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.
Morningstar analysts have increased its fair value estimate for Murphy to $33 from $26, after taking a second look at Murphy’s fourth quarter operating and financial results.
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 37% and net debt/EBITDA was 1.5 times. That’s about average for the peer group. However, the firm is generating substantial free cash, and management intends to prioritize further debt repayments.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. The firm should have no issues covering its obligations with cash from operations, unless oil prices fall significantly below our 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 Profile
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)
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
New Jersey Resources remains primarily a regulated gas utility even as it invests heavily in nonregulated energy businesses such as solar and natural gas midstream. NJR’s regulated utility business will continue to produce more than two thirds of earnings on a normalized basis for the foreseeable future as New Jersey’s need for infrastructure safety and decarbonization investments provide growth opportunities.
NJR’s constructive regulation and customer growth has produced an impressive record of earnings and dividend growth. The expected NJR’s regulated distribution utility can grow earnings 6% annually based on 1% customer growth and planned infrastructure investments. NJR’s clean energy business should grow even faster, leading to consolidated earnings growth near the top half of management’s 7%-9% annual growth target.
New Jersey’s historically constructive regulation allows NJR to support a high payout ratio and dividend growth in line with the utility’s earnings growth. That regulatory support was confirmed in November 2021 when regulators approved a settlement that raises rates to account for NJR’s infrastructure investments and maintains its 9.6% allowed return on equity from NJR’s 2016 and 2019 rate cases. Although this allowed ROE is lower than other utilities, NJR enjoys other rate mechanisms that support good cash flow generation.
NJR’s gas distribution business faces a potential long-term threat from carbon-reduction policies. To address that threat, NJR plans to invest $850 million in its solar business in 2022-24 and pursue hydrogen and renewable natural gas projects. These projects support aggressive clean energy goals in New Jersey and other states. NJR’s $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage. However, don’t expect windfalls like this to continue as management derisks its energy-services business, reducing the earnings sensitivity to volatile gas prices, basis spreads, and winter weather.
Financial Strength
NJR has maintained one of the most conservative balance sheets and highest credit ratings in the industry. We don’t expect that to change even with its large capital investment plans. The is forecast an average debt/total capital ratio around 55% and EBITDA/interest coverage near 5 times on a normalized basis after a full year of earnings contributions from its midstream investments. Management has a history of using large cash inflows during good years at its non-utility businesses to offset equity needs at the utility. NJR’s $260 million equity raise in fiscal-year 2020 will primarily go to fund the Leaf River acquisition and midstream investments. We don’t expect NJR will need any new equity through at least 2024. In mid-2019, it issued $200 million of 30- and 40-year first mortgage bonds at interest rates below 4%, among the lowest rates of any large U.S. investor-owned utility at the time. It has raised two low-cost green bonds to support solar investments. Up until 2020, NJR had been able to avoid issuing equity in part due to cash it has collected from its unregulated businesses. Extreme winter conditions in 2014 and 2018 provided a timely source of cash ahead of NJR’s uptick in utility and midstream investments. The success of the nonutility businesses and divesture of the wind investments also brought in cash to fund what is expected will be more than $2 billion of investment in 2022-24 without new equity. NJR’s board took a big step by raising the dividend 9% to $1.45 per share annualized in late 2021. The expected dividend growth to follow at least in line with earnings now that NJR has reached a pay-out ratio near 65%, which is reasonable for a mostly regulated utility.
Bulls Say’s
- NJR’s customer base continues to grow faster than the national average and includes the wealthier regions of New Jersey.
- NJR raised its dividend 9% for 2022 to $1.45 per share, its 26th consecutive increase. It is expected that streak to continue.
- NJR’s distribution utility has received three constructive rate case outcomes and regulatory approval for nearly all of its investment plan since 2016.
Company Profile
New Jersey Resources is an energy services holding company with regulated and nonregulated operations. Its regulated utility, New Jersey Natural Gas, delivers natural gas to 560,000 customers in the state. NJR’s nonregulated businesses include retail gas supply and solar investments primarily in New Jersey. NJR also is an equity investor and owner in several large midstream gas projects.
(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
Virgin Money UK consists of the CYBG business (demerged from National Australia Bank, or NAB), and the more recently acquired Virgin Money UK. In 2016, NAB demerged its U.K.-based operations in Clydesdale Bank and Yorkshire Bank, collectively known as CYBG. The CYBG merger with Virgin Money UK virtually doubled the size of the bank’s loan book and provided a foothold in the larger and faster growing London region. The bank’s loan book is split 80% mortgages, 12% business loans, and 8% personal (including cards) as at September 2021.
Acquiring Virgin Money in 2018 was transformative for CYBG. A larger and more geographically diverse mortgage book lowers risk and presents cost saving opportunities, but also presents the opportunity to grow its business loan book under the Virgin Money banner. Aiming to maintain its share of the mortgage market, the bank wants to reduce its weighting to mortgages to 75% as it grows its business loan book.
Financial Strength
The capital structure and balance sheet are sound. Common equity Tier 1 capital was 15.2% as at Dec. 31, 2021, well above the 9.5% minimum capital benchmark. The bank has a longer-term dividend payout goal of up to 50%. The percentage of funding sourced by customer deposits was 83% as at Sept. 30, 2021, the elevated savings rate in 2021 helped the bank increase the weight of funds to cheaper business and personal current accounts materially. These current accounts and linked savings increased 19% in the fiscal 2021, making up 38% of funding as at Sept. 30, 2021 and up from 31% at end of fiscal 2020. Virgin Money UK received internal ratings-based, or IRB, accreditation from the U.K. regulator for its mortgage and SME/corporate loan portfolios mid-October 2018. Virgin Money UK is now authorised to use its own risk models in determining risk weighted assets, resulting in a reduction in risk weighted assets for the two portfolios and thereby improving its capacity to grow share.
Bulls Say’s
- Virgin Money UK is a well-capitalised and well-funded retail and small-business bank with long-established franchises in core regional markets.
- Management’s ability to successfully integrate the merger with Virgin Money is critical to our thesis.
- Legacy conduct issues have caused pain for shareholders despite balance sheet provisions and conduct indemnities provided by National Australia Bank. It have made no allowance for large penalties or customer remediation in our forecasts.
Company Profile
Virgin Money UK was formed through the merger between CYBG PLC and Virgin Money. After being divested by National Australia Bank in 2016, CYBG went through a restructuring and recapitalisation process, with mortgages accounting for around 75% of its loan book. Following CYBG’s merger with Virgin Money, the loan book has been reshaped again, with mortgages now accounting for more than 81% of total loans, personal loans around 7%, and SME and business loans around 12%. The merger with Virgin Money does provide upside earnings potential, but operating conditions are tough, with business momentum slowing. An upturn in the earnings outlook is needed after several years of disappointment.
(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.