Murphy is an interesting company with a global footprint. There a couple of reasons to discuss this highly discounted producer. The sharp decline in price from the collapse of the global economy suggests the potential for a rebound in a improving scenario that isn’t currently reflected in the stock. Second, with their wide asset base they could attract a takeout offer. We’ll discuss these a little more as we go through the hurdles on this company.
The thesis for Murphy
We all know the industry is entering a consolidation phase. It probably began with Occidental’s, (OXY) ill-starred takeover of Anadarko Corporation last year, followed by long gaps between takeouts of any size. Chevron, (CVX) set a new and much more repeatable template last month with its takeout of Noble Energy, (NBL), essentially a stock swap with no new debt created.
Murphy has just the sort of diverse asset portfolio that might attract a suitor looking to add advantaged assets on the cheap. There are always the potential rationalizations that follow mergers that cut costs, and improve the financial metrics for the surviving entity-with the notable exception of OXY and Anadarko. So one aspect of the thesis would be to hold MUR and hope for a takeout that might be accretive to the current share price. We’ll spend a little more time than usual on their portfolio to see how likely this might be. I am not looking for a big premium here, if any. What might sweeten the pot is competing offers as their deepwater assets are irreplaceable at current prices. It could happen.
The other aspect is that management is clear-eyed about their priorities and is focused on debt reduction, maintenance capex on an oil heavy production portfolio, and supporting its dividend. Music to my ears.
Roger Jenkins, Murphy CEO comments on priorities-
Should oil prices move materially higher in the back half of the year, we have no intention to add to our capital and we intend to build cash on the balance sheet and in turn, allocate the free cash to reducing debt. As we begin the budgeting process for 2021, we plan to spend within cash flow producing oil-weighted high margin barrels, focusing on continued cost reduction and delivering our long-standing dividend. We plan to give official guidance in early ’21.
Naturally the core thesis for investing in Murphy is a belief that oil prices will rise in the near future delivering some capital appreciation that isn’t factored into the current share price. If you don’t buy that argument MUR is probably not for you. I’ll include a little discussion on oil price direction as we close out the article.
As usual my first concern is are they teetering on bankruptcy? Not something I would expect as the company has a reputation for managing cash. The slide below gives some comfort here as to concerns about insolvency in the near future.
Cash flow to cover capex and the dividend is our next priority. They fall a bit short here from the decline in oil prices. In the first half MUR generated $369 mm of cash from operations, and free cash flow of $220 mm. Asset write downs and dry-hole costs of $589 left a ~$220 mm GAAP hole in the balance sheet. Obviously then, this puts them in the red for first half capex of ~$575 mm, and the dividend of ~$40 mm or so.
David Looney, CFO comments-
Given that our capital spending was heavily weighted towards the first half of the year with over 75% of total CapEx being spent in the first 6 months, the combination of positive free cash flow for the rest of the year, along with proceeds from the closing of the King’s Quay transaction should leave us in approximately the same liquidity position we had at the beginning of the year, which is a truly remarkable accomplishment given these difficult times for the industry.
Note- Murphy has sold operatorship of the Kings Quay FPSO designed to take off production from future subsea wells at Samurai, Thales, and Mormont, Arc Light Capital. Cash to Murphy from the sale should be in the order of ~$200 mm later this year.
In the second half Murphy expects to go cash-positive from reduced capex, and massive cost cutting undertaken so far.
The Eagle Ford acreage is in the lower middle section of the play. We have previously identified this area as being mostly Tier I with lower D&C cost and lower GORs. Only maintenance capex is planned in the Eagle Ford for the rest of 2020.
A large footprint here in the Duvernay gives them a number of locations that should be economic sometime in 2021. The production is slanted toward liquids, but no capex for the rest of this year.
This area is gas prone and awaits better pricing for natty. Hedging has helped with current production. There are 4-DUCs waiting for better pricing in 21.
Murphy has a substantial footprint in the GoM and it will get the bulk of its 2020 capex. Murphy’s GoM production favors liquids and is in mostly mid-deepwater depths in 3,000′-5,000′ depths. The industry has mastered these depths and has 20 year of experience drilling the middle-Miocene.
