Category: Financial Markets

Business Strategy and Outlook

Murphy Oil repositioned itself as a pure-play exploration and production company in 2013, spinning off its retail gas and refinery businesses.The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. 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. There is regulatory risk, though: after entering office, U.S. President Joe Biden has pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). Murphy already holds valid leases for its upcoming projects and is ahead of schedule on permitting but will eventually require further approvals if it wants to continue its development plans. Thus far, the Biden administration has taken little action, leaving Murphy unencumbered. But we would not rule out a more comprehensive ban.

The firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,400 drillable locations in inventory.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.

Murphy Shares Starting to Look Pricey After Rally

Morningstar analyst nudged fair value for Murphy Oil to $26 from $25, after incorporating the firm’s third-quarter financial and operating results. That’s about 25% higher than where shares were trading as recently as September, but since then the stock has surged higher along with near-term oil prices. Morningstar analyst think the market has gotten carried away and is mistakenly extrapolating spot prices and midcycle forecast is unchanged at $60 Brent.

Financial Strength 

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 39% and net debt / EBITDA was 1.4 times. That’s about average for the peer group.The firm currently holds about $2.6 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 only about 20% of the outstanding notes come due before 2024 (the firm has maturities totaling $500 million in 2022). At strip prices, the firm should have no issues covering the 2022 notes with cash, but if the operating environment deteriorates, management could always refinance a portion of this obligation or lean on the revolver.

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 Profile

Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2020, the company reported net proven reserves of 715 million barrels of oil equivalent. Consolidated production averaged 174.5 thousand barrels of oil equivalent per day in 2020, at a ratio of 66% oil and natural gas liquids and 34% natural gas.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook:

The BHP Petroleum merger will result in a highly strategic lock-up of gas resources and infrastructure around the North West Shelf, with flexibility to mix and match gas with infrastructure to maximise returns. This includes construction completion of the Pluto to Karratha Gas Plant interconnector pipeline with commissioning underway. Woodside completed the sale of a 49% non-operating participation interest in Pluto Train 2 just after quarter’s close. This was as expected and the first LNG cargo from Pluto Train 2 remains targeted for 2026. 

Final investment decisions have already been taken on the Scarborough and Pluto Train 2 developments, including new domestic gas facilities and modifications to Pluto Train 1. The project signoff essentially unlocks 11.1 trillion cubic feet, or Tcf, (100% basis) of the world-class Scarborough gas resource. To put that into perspective, one Tcf of gas is equivalent to 20 million tonnes of LNG, and 11.1Tcf will underpin two standard 4.8Mtpa-5.0Mtpa LNG trains for over 20 years.

Financial Strength:

The fair value of Woodside is AUD 40 which equates to a 2030 EV/EBITDA of 7.6, excluding the USD 3.7 billion lump sum we credit for undeveloped prospects.

Woodside has a healthy balance sheet with which to fund development of Scarborough and Pluto T2. We estimate stand-alone net debt stands at just USD 2.6 billion, leverage (ND/(ND+E)) of just 17% and net debt/EBITDA just 0.6. And BHP Petroleum’s assets will be coming unencumbered, which will effectively halve these already favourably low debt metrics.

Company Profile:

Incorporated in 1954 and named after the small Victorian town of Woodside, Woodside’s early exploration focus moved from Victoria’s Gippsland Basin to Western Australia’s Carnarvon Basin. First LNG production from the North West Shelf came in 1984. BHP Billiton and Shell each had 40% shareholdings before BHP sold out in 1994 and Shell sold down to 34%. In 2010, Shell further decreased its shareholding to 24%. Woodside has the potential to become the most LNG-leveraged company globally.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.