (AXAS - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and Anadarko Petroleum Corp. (APC - Analyst Report) and Encana Corporation (ECA - Analyst Report) with a Zacks Rank #2 (Buy).

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