LITTLE ROCK — Murphy Oil Corp. is still considering whether to spin off its Murphy USA gas stations.
Should it do so, the El Dorado-based company would be following in the footsteps of other integrated oil and gas companies. The move would separate its retail business from its exploration and production operations.
The possible spinoff would not be unusual, said Pavel Molchanov, analyst at Raymond James & Associates in Houston.
“What we’ve seen for many years now is integrated oil and gas companies have been seeking to become less integrated,” he said. “In other words, they have been selling, spinning off, and shutting off refinery assets and marketing distribution assets.”
Murphy’s plans to become less integrated became known in July 2010 when the company announced its plans to sell all of its refineries and British marketing business, Molchanov said.
“At the time, the company did not explicitly say it wanted to spin-off marketing, but obviously that was the start of the whole thing,” he said.
Murphy sold two of its U.S. refineries last year, but is having difficulty selling its Milford Haven refinery in Wales.
What’s motivating companies to separate their upstream and downstream operations is that oil and gas producers trade higher on the New York stock markets than refineries trade, Molchanov said.
Upstream operations involve exploration and production, while downstream refers to refining and the distribution of petroleum-related products.
So, by spinning off its refinery and marketing operations, Murphy Oil could gain a higher valuation on the stock market.
Murphy shares fell 15 cents on the New York Stock Exchange on Friday to close at $54.96. Over the past 52 weeks the shares have ranged from $40.41 to $65.60.
Another reason companies are spinning off their retail chains is because refining is a shrinking business because oil demand is in decline, Molchanov said.
“For a company like Murphy, they are looking at this declining industry and it’s entirely understandable that they are interested in getting out of it,” he said.
U.S. retail margins have also been weaker because of high gasoline prices and lower demand, said James Williams, an energy analyst and owner of the consulting firm WTRG Economics near Russellville.
In general, retail margins for fuel tend to be low because there are many companies in the market and it is easy for a new company to enter the retail business, Molchanov said.
“Those retail margins are slim, at the best of times they are slim,” he said.
In the retail business, companies boost their profit through the sale of goods at a convenience store.
Murphy USA opened its first gas stations in Tennessee in 1996. The company now has 1,143 stations in the U.S., with 1,008 of those adjacent to Wal-Mart stores.
Molchanov said Murphy’s partnership with Wal-Mart is beneficial because it draws in more customers.
In 2006, Murphy USA opened its first Murphy Express store, which is a convenience store with a gas station, and now has 93 Murphy Express locations in 11 states, according to the company’s website.
The company advertises low prices and high quality fuels on its website.
If the separation of operations were to occur, it would not have a big impact on Murphy’s current operations because the company is primarily invested in exploration and production, Molchanov said.
But Steve Cosse, the company’s new president and chief executive officer, appears to be taking a cautious approach to the spinoff, Molchanov said.
During Murphy’s second quarter conference call last week, Cosse said the company still does not know if it will separate the businesses.
“In the United States, we regard our retail business as a very good business,” Cosse said on the call. “However, the question remains whether it stays part of Murphy or whether it continues its growth as a stand-alone held directly by Murphy shareholders.”
He said that before the company decides what to do, it needs to address under-performance in its retail operations.
“Before we get to the spin, no-spin decision, we’ve got to understand this underperformance we saw in the first quarter,” Cosse said. “It improved in the second quarter, but still we felt like it’s under-performing its capabilities and really need to understand that and address what-why that is.”
During Murphy’s first quarter, the company’s refining and marketing operations had a total loss of $4.2 million. Downstream operations in the U.S. lost $7.2 million, but the company’s refining and marketing business in the U.K. produced a profit of $3 million.
During the second quarter, though, Murphy’s refining and marketing operations generated income of $80.5 million.
The company saw an improvement in its U.K. retail operations, and its U.S. downstream operations had a profit of $73.3 million.
Murphy reported total second-quarter net income of $295.4 million — a 5.2 percent decrease from last year’s $311.6 million. The company’s revenue of $7.2 billion was a decrease of 2.8 percent.
“If you look at an exploration and production company, which is primarily what we are, with the upstream business, it is a little different fit to have the retail part with it,” Murphy spokesman Barry Jeffery said. “It’s two different businesses and you look at it to see if they do better together or on their own.”
Business, Pages 27 on 08/11/2012