Murphy Oil: Key Takeaways From The Fourth Quarter 2018

Summary

• Total revenues were $692.0 million this quarter, or up 27.8% from the same quarter a year ago and up 2.5% sequentially. It was a solid quarter.
• The company produced 176,422 barrels of oil equivalent per day (Boe/d) in the fourth quarter (61% liquids,) up 4.8% from the same quarter a year ago.
• While MUR is an excellent stock, I am not optimistic short term, and I believe the oil sector is about to retrace to ~$22-23, which is an excellent opportunity to buy.

Image: Murphy well pad site just North of Campbellton on U.S. Hwy. 281 A. Source: Pleasanton express.

Investment Thesis

I consider Murphy Oil Corp. (NYSE:MUR) as a solid long-term second choice in the oil division, particularly for an investor who desires to participate in the oil & gas exploration with assets concentrated in North America.

Murphy Oil controls one of the best upstream portfolios among the domestic oil & natural gas integrated companies. Other companies that can be considered equivalent include Penn Virginia Corporation (PVAC), Anadarko Petroleum (APC), and Apache Corporation (APA).

The first choice is, of course, an investment in oil supermajors like Royal Dutch Shell (RDS.A) (RDS.B) or Exxon Mobil (XOM), which are companies covering a broader aspect of the oil industry.

About 64.9% of the revenue in the fourth quarter comes from properties in the USA (Eagle Ford) and Canada (Montney).

Fourth quarter results were impressive and beat expectation as I will show below.

Furthermore, Murphy Oil is paying a 3.8% dividend yield.

However, for long shareholders who own already a position in the stock, it is essential to trade an estimated 30% of your holding due to extreme volatility in the oil prices.

Quick Presentation Of The Company Assets

As I said in my previous article, the case for Murphy Oil is quite simple to present. The company's business model looks promising even with oil prices back to $60s a barrel. The company is showing adequate proven oil reserves and increased proved reserves by 17% year over year, to 816 million barrels oil equivalent, with 57% liquids-weighting.

Source: Murphy Oil Presentation

Murphy Oil - Financial Table 4Q'18 - The Raw Numbers

Murphy Oil	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17	1Q'18	2Q'18	3Q'18	4Q'18
Total Revenues and others in $ Million	500.5	505.8	676.6	474.5	498.3	541.6	585.6	618.2	674.8	692.01
Net Income in $ Million	-16.2	-63.9	58.5	-17.6	-65.9	-286.8	168.3	45.5	93.94	103.38
EBITDA $ Million	278.4	221.0	435.6	258.2	276.5	288.6	372.8	365.0	432.1	421.4
Profit margin % (0 if loss)	0	0	8.64%	0	0	0	28.73%	7.36%	13.92%	14.94%
EPS diluted in $/share	-0.09	-0.36	0.34	-0.10	-0.38	-1.67	0.96	0.26	0.54	0.59
Operating cash flow in $ Million	167.0	320.4	305.5	286.0	240.2	308.9	278.5	346.0	372.4	222.45
CapEx in $ Million	177.1	145.3	211.6	220.0	274.8	303.3	273.9	341.2	243.2	244.45
Free Cash Flow in $ Million	-10	175	94	66	-35	6	5	5	129	-22
Total Cash $ Billion	0.87	0.98	1.09	1.10	1.00	0.96	0.94	0.90	0.95	387.37
Long-term Debt in $ Billion	2.99	2.99	2.98	2.93	2.92	2.92	2.91	2.91	2.91	3.24
Dividend per share in $	0.25	0.25	0.25	0.25	0.25	0.25	0.25	0.25	0.25	0.25
Shares outstanding (diluted) in Million	172.20	172.20	173.09	172.56	172.57	172.57	174.62	173.98	174.18	174.31
Oil Production	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17	1Q'18	2Q'18	3Q'18	4Q'18
Oil Equivalent Production in K boe/d	169.8	167.8	169.2	162.9	153.8	168.3	167.5	171.0	168.8	181.3
Eagle Ford Crude oil price ($/b)	44.59	46.99	49.45	48.11	48.49	55.86	64.28	68.14	72.08	63.14

Click to enlarge

Sources: Documents from the company, and data from Morningstar.

Trends And Charts: Revenues, Earnings Details, Free Cash Flow, Debt, And Upstream Production

1 - Total Revenues and other

Total revenues were $692.0 million this quarter, or up 27.8% from the same quarter a year ago and up 2.5% sequentially. It was a solid quarter. The adjusted income is attributable to Murphy was $54 million, or $0.31 per diluted share.

Murphy recorded income from continuing operations of $103.38 million or $0.59 per diluted share for the fourth quarter of 2018. The total costs and expenses were $542.2 million this quarter, up 5.2% from $515.3 million the same quarter a year ago.

Roger Jenkins, President, and the Chief Executive Officer said in the conference call:

We produced 176,000 barrels equivalent with 61% liquids in the fourth quarter and full year production was 171,000 barrels equivalent at 59% liquids. We are seeing the immediate impact of the MP GOM transaction and enhanced profitability, oil-weighted production and reserves.

In the fourth quarter, we generated $103 million or $0.59 per share of earnings and on an annual basis we recorded net income of $411 million or $2.36 per share. That's our highest annual net income in over four years.

