As the market wades through the biggest portion of the latest earnings season, a lot of reports are giving investors reasons to feel encouraged, and if the market over the past week or so is any indication, even more bullish. Add to the mix the Fed’s interest rate cut last week and optimism on the trade front, and you have a lot of different factors working in favor of renewed bullish momentum as we move into the holiday season.
Last week Murphy Oil Corp (MUR) joined the growing cast of energy companies releasing much-better-than-expected earnings. The added announcement on Friday that the U.S. and China had reached a consensus on trade principles could give investors added fuel to start buying stocks that have been trading at or near historical lows such as MUR. The earnings beat is something that could give investors reasons to start pushing MUR, which is down nearly -30% over the last year, back up enough to reverse its long-term downward trend.
MUR is also an interesting company because, unlike most U.S. oil exploration and production companies, they have been actively working to move their operations out of the oil-rich but pipeline-restricted Permian Basin, focusing instead on offshore, deepwater drilling operations in the Gulf of Mexico. That’s a contrarian approach in the industry, where supply constraints out of the Permian are expected to start lessening in 2020. That could be a prescient bet if Permian pipeline projects that are expected to be completed in the coming months don’t work out, or if oil prices rise from their current levels as some industry analysts are predicting. Is the earnings beat, along with the improvements in the stock’s fundamental profile, enough to make the value proposition truly compelling? Let’s take a look.
Fundamental and Value Profile
Murphy Oil Corporation (Murphy) is an oil and gas exploration and production company. The Company’s exploration and production business explores for and produces crude oil, natural gas and natural gas liquids across the world. Its exploration and production activities are subdivided into three geographic segments: the United States, Canada and all other countries. It explores for and produces crude oil, natural gas and natural gas liquids around the world. This business maintains upstream operating offices in several locations around the world, including Houston, Texas, Calgary, Alberta, and Kuala Lumpur. MUR has a market cap of $3.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by about 2.9%, while sales improved by 21%. In the last quarter, earnings increased dramatically, by almost 71.5% while revenues increased by more than 15%. The company operates with a healthy margin profile that is showing increasing strength; Net Income was more than 47% of Revenues for the last twelve months, but increased dramatically to 133% in the last quarter.
Free Cash Flow: MUR’s free cash flow is negative, and has declined dramatically over the past year. As of the last quarter, it was -$1.8 billion versus about $1 billion in the third quarter of 2018. This remains a big red flag that I would prefer to see reversing before taking it more seriously.
Debt to Equity: MUR has a debt/equity ratio of .46. In the quarter prior, this number was .91, demonstrating a major improvement that is at least partially reflected by their balance sheet, where long-term debt dropped from $4.6 billion in June of this year to $3.2 billion in the last quarter. This could partially explain the decline in the company’s Free Cash Flow, as they have focused on debt repayment and elimination. Even so, liquidity remains a concern, as they also reported just about $435 million in cash and liquid assets.
Dividend: MUR pays an annual dividend of $1.00 per share, which translates to a yield of about 4.54% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MUR is $37.14 per share. That marks a big increase from the prior quarter, when it was $29.36, and at MUR’s current price, it translates to a Price/Book ratio of .59 at the stock’s current price. The stock’s historical average is .91. A move to par with the historical average would put the stock at just about $35 – more than 58% above the stock’s current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line on the chart above marks the stock’s downward trend from October of last year to its low at around $17 in September. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock rebounded sharply from that trend low, peaking at the 38.2% Fibonacci retracement line around $25 late in September before dropping back again to about $18.50 in mid-October. From that point, the stock mostly hovered until the company’s earnings report on November 1, which pushed the stock up to its current level around $22. Current momentum suggests the stock has room to run back to its recent peak at about $25; a break above that level could push the stock up above the 50% retracement line to about $27.50 per share. If the stock’s momentum reverses and drops below immediate support, which I expect to be around $20, its trend low at around $17 shouldn’t be too far off.
Near-term Keys: There are some very interesting improvements in MUR’s fundamental profile, such its radically strengthening Net Income, reduction in long-term debt and dramatically increased Book Value that lend credence to the idea MUR could be a very compelling value right now. My preference, however, would still be to wait to see a reversal of the company’s declining Free Cash Flow before taking a long-term position seriously. The stock is showing impressive short-term bullish momentum, however, and so an aggressive investor might consider using the stock for a short-term trade, using call options or buying the stock outright, with an eye on the near term to around $25 per share, or possibly to $27.50 if its upward momentum continues to increase. If that momentum reverses, look for a drop below $20 as a signal to think about shorting the stock or working with put options with an eye on the $17 price level for a bearish trade.