Shares of Murphy Oil Corporation (MUR -0.52%) took off on Thursday, rising more than 12% by 10:30 a.m. EDT after the company agreed to form a strategic joint venture (JV) with Petrobras (PBR 4.64%) in the Gulf of Mexico.
Under the terms of the deal, both companies will contribute all their currently producing assets in the Gulf of Mexico. Murphy Oil will own 80% of the JV and will pay Petrobras $900 million to offset the difference in value. In addition to that, Petrobras could earn as much as $150 million in additional consideration if the JV meets certain conditions. Further, Murphy Oil will pay $50 million of Petrobras' costs if the companies approve a new project at the St. Malo Field.
The transaction will add about 41,000 barrels of oil equivalent per day to Murphy's total output. Further, given the oil-weighted nature of this production, it will increase the company's margins, especially since the oil fetches higher Gulf Coast pricing. Because of those high margins, the company expects the JV to generate meaningful free cash flow, some of which Murphy plans to allocate toward boosting its output from the Eagle Ford Shale.
This transaction is a needle mover for Murphy Oil because it will increase the company's oil production and cash flow. While that certainly makes it a more appealing option for investors, these oil stocks look like better buys right now.