When Murphy Oil Corp. announced last month its intent to sell its three refineries and retail network in the United Kingdom, the company’s leaders explicitly stated why: to strengthen the firm.
Strengthening Murphy Oil, based in El Dorado, means narrowing its focus. The worldwide oil and gas company will emphasize two sides of the business, the upstream – exploration and production – and retail, meaning its more than 1,000 gas stations in the United States, many of them at Wal-Mart Stores.
In a conference call July 23 explaining the decision, CEO and President David Wood told industry analysts:
"It’s really very simple. The refining assets are marginal in size within Murphy Corp.’s worldwide portfolio and are no longer strategic for us. In 2009, these businesses contributed $4.2 million or just 0.5 percent of our bottom line.
"Upon closing of this sale, Murphy will emerge a stronger and more focused company. We will have two growth vehicles, a premier global upstream business where production has grown 15 percent in the last five years, and a top-quartile U.S. retail company … ."
"These two businesses provide a natural hedge for each other during times of high oil price volatility and thereby help mitigate portfolio risk," Wood added. "This planned sale would also reposition Murphy closer to an upstream peer group where we have always believed we are a natural fit. Over time, we see this comparative leading to an enhanced valuation."
In addition, Murphy will use sale proceeds to reduce debt, which Wood described as "already very low." Murphy, ranked No. 125 on the Fortune 500, last year reported $838 million in net income on $19 billion in revenue.
Earlier this month, the company announced that net income in second-quarter 2010 had jumped to $272.3 million compared with $158.8 million in second-quarter 2009. During the first six months of this year, Murphy’s net income totaled $421.2 million compared with $329.9 million during the first half of 2009.
Change in Strategy
Despite these strong earnings reports, Murphy Oil joins a number of other oil companies, including ConocoPhillips, in announcing plans to sell their refineries or convert them into terminals.
The reasons for the move out of the refinery business are several, oil industry experts said. Among them: low profit margins, greater competition globally, weak demand because of the recession and increased environmental regulation.
John Felmy, chief economist at the American Petroleum Institute, called refining "a real tough business to be in."
The "refining business has been a very poor business for a year and a half," he said. "Out of the last seven quarters, refiners have lost money five times."
"They made a bit of money last quarter as a group, but they still were only making about a profit rate of about 2 cents on the dollar," Felmy said. "That’s very thin margins.
"And that’s because it’s a very competitive business, and it’s competitive at a world scale. You have refiners, for example, in India that are basically building new refineries to export around the globe. It’s incredibly competitive.
"And when you have weak demand, for example, as what we’ve had here in the U.S., and fluctuating crude prices, you can’t always recover your costs."
Murphy’s three refineries are in Meraux, La., Superior, Wis., and Milford Haven, Wales, Great Britain. It owns 457 gas stations in Great Britain.
When Murphy Oil announced on July 22 its plans to sell the refineries and U.K. gas stations, it said it had received "unsolicited" inquiries about parting with the plants and expected to complete a transaction in first-quarter 2011. "We’ve had a number of parties that have expressed interest in our refining business before we started this here," Wood told analysts.
Eric Smith, associate director of the Tulane Energy Institute in New Orleans, said Murphy’s "refining margins are not the best. Its refineries are not the newest. And so their costs are relatively high."
"What’s happened over the last 100 years is that it’s become increasingly obvious that refining tends to be a commodity business where people compete based on technology and to a lesser degree on location," Smith said. "And if you can sell the oil without having to put the huge amounts of money that are necessary into refining, then it makes sense perhaps to do that."
Smith also cited increased regulation as a potential factor in Murphy’s move.
He pointed to "a hostile government, in the United States at least, which is intent on adding taxes on top of the existing operations and raising the entry fee – if you will, the membership fee – in terms of proposing cap-and-trade programs and things like that, which will definitely hurt the refining sector disproportionately."
Speaking of Murphy Oil and its thinking behind its new focus, Smith said, "They’ve said, ‘We’re never going to be the biggest refiner in the world. We don’t really make a lot of money doing it, and every dollar of capital we spend on these marginal refineries is a dollar we can’t spend looking for oil in Indonesia or Africa or wherever they want to look.
"So they’re running their company like a big portfolio, and they’re deciding that they don’t really need the refining and it costs a lot of money and they have a better use for the money somewhere else."
Tulane University, of which the Energy Institute is a part, has close ties to Murphy Oil. In 2007, Murphy Building Corp., a wholly owned subsidiary of Murphy Oil, donated the former Murphy Exploration Building and a parking garage in New Orleans to Tulane. In addition, Cathy Pierson, sister of Claiborne Deming, who at the time was Murphy’s president and CEO, once served as chair of the board of Tulane.
In discussing the oil company, Smith stressed that "I haven’t talked to anybody at Murphy, so I can’t really say that I know the insider story."
Smith noted, however, that the petroleum refining business is in "flux."
"I would say that overall we’ve lost something like 100 refineries since the last big buildup 20 years ago," he said. "And at the same time we haven’t lost any capacity. It’s just been a big consolidation game. So I think what’s happened with Murphy is Murphy said, ‘I can make more money and it’s simpler and cleaner to drill for oil internationally and sell the crude on the world market than it is to try to operate a refining and distribution system in the U.S.’"
Move Hailed
After Murphy reported robust earnings figures Aug. 4 and held its second-quarter earnings conference call the next day, several industry analysts issued reports expressing confidence in the company’s new direction.
Goldman Sachs, which will be advising Murphy Oil as it exits the refinery business, said in a report that "we continue to gain confidence that Murphy will become the first integrated oil [company] to receive credit for its North America resource expansion strategy."
Analysts for Deutsche Bank issued a "buy" recommendation for Murphy shares, saying in their report, "The focus for us remains the exploration programme in the second half … ."
Murphy Oil, which has more than 8,000 employees around the world, has deepwater oil wells in the Gulf of Mexico, the Republic of Congo and Malaysia, natural gas wells in Canada and Malaysia and a presence in the Eagle Ford Shale Play in South Texas.
In October, it announced that it had bought a corn-based ethanol plant in Hankinson, N.D., its first foray into bio-fuels. Wood, Murphy’s CEO, said at the time, "Given the current ethanol mandates and our subsequent blending needs, having more of a presence in the supply chain better balances our business."
In the Aug. 5 earnings call, Wood said the company had signed an intent-to-purchase agreement on a partially built ethanol plant in Hereford, Texas, expected to begin production in first-quarter 2011. He said these two plants would supply nearly 50 percent of Murphy’s ethanol needs.
Wood, who declined through a spokesman to be interviewed by Arkansas Business, told analysts after the company announced its planned departure from the refinery business, "Unlocking value is a key goal of mine.
"Exiting businesses is not new to our corporation," he said. "We’ve done it before, most recently in 1996 when we spun off our farm and timber interests into Deltic Timber Corp., which has prospered. I’m excited about the future of our company and see this sale as a way forward for an even brighter future."
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