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Murphy Oil's (MUR) recent rally is due to hedge fund manager Daniel Loeb's bullish stance on the company. He believes the stock will show significant upside (60%) if the company sells its natural gas assets in Canada or spins off its retail business. In response, the management at Murphy has announced it will consider Daniel's suggestions and speed up the spin-off of its retail business to maximize shareholder value. We are recommending our readers to go long the stock, as significant shareholder value can be created through the spin-off/asset sales.

Company Overview

Murphy Oil is an oil and gas company operating in upstream and downstream business segments. The upstream business segment of production and exploration is divided into 6 geographical segments comprising of the United States, the United Kingdom, Canada, Congo, Malaysia, and other countries. On the other hand, its downstream business of marketing and refinery is subdivided into the United Kingdom and United States. It is generating ~74% of profits from the upstream business segment and the remaining 26% from its downstream business.

Source: Company earnings release.

Expected Sale of Non-Strategic Assets

Loeb manages a $4.5 billion hedge fund called Third Point LLC, which is holding 1.5 million shares of Murphy Oil, constituting 0.8% of its ownership in the company. He aims to increase its holding in the company. He wrote a letter to Murphy's investors in which he criticized its management and demanded changes aimed at giving more value to its shareholders. According to Loeb, if the management sells its non-strategic U.S. retail fuel business assets, or Canadian natural gas assets, the company's worth would be $94 a share, with an upside of 60%.

Upstream Business Performance

Its income from the upstream business operation of exploration and production declined to $230 million in the second quarter of 2012, from $243.3 million in the first quarter of 2011. The higher income of $243 million includes a gain of $13 million on the sale of its Spanish storage assets. Another reason behind the decrease in earnings is decreased average realized sales prices. Its average realized oil sales price has decreased from $99.37 per barrel in Q22011 to $94.37 per barrel in Q22012. The average realized North American gas price also declined from $4.26 per MCF in Q22011 to $2.15 per MCF in Q22012. Natural gas extraction in North America through hydraulic fracturing has increased the company's natural gas production volumes to 507,379MCF per day, with an upside of 11% over the last one year. Moreover, their oil production volume has also increased by 10% in the last one year.

Due to higher oil and gas production volumes, the company had registered a higher extraction cost. However, its exploration expenses have considerably decreased from $122.5 million to $96 million over the last one year. The company has seen higher dry hole expenses in the United States in the last quarter, primarily because of the write-off of the Deep Blue project in the Gulf of Mexico.

Downstream Business Performance

The company intends to sell its United Kingdom refining and marketing business assets, in order revert to the American market. The company's profits from this segment have increased by 33% in the last one year, and interestingly, the 142% improvement in profits from the United Kingdom, where it intends to sell its business. In the United Kingdom, its refinery margins have shown a significant improvement from -$1.76 per barrel to $1.26 per barrel over the last one year. The company's profits from the United States have declined from $75.9 million to $73 million over a year, due to a decrease of 14.7% in the United States retail fuel margin.

Financial Performance

The company's net income from continuous operations has improved from $280 million to $295 million in the last one year. The improvement has come primarily from the downstream business.

The company's gross and operating margins are 14% and 6%, respectively, which are higher than its peer Sunoco (SUN)'s, at par with BP plc (BP)'s, and considerably lower than Exxon Mobil's (XOM) and Chevron's (CVX).

Comp Sheet

Murphy Oil

Sunoco

Exxon Mobil

Chevron

BP plc

Market Cap:

11.31B

4.90B

423.28B

227.88B

134.00B

Qtrly Rev Growth (yoy):

-3%

8%

-7%

-10%

-8%

Revenue (TTM):

28.21B

47.66B

434.82B

230.56B

376.60B

Gross Margin :

14%

5%

29%

30%

13%

EBITDA :

3.40B

879.00M

65.40B

50.98B

36.13B

Operating Margin :

6%

1%

11%

16%

6%

Net Income :

807.98M

-954.00M

45.09B

26.63B

17.26B

Source: Yahoo Finance.

Valuations

The stock is trading at a forward P/E of 10.3x, at a discount when compared to a forward P/E of 25.8x for Sunoco and 11.3x for Exxon Mobil . On the other hand, it is trading at a premium when compared to a forward P/E of 9.2x for Chevron and 7.48x for BP. It is trading at a P/S of 0.4x, EV/Revenue of 0.39x, and EV/EBITDA of 3.22x.

Comp Sheet

Murphy Oil

Sunoco

Exxon Mobil

Chevron

BP plc

PEG (5 yr expected):

1.19

9.76

1.47

9.63

3.58

P/S :

0.4

0.1

0.97

0.99

0.36

Forward P/E

10.3

25.86

11.31

9.28

7.48

EV/Revenue

0.39

0.12

0.97

0.94

0.44

EV/EBITDA

3.22

6.33

6.44

4.25

4.61

Source: Yahoo Finance.

The stock has a dividend yield of 2.1%.

Source: Activist Investor To Create Shareholder Value In Murphy Oil