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Steinway Capital Inc is a New York based proprietary investment research firm with a focus on opportunistic long-term investments. The firm focuses on spin-off related investment strategies, distressed and post distressed investments, and event driven special situation investments. Steinway... More
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  • Quick Take On Spin-Off: Murphy Oil (MUR) / Murphy USA (MUSA) 3 comments
    Sep 4, 2013 9:31 PM | about stocks: MUR, RS, MPC, MRO, DVLN, TA, CST, WMT, VLO

    The growth platform for Murphy USA appears to be one of organic store addition at Wal-Marts. 200 or so stores. EBITDA should over time go from around 350 MM to 420-450 million. I estimate the short term price target of spinoff close to 50 bucks. 45-50 if I had to guess for a 12 month price band. I use about an 8x EBITDA multiple.

    As to Murphy Oil, I have done a lot of work on Malaysia some of which can be glimpsed through my comments including an Instablog post on MISC Berhad which stands for the Malaysian International Shipping Company.. MISC which trades in Malaysia participates in the Malaysian oil sector opportunities in a slightly different way than Murphy Oil does. MISC supplies floating production storage and offloading platforms (FPSO) including the Gumusut-Kakap FPSO that will be used by the operators of the Gumusut-Kakap oilfields where Murphy participates in Kakap development. Gumusut-Kakap is the second deepwater offshore field in Malaysia after Murphy's Kikeh field. MISC also participates with a 50% interest in the FPSO that serves the Kikeh field which currently produces around 70,000 barrels of oil per day.

    we know from upgrading work at Fpso Kikeh that output of Kikeh will go to 120,000 barrels per day. Gumusut-Kakap has another 120-140,000 per day capacity of which 50,000 is dedicated to Kakap.. All in all and subject to the risks of actually extracting the added hydrocarbon quantities near term production in Murphy fields in Malaysia is set to double from a not small base number.

    Admittedly, there is bigger risk with something in hydrocarbons extraction going wrong or off plan than say in the steady eddy Murphy USA business.

    The reserve life of Murphy Oil isn't that great but they have had a very decent run of the last couple of decades. I give them the benefit of the doubt that they can reinvent themselves, especially if Malaysia production plans are on target.

    Having reviewed both names, I feel most comfortable to assume here both risks. MUR should have more earnings variability than MUSA, albeit I can foresee a distinct case where MUR surprises on the upside. I wouldn't bet against them. I am exposed to them through CET, MUR and now MUSA. CET is the longest holder of MUR known to me other than the founding family itself. Its a very well managed closed end fund in its own right for whatever it is worth.

    Although I take notice that Third Point has exited its position being happy with the short term gain they have made. I believe both post spin investments created by Murphy have the characteristics of decent long term holdings. Murphy Oil wasn't an expensive one to being with with respect to its tangible book value and while I am not an expert on their abilities to reinvent their reserve book, I understand the near term value of book value. Murphy Oil on that basis trades a little bit like a liquidation, ludicrous as that sounds for a company that is labeled by Morgan Stanley as a mini-major or part of that sub-group. The valuation characteristics are not too dissimilar from a Talisman Energy.. But when you look at Anadarko (NYSE:APC) or Encana (NYSE:ECA) you have very different multiples and just of the top of the head Nexen (NXY) fetched a very different multiple. Marathon Oil (NYSE:MRO) provides a different reference point for a company with sluggish international growth profile at about 1.3x book and some amount of restructuring charges diminishing earnings. The multiple at 15-16 x earnings is probably what it is because of some lack of confidence in them... spinoff Marathon Petroleum (NYSE:MPC) more than doubled and has at times had a bigger market cap than the parent co MRO itself.

    MPC now trades at 2x book value. Its had a great run for sure boosted by shale bonanza and great refining profits. Profits have quintupled since spinoff and there is a view that this may not last forever. The growth profile of MUSA should be more subdued given the different nature of their retailing and marketing operations. MUSA has some similarities with the Sunoco business that was bought by Energy Transfer last year. At least in its retailing aspects. Different animal though as SUN had lots of pipeline assets in addition to 4900 gasoline stations. Valero spinoff CST looks most similar in nature. The final disaggregation of these constituent assets into E&P producers, transporters (pipelines), refiners and retailers of end product is the surprising part.

