Pick Murphy Oil For Long-Term Gains

December 18th, 2020 by Trefis Team
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Trefis
RDSA: Royal Dutch Shell logo
RDSA
Royal Dutch Shell

After OPEC’s decision to continue with production cuts in January and the release of Pfizer’s vaccine, crude oil prices observed an upward trajectory. Subsequently the shares of Murphy Oil (NYSE: MUR) surged by 70% in hopes of a quick macroeconomic rebound. Trefis believes that there is more room for growth in Murphy Oil stock at the current level of $13 supported by EIA’s (U.S. Energy Information Administration) forecast revision for 2021 and the stock remaining down by 50% since the beginning of the year. Our interactive dashboard analysis highlights Murphy Oil’s stock performance during the current crisis with that during the 2008 recession.

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 64% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

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In contrast, here’s how MUR and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Murphy Oil Stock vs S&P 500 Performance Over 2007-08 Financial Crisis

MUR stock declined from levels of around $63 in September 2007 to levels of around $36 in March 2009 (as the markets bottomed out), implying MUR stock lost 43% from its pre-crisis level. It recovered post the 2008 crisis to levels of about $47 in early 2010 – rising by 30% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Murphy Oil’s Fundamentals are likely to improve in the coming quarters

MUR’s Revenues grew by 56% from $1.8 billion in 2016 to $2.8 billion in 2019, driven by rising benchmark prices and production volumes. The company’s margins also improved, resulting in a sharp increase in earnings per share in 2019. Recovery in benchmark prices and growing production volumes led to a sequential improvement in third quarter revenues and earnings. Considering the declining trend in commercial crude oil inventories, we expect Murphy Oil’s fundamentals to improve in the coming quarters.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Going by the historical performance and in view of declining crude oil inventories, we believe that the stock will observe a long road to pre-Covid levels supported by an improving top line and strong cash position.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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