The upcoming Murphy Oil (MUR) spin-off in the second half of 2013 will offer investors an excellent opportunity to capitalize on both the spin-off success, as made famous by Joel Greenblatt, as well as invest in a strong independent retail energy company.
The separation date has not been announced as of this writing, however it is known that all shares of the newly spun off company, Murphy USA, will be distributed to Murphy Oil shareholders as of the declared (unknown) record date. Currently, Murphy Oil's market cap is $11.79B and Institutions own approximately 84.30% of outstanding shares. Due to this, it is probable, in my opinion, that institutions will be forced to sell shares of either company if the adjusted market cap is below required thresholds. This selling will cause an opportunity for retail investors to purchase shares at depressed prices.
According to company filings, Murphy USA will consist primarily of retail marketing of motor fuel products and convenience merchandise through its large chain of stores, which, as of March 31, 2013, stands at 1,172. The stores are located in 23 states, mainly encompassing the Southern and Midwestern United States. Currently 1,016 stores are branded as Murphy USA and 156 are standalone Murphy Express locations.
The business also owns midstream assets, including product distribution terminals and pipeline positions. According to company filings, as of December 31, 2012, Murphy USA had $2 billion in assets and as of year-end 2012, generated $19.7 billion in revenues and earned $84 million in income from continuing operations.
Thesis & Catalyst For Murphy Oil Corporation (MUR)
The biggest advantage the company has in its favor is the strategic partnership with Walmart. Of the 1,172 retail stations, more than 1,000 are located on out-lots of Walmart stores. This generates significant traffic to these locations. Additionally, Murphy currently collaborates with Walmart in a fuel discount program that, according to recent filings, "enhances the customer value proposition as well as the competitive position of both Murphy USA and Walmart with respect to our peers." This relationship was born in 1996 and in December 2012, an agreement was signed that allows Murphy USA to build 200 new sites on Walmart sites over the next three years. The company also states that management will focus on converting the remaining 15% of locations into collaborative agreements within the Walmart Discount Program in the future.
Murphy USA also benefits from locations with a smaller footprint. Almost all the stations are standardized 208 or 1,200 square foot kiosks, which have very low capital expenditure requirements. According to the 2011 National Association of Convenience Stores' State of the Industry Survey (source: filings), Murphy's kiosks are operating at approximately 58% of the average monthly operating costs of the industry. Furthermore, the company sources fuel at or below the industry benchmark prices due to the diversity of fuel options available in bulk and rack product markets, shipper's status on major pipeline systems, and access to numerous terminal locations. Lastly, the company benefits from the ability to utilize a "Best Buy" method that sends third-party tanker trucks to the most favorably priced terminal to load products for each Murphy USA site. This ability to reduce fuel costs to the company further complements management's focus on low-cost operations.
According to the company filings and As-Reported Revenue for the year ended December 31, 2012, Murphy USA Earned $19,655,436 in Revenues and $86,568 in Net Income (figures in thousands) which equates to a Net Margin of 4.26%. This compares to a Net Margin of 1.80% for recently spun of retail operator CST Brands (Valero Energy) and 0.80% for Susser Holdings (SUSS) and 1.50% for Casey's General Stores (CASY). Murphy USA earned $1.04 per share and given an average P/E of 18.68 of the three competitors can be valued at $19.42. I expect the stock to trade at a slight premium to the others given its better margins.
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The company operates in a highly competitive space that presents many risks and challenges. However, with the competitive advantage of the Walmart program, discount fuel, low overhead and CapEx, as well as being the number one per square foot retailer, I believe Murphy USA is competitively placed within this industry.