It’s been a tough year for oil and energy investments. As a whole, the sector is down about 14% over the last 12 months.
However, the fact that short-term factors – like mild winter temps – account for much of this decline is something we can be thankful for. When judging the long-term value of a company, weather blips hardly matter. In fact, they often create some bargains.
One company worth considering is Murphy Oil Corp (NYSE: MUR).
Headquartered in Houston, TX, Murphy Oil is a mid-sized oil and natural gas company that has exploration and production operations worldwide. Most notably, it has operations in Malaysia’s Kikeh Field and the Eagle Ford Shale in Texas.
Yesterday, Murphy reported earnings of $1.52 per share, up from $1.44 last year. It also beat average analyst estimates of $1.33 per share. Nevertheless, revenue declined 3% to $7.2 billion from $7.4 billion a year ago. Net profits also fell 5% over the same period.
Higher extraction costs and lower natural gas drove the decline, although it was somewhat tempered by lower exploration expenses.
Shares are up more than 3% since the company reported earnings.
But that’s just today. With Murphy Oil, it’s all about the long term…
Will Murphy’s Big Plans Pay Off?
In the long-term, Murphy has been dogged by aggressive yet fruitless exploration.
Barron’s reported that in 2011, over half of its wells were uneconomical. And Kikeh Field, one of its largest operations, continues to operate at a decreasing loss five years after discovery. (Though new wells and increased efficiency in those fields are projected to add productivity to Kikeh down the road.)
On the other hand, recognizing the limited value of its downstream business, Murphy is transitioning from an integrated business into a pure-play exploration and production company.
Production of 188,575 barrels of oil equivalent per day (boe/d) is up 10.6% year-over-year. Realization of its rights in the Eagle Ford Shale play contributed mightily to this increase. The company plans to expand production from 200,000 boe/d to 300,000 boe/d by 2015 and forecasts production of 183,000 boe/d next quarter.
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RBC Capital notes, “[Murphy’s] low reserve-to-production ratio limits its operating flexibility, increasing dependence on long-term projects.”
In other words, not all is well with Murphy in the short term. And it has a long road ahead of it if it’s going to ramp up production.
So is it a bargain at current prices? It’s an iffy situation, to be sure.
To be considered undervalued – rather than a languishing mid-tier producer – it will have to meet its targets, which are aggressive.
Eagle Ford could very well prove to be Murphy’s salvation. It’s been extremely productive for other manufacturers operating in the field, and Murphy estimates a potential of 60,000 boe/d by 2013. If actualized, that would put Murphy well on its way to meeting its targets.
But just where the remaining 40,000 boe/d will come from remains unclear. To attain it – and for the company to successfully transition into a pure-play E&P – exploration would need to be continually aggressive and remarkably fruitful. Its track record, while improving, doesn’t exactly inspire confidence.
Still, the company has managed to keep a large amount of cash on its books, out of which it continues to disburse a steadily increasing dividend. Its quarterly dividend of $1.25 annualized was recently increased from $1.10 annualized and its dividend yield is now moderate at 2.01%.
Bottom line: The future of Murphy Oil is far from assured. Its long-term goals are aggressive but, if met, will increase the company’s valuation and leave it fundamentally stronger. For an investor willing to speculate that Murphy’s exploration will be fruitful enough to land another Eagle Ford, the stock can be viewed as a bargain at current prices.