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Murphy Oil to separate retail, production units

Gasoline-spinoff plan sends shares up 8%

By Jessica Seaman

This article was published October 17, 2012 at 1:44 a.m.

motorists-fill-up-tuesday-at-the-murphy-oil-usa-station-at-23800-chenal-parkway-in-little-rock

Motorists fill up Tuesday at the Murphy Oil USA station at 23800 Chenal Parkway in Little Rock.

— Murphy Oil Corp. shares jumped 8 percent Tuesday after the El Dorado-based company said it would spin off its retail gasoline business.

After months of considering the prospect, Murphy said early Tuesday that it would separate its retail and marketing business from its more profitable exploration and production operations during 2013.

After the announcement was made, shares of Murphy peaked at $64.91, near the 52-week high of $65.60, before closing at $63.74 on the New York Mercantile Exchange. On Monday, the stock ended at $59.

Once the move is finalized, Murphy Oil USA Inc., a subsidiary of Murphy, will become an independent and separately traded company, while Murphy Oil becomes solely an exploration and production company.

“We look forward to these two separate well-positioned companies growing and prospering in their respective industries,” Steven Cosse, president and chief executive officer, said in a prepared statement.

“Our strong balance sheet provides the opportunity to enhance value to our shareholders through this special dividend and share repurchase program,” he said.

As an independent exploration and production company, Murphy will focus on its activities in the United States, Canada and Malaysia, where it has offshore projects.

It will also continue expanding its North America onshore operations, primarily in the Eagle Ford Shale in Texas, according to the news release.

Murphy Oil USA opened its first gas station in 1996. As of August, the company had 1,143 U.S. stations, 1,008 of which were next to Wal-Mart stores. There are also 93 Murphy Express outlets, which include a convenience store, in 11 states, according to the company’s website.

Murphy Oil USA’s assets also include seven product distribution terminals and two ethanol production plants, one each in North Dakota and Texas.

Murphy Oil Corp. said it has also authorized a special dividend of $2.50 per share for a total of about $500 million. It also announced a share buyback plan of up to $1 billion of the company’s common stock.

The company’s move to separate its operations will mainly boost the company’s value on the New York stock markets, said Leo Mariani, an analyst for RBC Capital Markets.

“I think they can unlock some value for shareholders by doing this,” he said. “I think separating these two businesses somewhat also improves the predictability of the E&P [exploration and production] business.”

The performance of exploration and production businesses is easier to predict than that of retail businesses because it mainly depends on production levels and the market price of oil, Mariani said.

Murphy’s announcement comes after activist investor Third Point LLC, a $9 billion hedge fund run by Daniel Loeb, urged the company earlier this month to sell various international assets and spin off its retail business.

In its third-quarter letter to investors, released Oct. 3, Third Point said investors were frustrated with Murphy’s delay in spinning off its retail and marketing business because of the benefits of such a move.

“At this point, it appears sentimental attachment by management and the Murphy family is driving a stubborn desire to hold onto these and other nonstrategic assets, creating a significant drag on enterprise value,” the letter said.

Murphy responded to Third Point’s letter on Oct. 4 in a news release that said the company recently met with investors, including Third Point, who have made “suggestions with regard to the Company’s portfolio.”

Energy analysts say Third Point’s letter influenced the timing of Murphy’s announcement despite the hedge fund’s owning less than 1 percent, or about 500,000 shares, of Murphy stock.

“Third Point’s recommendations probably influenced management’s decision and may have been the catalyst needed for Murphy to follow through on the spinoff,” said Stacey Hudson, an analyst at Raymond James & Associates in Houston.

Cosse, who became Murphy’s president and chief executive officer this summer, has taken a cautious approach to the spinoff.

During the company’s second-quarter conference call in August, Cosse said the company needed to address the underperformance of its retail operations before deciding whether it would separate its businesses.

Murphy’s refining and marketing operations reported a $4.2 million loss during the first quarter. In the second quarter, the unit reported income of $80.5 million, while the company’s total net income fell 5.2 percent from 2011 to $295.4 million.

In response to questions about the performance of Murphy’s retail business and the amount of influence Third Point’s letter might have had in the timing of Murphy’s announcement, a spokesman said in an e-mail, “The evaluation of where the U.S. downstream business best fits going forward has been ongoing for many months. The company is comfortable that the business is able to proceed as a standalone business.”

Upstream operations refers to exploration and production, while downstream refers to refining and petroleum retail operations.

Murphy’s upstream operations will benefit from the separation of the companies, according to a report released Tuesday by Pavel Molchanov, another analyst for Raymond James & Associates.

“As a quasi-E&P company already, Murphy’s retail business added a complication that was unhelpful from a multiple standpoint,” the report said. “More broadly, Murphy will be able to singularly focus its capital and management time on upstream operations — which suffered in recent years from frequent production shortfalls and exploration disappointments.”

The long-term value of Murphy’s shares will depend on better results from the company’s exploration and production operations, the report said.

Third Point’s letter also said Murphy should complete its exit from the refining business in the United Kingdom, and sell its Canadian natural-gas assets and its 5 percent stake in the Syncrude Canada Ltd. oil sands project in Alberta.

Murphy sold its two U.S. refineries last year but has struggled to sell its Milford Haven refinery in Wales.

The company said it is continuing its plan to shed its U.K. operations and that those assets will remain with Murphy Oil Corp. until they are “fully divested.”

Murphy also said it has hired an investment bank to evaluate options for its Canadian assets and its stake in the Syncrude oil project, the report by Raymond James & Associates said.

Murphy’s decision to spin off its retail and marketing business is part of a larger movement by oil and gas companies to become less integrated.

Marathon Oil Corp. and ConocoPhillips Co. recently have spun off their refining and retail assets.

Murphy first announced its decision to become less integrated in July 2010, when it said it would sell all of its refineries and British marketing businesses.

Companies are separating their upstream and downstream operations because exploration and production companies trade higher on the New York stock markets than do refinery companies.

Murphy plans to release its third-quarter earnings Oct. 31 and will hold a conference call at noon on Nov. 1.

Front Section, Pages 1 on 10/17/2012

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