Murphy Shifting From Deleveraging to Capital Returns

Director

Dave Meats

Murphy Oil has been a pure-play exploration and production company now for close to a decade, having spun off its retail gas and refinery businesses back in 2013. The firm produces oil and natural gas in the U.S. and Canada. Unlike most upstream firms, it focuses heavily on offshore resources, primarily in the Gulf of Mexico (where it is a top five operator). Offshore production accounts for about half of its total volumes.

The firm expanded its Gulf of Mexico footprint in late 2018, signing a joint venture agreement with Petrobras that gave it an 80% stake in the combined assets of the two companies. It recently brought on line a number of major expansion projects in the region, including Samurai, Khaleesi, and Mormont, and it still has a number of development opportunities on deck. These projects should should offset legacy declines and enable it to hold production flat in the next few years. There remains some incremental regulatory risk for Gulf of Mexico operators but this has substantially receded in the past couple of years. Upon entering office, U.S. President Joe Biden pledged to halt offshore oil and gas permitting activity to demonstrate his climate credentials. But high crude prices made it politically unpalatable to follow through, and so far the only action taken was a temporary permitting suspension that came into effect in early 2021 and was rescinded a few months later.

The onshore portion of the portfolio includes 120,000 net acres in the Eagle Ford Shale play in South Texas. Like other shale producers, Murphy has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,000 drillable locations in its Eagle Ford inventory, only one third of them are in the prolific Karnes County area. To avoid exhausting its core acreage too quickly, management has started layering in development activity in other regions of the play, which affects well performance, and thus returns. And in Canada, the firm is currently prioritizing the Tupper Montney gas play to take advantage of higher natural gas prices supported by rising LNG export demand.

Business Strategy & Outlook

The ability to generate durable excess returns on invested capital is a hallmark of companies with economic moats. Before 2022, Murphy had not earned its cost of capital since 2013 (when Brent crude averaged $108 per barrel). The near-term outlook for crude is exceptionally strong once again and could commensurately drive up corporate returns, but we see this as a cyclical upswing and not a secular shift. Murphy is now investing in projects that offer decent returns at midcycle prices, but its capital base is still inflated by less attractive investments during previous cycles. As such, we see little chance that Murphy can maintain corporate returns in excess of the weighted average cost of capital, and accordingly we assign a no-moat rating.

Today, the firm is focusing on offshore exploration and development. This is probably the right move, since the company has a relatively short runway of top-tier drilling opportunities in the shale portion of its portfolio. We'd rather see it cherry pick low-cost high-return projects offshore than pour capital into lower-productivity shale acreage. Nevertheless, we doubt that Murphy's offshore portfolio can consistently compete on costs with the best shale opportunities, leaving the company with a higher average cost of production than the best of its shale-focused peers. In addition, like all E&P firms, the firm is exposed to a range of potential environmental, social, and governance issues that could hurt its ability to generate strong returns.

The most significant ESG exposures are greenhouse gas emissions (both from extraction operations and downstream consumption) and other emissions, effluents, and waste (primarily oil spills). Greenhouse gas emissions are the biggest threat and are unavoidable for oil producers. Firms can clean up their operations in the field as much as possible by avoiding unnecessary flaring and using technologies like electric fracking and carbon capture to reduce CO2 volumes being released into the atmosphere during the extraction process. Downstream emissions—at the refinery and beyond—are beyond producers' control, yet these account for the vast majority of total emissions. So, there's no such thing as a "green" oil producer. As consumers grow more averse to fossil fuels, the reputational risk increases for producers and the probability of widespread substitution away from fossil fuels rises. This also makes value-destructive regulatory intervention more likely (think fracking restrictions or carbon taxes). These threats are not likely enough to be included in our base-case forecasts, but because the impact would be material, it does further erode the firm’s moat potential.

Likewise, spills are a significant concern for firms operating offshore, as Murphy does. Though the probability is very remote, a devastating accident like the BP Macondo disaster in 2010 would have a material adverse impact on Murphy, if it were forced to cover cleanup costs and other legal penalties. Spills also occur from time to time during long-haul transit over land, but Murphy has limited exposure, as this activity is typically outsourced to midstream firms. So there is no chance that the firm would be on the hook for an event like the Kalamazoo River (Michigan) spill, which also occurred in 2010.

None

Economic Moat

Murphy Oil

Murphy Oil Corp. is a holding company, which engages in the exploration and production of oil and natural gas. It operates through the Exploration and Production and Corporate and Other segment. The Exploration and Production segment includes the United States, Canada, and all other countries. The Corporate and Other segment focuses on interest income, other gains and losses, interest expense, and unallocated overhead. The company was founded by Charles H. Murphy Jr. in 1950 and is headquartered in Houston, TX.

Earnings data Q1 2024

MUR exceeds production guidance, faces offshore cost challenges

MUR reported strong operational performance, debt reduction efforts, and a credit rating upgrade. The company faces challenges in offshore cost inflation and production limitations at the King's Quay facility. However, opportunities lie in exploration activities and potential production optimization. The planned split of free cash flow between debt reduction and share repurchase provides financial flexibility.

Murphy Oil exceeds Q2 guidance, plans Vietnam and Cote d'Ivoire expansion

Murphy Oil Corporation's Q2 2023 earnings call highlighted strong operational and financial performance, progress in debt reduction and stock buybacks, as well as challenges related to specific operational matters and potential cost increases. The company emphasized its expansion into new regions and opportunities for exploration and development work.

