Daniel Loeb Comments on Murphy Oil - Apr 04, 2013

As we explained in our Third Quarter Letter, Third Point initiated a significant stake in Murphy (MUR) following a 3-year period in which Murphy's share price declined by ~15% while the SPDR S&P Oil and Gas E&P Index appreciated by ~49%. Our thesis was that the company had many routes to unlock latent, meaningful value, among them – and most significantly – a highly accretive spin-off of its retail business.

Two weeks after our letter, Murphy's management announced a series of shareholder-friendly initiatives that have been met with market enthusiasm. In addition to announcing a separation of the retail business via a tax-free spin, management unveiled a $1 billion share repurchase program and a $2.50 per share special dividend. While we applaud these first steps, we expect the company to announce further moves to address its still-depressed valuation, including sales of its Montney asset and 5% stake in Syncrude. Natural gas acquisition activity in Western Canada has continued vigorously since we called for the sale of the Tupper asset, and recent deals in the space have confirmed our valuation expectations.

From Daniel Loeb’s fourth quarter commentary.


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Daniel Loeb Comments on Murphy Oil - Jan 09, 2013

Murphy Oil (MUR)
As we explained in our Third Quarter Letter, Third Point initiated a significant stake in Murphy following a 3-year period in which Murphy’s share price declined by ~15% while the SPDR S&P Oil and Gas E&P Index appreciated by ~49%. Our thesis was that the company had many routes to unlock latent, meaningful value, among them – and most significantly – a highly accretive spin-off of its retail business.

Two weeks after our letter, Murphy’s management announced a series of shareholder-friendly initiatives that have been met with market enthusiasm. In addition to announcing a separation of the retail business via a tax-free spin, management unveiled a $1 billion share repurchase program and a $2.50 per share special dividend. While we applaud these first steps, we expect the company to announce further moves to address its still-depressed valuation, including sales of its Montney asset and 5% stake in Syncrude. Natural gas acquisition activity in Western Canada has continued vigorously since we called for the sale of the Tupper asset, and recent deals in the space have confirmed our valuation expectations.

From Daniel Loeb's Third Point fourth quarter investor letter.

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Daniel Loeb's Third Point Comments on Murphy Oil - Oct 03, 2012

Long Equity: Murphy Oil (MUR)

Although we've come to the end of the road
Still I can't let you go
It's unnatural, you belong to me,
I belong to you
Come to the end of the road
Still I can’t let you go
-Boyz II Men. “End of the Road”.

Murphy Oil is a ~$10.4 billion energy company with three primary business segments: Exploration and Production; Refining, which it is in the process of exiting; and Retail and Marketing. Third Point owns a significant stake in Murphy and recently filed for Hart-Scott-Rodino approval to increase our position should we so desire. If Murphy pursues the steps outlined below, we believe its shares could be worth in excess of $90, an increase of about 60% from current levels.

We initiated our investment following a 3-year period in which Murphy’s share price declined by ~15% while the SPDR S&P Oil and Gas E&P Index appreciated by ~49%. We believe this lagging performance can be explained partially by Murphy’s disparate asset base, which makes the company complex and cumbersome to value. This issue has been exacerbated by management’s decision to repeatedly delay spinning off its retail business. Investors in Murphy have grown frustrated, particularly given the obvious merits of the spin due to the large multiple disparity between the retail business and the core E & P business.

We believe Murphy can take four easy steps to unlock the latent value in its lagging shares, and we have shared these proposals with Murphy’s management team previously:

1) Spin-Off Its Retail Business: Murphy’s retail business consists of a network of over 1,100 fuel stations, the majority of which are located on or near Wal-Mart store sites. The business generated EBITDA of $363 million in 2011 and has relatively low ongoing capital requirements, making it highly cash generative. On the company’s 2011 Third Quarter earnings call, management indicated they were evaluating a separation of the retail business. After 9 months of consideration, management recently said that they were not interested in pursuing a retail spin at this time on account of the unit’s “underperformance”.

We believe forgoing this accretive spin-off would be a major missed opportunity. Both public company comparables like Alimentation Couche-Tard, Casey’s General Stores, and Susser Holdings and a forecasted dividend yield analysis suggest the retail business would be worth $2.3 - $2.8 billion if separated into a standalone public company. A spin-off in this valuation range would be worth $12 - $14 per share.

At this point, it appears sentimental attachment by management and the Murphy family is driving a stubborn desire to hold onto these and other non-strategic assets, creating a significant drag on enterprise value. While we hope that reason and a desire to create shareholder value will prevail over sentimentality and inaction, we have filed HSR to keep our options open should our discussions with the board and management not bear fruit for Murphy’s owners.

2) Sell Its Canadian Natural Gas Assets: Murphy owns ~145,000 net acres in the Montney play in British Columbia. Investors may recall our description of the Montney opportunity in our Second Quarter 2012 Investor Letter’s discussion of our profitable investment in Progress Energy Resources. Western Canadian gas assets have become strategically valuable given the large arbitrage opportunity between LNG prices in Asia in excess of $15/mmbtu, and $1/mmbtu F&D costs in Western Canada. Encana recently sold 164,000 nearby acres in the Montney to Mitsubishi for C$2.9 billion, or ~C$16,000 per acre (adjusting for the present value of drilling carry). Applying this metric to Murphy’s acreage and attributing ~$4k per flowing mcfe/d for existing production would result in a value of ~$3.0 billion, contributing an additional $15 per share. Management has told investors previously that they would require $4.50 gas in order to resume drilling the asset, which may occur in late 2018 based on the current futures curve and assuming a $0.40 AECO/NYMEX basis differential.

3) Sell Its 5% stake in the Syncrude Oil Sands Project: In April 2010, ConocoPhillips sold its 9% stake in Syncrude for $4.65 billion. In April 2010, WTI crude prices were $84/bbl vs. $92/bbl currently. Assuming a similar purchase price, we believe Murphy’s Syncrude stake would be worth $2.6 billion, or an additional $13 per share.

4) Complete UK Refining Business Exit: According to management, this exit is currently tying up about $500 million in working capital.

These four transactions could generate pre-tax proceeds of $8.4 - $8.9 billion. Assuming 20% tax leakage on the two Canadian asset sales, we arrive at $7.3 - $7.8 billion in after-tax proceeds, or roughly $37 - $40 per share. Third Point estimates that the associated EBITDA with the assets sales is $750 million or ~20% of our 2013 EBITDA forecast for Murphy. Based on a current enterprise valuation of $10.4 billion, our analysis suggests investors are paying only $2.6 - 3.1 billion for the balance of Murphy’s assets, which we estimate could generate $2.9 billion in EBITDA in 2013.

This “new”, slimmed-down Murphy has tremendous upside. Based on May 2012 company guidance, new Murphy could grow production at a 14% CAGR from 2012 to 2015, with oil and oil-indexed gas making up over 85% of the production mix. This strong, “oily” growth profile is bolstered by an industry-leading Eagleford shale position, where Murphy has over 220,000 net acres, the majority of which are located in the oil and wet gas windows of Karnes, Dimmitt, McMullen, LaSalle, Atascosa and Webb Counties. Murphy also has a collection of cash-generative Malaysian assets comprised of high-margin oil and oil-linked natural gas production with several development opportunities.

Assuming new Murphy trades at an extremely conservative 3.5x EBITDA multiple, we estimate total value of $91 - $94 per share after these four steps are completed. We hope that management ultimately decides to take up our suggestions, and act on its own to benefit all shareholders. In any event, as mentioned above, HSR approval, once obtained, will provide us maximum flexibility with the position.

From Third Point's third quarter letter.


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