We reiterate our bullish stance on Murphy Oil (MUR) after the company announced the spinoff of its retail business segment and declared its intent to buy back 1 billion shares. It announced a special dividend of $2.5 per share and reemphasized the divestment of its United Kingdom downstream business.
Murphy Oil's stock has showed an upside of 7.2% in the last 5 days, after the company announced the spinoff of its United States downstream business segment. The company has started selling its U.S. retail business on the advice of hedge fund manger Daniel Loeb. He revealed to investors that the company has a significant upside potential of 60% if it sells its retail business and goes through with the spinoff of its Canada based natural gas assets. In our opinion, this move would enable the company to enhance its profitability by putting its focus back on the profitable market of production and exploration of oil and natural gas.
The company's board of directors gave the approval for separating its upstream and downstream business segments. This approval would enable it to increase its oil and gas drilling activities in Malaysia, Canada and the United States. The company revealed the spinoff of its U.S retail business, comprising 2 ethanol stations, 1,152 gasoline retail businesses and other assets, to existing shareholders. It also announced that the spinoff would take place in fiscal year 2013. Murphy is following in the footsteps of other oil integrated companies with regards to separating its upstream and downstream business segments. Marathon Petroleum (MPC) finished the progression of the spinoff of its exploration and production business and Conoco Phillips (COP) conducted the spinoff of its refining business to present the true value of their businesses to shareholders.
Murphy's management has also put focus on the divestment of its United Kingdom downstream business operations, which was approved by the board in the fiscal year 2010. This would be another important development in its current restructuring efforts and we believe the company can utilize the money going forward in lucrative business markets to generate higher returns.
Along with accelerating the spinoffs, the company has also announced to pay special dividends of $500 million. Buying back shares worth $1 billion by the end of 2013 would increase share holder returns in the coming years.
The stock has shown an upside of 23% in the last three months. As we already mentioned in our previous report, the stock is attractive due to its low valuations and has significant potential to show an upside. The separation of 1,152 gasoline retail stations, distribution terminals, retail marketing and 2 ethonal plants is still to be incorporated in the stock price.
The stock is trading at an EV/EBITDA of 3.4x, at discount when compared to its peers - Sunoco (SUN), BP plc (BP), Exxon Mobil (XOM) and Chevron (CVX) with EV/EBITDA of 6.3x, 3.6x, 6.4x and 4.2, respectively. We believe the ongoing divestments would further improve the company's valuation and make it more attractive to investors. Therefore, in our opinion it's a good opportunity for value investors to include this stock in their portfolio.