Murphy Oil Corp. (MUR): Potential Malaysia/Brunei border resolution could boost shares - Goldman Sachs - August 16, 2007
News
Recent press reports indicate that Malaysia and Brunei are close to reaching an agreement that could end a multiyear maritime border dispute that has held up exploration in highly prospective deepwater acreage adjacent to Murphy’s large Kikeh field in deepwater Malaysia. Murphy currently owns a 60% working interest in what Malaysia calls Block L and a 70% interest in Block M, with Malaysia’s state-owned oil company Petronas owning the remaining interest on both blocks. Total and Hess own competing interests in the same acreage that was awarded by Brunei.
Analysis
Based on the resolution of other maritime border disputes in the region, including between Malaysia and Thailand, our base-case assumption is that a Joint Development Area (JDA) will be formed between the two countries. Our working assumption is that the JDA will be split 50%/50% between Malaysia and Brunei, though we are not privy to the details of the negotiations and the agreement could end up being very different from what we assume. In addition, it is possible that no resolution is reached despite the encouraging press reports.
Implications
We see the potential resolution of the border dispute as being most important for the shares of Buy-rated Murphy Oil. Shortly after being awarded Block L in January 2003, Murphy drilled the Lepu #1 well, with results being kept confidential. To our knowledge, Murphy has not written off the well, which in our view provides some encouragement that it may have made a discovery. Regardless, Block L appears to be highly prospective, with the large Kikeh field likely spilling onto its acreage. Our $80, 12-month target price (based on asset value, P/E and cash flow valuation analyses; key risk is sustained lower commodity prices) for Murphy ascribes no value for Blocks L or M. Our target price does include about $30 per share of estimated value for Block K, suggesting meaningful upside could exist for Murphy shares from Block L. |
