Murphy Oil Stock: More Upside Looks To Be On The Table (NYSE:MUR)

Murphy headquarters office building in Houston, Texas, USA.

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October 3rd of 2022 proved to be a very bullish day for shareholders in Murphy Oil Corp. (NYSE:MUR). After the company released an investor presentation reiterating guidance for the 2022 fiscal year from a production standpoint and updating investors on debt reduction, shares of the enterprise roared higher, closing up by 11.2% for the day. It also helps that oil prices are also on the upswing again as the possibility of a cut from OPEC+ is breathing new life into the bullish stance on crude. Irrespective of what the future holds from an energy price perspective, Murphy Oil does seem to offer investors attractive upside potential from here. Management continues to reduce debt, plus they will continue to reward shareholders in other ways. Add on top of that how attractively priced shares are right now, and I cannot help but to rate the company a robust ‘buy’ at this time.

Great developments in Murphy Oil

With a market capitalization of $5.47 billion, Murphy Oil is not exactly a massive player in the oil and gas exploration and production space. But despite the company’s small size, it has been making some major moves. For instance, in its latest investor presentation, the firm announced that the amount of debt reduction it has seen so far this year has totaled $440 million. They then reiterated their goal of hitting between $600 million and $650 million in debt reduction for the year in its entirety. Already, as of the end of the latest quarter, the company had net debt on its books of $1.84 billion. Eventually, the company hopes to get this number down to $1 billion or less.

Murphy Oil Production

Murphy Oil

Even though the company is focused on debt reduction, it is also active in buying back stock. Its most recent share buyback program was set at $300 million. And between 2012 and the end of the first half of this year, the company succeeded in putting $1.8 billion in all towards share repurchases. Management has also been active in returning capital to shareholders in other ways, most notably through distributions. Since 1961, the company has returned over $6.6 billion to its investors, with $4.3 billion in all transpiring in the past ten years.

Murphy Oil building momentum into 2023

Murphy Oil

Moving forward, it stands to reason that the company will continue to create more and more value for its investors so long as energy prices remain at acceptable levels. This is aided by the fact that the company has a robust capital expenditure plan already in the works for the 2022 fiscal year. With a budget of between $900 million and $950 million for the year, the company has worked hard to ramp up its energy production. In the first quarter of this year, for instance, the company was responsible for producing 141,000 boe (barrels of oil equivalent) per day. In the final quarter of this year, the company expects for this number to be around 198,000 boe per day, representing a significant improvement year over year. For 2022 as a whole, the company recently reiterated guidance of between 168,000 boe per day and 176,000 boe per day, an increase compared to prior expectations, at the midpoint, of 4,000 boe per day.

Murphy Oil EBITDA and Cash Flow

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When it comes to knowing what the future holds, projecting what kind of value the company offers is a little more art than science because management has not been terribly detailed in its guidance for the year. What we do know, however, is that in the first half of 2022, the company generated EBITDA per boe of $36.18. If we assume three different scenarios of pricing for the entirety of the current fiscal year, we can get a pretty meaningful range of where cash flow might be. In the table above, you can see the base case where energy pricing remains unchanged from what the company experienced in the first half of the year. You can also see a low case where pricing is $10 per boe lower, and a high case where it is $10 per boe higher. Using this range, we get EBITDA, using midpoint guidance for production, of between $1.64 billion and $2.90 billion. The base case stands at $2.27 billion. When it comes to calculating operating cash flow, I stripped out pro forma interest expense using how much debt the company plans to have as of the end of this year. This gives us a range for operating cash flow of between $1.52 billion and $2.77 billion. And taking out midpoint capital expenditure figures, we end up with free cash flow of between $594 million and $1.85 billion.

Murphy Oil EV/EBITDA

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In the next table, shown above, you can see how the company would be priced at each of these points. On an absolute basis, this pricing looks very low. However, relative to some players that I have seen in the market, that I have covered in my Marketplace service, it is true that the low case scenario would make the company near the higher end of pricing relative to similar oil and gas exploration and production companies. But even so, this doesn’t mean that the company would make for a bad prospect. Given how cheap shares are on an absolute basis and factoring in the low debt the company should have, upside for investors could be quite appealing from here.

Murphy Oil EBITDA Projection

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Of course, it’s also important to keep in mind what the future holds. We already can tell that the company is going to end the 2022 fiscal year producing a lot more oil and natural gas than it was producing at the start of the year. To account for this, I also created the table above. This shows EBITDA, operating cash flow, and free cash flow under the same pricing scenarios assuming that output next year remains flat with what the company should achieve in the fourth quarter. The operating cash flow calculation assumes no further reduction in interest expense, while the free cash flow calculation assumes that capital expenditures remain flat next year relative to this year. In the table below, meanwhile, you can see the pricing for the company, with the EV to EBITDA multiple of the company assuming a continued accumulation of cash, thereby reducing net debt, throughout 2023. In this case, particularly in the base case and the high case, shares start to look very cheap even relative to similar players.

MUR Stock Projection

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Takeaway

Based on the data provided, I do think that Murphy Oil is doing quite well for itself at this time. Obviously, the energy markets are incredibly volatile and we have no idea what exactly the future holds. But so long as pricing remains in the kind of range I highlighted and management can deliver on production growth, the future for the firm is looking very bullish. All of these factors, combined with the company’s continued debt reduction, leads me to be optimistic about it, enough so that I have decided to rate it a ‘buy’ at this time.

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