Shares of Murphy Oil (MUR -2.90%) spiked last month after two reports emerged that could impact its future.
In early September, Bloomberg reported that Murphy Oil and two other companies were in talks to form a group to jointly bid for the opportunity to operate deepwater oilfields on Mexico's side of the Gulf of Mexico. The company is taking advantage of the fact that Mexico is finally allowing foreign companies to operate oil assets within the country after a 70-year monopoly in an attempt to offset production declines from its legacy oil fields. Mexico has already approved Murphy Oil to act as an operator if it wins an oil block. However, it is teaming up with the national oil company of Malaysia and a recently formed Mexican company that qualified as a financial partner. By joining forces, the trio can offset some of the risk as well as the costs of turning an offshore prospect into a producing field. Not only that but the Mexican government established high capital requirements for bidders, which is too much for producers to submit solo bids.
Murphy Oil is one of several U.S. oil companies that are teaming up to bid on upcoming deepwater leases in Mexico. U.S. oil giants Chevron (CVX -2.03%), ExxonMobil (XOM -2.29%), and Hess (HES -1.93%) have also agreed to team up for Mexico's next auction, according to an earlier report by Bloomberg. That report said that the trio reached a joint operating agreement, which allows Chevron, ExxonMobil, and Hess to coordinate the bidding on the 10 areas up for auction. That said, even if they win a bid, it could take several years and billions of dollars in investments before they produce a drop of oil due to the long lead time of deepwater drilling.
Aside from the potential Mexican joint venture, the other catalyst driving Murphy Oil higher last month was OPEC. The oil cartel agreed to cut and cap its output, which sent oil prices spiking and drove Murphy Oil's stock up more than 10% on the day of the agreement. The reason that agreement sent Murphy Oil's stock rocketing higher is that rising oil prices will provide a noticeable boost to its cash flow. Furthermore, an improving oil market will give the company the confidence it needs to make long-term investment decisions, such as joining in on the Mexican joint venture or sanctioning long-term development projects.
After spending the past year pivoting its business to survive lower oil prices, Murphy Oil is starting to look ahead toward growth. Like many producers, it has its eyes on Mexico because the country holds vast offshore resources, which is a sweet spot for Murphy. While the OPEC deal potentially makes that oil more lucrative, even if the Murphy Oil consortium wins drilling rights, it will be years before the Mexican venture creates value for shareholders.