Neutral on Murphy Oil

We maintain our long-term Neutral recommendation on Murphy Oil Corporation ( MUR - Analyst Report ) as the company continues to operate in a very competitive environment with peers having greater resources, which continues to impact Murphy’s profitability and ability to expand.

The company's success in the oil and gas sector hinges on its ability to replenish reserves with new findings. Profitability is seriously hampered by the company’s inability to find new resource and unsuccessful drilling. Failed drilling attempts in Congo, Suriname and more recently in Indonesia have severely affected Murphy’s stock performance.

Among the positives are the company's strong balance sheet and its ability to generate consistent cash flows. Besides, the step taken by Murphy, during the third quarter, to exit its refining business and concentrate more on its exploration & production (E&P) operations was aimed at boosting profitability.

Many of Murphy's key production sites are subject to severe weather, even though the company has taken adequate pre-cautionary measures. The fury of unpredictable tropical storms and hurricanes often results in shutdown and damages. This invariably takes a toll on operating costs of the company.

The volatile prices of Murphy's primary products also impact profitability. A slowdown in the economy to a great extent reduces worldwide demand of petroleum products and leads to lower E&P activity, which is Murphy's main source of revenue.

In a nutshell, the strengths of the company are undermined by volatile demand, unpredictable weather conditions, and a fiercely competitive industry. Hence, we continue to remain on the sidelines maintaining our cautious stance on the stock.

Murphy expects earnings per share in the fourth quarter 2011 to be in the range of $1.35 to $1.70. Our earnings expectation for the quarter is presently at $1.37 per share, which is on the lower end of the guidance. It reflects our concern on the restoration of activity in the Gulf of Mexico and potentially higher costs for future drilling operations and offshore insurance.

Murphy retains a short-term Zacks #3 Rank which translates into a short-term Hold rating. Its competitors Marathon Oil Corporation ( MRO - Analyst Report ) and Hess Corporation ( HES - Analyst Report ) also hold short-term Zacks #3 Ranks.

Based in El Dorado, Arkansas, Murphy Oil Corporation engages in the exploration, production, refining and marketing of oil and gas in the U.S. and the U.K.