Murphy Oil’s relative valuation
The below table shows different fundamental ratios for the S&P 500 (SPY) upstream companies, which have similar production mixes and overlapping geographical areas of operations.
Murphy Oil (MUR) has a much lower forward EV-to-EBITDA ratio of 4x when compared with industry peer Noble Energy (NBL), which has a forward EV-to-EBITDA ratio of 7x. Bigger players like Occidental Petroleum (OXY), Pioneer Natural Resources (PXD), and EOG Resources (EOG) have forward EV-to-EBITDA ratios of 9x, 10x, and 10x, respectively, which are also much higher compared to MUR’s ratio. So MUR’s valuation appears to be at the lower end when compared with its peers. The average EV-to-EBITDA ratio for the upstream industry is ~12.2x.
Even when compared with price-to-book or price-to-sales metrics, MUR appears much cheaper with numbers of ~0.63x and ~1.13x, respectively.
Why is MUR trading at a steep discount?
From the above table, one trend is clear. Companies with higher leverage or lower current ratios are trading at a discount to their book value, or have lower price to sales. A possible explanation to this could be a fear of an energy-driven debt crisis if commodity prices stay low or move further down for longer than anticipated. Also, given a path of rising interest rates at a time when energy companies are so indebted and are scrambling for access to capital, interest expenses for highly leveraged companies can rise further.
MUR is also trading at a steep discount to Noble Energy (NBL), which has higher leverage and lower current ratios. Possible explanations for this could be the absence of significant exploration discovery over the last few years, a stagnant production growth outlook, and thus a need for asset acquisitions, as we discussed in part two of this series.