    The weakness of any of these businesses so created is in their supply agreements. In the case of Murphy USA there appears to have been no special relationship with the parent co on supplying the refined gasoline goods. Unlike with Valero and CST. This reduces the specter of nasty earnings surprises at Murphy USA because more likely than not things have already been conducted on an arms length basis going into the spinoff. A spinoff that clearly wasn't separated on an arms length basis is Travel Centers of America (NYSE:TA). The contractual issues there reside not so much in gasoline supplies but in the rents they have to pay to their landlord under sale leaseback arrangements entered with parent. TA wasn't set up to enrich shareholders but more so to let the parentco feast high on the hog. I suspect no such evil intentions on the side of Murphy that lead to their spinoff of MUSA. Just some of the shades of spinoff gray to consider.

    My thesis for now is that MUSA will outgrow to prosperity to make up for any diseconomies of scale felt in the short term. Some of the store count additions of 200 are part of that game plan. They have a very nice captive client base as a Wal-Mart centric business. Their business model very much reflects that everyday low pricing philosophy for which they are compensated with much higher volume.. Lower margins per unit but more overall bang for the buck. That is what I like having made very good experiences with other Wal-Mart centric but more esoteric businesses such as DVLN (DVL Inc), an original landlord to Wal-Mart in the days where Wal-Mart didn't own all its real estate. National Vision (formerly NVI, and today owned by Berkshire Partners) is also a good example of the good operational things that can happen in symbiosis with Wal-Mart. Each DVLN and NVI fell on tough times for reasons unrelated to Wal-Mart and become interesting value investments for someone like me who wasn't around when these firms even had their heydays.. if it wasn't for Wal-Mart, NVI would never have grown to its scale in the early to mid nineties. I am not an expert on the capex aspects that come with adding 200 stores at MUSA. This will in all likelihood drain decent cash. Folks like NVI have been adding 250 stores in 1993 and 400 in 1994, but the presumption is that these eyewear centers anchored within existing Wal-Marts were less capex intensive to begin with. Time will tell how many stores will be added per annum. I'd be happy if the 200 stores can be added over the next 3-4 years. That would in and of itself be a significant acceleration of their business providing some margin of safety to whatever else might happen in their biz.

    Disclosure: I am long MUSA, MUR, OTCPK:DVLN.

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  • SteinwayCapital
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    Comments (219) | Send Message
     
    Author’s reply » My 3-4 year price target on MUSA is in the mid 60s to low 70s with a 8x ebitda multiple on something like 420-450 MM in EBITDA, and slight reduction in absolute debt levels.. I dont expect a linear progression here.. A trading band similar to Core-Mark (CORE) after reorg would be consistent with their stabilized business model that should be devoid of major moments of post spinoff crisis.
    4 Sep 2013, 09:45 PM Reply Like
  • J-B
    , contributor
    Comment (1) | Send Message
     
    Nice article. I was wondering why you used 8x EBITDA?
    7 Sep 2013, 03:40 AM Reply Like
  • SteinwayCapital
    , contributor
    Comments (219) | Send Message
     
