This Stock is Poised to Unlock Shareholder Value

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Brent Crude prices are above the $110 mark again, and are expected to further rise, as the fears of the fiscal cliff subside. Another boost for oil prices is the declining unemployment rate, recovering Chinese manufacturing output, and rising crude imports of both India and China. Analysts also expect an upside in natural gas, due to its rising demand and falling number of rigs. This offers an upside potential in oil and gas exploration and production (E&P) companies, as higher commodity prices in the market would fatten their margins.

Murphy Oil (NYSE: MUR) is an oil and gas E&P company is also involved in the refining of crude oil. In its recent quarterly earnings report, the company announced that its revenues stood at $7.12 billion, which was higher than estimated. EPS stood at $1.17, which marginally missed the analysts’ expectations. Management at Murphy Oil announced that it would be spinning off their retail and wholesale assets. Murphy Oil USA, the company’s retail segment, operates with a network of over 1100 fuel stations that generated $363 million in 2011 (EBITDA).  Analysts believe that such a move would allow the management to focus on their core competencies.

Since natural gas is used as a fuel to refine crude, oil refiners stand to lose out on margins with high natural gas prices. It should be noted that UK wasn’t able to enjoy a boom in natural gas production and the spot price of natural gas is as high as $12-$14 MMBtu in Europe as compared to $3.8 MMBtu in the US. In order to focus on profitability, the management at Murphy Oil announced that it would be selling its UK based refining and marketing business, and would be looking to enter the US markets for refining and marketing of crude oil.

The refinery segment in the UK, reported a net margin of $1.26 per barrel, which was up from, a loss of $1.76 per barrel, YoY. With a profit margin per barrel close to 1%, exiting from the UK segment is a logical choice in my opinion. Also since the refinery is not reporting losses, Murphy Oil would now be able to enjoy a better sale price for its UK refining segment.  Adding to the investor’s delight, the company announced a special dividend of $2.5 per share. Also management said that the company would be repurchasing its 1 billion shares from the market.

Here are a few financial metrics of Murphy Oil:

Debt/Equity

12%

Dividend Yield

2.17%

Gross Profit Margin

21.39%

P/S

0.40x

Forward P/E

10.22x

However, despite the rising oil and gas prices, British Petroleum (NYSE: BP) won’t be able to enjoy a profitable ride. Oil and gas exploration and production involves risks like oil spills, and very recently BP was ordered to pay $4.5 billion for the deadly oil spill in the Gulf of Mexico. The record amount was the highest criminal penalty in the history of the US.

British Petroleum has been selling off its non-core assets with a plan to raise $38 billion from the program. Marathon Petroleum (NYSE: MPC), which is a US based oil refiner, purchased British Petroleum’s Texas refinery with a capacity of 451k bpd, for $2.5 billion. The management of Marathon Petroleum expects the US distillate demand to increase by 3.7%, which justifies its purchase.

In my opinion, Murphy Oil appears to be a good investment option, especially since it would be selling off its UK based refinery segment. Also the spinoff of retail division would not only unlock shareholder value, but would also allow the management to focus on its core competencies. Murphy Oil has a good mix of fundamentals and financials, which is why it gets a Foolish Buy Rating.

 

 

 

 

 

 


PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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