CA - Murphy Oil: An Offshore Discovery Heads Towards Production

2023-11-27 13:21:22 ET

Summary

• Murphy Oil Corporation has made a successful discovery in Vietnam that could add 30,000 to 40,000 BOED to its production.
• The company's lease holdings in Vietnam have the potential to become a major source of income in the future.
• Murphy's onshore business in the United States generates cash flow for its offshore operations and has the potential for growth with operational advances.
• Murphy is excellent at controlling the risk of the offshore business.  The partnership with Exxon Mobil in Brazil has tremendous upside potential.
• Murphy Oil has one of the best balance sheets for a small player in the offshore business.

Murphy Oil Corporation ( MUR ) is one of the few companies that I follow that is doing business in Vietnam . That business has resulted in a discovery that is now proceeding towards production. Management stated that this project was dormant for some time. But evidently it is now attracting attention. That is probably because Vietnamese politicians believe that more money is better than no money (which is where they were). They just took some time to figure it out. That new attitude now goes double for investors, as this is one of the faster moving managements in the business.

This discovery could add 30,000 to 40,000 BOED to the company's total production in the future (probably like 2026 give or take). Management also has other leases that may provide upside potential at some point.

The company has actually been active in this area for several years and has several years of dry holes to show for it before there was a successful discovery. Now with other fields nearby, the next set of exploration wells should have lower risk. These lease holdings have the potential to become a major source of income in the future.

Murphy is one of the few companies I follow that is doing business in Vietnam. The advantage of this business is that the country badly wants United States companies in all sorts of industries and probably has as wide open a door to meet that goal as you can possibly have. There are mostly political reasons that the United States companies do not go there quite like they do elsewhere in Asia and Africa. But the country is incredibly stable and about as favorable to United States companies as you can get.

Anytime something like this happens, the company that is successful in an area like this often succeeds with a little less competition than elsewhere. This is a Murphy trademark. It is part of their strategy to reduce risk. The ironic part is that management pointed out in the conference call that there is a lot of infrastructure in place which also reduces costs.

Onshore Business

Murphy has quite a bit of business onshore United States. That business is generally used to generate cash flow for the offshore business as much of this is considered mature.

However, every now and then an operational advance leads to some growth and more Tier 1 acreage.

Management is showing how this business improved. This is one of many things that led to higher-than-expected production for the quarter. Something like this also usually lowers the breakeven point for these wells, as the costs often do not increase anywhere near the production improvement shown above.

In the current environment, a well that produces 100,000 anything (mixture of different oil and gas products) in the first few months, as shown above, is very likely to pay back in less than a year. Murphy is in an area that produces a decent amount of oil per well and so likely has an extremely profitable proposition.

The other thing this does is add more Tier 1 acreage to potentially produce in the future. A lot of drillers have been drilling the Austin Chalk as well as the Eagle Ford. This is an example of a very old interval (Austin Chalk) which has been producing "forever" to be revitalized by new production techniques.

If technology continues to advance, it is only a matter of time before more intervals become commercial. Investors need to remember that the unconventional business is relatively young. There are a lot of frontiers in the industry that are yet to be produced. As long as news like the slide above continues to happen periodically, the chances of us running out of oil are non-existent. Compared to when I was growing up, technology in the industry is advancing at many times the pace.

This rapid advancement of technology makes it harder for companies to overpay for an acquisition. All that needs to happen if a mistake is made, is the chart shown above. Then the overpayment part disappears. Now, that is risky or even gambling for advancements to continue. But technology improvements appear to be bailing out a lot of mediocre or worse deals.

Canada

Murphy Oil has a similar situation in Canada in that it has taken its Eagle Ford technology up to Canada with the expected improvement.

In a typical year, most companies generally show production improvements in the 10% range. What "juices" the return is an occasional fantastic year. Advantage Energy ( AAVVF ), for example, had an outlier year where they nearly doubled initial production that I covered a few years back .

All of these improvements often spread "like wildfire" through the service companies (most times). The second main source would be personnel switching companies. Generally, when one company shows an improvement of any kind, it is very hard to "keep a lid on it." Trying to patent the idea is even worse because the next advancement usually renders the patent obsolete quickly.

But the result is a steady improvement in well results with an occasional big jump in well results. As long as this keeps happening, some things like sand quality will not matter because companies are spending their money where there is the most production improvement.

If the sand quality is reasonable (but not the best), then most likely the well will be reworked with the latest technology to produce more. It is not reasonable to pay extra for the best quality sand when things are changing so fast. That is where the returns are right now. So, that is where investors should expect the company to spend money.

Offshore

Murphy is one of the smaller players offshore. It is one of the very few that I cover that can control risk effectively. Hence, the balance sheet is in good shape. Some others like Tullow ( TUWLF , TUWOY ) have had previous managements that effectively "bet the company," which left the current management in the position of improving the balance sheet.

The result of this is that Murphy has a thriving Gulf of Mexico business both in the United States and Mexico. This can make quarterly comparisons tough to figure out because offshore wells are expensive. So, a dry hole can make life very tough when investors are analyzing the results. Anyone who wants nice predictable quarterly comparisons can look elsewhere due to the size of the offshore projects.

Along with this, is the idea that offshore wells tend to be very large. So, the offshore business will usually grow in lumps. Maintenance also causes production comparison issues as a group of wells can go down for maintenance, which can magnify the effects of an offshore production well.

Murphy also controls the risk of the offshore business with solid partners. This company is partnered with Exxon Mobil ( XOM ) in Brazil. Ironically, Exxon Mobil has had really no luck in Brazil. This is the exact opposite of Guyana. That "luck" can change at any time. It is a risk of the offshore business. But Exxon Mobil is a good partner with a great reputation.

If the Exxon Mobil partnership should find oil in Brazil, the chances are that Murphy would likely become a takeover candidate at some point. For Murphy, the key is controlling expenditures so that an exploration effort like the one in Brazil which is high risk does not result in "betting the company" on any one outcome.

Summary

Murphy Oil can still grow its offshore business while engaging in riskier exploration wells. The key is that management knows how to control risk while still having exposure to a potential "home run." Management has several more projects it is evaluating at this time that can be found in the latest presentation.

The emphasis on a strong balance sheet with mature projects to generate cash flow allows this company "to take a flier" offshore. At some point, the well-chosen offshore exploration wells are likely to find "the big one." In the meantime, the company management makes sure that Murphy Oil gets as many tries as needed.

The timing of a big offshore discovery is necessarily uncertain. So is the erratic growth of the offshore business. But this is a solid company that is growing.

Because of the emphasis on growth and exploration, this is not suitable for income investors. The company does pay a growing dividend. But growth is the major driving company strategy. Therefore, this issue is for growth-oriented investors. The risk control and management emphasis on a strong balance sheet should mitigate some of the offshore volatility. However, the varying quarterly results that come with the offshore business are not for all investors. For those investors that can handle the volatile offshore business, this issue is a strong buy.

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