Wednesday, October 17, 2012

Murphy Oil Takes Cue from Activist Third Point

Murphy Oil Corp. (Ticker: MUR) announced a reorganization of its business units, a special dividend and a stock buyback.  The actions can be viewed, at least partly, in anticipation of an activist push from Daniel Loeb's Third Point. 

The company said in a press release yesterday that it will spin off its downstream subsidiary Murphy Oil USA as a publicly traded company operating gas stations and distribution terminals.

The separation of the two units would allow each to focus its capabilities and capital on specific markets, while investors will be able to value each company separately and invest accordingly.

Shareholders will also receive a $2.50 per share dividend (amounting to $500 million), and the company plans to buy back as much as $1 billion in common stock.

These measures correspond fairly closely to suggestions Third Point made about Murphy in their third quarter letter to investors which mentioned discussions they've had recently with management regarding broad changes to the company's operating structure.

The letter said that Murphy's shares could rise around 60% if the company takes four steps. These comprise spinning off  the retail business, selling Canadian natural gas holdings, unloading a stake in Syncrude, and finishing a move out of U.K. refining activity.

These four steps, the letter said, could generate $8.4 billion to $8.9 billion pre-tax:

"Assuming 20% tax leakage on the two Canadian asset sales, we arrive at $7.3 - $7.8 billion in after-tax proceeds, or roughly $37 - $40 per share. Third Point estimates that the associated EBITDA with the assets sales is $750 million or ~20% of our 2013 EBITDA forecast for Murphy. Based on a current enterprise valuation of $10.4 billion, our analysis suggests investors are paying only $2.6 - 3.1 billion for the balance of Murphy’s assets, which we estimate could generate $2.9 billion in EBITDA in 2013."

On October 4 MUR issued a press release stating that they had recently met with Third Point and that, “The Board and management have been working to evaluate opportunities to illuminate the value in our stock price for the benefit of all of our shareholders.”

While Murphy did not mention Third Point in its release on the spin-off, it clearly fulfilled the first of the activist hedge fund's recommendations. At the same time, the release said it is considering actions that comport with Third Point's other suggestions: "Murphy also reaffirmed the plan to divest the U.K. downstream operations and stated that it is continuing to review possible options with respect to selected assets."

Third Point also revealed in its investor letter that it was seeking Hart-Scott-Rodino clearance from the Federal Trade Commission in order to provide them with the flexibility to augment their 1.5 million share position.  On October 10 Third Point was granted "early termination" from the FTC, clearing the way for Third Point to add to its position.

Posted by Paul Springer