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We reiterate our Neutral recommendation on Murphy Oil Corporation (MUR - Analyst Report) taking into account first quarter 2012 earnings of the company, which lagged the Zacks Consensus Estimate. This was primarily due to lower crude oil sales volume and considerably lower North American natural gas sales price. At present, unimpressive performance of downstream operations continue to be a major cause of concern for Murphy. 

Like other oil companies, Murphy’s businesses operate in highly-competitive environments. The company faces intense competition from other oil and gas companies in terms of price and chances of fuel-switching from oil to alternate energy. These might adversely affect Murphy’s profitability, its ability to grow and manage its businesses.

Murphy is well positioned with its strong diversified asset base around the world. The company’s strong cash position with $936.6 million as of March 31, 2012 enables it to follow robust exploration and refining program.

Recently, Murphy made two natural gas discoveries in Malaysia and Brunei. Along with international expansion, the company is also strengthening its American operations, which include its recent entry into the Three Forks zone of Southern Alberta and the Muskwa oil play in Northern Alberta.

Apart from aggressive exploration and production (“E&P”) activities, Murphy has taken some important steps during this quarter. The company has curtailed its proposed capital spending in dry gas areas and plans to reinvest the amount in the oil rich regions.

Also, Murphy is continuing its efforts to sell its United Kingdom downstream assets expected to incur losses. The company is also evaluating the realignment of its E&P and downstream businesses. We expect that these initiatives will enable Murphy to improve its financial performance in the long term.

On the negative side, Murphy’s ability to generate profits in the E&P segment depends on its ability to find, develop, produce and purchase oil and natural gas reserves below the realized sales price of these products. In order to sustain and expand its businesses, the company must supplant its existing crude oil and natural gas reserves with additional reserves. 

In addition, volatility in global prices of oil, natural gas and petroleum products can significantly affect the company’s operating results. An economic slowdown can largely affect the worldwide demand for energy commodities. This in turn would result in lower earnings from the company’s exploration and production and refining operations.

Murphy expects second quarter 2012 earnings to be in the range of $1.35 to $1.60 per share. The Zacks Consensus Estimates for Murphy’s second quarter and full year 2012 earnings are pegged at $1.38 and $5.65 per share, respectively.

Murphy Oil Corporation currently retains a Zacks #3 Rank (short-term Hold rating).

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 U.K. The company competes with Marathon Oil Corporation (MRO - Analyst Report).

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