Murphy USA Innovates in Face of Possible Spinoff

In the wake of the sudden departure last month of Murphy Oil Corp.'s CEO David Wood, the future of the company's highly successful and evolving Murphy USA arm has been thrown into question.

Non-retail business for Murphy has been flat lately. Saying that the company's exploration sector has been spotty was "putting it kindly," said Fadel Gheit, a managing director and senior analyst at Oppenheimer & Co. Inc. in New York City.

The company has also been hurting over its failure to divest the last segment of its refinery business in Milford Haven, Wales.

"In the absence of an acceptable offer we are evaluating the potential conversion of the facility into a storage terminal," Wood was quoted in the June 3 issue of The Sunday Times of London.

Murphy's U.K. refinery business has been losing money for years. In 2011 the company lost $33.3 million in that market. Murphy posted an overall loss of $113 million on $6.8 billion in revenue for its fourth-quarter 2011 due to drooping production and oil recovery. Its first-quarter 2012 results were better, but Gheit said the company was nevertheless in a volatile position.

"They have been missing a lot lately," Gheit said, "more than shareholders can take."

Other analysts that cover Murphy were contacted but didn't calls by press time.

When the fourth-quarter loss was announced in January, Wood also said Murphy was considering spinning off Murphy USA, the wholly owned retail subsidiary that has piggybacked on Wal-Mart locations.

Murphy USA generates almost half of Murphy's total revenue and sells 2.6 percent of the country's total retail gasoline. Gheit said it's been one of Murphy's most successful ventures.

"It's generated free cash for many years," he said. "It's a very stable, very predictable business. It's very strategically positioned geographically."

The retail platform's strength is in a sale model similar to Wal-Mart's, where the profits come from an extremely high volume of product sold at a low margin. Gheit said this model has worked well. Since the kiosks are typically paired with Wal-Mart Supercenters, they gain widespread recognition with very little effort.

"It's very competitive," he said. "They have a captive audience. They don't have to do too much advertising. The concept is very, very good."

In January, Wood said he would be discussing the spinoff with the Murphy board of directors through the first half of the year.

So why would Murphy want to spin off half its revenue?

Back in January, Wood told analysts that the spinoff would "unlock the value" of the retail arm, claiming that it was "unrealized within the current corporate structure."

"You can spin it off to shareholders and it will still be in the family," Gheit said. "It will command a higher value to the shareholders."

A major spinoff isn't without precedent at Murphy. In 1996 the company spun off its timber assets into Deltic Timber Corp., a publicly traded company also headquartered in El Dorado and controlled by members of the Murphy family.

"There are rumors that David wanted to [spin off Murphy USA] immediately," Gheit said.

There was another rumor, he added, that there was resistance to the spinoff in the company. Perhaps it was true: Before the first half of the year was over, Wood was gone. His retirement was announced June 20, and he was immediately replaced by Steve Cossé, a board member who had previously served as EVP and general counsel.

In any case, Gheit said, Wood was "in the hot seat" thanks to Murphy's overall underperformance of late.

The last time Wood publically spoke of Murphy USA was in May, at the company's annual meeting for shareholders. He talked about new directions for the gas stations.

There would be changes to the ways the kiosks were structured, for example. Wood told shareholders that the company would be expanding the shops to include more snack and beverage space, as well as increasing the size of the pavilions themselves.

There have been recent changes to the company, too. During the past year, Murphy USA has entered social media in a big way, with a new website, Twitter feed, gas price comparison app and a mobile payment method. The company has also made forays into electric vehicle chargers.

For a sidebar on the ways Murphy USA has innovated in recent years, click here.

More significantly, Wood said Murphy would be pairing kiosks with retail stores other than Wal-Mart. Of the 1,128 Murphy USA stations, only about 100 don't share a parking lot with Wal-Mart, and of those 100, all but a few are standalone Murphy Express stores.

"Our retail business has reached critical mass," Wood said to investors in May. "It's a premium business."

Gone was the talk of "unlocking the value" of Murphy USA.

Whatever's going on with Murphy USA, the company has been mum. When contacted on the issue, it declined to comment, telling Arkansas Business to rely solely on the comments Wood made in May.