Murphy Oil Exceeds Q3 Earnings Expectations, Eyes Growth Opportunities

Murphy Oil Corporation delivered strong financial results, exceeding earnings expectations and showcasing operational excellence. The company's strategic focus on debt reduction, increased dividends, and capital discipline underscores its commitment to long-term financial stability and shareholder value. Despite short-term production challenges, Murphy's expansion into new projects and exploration prospects presents promising growth opportunities.

Murphy Oil Corporation achieves debt reduction goal and eyes Vietnam growth

Murphy Oil Corporation's Q4 performance reflects progress in debt reduction, strong financial results, and strategic capital allocation. Despite facing challenges with well completion and downtime, the company is focused on long-term growth opportunities, particularly in Vietnam. Overall, the company remains committed to returning value to shareholders and maintaining a strong balance sheet.

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Diamondback Energy

Hess

Noble Energy

Parsley Energy

Beware these high yields: Cuts could be imminent.

5 of the Riskiest Dividends in the Oil Patch

Coronavirus outbreak compels Murphy Oil (MUR) to curb its 2020 Capex by 335%.

Murphy Oil Cuts Capital Budget Amid Strained Pricing Scenario

Murphy Oil Corp. MUR, -19.61% said Thursday it is reducing capital spending for 2020 by 35% to about $950 million, as it moves to preserve its dividend in the face of a sharply falling oil price.

Murphy Oil to cut 2020 capex by 35% to $950 million in effort to preserve dividend

Centennial Resource Development

Vermilion Energy

Two of the world's biggest oil-producing nations are planning to flood global oil markets. That's bad news for U.S.

Oil Producer Stocks Getting Smashed by Today's OPEC Announcement

Murphy Oil: A Steady Business Dealing With Volatility

Murphy Oil (MUR) is poised to benefit from its focus on high-margin liquid assets.

Murphy Oil's Steady E&P and Development Activities Bode Well

Murphy Oil: Oh, When That Cash Comes Marching In

Murphy Oil (MUR) reported earnings 30 days ago. What's next for the stock?

Why Is Murphy Oil (MUR) Down 11.2% Since Last Earnings Report?

Murphy Oil Corporation (MUR) CEO Roger Jenkins on Q4 2019 Results - Earnings Call Transcript

Murphy Oil's (MUR) fourth-quarter 2019 revenues increase on a year-over-year basis.

Murphy Oil (MUR) Q4 Earnings Beat Estimates, Revenues Miss

Murphy Oil (MUR) delivered earnings and revenue surprises of 33.33% and -15.95%, respectively, for the quarter ended December 2019. Do the numbers hold clues to what lies ahead for the stock?

Murphy Oil (MUR) Q4 Earnings Top Estimates

The firm announces its Q4 numbers on the 30th of January.

Assessing An Earnings Trade In Murphy Oil

Legg Mason

M.D.C. Holdings

MKS Instruments

WESCO

Investment in mid-cap stocks is often recognized as a good portfolio diversification strategy. These stocks combine attractive attributes of both small and large-cap stocks.

5 Must-Buy Mid Caps Set to Beat Earnings Estimates Next Week

Chevron

Pioneer Natural Resources

Talos Energy Inc

There has been a transition in the Energy sector with many institutional investors agreeing that the space will become lucrative again.

4 Best Oil-Energy Stocks for Value Investors in 2020

Murphy Oil (MUR) is an appropriate investment pick, courtesy of these five factors.

Here's Why You Should Add Murphy Oil (MUR) in Your Portfolio

Murphy Oil (MUR) has an impressive earnings surprise history and currently possesses the right combination of the two key ingredients for a likely beat in its next quarterly report.

Will Murphy Oil (MUR) Beat Estimates Again in Its Next Earnings Report?

Murphy Oil Corporation (MUR) is looking like an interesting pick from a technical perspective, as the company is seeing favorable trends on the moving average crossover front.

Moving Average Crossover Alert: Murphy Oil

Murphy Oil (MUR) shares have started gaining and might continue moving higher in the near term, as indicated by solid earnings estimate revisions.

Earnings Estimates Rising for Murphy Oil (MUR): Will It Gain?

Murphy Oil: A Solid Oil Company For 2020

Murphy Oil (NASDAQ: MUR) is an oil and gas exploration company based in the U.S. The company significantly outperformed Q3 earnings estimates, with revenues coming at $817 million, a 66% increase year on year.

Why Has Murphy Oil’s Stock Rallied 15% In A Fortnight?

Murphy Oil (MUR) is poised to benefit from its best upstream portfolios as well as from steady E&P and development activities.

Murphy Oil's Focus on High-Margin Liquid Assets Bodes Well

Murphy Oil Corp (MUR) CEO Roger Jenkins on Q3 2019 Results - Earnings Call Transcript

Strong revenues from customers drive Murphy Oil's (MUR) Q3 results.

Murphy Oil (MUR) Beats Q3 Earrings and Revenue Estimates

Murphy Oil (MUR) delivered earnings and revenue surprises of 63.64% and 15.83%, respectively, for the quarter ended September 2019. Do the numbers hold clues to what lies ahead for the stock?

Murphy Oil (MUR) Q3 Earnings and Revenues Top Estimates

The Exxon Mobil partnership provides speculative as well as large upside potential.

News for Murphy Oil Stock (MUR)