Murphy has hired a 7th generation drillship, the Pacific Sharav for this 10-well project, with first oil expected in 2022. This is an advantaged project in that much of the product will go through existing GoM host facilities. Murphy will also spud another UDW Miocene well at Highgarden in Green Canyon. This is adjacent to the Chevron operated Anchor project for which it is commissioning a new-build drillship.
Murphy is operating LDV prospect in Vietnamese waters. Murphy has a lot of experience in Asia due to its long time Malaysian base in Kuala Lumpur, and a number of deepwater projects. Operations in Mexican waters leverage their GoM experience. Down the road (2022) they explore in Brazilian waters through a partner.
Murphy has a lot to say grace over for a company its size-now smaller by 30%. One of the things that makes me think that some or all of the company could be on the block at some point. Assets take people to bring into production efficiently, and Murphy has shed a bunch of them recently. Food for thought.
Murphy expects to produce a mid-range of 158 BOEPD in Q-3, and much the same for Q-4. Some of this is hedged ~15K BOPD at ~$44.00/bbl, most is on the open market at substantially lower prices. The company would like to hedge as much as 50K BOPD, but is price shopping.
On a P/FB basis the company is in a decent range at $31K per flowing barrel. Quite a bit less than another deepwater GoM operator, Hess, (HES) coming in at $91K per flowing barrel. For reference HES is selling at $38 share, making the paltry ~$9ish Murphy’s going for seem pretty cheap.
Murphy has recently received an analyst upgrade from MKM on valuation, after the recent sell off. John Gerdes the analyst is calling for a $14 price target due to increasing cash flow from current and upcoming projects.
Bottom-line. I think MUR is a worthy target for your consideration. The company has significant assets that are being well managed, a comfortable debt profile with a clear view toward its reduction, and no debt bomb that will blow up the company. I think there is probably more upside than is called for by MKM if oil prices advance. Murphy could be a twenty dollar stock with oil prices in the $50’s.
The likely direction for oil prices in 2021
There are a couple of easy metrics to track as we assess the health of the industry. One is the rig count, the other are frac spreads in the field. Rigs have increased modestly over the last 6-months, but frac spreads are well on their way to tripling-134 as of yesterday, as we close out October. DUC’s are being put into service to keep production on a fairly flat decline. This activity has an endpoint, and soon drilling must add a couple of hundred rigs to the present 287 to maintain production at the current ~7.7 mm BOEPD, or the decline rate of shale wells will cause production to drop sharply.
Baker Hughes, Chart by author
We identified the crude surplus from late March-on as being one of the big drags on the market generally. Over the last 8-months we’ve done a decent job of reducing this overhang, but let’s not kid ourselves… we’re still looking at a lot of oil in storage. Here and other places, like China there has just been too much oil in storage for it to move much higher. Fortunately China’s oil demand has stayed strong as their economy has recovered, and cargoes of LNG are no longer being delayed or cancelled. All good news.
If you’re looking for reasons other than a surge in Covid-19 cases, as to why WTI has been unable to move out of the low $40’s, you don’t have to look much beyond that. The inability of the Saudis and Russians to sort out their houses, so-to-speak does nothing for the market in general, either. They keep trying to kill shale and shale finds a way to survive. Now there are suggestions from the Kremlin that the output cuts may be extended.
The OPEC+ price wars made sense when shale was a high cost competitor, but company after company now tells us they can do just fine with $35 oil. They’d like $40 or higher, but shale companies-the good ones anyway, can keep the lights on at $35.
Most analysts expect crude to move higher from demand growth and restricted supply from OPEC+ (Who seem to wish for higher oil prices enough to keep to the mid-year cuts.) Goldman Sachs expect Brent to hit $65 in Q-3, 2021, and WTI to hit $58/bbl. Morgan Stanley is a little more reserved estimating WTI will top out at $50.
The Daily Drilling Report
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Additional disclosure: This is not advice to buy or sell this stock or ETF. I am not an accountant or CPA or CFA. This article is intended to provide information to interested parties and is in no way a recommendation to buy or sell the securities mentioned. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to do their own due diligence before investing their hard-earned cash