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Summary

  • After the retreat in its stock price, it is now an excellent opportunity for a long-term investment in MUR at a cheap price.
  • MUR has compelling valuation metrics; its EV/EBITDA ratio is extremely low at 4.35.
  • MUR will benefit from the rising prices of oil and natural gas.
  • MUR is generating much cash and it delivers large sums of cash back to shareholders.

After the retreat in its stock price, it is now an excellent opportunity for long-term investment in Murphy Oil Corporation (NYSE:MUR) stock at a cheap price. MUR's stock price has declined 12.1% from its August 2013 peak value of $71.84, and since the beginning of the year MUR's stock has declined 2.7%, while the S&P 500 index has risen 5.5%, and the Nasdaq Composite Index has increased 3.5%. Murphy Oil has compelling valuation metrics and strong earnings growth prospects; its Enterprise Value/EBITDA ratio is extremely low at 4.35. Moreover, the dividend yield is at 1.98%, and the annual rate of dividend growth over the past ten years was high at 12.1%. In this article, I will explain why, in my opinion, MUR stock is a smart investment right now.

The Company

Murphy Oil Corporation is an independent exploration and production company with a strong portfolio of global offshore and onshore assets delivering oil-weighted growth. Murphy produces oil and/or natural gas in the United States, Canada, and Malaysia and conducts exploration activities worldwide. Murphy Oil Corporation was founded in 1950 and is headquartered in El Dorado, Arkansas.

Valuation Metrics

The table below presents the valuation metrics of MUR, the data were taken from Yahoo Finance and finviz.com.

Murphy Oil's valuation metrics are very good; the trailing P/E is low at 12.86, and the Enterprise Value/EBITDA ratio is extremely low at 4.35, one of the lowest among all Russell 1000 companies. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street", Mr. O'Shaughnessy demonstrates that 46 years back-testing, from 1963 to 2009, have shown that companies with the lowest EV/ EBITDA ratio have given the best return. Mr. O'Shaughnessy explains that EV/ EBITDA is a better way to assess value-that is, how cheap or expensive it is-than looking at the PE ratio alone. The EV/ EBITDA is neutral to a company's capital structure and capital expenditures. Stocks that have very high debt levels often have low PE ratios, but this does not necessarily mean that they are cheap in relation to other securities.

Latest Quarter Results

On April 30, Murphy Oil reported its first-quarter 2014 financial results, which missed EPS expectations by $0.03 (3.00%) and beat Street's consensus on revenues. The Company reported income from continuing operations of $169.3 million ($0.93 per diluted share). This was a decrease from the $182.7 million ($0.95 per diluted share) earned in the first quarter a year ago. Adjusted earnings, in the first quarter of 2014 were $174.8 million ($0.96 per diluted share). This was a decrease of $12.7 million ($0.02 per diluted share) compared to the prior year`s quarter. Adjusted earnings were lower in the 2014 quarter compared to the prior year primarily due to $30 million of higher exploration expenses in the current quarter.

In the report, Roger W. Jenkins, President and Chief Executive Officer, commented:

So far in 2014, we have placed SNP on production, progressed Dalmatian with first production on April 20, added wells in the EFS, ramped up the four new Sarawak oil fields, and tested the new 300 mmcfpd gross capacity for Sarawak gas. In fact, we are on track to establish record production this year, which will be the third consecutive year we have achieved record volumes. Our annual production guidance is now 225,000 - 230,000 boepd, primarily reflecting reductions at two non-operated properties. The start-up of the Kakap-Gumusut project is now further delayed and Syncrude will have unplanned maintenance downtime in the second quarter.

Dividend and Share Repurchase

Murphy Oil has been paying dividends since 1983, the forward annual dividend yield is at 1.98% and the payout ratio is only 26.7%. The annual rate of dividend growth over the past three years was at 6.0%, over the past five years was at 7.4%, and over the past ten years was high at 12.1%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and MUR's performance has been good in this respect.

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Source: Charles Schwab

Since Murphy Oil is generating much free cash flow and the payout ratio is very low, I believe that the company is well-positioned to achieve steady dividend growth going forward.

Net cash provided by operating activities during first-quarter 2014 was $735.9 million, and the company distributed $56.1 million during first-quarter 2014 to its shareholders as dividend.

On May 14, Murphy Oil announced that its Board of Directors authorized a share repurchase program of up to $125 million of the Company`s shares of common stock. This program is in addition to the previous board authorized program to repurchase up to $1 billion of the Company`s shares of common stock, which was recently completed.

Competitors

A comparison of key fundamental data between Murphy Oil and its main competitors is shown in the table below.

Murphy Oil has the lowest Enterprise Value/EBITDA ratio, but it also has the lowest dividend yield among the stocks in the group.

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The MUR stock price is 3.45% above its 20-day simple moving average, 2.48% above its 50-day simple moving average and 3.95% above its 200-day simple moving average. That indicates a short-term, mid-term, and a long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.22 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 54.57 which does not indicate oversold or overbought conditions.

Analyst Opinion

Most Analysts are not recommending the stock, among the fifteen analysts that are covering the stock, two rate it as a strong buy, one rates it as a buy and twelve analysts rate it as a hold.

Major Developments

Murphy Oil has spun-off its U.S. retail marketing division, and it plans to sale its U.K. refining and marketing businesses. This strategy will enable the company to expand its exploration and production activity. The 5-year production growth outlook is about 8%-9% CAGR, as shown in the company's chart below.

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Source: Sanford C. Bernstein 30th Annual Strategic Decisions Conference 2014

Murphy Oil will benefit from the rise of oil and natural gas prices. Oil and natural gas prices have been rising since the start of the year. WTI crude price has risen 13.2% from its low of $90.69 per barrel on January 09, 2014, to $102.66 per barrel on June 08 while Henry Hub natural gas price has risen 13.6% since the beginning of the year to $4.71 per Million Btu.

WTI crude July 2014 leading contract

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Henry Hub natural gas July 2014 leading contract

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Charts: TradeStation Group, Inc.

Conclusion

Murphy Oil will benefit from the rising prices of oil and natural gas. Murphy Oil has compelling valuation metrics and strong earnings growth prospects; its Enterprise Value/EBITDA ratio is extremely low at 4.35. Murphy Oil is generating strong free cash flows and returns value to its shareholders by stock buyback and by increasing dividend payments. I consider Murphy Oil's stock as an excellent combination of good value and strong growth dividend stock, and in my opinion, after the retreat in its stock price, it is now an excellent opportunity for long-term investment in a good company at a cheap price.

Source: Why Murphy Oil Stock Is A Long-Term Investment Opportunity