Murphy Oil Considering Following Downstream Spin Trend

‘Everyone else is doing it’. Unfortunately, that line never worked for me as a child [it was always met with something like ‘if everyone else was jumping off a bridge…’ or ‘well, you are part of this family’], but apparently it is the new motto for integrated energy companies. Many players in the space appear to be operating with the same playbook as the trend over the past couple of years has been to separate downstream operations from the entity. Murphy Oil (MUR) is the latest to ‘see the light’ as the company announced that it is exploring its options for its retail operations in order to unlock its potential and to focus more on E&P. According to CEO David Wood, the retail operations’ value “is unrealized within the current corporate structure.”

Within its Refining & Marketing (R&M) segment, Murphy operates high volume/low-cost retail gas stations in 23 states, predominantly in Wal-Mart(WMT) parking lots. It has over 1,100 convenience stores in the US. The segment also includes two ethanol production facilities and wholesale marketing and trading operations. R&M profits improved nicely over the past year, $190.3 million in ’11 vs. $130.6 million in ’10, mainly due to better retail marketing margins. A table detailing important relevant metrics can be found in its press release. It is worth remembering that the margins in Murphy’s R&M business are thin, which isn’t surprising given its high volume/low cost business model. Very little room for error.

The stock moved up nicely on the news (reversing an earlier fall due to a quarterly loss) and it is interesting that the market still doesn’t seem to give the necessary ‘credit’ to these companies. Given the prevalence of spins/separations, I would guess (and hope) that most integrated companies have at least considered this type of move by now. While it seems Murphy is late to the game, it has slowly been shedding downstream assets.The company recently completed the sale of its 2 US refineries, but it has been unable to unload those assets in the UK. According to Mr. Wood, all options – including a spinoff, IPO or sale – are still on the table, but he expects a decision regarding the separation to be taken to the board in the middle of the year. We will keep you updated as more information is released.

Disclosure: Author holds no position in any company mentioned.