(By Balaseshan) Brean Capital LLC analyst Raymond Deacon upgraded the rating of Murphy Oil Corp. (NYSE:MUR) to "buy" from "hold" with a $73 price target.
Deacon likes MUR's new strategic moves announced yesterday that indicate an intent to maximize value and optimize capital allocation.
MUR has approved a plan to spin off its U.S. downstream subsidiary, Murphy USA, into an independent and separately traded company (which he estimates has a value of $2.3 billion), and announced a special dividend of $2.50 per share and a share buyback program of up to $1 billion of its shares of common stock.
Third Point's letter suggested that MUR should seek to unlock value by spinning off the retail assets (gas stations) for $2.3 billion to $2.8 billion.
If the analyst assumes $135 million of distributable cash flow (and a potential 7 percent yield) he gets a $1.9 billion value for the downstream (assuming a 32 percent effective tax rate and $80 million of capex for new stations and maintenance). The math implies a valuation of 6.7 times 2013 EBITDAX.
"That would be very accretive given that MUR trades at half of that level. The spin will not likely occur until mid-2013, if you are a crude bull and think retail margins will remain weak. We assume crude drops back to $85/bbl which is why our EBITDA is stronger than the first half run rate would imply," said Deacon.
The analyst said the special dividend is the most direct way to put cash into shareholder's hands. It also sends the message that the expansive exploration program may get tamed in a bit.
The company also noted it was difficult to make accretive acquisitions with crude prices at highs, Deacon noted. Lengthening the reserve life by accelerating its highest rate of return assets, Seal and the Eagle Ford, should be the focus.
MUR is trading down 1.30 percent at $62.91 on Wednesday. The stock has been trading between $43.29 and $65.60 for the past 52 weeks.