    Author’s reply » some of the musa comps trade in the range of 6.7 to 10 x EBITDA.. 8 apart from being a lucky number is close to a midpoint of observed ranges. ... I customarily scribble down EBITDA valuations of companies and while there may be a general disagreement in the investment community what cheap and what expensive represents for any such type of stabilized business, I have seen plenty of businesses being spun-off eventually trading at 11-12 x ebitda numbers. This morning I quickly reviewed for myself the Interval Leisure (IILG) and Marriott Vacations (VAC) spinoffs just to see how they doing cash flow wise, deleveraging wise and EV/EBITDA wise.. VAC trades now at 7.8x EBITDA and this is after adjusting for significant non recurring charges. if you ignore some of the non recurring charges, they trade closer to 12.7x unadjusted EBITDA... of course the spinoff is up 100% in its own right, but just giving you a notion. 6.75x MUSA EV/EBITDA for a reasonably growing and stable entity is cheap in my opinion. its anyone's best guess what exit multiple should be chosen for the scenario where investment could shoot if you have time on your hands to turn coal into diamonds. The scenario of growth through cash flow and stable to improving balance sheet implies EPS growth and this is generally associated with shooting the lights out in a spinoff... Interval Leisure (IILG) is now at 8.75 x EBITDA... significant deleveraging has occurred. since it was spun off 5 years ago. stock roughly doubled, despite a rocky start in late 2008 early 2009. from the cyclical low points it quadrupled actually. I am not saying that time share businesses or spinoffs such as IILG, VAC or cendant spinoff Wyndham (WYN) make ideal comps for gasoline retailing spinoffs. Just provide you a random comp basket of a different spinoff group where you can see what multiples the market eventually deamed acceptable from a valuation standpoint. for the cyclical time share sectors 8x seems for the moment an OK reversal to the mean multiple after clearly any of these stocks were at one point available at much cheaper metrics when the future looked a lot murkier for time shares. As a group healthcare spinoffs tend to get the richest valuations out of the gate. In my own way of looking at companies I customarily look at companies trading anywhere between sub 5 to above 15x ebitda. as a general rule of thumb I would go for anything that looks stable and trades below 5x ebitda. 5 plus to 7x gets my attention especially if I can observer a relative valuation/sector/peer discount.. 8ish to 10 need the consultation of a an astrologer or geomancer to figure which way its headed.. I customarily stay away from names that are too richly priced unless I understand clearly what a pathway to growth might be. Chipotle was never a cheap stock out of the spinoff gate trading really expensive based on a growth plan that did not yet translate into firm visible numbers in the present.. this was easily a 15-20x ebitda story and only be end of 2008 did it get down to a rather reasonable 6-7x EBITDA multiple. I think it didnt get any lower than that ever. now its back to a 20-24x ebitda multiple. Growth of franchise has been very nice for them. so whether 8x ebitda is nice as an exit multiple of moving target type of multiple depends on what happens in the company to which you attache that multiple. for companies that progressively should be stable and debt free I would think its doable. As a point of reference, highly leveraged and disfunctional TA spinoff (Travel Corp of Americal) trades at 6.62x EV/EBITDA.. emphasis added on disfunctional because TA is not a company with a normal governance.. so for MUSA to trade at a TA EV/EBITDA multiple is a complete insult to good corporate governance practices. And TA is probably as close to a comparable to MUSA as it gets, just a bad comp because of all the conflicts of interest that exist with its parent. if I had to give a quick note on the growth profile of MUSA, I would have to note the market penetration and with that I mean the percentage of Wal-Mart Stores where MUSA has a presence. Wal-Mart has a worldwide presence of around 8700 stores of which 4500 are in US in various formats from Discounts, Supercenters to Market format all the way to Sams Club. MUSA has gasoline stations at around 1200 points of sale. So give and take, they have achieved a penetration rate of around 27% of the points of sales of their business partner. Measured vis a vis their supercenters which number around 3100, the penetration rate is about 39%... Either way, plenty of room for growth. After adding 200 retail gasoline stations they probably will come up with a plan to add some 400 more and then after some 300 more.. very reasonably, they could be doubling the points of sale for gasoline retailing over the next 13-15 years. At that point we would be looking at that same evolving 8x EBITDA multiple and say take a 600-800 MM EBITDA base which I assume would come debt free.
    so if you shoot for the lower EBITDA target of 600 MM and 8x multiple you get a 4.8 bilion market cap or a 100 dollar share price. So conservatively you are probably looking at 160-200% appreciation potential over a long term investment horizon of average 14 years. very likely there will be some overshooting going on here. in the base case though over 14 years. you get 12-14% annual returns and that is what I take any day in a spinoff going out of the gates, ceteris paribus, as economists would add. The low penetration rate here may not be as low as Chipotle in 2004/5 when McDonalds hived off the name but the flipside of it is that MUSA has much more revenues and cash flow to show for. thus less of a gamble as to the stability and which way growth could go. Of course if u use such 14 years scenario, same exit multiple and the 800 MM EBITDA per annum base, you get closer to 260% appreciation potential, or 18% per annum return. The downside is that it becomes a turkey,, deleveraging moderately over the years and never evolving beyond 400 MM in EBITDA despite all the hard work displayed.. if the stock stays where it is you would end up with a company trading at 4.5x ebitda and mos everyone would recognize that one as cheap and defensive multiple that probably would attract lots of buyout firms to get a piece of the action. . upside downside evaluation suggests a rather reasonable and assymetrically favorable risk reward. Even in a tough time scenario where EBITDA goes to 250 MM (really difficult to envision), and a TA type dispair multiple of 6.6x, you would still get a 35 buck stock under assumption of being debt free after 14 years of unsuccessful strategic toiling and just hoping every year for a better year, just like TA... MUSA in that sense seems to be priced for perfection. Hope that helps..
    9 Sep 2013, 10:30 AM Reply Like
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