Murphy Earnings: Production Tops Guidance Across Portfolio

Our fair value for Murphy Oil MUR is unchanged after incorporating the firm’s first-quarter financial and operating results. The stock traded sideways in the first session after the release, while substantially outperforming the sector (the U.S. Federal Reserve’s rate hike weighed heavily on oil prices the same day, and that dragged down most upstream oil stocks). Markets cheered Murphy’s much-stronger-than-expected first-quarter production, which drove the company’s financial results above FactSet consensus estimates (by 2% and 23% respectively for adjusted EBITDA and adjusted EPS). Firmwide volumes in the period were 172.5 million barrels of oil equivalent per day net to Murphy, which compares with prior guidance from management of 161-169 mboe/d.

Management attributed the upside to better-than-expected well performance in the Gulf of Mexico (3.8 mboe/d) and the Tupper Montney (1.1 mboe/d), along with a lower Montney royalty rate (1.1 mboe/d). We agree that the performance was very impressive, though there are a couple of asterisks to highlight. The Gulf of Mexico’s uptime was extremely high, especially for the King’s Quay project (97%). That showcases excellent execution in the period but may not be maintainable in future periods, due to weather and workover requirements. So while flow rates from new wells, such as the Samurai #5 well in the Green Canyon 432 block, are apparently outperforming projections, this may not account for as much of the production surprise as implied. Likewise, royalty rates in the Montney are commodity-linked, which means Murphy keeps a higher share of its production when gas prices dip, though, of course, overall cash flows are lower (and vice versa—we discussed the negative impact of high prices on Murphy’s production guidance in our December update). These observations probably explain why Murphy left its full-year guidance unchanged despite what was ostensibly a blowout quarter. The 2023 capital budget was similarly unchanged.