Lucrative Spinoff for 2013

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In late October of 2012, El Dorado, Arkansas-based Murphy Oil Corp (NYSE: MUR) announced its intention to spin off its downstream retail assets into a standalone company. As part of the spin-off, the company would also issue a special cash dividend of $2.50 per share to all of its common shareholders. The bulk of this special payout would be financed with the bond float that Murphy Oil issued in late November of 2012. If no unforeseen issues arise to delay or scuttle the deal, the company's management team expects the spun-off downstream assets to begin trading as a separate public company by the end of the third quarter of 2013. The new company will be known as Murphy Oil USA and trade under the "MOUSA" ticker symbol.

Murphy Oil will spend about $1.5 billion as a result of the spin-off. About $500 million of this total will be used to finance the special dividend. Another $1 billion will be earmarked for an ongoing stock buyback program that should last through the first half of 2013. Current Murphy Oil shareholders stand to receive a single share of the spun-off company for every Murphy Oil share that they own. The offer price of this new stock has not yet been determined.

After the spin-off, Murphy Oil will focus almost exclusively on upstream exploration and production activities in the fossil fuels industry. Most of its assets will be concentrated in the United States and Canada with substantial additional holdings in the southeastern Pacific Rim. 

Its most lucrative properties sit on top of the Eagle Ford shale formation in southern Texas and the Montney shale formation in northern British Columbia. Murphy Oil also maintains a minority ownership stake in Canadian oil sands refiner Syncrude Canada. Along with an aging refinery in the United Kingdom, this may be the only major refining asset that it retains after the spin-off. As an independent exploration concern, Murphy Oil stands to earn between $9 billion and $12 billion per year in revenues.

Murphy Oil USA will operate over 1,100 retail gasoline outlets in the southern and central United States. The company will strengthen an existing partnership between Murphy Oil and Walmart (NYSE: WMT) by opening an undisclosed number of new refueling stations near Walmart's Supercenter outlets. The new company will also operate several distribution terminals and refineries in the southern tier of the United States as well as two biofuels plants in the Great Plains region. As a standalone company, the division appears poised to earn about $15 to $18 billion per year in revenues.

Walmart looks to benefit substantially from the Murphy Oil USA spin-off. The Bentonville, Arkansas-based retailing giant already enjoys a gasoline-retailing partnership with Murphy Oil. With the vast majority of Murphy's retail gas stations located next to Walmart outlets, the retailer appears committed to using the spun-off company to increase its penetration in the low-margin gas retailing business. 

Although gasoline is basically a loss leader for Walmart, its gasoline-selling stores tend to see higher year-over-year sales increases and greater customer volumes. The partnership will certainly be beneficial for the Murphy Oil spin-off. With its outlets occupying prime real estate in Walmart Supercenter parking lots across half of the United States, the company's core retail gasoline business will enjoy an inherent competitive advantage over mid-size competitors. It remains unclear whether the nominally-independent Sam's Club retail gasoline outlets will be affected by the new partnership. 

Murphy Oil is not the first American oil and gas producer to look seriously at spinning off a downstream division from a potentially lucrative drilling and exploration business. In a well-regarded deal that has produced decent returns for both companies, ConocoPhillips recently split into its two component parts: Conoco (NYSE: COP) and Phillips 66 (NYSE: PSX). The former focuses mainly on upstream exploration and drilling operations. The latter operates a network of about 10,000 retail gasoline outlets as well as multiple refining assets in the southern United States. 

In fact, Phillips 66 stands as a principal competitor of Murphy Oil USA. Normally, the company's ability to refine 2.2 million barrel-equivalents of crude per day and its 10,000-strong network of retail outlets might permit it to out-compete the smaller Murphy Oil USA. However, Phillips 66 is also heavily invested in the natural gas liquids sector. Since Murphy enjoys a strategic partnership with Walmart and is not as heavily invested in the natural gas business, it should be able to coexist with Phillips 66.

The proposed spin-off is contingent upon customary votes by Murphy Oil's common shareholders and board of directors. In light of the fact that the stock's price jumped by nearly 10 percent on news of the spin-off, it appears likely that neither vote will present a significant hurdle. Likewise, the spin-off must undergo a review by the U.S. Internal Revenue Service to ensure that it can be classified as a tax-free deal. If each of these conditions can be met, Murphy Oil shareholders can look forward to seeing a promising new stock in their portfolio by the end of the summer.


mthiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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