Murphy Oil Stock: The Safest Bet on Oil and Gas Prices
Murphy Oil is a global E&P company that has significantly undervalued assets.
Murphy Oil Stock Price as of Publication: $25.5 per share.
MOP Price Target: $31 per share.
Murphy Oil is an E&P US-based company with a balanced portfolio of onshore and offshore assets. Production regions are the US, Canada, and Malaysia. The company’s onshore assets are in Eagle Ford and Permian basin where the company still has 2,679 wells, and Canada (Montney and Duvernay) where the company still has 2,497 wells. At the end of the last fiscal year, Murphy Oil had 185.3 million barrels of crude oil, 40.2 million barrels of natural liquid gas, and 189.2 billion cubic feet of natural gas in its onshore US segment as proved reserves.
The company also operates in the Gulf of Mexico where it has 42.4 million barrels of crude oil and gas liquids and 34.1 billion cubic feet of natural gas.
The US segment, onshore and offshore, is responsible for nearly one-third of the company’s total output.
In Canada, the company has 15% of its proven oil reserves and 62% of its natural gas. In Malaysia, the company has minimal reserves but get most of its free cash flows from there.
The company’s Malaysian segment is its most profitable with 75% of its income before corporate expenses deductions generated there ($224 million of the $296.6 million generated in 2017).
Why Murphy Oil lags other E&P companies?
We believe that Murphy Oil’s history is the main reason investors are not giving the company the benefit of the doubt. The stock (MUR) trades at 0.9x book value while the iShares E&P ETF trades at 1.9x. That’s a significant premium over Murphy Oil (why we think such premium is unjustified, look down). Investors are undervaluing Murphy Oil due to its not encouraging history of incurring huge costs on dry wells. For instance, in 2015 the company spent $297 million on drilling wells that turned out to be dry, which is 25% of the company’s cash-from-operations at that time.
Also, Murphy’s assets, although they are of good quality, does not give any relief to investors betting on either oil or gas prices as the company has balanced exposure to both. The company also has a balanced exposure to onshore and offshore assets which makes it a risky bet in a low energy prices environment.
What changed now?
We believe that is no longer the case. Regarding Murphy’s dry hole costs, the company has managed to improve its exploration techniques with the help of the industry’s advancement in technology. For instance, in 2016 and 2017 the company spent only $10 million on wells that turned out to be unproductive which is very low compared to the $100 million-plus costs incurred in preceding years.
At the same time, the company increased its shale presence as it divested its Syncrude operations in Canada (oil sands) and exited some of its offshore operations. In 2012, the company had 50% of its proved reserves in shale and conventional areas, however, the rate now is 71%.
We believe that such improvements should ease investors’ concerns over the long-term.
Why Murphy Oil Should Trade at a Premium to Peers
Among all E&P companies that trade on US exchanges, Murphy Oil offers the highest dividend yield. And this dividend is completely safe as its funded from the company’s well-situated cash-from-operations. Rarely do we see E&P companies that are financially disciplined in terms of capital spending and predictive in terms of cash-from-operations. Murphy Oil managed to increase its dividends in every year until 2014 when oil prices collapsed. Currently, as oil prices are hovering around the $60 per barrel level, Murphy Oil cannot only cover its dividend, but it can also generate excess cash flow which can be used to pay its not-worrying amount of debt.
According to most of Wall Street analysts, the stock is a buy at current levels
We read multiple reports from Wall Street firms on the stock. The two most interesting reports were from UBS and JP Morgan. UBS has a base case price target of $28/share, a 12% upside from current levels, and a $33/share at a best-case scenario. JP Morgan’s base case PT is $32 per share which offers a 23% upside from current levels.
UBS’ analysts Lloyd Byrne and William Atcheson who worked on the report believe that Murphy Oil should trade at 3.3x cash flow per share based on historical valuation while JPM’s Ashish Rath, who is more bullish on the stock, believe that the reserves of MUR have a net asset value of $32 assuming a $50 per barrel WTI price.
What Technical Analysis shows.
We believe that Murphy Oil stock offers an attractive entry point at current levels. The stock is trading near a strong uptrend that has been formed since March 2016. Also, the stock respected the strong support level of $24.7 per share which suggests that the stock may not go lower from current levels. Our thesis is strengthened by the fact that oil prices are currently trading above $60 per barrel. The last time the stock was at current levels was on November 2017 when oil prices were $7 to $10 lower.
What are the risks?
- As many E&P companies, Murphy Oil is subject to commodity price risk. If oil prices returned to the $40 - $50 range, Murphy Oil stock may drop to the $22 - $24 price range which is between the two strong support levels.
- Higher interest rates: Murphy Oil now gives back all of its FCF back to its shareholders in the form of dividends. If interest rates continue to rise (current 10-year treasury yield is 2.8%), and oil prices remain stagnant, Murphy Oil stock, which offers a current dividend yield of 3.9%, might be less attractive in the eyes of investors. However, note that Murphy’s latest replacement metric was 123% which means that the company is increasing its proved reserves year-by-year without incurring any debt.