2 - Free Cash Flow

Free cash flow was negative this quarter of $22 million and is now $117 million for 2018. Dividend payout represents $174 million annually, which is still higher than the FCF annually. MUR dividend yield is now 3.8%.

MUR is still failing the FCF Test.

3 - Production

The company produced 176,422 barrels of oil equivalent per day (Boe/d) in the fourth quarter (61% liquids,) up 4.8% from the same quarter a year ago.

Source: MUR Presentation

Murphy Oil noted that the production was driven by outperformance in the Tupper Montney onshore Canada and Sarawak natural gas in Malaysia, as well as higher than forecasted volumes. Detailed output is as follow:

Note: On October 11, 2018, Murphy Oil and Petrobras America, a U.S. subsidiary of the Brazilian oil company Petrobras (PBR) announced that they had signed an agreement to create a joint company comprised of all of Murphy's and Petrobras' Gulf of Mexico assets. Murphy is the operator.

The joint venture will be owned 80% by Murphy Oil and 20% by Petrobras. The JV is expected to add around 41K net Boe/d to Murphy's Gulf of Mexico production, of which 97% is oil.

This transaction closed in December 2018, resulted in the addition of more than 70 million barrels of oil equivalent of proved reserves.

Eagle Ford situation and rapid growth

Source: MUR Presentation

Roger Jenkins, President, and the Chief Executive Officer said in the conference call:

[D]iscussing the Eagle Ford Shale, according to our plan during the fourth quarter, we bought eight wells online in the Eagle Ford all in Catarina. The IP30 average rage for eight wells is 860 barrels equivalent per day gross. Eagle Ford Shale team has done a good job containing to lower completion cost are holding drilling cost flat in spite of service cost inflation. Our completion cost per lateral foot decreased 13% year-over-year, while drilling per foot was flat, while we increase our laterals drill.

Note: One element to consider with Murphy Oil is that since the company operates in plays that are not pipeline-constrained and its production has minimal pricing exposure to the WTI price, the company-diversified oil-weighted portfolio receives premium pricing.

4 - Net Debt under control

Net debt is now ~ $2.85 billion. The company's goal is to maintain a total debt/EBITDAX below 2.0.

According to the press release:

As of December 31, 2018, the company had $2.8 billion of outstanding long-term, fixed-rate notes, $325 million of borrowings on the $1.6 billion unsecured senior credit facility, and approximately $387 million in cash and cash equivalents, including noncontrolling interest, at year-end. The fixed-rate notes had a weighted average maturity of 7.8 years and a weighted average coupon of 5.5 percent.

Source: MUR Presentation

David Loony CFO said in the conference call:

At December 31, 2018, our total debt amounted to approximately $3.2 billion including capital leases or 40% of total capital, while net debt amounted to 37% of total capital. During the quarter, we closed on a new $1.6 billion senior unsecured revolving credit facility with more favorable covenants than the previous credit facility... Also in the quarter, we received rating agency upgrades. Moody's increased their rating to BA2 and Fitch Ratings increased to BB+.

One important element is that production guidance for 1Q'19 is about 200K Boe/d (mid-point), which is quite a solid jump sequentially.

Conclusion And Technical analysis

As a value investor, you always try to invest in the best stocks that the market has to offer. While Murphy Oil is not a leader in this sector, it presents an appealing business model with growth potential that makes the stock a good opportunity long term.

It is evidenced mainly by the earnings diluted for 2018, which came up to $2.35. The actual Murphy's PE ratio is about 12.1, while the S&P PE ratio stands at 20.8 and Shell stands at 11.6 after looking at the data indicated in my preceding article about Shell last 4Q'18 earnings results.

Late last year, it was a rumor that Murphy Oil was contemplating the sale of its Malaysian assets to Spain-based Repsol (OTCQX:REPYY) for between $2 billion and $3 billion. The Malaysian assets are producing 46K Boe/d or 26% of the total output. During the last conference call, the question of a potential sale was asked to Roger Jenkins, and he said:

I mean, our portfolio is something we like. We really don't have a lot of low-hanging fruit in the portfolio at this time. We are very used to working there and understand that asset. But we have -- we will look at our assets as we see fit and we have some very sought after assets in our company and some very high review of our probable reserves and our company as well by external folks.

This rumor proves only one thing for sure. It is that, unlike Aristotle who said "The whole is greater than the sum of its parts," when it comes to stocks, it is often the opposite which is true.

If Murphy Oil can get $2.5 billion for its assets in Malaysia, the value of the entire assets owned by the company surpasses mostly what the market is willing to pay for the stock now. While MUR is an excellent stock, I am not optimistic short term, and I believe the oil sector is about to retrace because I am not confident about the oil prices in 2019 and see them go down gradually.

Technical Analysis

MUR is forming a descending channel pattern with line support at $20, but the low of $22-23, created at the end of December 2019, should be regarded as a likely-bottom (double bottom), and I recommend accumulating MUR at this level. The line resistance is also the long-term resistance at $29 (I recommend selling about 20% of your portfolio at this level unless oil prices turn bullish, which is not likely.)

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I may start buying around $23.