Oppenheimer Downgrades Murphy Oil: Is It No Longer A Buying Opportunity?

Oppenheimer analyst Fadel Gheit downgraded Murphy Oil Corporation MUR on Thursday from Outperform to Perform following the company’s Q2 earnings report this week. Gheit believes that Murphy will continue its deficit spending “into 2017 and beyond.”

The Numbers

Murphy reported Q2 earnings per share this week of -$0.48, slightly beating consensus expectations of -$0.54. Oppenheimer is now projecting 2016 EPS of -$2.64.

In terms of production, Murphy averaged 202 mboed in Q2, and the company issued guidance of 200 mboed for Q3 and 200-208 mboed for the full year.

Murphy reported $331 million in operating cash flow and $610 million in capex, $62 million in dividends and $250 million in share buybacks.

Tough Environment

With the price of oil remaining well below $80 per barrel over the next several years, Gheit finds it hard to see a way that Murphy can avoid deficit spending.

“We expect MUR to face a cash flow deficit of $1.6B this year and $900M next year, which will be funded from $1.3B cash on hand and additional borrowing,” Gheit explained.

Credit Suisse’s Take

Credit Suisse analyst Edward Westlake puts a more positive spin on Murphy’s situation. He sees Murphy’s stock as undervalued at its current price, and focuses on the company’s balance sheet readjustment strategy.

“Tactically, MUR is focused on less risky exploration and adjusting its capital spend,” Westlake wrote.

While Oppenheimer removed its $55 price target for Murphy when it downgraded the stock, Credit Suisse recently upgraded Murphy to Neutral and has a $47 price target on the stock.