Murphy Oil: Oh, When That Cash Comes Marching In

Summary

• Portfolio rearrangements have enabled management to rake in about $5 billion.
• The latest sale of Malaysian properties while purchasing Gulf of Mexico properties increased production about 31 KBOED (mostly oil).
• Management bought back about $500 million of common stock while retiring some debt.
• The unconventional Eagle Ford operations are still lowering costs while increasing production.
• The most significant potential future upside potential is represented by the joint venture with Exxon Mobil in Brazil offshore.
• This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »

Murphy Oil (NYSE:MUR) had announced the sale of the Malaysia operations. That sale brought in about $2 billion in cash during the fiscal year. This sale also generated a gain in the $1 billion value range. In addition continuing operations generated another $1.4 billion. Anytime a company the size of Murphy generates that much cash in one year, then shareholders can just bet that management will be going shopping.

There are a lot of great deals to be had out there under current conditions. All that is needed is cash and this management was one of the few out there with the cash. The joint venture with Petrobas was definitely a step in that direction. For the cost of $900 million, the company picked up about 41K BOED of mostly offshore oil production sold at a premium.

There was a second purchase after the Malaysian sale closed for another $1.375 billion that added another 38,000 BOED of production. Basically, Murphy sold about 48,000 BOED of production that was 60% oil but was expected to decline to 40% oil over the next few years. In the two Gulf transactions (one closed before the Malaysian sale and one after the Malaysian sale), Murphy picked up nearly 80,000 BOED of Gulf Of Mexico production that should remain much more oil-weighted than the production sold. Those three transactions would be a major coup for many managements.

Current And Future Shareholder Benefits

This whole process allowed management to reduce long-term debt overall while redeeming and retiring common stock. The stock repurchase program totaled $500 million in the current fiscal year.

Source: Murphy Oil Fourth Quarter 2019 Earnings Conference Call Presentation Slides

Management has been careful to acquire production that is usually sold at a premium to the appropriate oil price guideline in the area. This gives the company a "head start" at achieving some generous margins. More importantly, management significantly increased production at a net cost of approximately $100,000 or so. Very few companies the size of Murphy grow production 20% in a year. Fewer still can show that growth for the net cost just mentioned. Plus management has increased the percentage of oil produced in the process. This process places management in an excellent position to post positive earnings comparisons all year (excluding the sales gain).

Mr. Market has been fretting about spending in excess of cash flow. But operating cash flow has been distorted by the sale and purchases. There is always non-recurring sales and assimilation costs with any major divestiture and purchase. This company has been rearranging its portfolio ever since the oil price crash. That has severely muddied the operating cash flow situation for several years.

This year should (again) feature operations without the initial non-recurring charges. Management has a fair amount on its plate. But the net growth in continuing production from those sales should translate to a significant cash flow quarterly jump throughout the fiscal year.

The Original Plan

Management needed to remake the company to better compete in the new environment.

Source: Murphy Oil Presentation Of Malaysia Sale March 2019

The portfolio repositioning generated enough cash to significantly reduce debt during some very lean industry times. These sales also supported the reduced dividend at a time when operating profits were hard to come by. Now with the industry recovery underway since 2016, Murphy has a more profitable oil-weighted portfolio featuring oil often sold at premium prices.

Operations Update

The unconventional business still appears to have considerable cost reduction potential. Murphy reports continuing operational improvements in the Eagle Ford. Many of the companies I follow still do not see an end to operational improvements in sight. Therefore, more innovations can be expected this year.

Source: Murphy Oil Fourth Quarter 2019 Earnings Conference Call Presentation Slides

The Eagle Ford represents about one-quarter of the total company production. As shown above, the continuing improvement of IP30 oil rates implies greater profitability in the future. The Eagle Ford is already known for low break-even costs. Evidently those costs can decline some more in the future.

Source: Murphy Oil Fourth Quarter 2019 Earnings Conference Call Presentation Slides

The Gulf of Mexico production will most likely produce the bulk of the company cash flow in the future. Growth involving the Gulf of Mexico tends to be lumpy because wells are generally large and groups of wells are tied together on one production platform. Management will be evaluating more opportunities than what is shown above. The profitability of the leases purchased appears to be substantial enough to continue development even during times of pricing weakness. Therefore, Murphy has an excellent chance of sailing through hostile industry pricing conditions "without a scratch."

The Future

Management forecasts possible exit production of 196,000 BOED. That is not going to be a lot of production growth in the current year. Management will be rationalizing the operations first before "hitting the growth button." That makes a lot of common sense when large acquisitions and divestitures happened in the recent past.

Source: Murphy Oil Fourth Quarter 2019 Earnings Conference Call Presentation Slides

Probably the largest future upside potential would exist with the Exxon Mobil (XOM) Brazil partnership. Production is several years away. However, neighboring announcements as well as partnership progress could provide considerable stock upside potential over the next few years. That Brazil joint venture is an elephant hunt. It may represent the most significant upside potential for Murphy Oil in the company portfolio.

Should a commercial discovery result for the company partnership, then the resulting production increase a few years out would be substantial. Murphy has the credit lines and low debt to be able to finance the development of a major discovery.

The Gulf of Mexico wells are both profitable and generally large wells. However, they are just as generally not "game-changing" discoveries. Murphy has long been known as a cautious operator inclined to take the "sure thing" while forgoing the speculative giant upside potential. The result is already a significant increase in annual production just from the purchases along with reasonably assured locations to increase that production in the future.

Between the Eagle Ford, and the Gulf Of Mexico, about 75% of the company production is located in areas with supporting infrastructure where an additional well is not a major project. Steady growth with a lot less portfolio rearrangement is probably a decent future expectation. In addition, some money will be spent hunting elephants with partner Exxon Mobil off the coast of Brazil. That partnership will give this company an above-average speculative chance of adding major production additions in the future.

More importantly, a low-cost producer like Murphy Oil can repeatedly try again for that home run discovery. Murphy has consistently "hit doubles and singles." Such a company is far more likely to produce a "home run" success in the future. In the meantime those "doubles and singles" add up to an above average future return.

Cash flow will probably drop from the roughly $3.4 billion from continuing and discontinued operations. However, cash flow from operating activities should continue its rapid growth in the year ahead. Spending within cash flow while producing the market necessary free cash flow should be easier for Mr. Market to see in the future without all the acquisitions and divestitures.

This stock, with its current 4% dividend yield is a good core holding for many kinds of investors. This well-run company will most likely be sold in the future at a generous price. It has everything acquirers like from well-run low-cost operations to good solid speculative low-cost gains. But until that sale of the company happens, investors can expect Murphy Oil to continue its long history of production growth.

Analyst’s Disclosure: I am/we are long MUR. 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.

Disclosure: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

Comments

[FarmerJan]

thank you. will MUR survive oil crash on 3/9?

[Long Player]

You are talking one of the better balance sheets in the business along with some very low costs. Survival here is not a question.

[Cue Ball]

One problem is that the insider are always selling MUR stock . Not large amounts but every time they get some options to exercise , they sell . Another problem is MUR's investor relations will NEVER return your call or emails .

Book value is accurate....no write downs at this point .

[Krypto]

The market cap looks to be about half of book value?

Is the market discounting the value of the assets or expecting a write-down?

[Long Player]

I would not know why. They just sold Malaysia for a small fortune and got into the Gulf for a song. That is just what you want to see too. They booked a decent gain from the sale last year too.

[billknowsall]

I think oilcos are just that ignored/hated right now. Sooner or later, the pendulum will swing.

[Long Player]

This is one of the better ones out there. Good solid balance sheet too.