Murphy Oil Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Murphy Oil Corporation (MUR) is a global independent oil and gas exploration and production company, with both onshore and offshore assets, primarily located in the US, Canada, and the Gulf of Mexico.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

  • Operations: MUR focuses on hydrocarbon exploration, development, and production. Its activities range from identifying potential reserves to extracting and processing oil, natural gas, and natural gas liquids (NGLs). The company sells its products to a variety of customers including refiners, marketers, and other producers.
  • Geographic Segments: The company’s primary operational areas are located in the US, Canada, and other international offshore locations, with exploration and production activities focused on the Gulf of Mexico, Western Canada, and other assets in the Americas.
  • Product Mix: Murphy produces a mix of crude oil, NGLs, and natural gas. Oil represents the largest portion of the company’s overall production.

Moat Analysis:

  • Limited Moat: While Murphy Oil does possess some competitive advantages, these are not substantial enough to give it a wide economic moat. The company’s access to geographical locations and operational expertise are beneficial, but not unique and easily replicable.
  • Scale: Murphy has a moderate size for a company operating in this industry, but it faces competition with much larger and more influential players.
  • Economic Moat Rating: 2 / 5: Murphy has some operational expertise but no strong long-term competitive advantages that can shield it from competitors.

Legitimate Risks to the Moat and Business Resilience:

  • Price Volatility: The most significant risk to Murphy’s business is the volatility of oil and natural gas prices. The company’s profitability is closely tied to these commodity prices, and any sharp decline can severely impact its cash flows and earnings.
  • Operational Risks: MUR faces operational risks related to drilling and exploration, particularly in deepwater and frontier locations. These risks include high production and exploration costs and the possibility of unexpected events that affect production.
  • Environmental and Regulatory Risks: The company is subject to stringent environmental regulations, health, and safety rules. Government regulations and potential lawsuits related to climate change may create future financial risks for the company.
  • Geopolitical Risks: As an international oil and gas company, MUR’s operations are subject to regional political and social instability, which can be significant. This includes the potential for expropriation of assets, social unrest, and changes in local laws and regulations.
  • Financial Risks:
    • Credit Rating: MUR has a credit rating of BBB which represents a minimal threat of default. A lower credit rating would lead to an increased cost of capital.
    • Debt: MUR has a relatively high ratio of debt to equity, which is a risk factor if profits fall. However, debt has been decreasing
    • Interest Rates: An increase in interest rates can put pressure on MUR’s debt payments.
  • Supply Chain Risks: MUR is exposed to risks associated with supply chain disruptions and constraints. The company needs to have a reliable supply of equipment, which can be limited by market conditions.

Business and Financials:

  • Revenue Distribution: MUR’s revenue is primarily generated from sales of crude oil, natural gas, and NGLs.

Revenue is generated by both offshore and onshore production in three geographical regions – US, Canada, and Other (primarily Mexico and South America). * In 2023, nearly 40% of the revenue came from the USA, 36% from Canada, and rest of the revenue came from other parts of the world.

The revenue distribution across its three geographical areas can greatly affect its profit because costs are mainly denominated in US dollars, while selling price can fluctuate depending on the location.

