Murphy Oil (MUR, Financial) reported mixed numbers in the fourth quarter with steady growth in its top line while profits slumped. Its revenue rose 4.4% from a year ago period to $1.41 billion, while adjusted earnings declined to 39 cents a share representing a drop of 41.8% on a year over year basis. The earnings decline was led by increased depreciation, depletion and amortization expenses coupled with falling crude prices. But the company managed to offset some of these affects with higher production and will search for various options in the days ahead to further improve its efficiency.
Making the right moves
During the quarter, Murphy boosted its oil production through new offshore projects coming online in the Gulf of Mexico. The company continues to progress in its subsea well expansion project at Medusa and Mississippi Canyon where it has a 60% working interest. Under this, two wells are in progress, one of which is expected to start production by mid 2015, while the second is in the drilling phase. Once complete, these new wells will further strengthen its production profile and add to its top line.
In addition, the Eagle Ford Shale is also a strong contributor to its total production and the continued ramp-up at this site benefitted the fourth quarter. But for the current fiscal, Murphy anticipates oil production to be around 57,000 barrel equivalent per day, flat to the prior year. Considering the present weakness in oil prices, its main focus for now is to manage capital spending and operating expenses.
Consequently, it has reduced its capital expenditure by 46% at Eagle Ford for the current fiscal along with reduction in rig count from 8 in 2014 to 4 in 2015. But looking in the long term horizon, the company has a strong position in the Eagle Ford because of its reasonable lease cost of around $2,000 per acre. And when commodity pricing improves, it will be able to tap this potential driving its business in the future.
On the flip side, Murphy will have to face some near term headwinds on account of a dry hole expense of approximately $47 million at the Urca well in Mississippi Canyon Block 697 as it failed to encounter hydrocarbons. Additionally, two other wells in Australia, namely Koel and Cisticola, located in Block WA-481-P, were also unsuccessful and would result in another dry hole expense of around $23 million. The affect of both these charges would be seen in the first quarter of 2015, which will impact its bottom line
Although this will not affect its long term prospects, coupled an uncertain oil market, it could sink its stocks further. According to a recent report from EIA:
“Brent crude oil price will average $59/bbl in 2015, unchanged from last month's STEO, with prices rising from an average of $56/bbl in the second quarter to an average of $67/bbl in the fourth quarter. The Brent crude oil price is projected to average $75/bbl in 2016.”
Conclusion
Since oil prices are expected to improve in 2016, this is good for Murphy. The company currently does not have a forward P/E but its long term prospects look good and dependable. Therefore in the light of these facts, Murphy seems to be a good long term bet.
