Source: Murphy Oil Corporation Headquarters 2003. Now transferred to the company’s existing headquarter in Houston.

Investment Thesis

The Arkansas-based Murphy Oil Corp. (MUR) recently released its second quarter of 2020 results on August 5, 2020. Results were a little better than analysts’ expectations. However, revenues were down significantly due to the unprecedented slump in oil and gas price. The oil price realized this quarter was $22.89 per barrel.

The investment thesis is now complicated. Murphy Oil is an excellent E&P company – a major player in the Eagle Ford basin – that could be considered as a long-term potential. However, the oil sector has been suffering lately, and the struggle is not about to end soon. Thus, I recommend using MUR as a trading opportunity right now and avoid investing long term in the stock.

Murphy Oil – Financial Table 2Q ’20 – The Raw Numbers

Murphy Oil 2Q ’19 3Q ’19 4Q ’19 1Q ’20 2Q ’20
Total Revenues and others in $ Million 709.05 817.08 637.48 1,003.73 211.50
Net Income in $ Million 92.27 1,089.00 -71.72 -416.10 -317.18
EBITDA $ Million 435.31 552.03 291.84 -248.17 -142.69
EPS diluted in $/share 0.54 6.76 -0.47 -2.71 -2.06
Operating cash flow in $ Million 191.28 572.16 335.30 392.66 -24.48
CapEx in $ Million 1,601.09 350.67 334.49 376.13 213.11
Free Cash Flow in $ Million -1,286 221 1 17 -238
Total Cash $ Billion 0.33 0.33 0.31 0.41 0.15
Long-Term Debt in $ Billion 4.19 2.78 2.80 2.97 2.96
Dividend per share in $ 0.25 0.25 0.25 0.125 0.125
Shares outstanding (diluted) in Million 169.27 160.98 154.92 153.31 153.58
Oil Production 2Q ’19 3Q ’19 4Q ’19 1Q ’20 2Q ’20
Oil Equivalent Production in K Boe/d 196.2 195.1 193.9 185.8 167.7
US Onshore Crude oil price ($/b) 64.17 58.80 57.18 46.46 21.42
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Sources: Murphy oil release and Morningstar.

Note: Revenues and others include gain/loss on crude contract and gain on sale of assets.

Analysis: Revenues, Earnings Details, Free Cash Flow, Debt, And Oil & Gas Production

1 – Total Revenues and other were $211.5 million in 2Q ’20

Murphy Oil reported a second-quarter 2020 loss of $2.06 per share. The company generated total revenues of $211.50 million. Oil revenues were $285.75 million. The second-quarter 2020 adjusted loss was $0.71 per share.

Roger Jenkins, President and Chief Executive Officer, said in the conference call:

“I’m sure we can all agree that it was not typical, but our company swiftly took multiple actions to ensure that when we emerge from the downturn, we’ll be a more resilient company. We rapidly reduced our capital spending for 2020 and in our long-range plan.”

In the second quarter, Murphy Oil’s total costs and expenses were $585.7 million.

2 – Free cash flow was a loss of $238 million in 2Q ’20

Note the generic free cash flow is cash from operating activities minus CapEx.

This amount is significant to evaluate if the company can afford expenses such as the dividend.

In the case of Murphy Oil, the free cash flow was a loss this quarter of $238 million in 2Q ’20 and a profit of $1 million yearly (“TTM”).

Thus, the company is not generating free cash flow and, therefore, cannot support a dividend. Despite cutting the dividend by 50% last quarter, the current payout represents $77 million annually.

3 – Production in K Boep/d was a total of 167.7 Boep/d in 2Q ’20

The company produced 167,667 Boep/d in the second quarter, with oil representing 58.4% of the total output.

Production Per Region.

Below is how it is spread between oil, NGL, and natural gas.

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On the project side, the company announced that the fabrication of King’s Quay Floating Production System remains on track despite COVID-19 limitations, and is expected to close in the third quarter of 2020.

Source: Presentation

The current hedging position has been increased this quarter:

4 – Net Debt under control

At the end of June, debt is now ~$2.81 billion, and the total liquidity of the company was $1.6 billion.

David Looney, CFO, said in the conference call:

“Our next debt maturity isn’t until mid-2022 with approximately 80% of our senior notes due in 2024 and thereafter. With the market shift earlier in the year, we opportunistically repurchased $19 million of senior notes with $12 million of cash in the first half of the year.”

Source: MUR Presentation

5 – Guidance 3Q ’20 and for H2 2020

Source: Presentation

Production is expected to go down in 3Q ’20 to a range between 153 and 163K Boep/d. MUR has reduced its CapEx to now $700 million (mid-point).

Conclusion And Technical analysis

Murphy Oil owns a great upstream portfolio and manages a promising project pipeline in the United States and internationally.

One good move implemented by the company is good cost-cutting initiatives matching the severity of the downturn in the oil sector. It is such an independent E&P that can offer some potential for the long term, in my opinion. However, I believe the industry will experience more headwinds in the next few months, and investors will have an opportunity to buy the stock at a good discount and potentially around $10.

Technical Analysis (short term)

MUR is showing a descending triangle pattern with line support at $12 and line resistance at $14.80. Looking at the RSI, we can conclude that support is reliable at $12. However, if oil continues to weaken, MUR may experience a support breakout with a retest of $9 as new lower support of a potential descending channel pattern. On the other hand, depending on the oil prices, we could see MUR break out support.

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Thus, the short-term strategy is to eventually buy at support around $12 or a little lower and finally take some profit between $14 and $15.

If oil prices show strong momentum, MUR could eventually reach its 200 MA at around $15.75-$16.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.