  • Industry Trends: The oil and gas industry is seeing a shift toward energy transition, with increasing pressure to reduce emissions and invest in renewable energy. This requires energy companies to adopt a clear long-term strategy which is a financial and competitive advantage.
  • Margins: The recent increase in commodity prices has greatly improved Murphy’s margins. However, if there is a commodity downturn, margins and profits could decrease.
  • Competitive Landscape: The oil and gas industry is highly competitive. Companies compete based on efficiency, cost structure, technology, and geographic presence, with major oil companies dominating the sector.
  • What makes MUR different?: A clear vision for how they will manage their carbon emissions. They have announced ambitious goals of reducing carbon emissions by 35% by 2030 (compared to the 2019 levels) and are working on several methods to achieve this goal.
   Murphy's management stated on their earnings call: *"We understand that our stakeholders are increasingly looking at us to see how we are reducing our carbon emissions. We have committed to reduce our absolute scope 1 and 2 GHG emissions by 35 percent by 2030 from our 2019 level. That's a significant increase over the previous target and is a direct result of our hard work and new initiatives across our operations to reduce emissions. We are also working to formalize our pathways to net zero as we progress on our decarbonization journey."* *  **Financials (Latest):**
* **Earnings**: The company reported a net income of $561 million (or $3.74 per share) for the three months ended September 30, 2023 compared to a net income of $697.5 million ($4.58 per share) in the same period of 2022,  representing a decrease of ~19%. For the 9 month period ending in Sept. 2023, net income was $474.3 million compared to a net income of $1,625.6 million, a decrease of ~71%. The huge decrease in net income and diluted EPS is primarily related to lower prices and slightly lower production. The company’s realized oil and natural gas prices in the third quarter 2023 were lower than 2022 by roughly 12-22%, primarily owing to the volatility of energy prices.
*  **Cash Flow:** Cash from operating activities was $733 million, compared to a cash flow of $1,367.5 million in the same quarter last year.
*   **Revenue:** Murphy's operating revenues totaled $797.5 million, a 21.8% decrease compared to a year ago with the last year revenues at $1,019 million.

     Lower realized prices and lower production was a driver of lower revenue.
*   **Debt**: Debt has increased slightly year over year to $3,833.5 million, but is manageable.
*   **Assets:** Murphy has total assets worth $9,883.2 million, including $754.5 million in cash and cash equivalents and total liabilities of $4,715.5 million.
  • Management Insights and Latest News
    • MUR is committed to decreasing its debt-to-equity ratio by repurchasing shares and paying dividends.
    • MUR completed share buybacks of nearly $450 million in 2023 and has approved $500 million more to be used on future repurchases.
    • MUR is focusing its efforts in high margin areas, such as the gulf of mexico, while divesting its assets that don’t show higher ROIC and profit margins.
       They recently divested their oil exploration assets in Malaysia.
 *   There has been a recent slowdown in production due to temporary events. Management expects this to rebound in the next few quarters.

        Management on earnings call: *"In the third quarter, we achieved record production at our operated projects in the Gulf of Mexico, but that was offset by lower production in other areas due to downtime related to a hurricane and scheduled maintenance. We expect that the downtime related to those events, in general, will be behind us for the fourth quarter, resulting in higher overall company production."*
 *   Management seems focused on a strong long term and sustainable approach, with an emphasis on value creation rather than on simply production.

Understandability Rating:

  • Complexity: While the fundamental aspects of the oil and gas business are easy to grasp—finding, extracting, and selling hydrocarbons—the overall industry is very complex. There are many outside forces that can influence its performance.
  • Financials: Murphy’s financial statements are complex and need to be analyzed using several ratios and metrics in order to get a clear picture of its performance, specially if you want to factor in the volatility of oil and natural gas.
  • Understandability Rating: 3 / 5: Though the core business is relatively straightforward, there are many complexities associated with the industry and its financials, and therefore, requires time and diligence to fully comprehend it.

Balance Sheet Health Rating:

  • Asset Strength: Murphy’s assets are significant, comprising a portfolio of oil and gas properties. However, the company has high capital costs and is vulnerable to oil and gas price volatility.
  • Debt Management: The company has a large debt burden which could limit the financial flexibility of the company when prices are low and there’s an economic downturn.
  • Cash Position: Their cash on hand is adequate for ongoing operations but not for major expansion or acquisitions.
  • Balance Sheet Health Rating: 3 / 5. Though Murphy has a reasonably strong balance sheet, and they have a good credit rating, its high debt-to-equity ratio and high exposure to volatile energy prices are a bit concerning.

In conclusion, Murphy Oil is an operationally capable and decently managed company but has a limited economic moat. A risk-averse investor might need to be cautious with its exposure to outside influences such as price, volatility, government regulation and geopolitical instability.