Murphy Oil Corp. (MUR) Buy: Adding Murphy Oil to Americas Buy List - Goldman Sachs - June 09, 2008
Source of opportunity
We are adding Murphy Oil to the Americas Buy List, with 24% total return upside potential to our revised $115 ($105 before) 12-month target price; the shares were previously Neutral rated. We believe Murphy shares will be major beneficiaries of our bullish crude oil view, as the company is also in the midst of a major E&P volume ramp-up at the Kikeh field in deepwater Malaysia. Finally, a revamped exploration program that is just kicking off provides additional upside optionality. We have updated our 2008-2012 EPS estimate for Murphy.
Catalyst
Key catalysts include:
(1) rising consensus EPS revisions, as the Street raises its oil price outlook;
(2) continued successful ramp-up at the Kikeh field and execution of other development projects (e.g., Horn River Basin, Sarawak gas);
(3) exploration drilling news starting with the important Buntal prospect on Block K in deepwater Malaysia (news likely in July).
Valuation
Murphy shares trade at 5.8X 2009E EV/DACF, essentially in line with its domestic integrated oil peers, despite having far superior growth over the next few years and competitive ROCE. Our $115 12-month target price corresponds to a 7.1X 2009E EV/DACF valuation and is based on the combination of asset value, cash flow and P/E valuation analyses incorporating our base-case WTI spot crude oil price deck of $108, $110, $120, $120, and $75 per barrel for 2008-2012 normalized, respectively. Notably, using current 5-year strip commodity prices into perpetuity results in a potential upside valuation of ~$180 for Murphy.
Key risks
Key risks include sustained lower oil prices, reservoir problems at Kikeh, and unsuccessful exploration. |
