Financial Markets - Investor Desk

Business Strategy & Outlook:

Murphy Oil repositioned itself as a pure-play exploration and production company in 2013, spinning off its retail gas and refinery businesses. Historically, the company’s capital efficiency was skewed to the weaker end of the peer group range, even after this transformation, but management has since narrowed the gap by downsizing the portfolio and shifting capital toward higher-margin projects. The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. It signed a joint-venture agreement with Petrobras in late 2018, giving it an 80% stake in the combined assets of the two companies.

Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. This includes Samurai, Khaleesi, and Mormont, which will start contributing this year and are expected to collectively add about 30 thousand barrels of oil equivalent by 2025. There is regulatory risk, though: after entering office, U.S. President Joe Biden pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). But high crude prices have made it politically unpalatable to follow through, and so far the only action taken was a temporary suspension that came into effect in early 2021 and was long since rescinded. This would not rule out a more comprehensive ban eventually, but for now it remains business as usual for Murphy.

Murphy also has onshore assets in several parts of North America. This includes 120,000 acres in the South Texas Eagle Ford play. Like other shale producers, the firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,000 drillable locations in inventory, only around 350 of them are in the prolific Karnes County area. When this portion is exhausted, well performance, and thus returns, could deteriorate. And in Canada, the firm is currently prioritizing the Tupper Montney gas play while natural gas prices in the region are more stable after a period of steep discounts caused by takeaway constraints that have now cleared.

Financial Strengths:

The COVID-19-related collapse in crude prices during 2020 impacted the balance sheets of most upstream oil firms, and Murphy saw its leverage ratios tick higher as well. But management has engineered a rapid recovery, aided by strengthening commodity prices. At the end of the last reporting period, debt/capital was 37% and net debt/EBITDA was 0.9 times. That’s about average for the peer group. The firm is generating substantial free cash, and management intends to prioritize further debt repayments. Its leverage ratios to continue improving in the next few years, even if commodity prices recede from current high levels. The firm currently holds about $2.5 billion of debt, and has roughly $2 billion in liquidity ($500 million cash and about $1.5 billion undrawn bank credit). The term structure of the firm’s debt is reasonably well spread out, and nothing is due before 2024, though management intends to accelerate their payment of these obligations using the windfall from very high commodity prices. The firm should have no issues covering its obligations with cash from operations going forward, unless oil prices fall significantly below the midcycle forecast ($60 Brent) for a significant period.

Bulls Say:

The joint venture with Petrobras is accretive to Murphy’s production and generates cash flows that can be redeployed in the Eagle Ford and offshore.
The Karnes County portion of Murphy’s Eagle Ford acreage offers economics that are as good as or better than any other U.S. shale.
Murphy’s diversified portfolio gives it access to oil and natural gas markets in several regions, insulating it to a degree from commodity price fluctuations or regulatory risks.

Company Description:

Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2021, the company reported net proved reserves of 699 million barrels of oil equivalent. Consolidated production averaged 167.4 thousand barrels of oil equivalent per day in 2021, at a ratio of 63% oil and natural gas liquids and 37% natural gas.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.