Murphy Oil Gives In – Will Spin Off Downstream Assets

After close to a year of deliberation, Murphy Oil (MUR) announced that its board of directors approved the spin off of its downstream subsidiary, Murphy Oil USA. The transaction is expected to be completed in 2013 and is a continuation of the process started earlier this year when Murphy announced that it was ‘considering its strategic options’ for its retail unit. As a result of the transaction, Murphy Oil will become a pure E&P play while Murphy USA will focus on the retail & marketing of petroleum products and convenience merchandise at gas stations. Murphy USA will also own seven product distribution terminals and two ethanol production facilities in the US.

According to the press release, a spinoff will offer the following ‘advantages’:

• Each business would focus on its strategic priorities with financial targets that best fit its own market and opportunities;
• Each business would be able to allocate resources and deploy capital in a manner consistent with its priorities; and
• Investors, both current and prospective, would be able to value the two businesses based on their respective financial characteristics and make investment decisions based on those characteristics.

In other words, the classic, vanilla spinoff reasoning. As this WSJ article notes, this announcement also represents another ‘win’ for activist investors. Dan Loeb’s Third Point recently unveiled a large stake in the company and one of its key points for improvement was a spinoff of the retail business. It can’t take too much credit though as the company had started the process long before Third Point’s involvement and even starting selling off non-E&P assets last year. Along those lines, the company also announced that it is considering its options for divesting its UK downstream operations as well.

The retail business operates on thin margins and I am interested to see the SEC filings. The good news is there will be an easy comp, as Valero Energy (VLO) announced this past August that it will also spin off its retail operations. Despite all the previous spinoff speculation, the market reacted favorably to the announcement and MUR is currently up over 9%. That might also be due to the company’s other announcements of a $2.50 special dividend and a $1b share buyback program. You know our bias here. The transaction is still subject to the necessary government approvals and we will keep you updated as more information is released.

Disclosure: Author holds no position in any stock mentioned.