Oil and gas producers seem to be shrinking. Companies like Murphy Oil (NYSE:MUR), Hess (NYSE:HES), and Newfield Exploration (NYSE:NFX) have all been divesting assets. It's usually worth checking out companies selling off large portions of their businesses. The process can sometimes produce a more valuable yet unrecognized investment opportunity. Could Murphy Oil, Hess, or Newfield Exploration be undiscovered bargains?
Just starting to slim down
Murphy Oil has just begun its downsizing process. The company spun off of a U.S. retail marketing operation to shareholders late last summer and is planning to sell its European refining business.
Murphy is reportedly looking to trim operations further by putting some Asian properties up for sale -- an appealing idea after Newfield Exploration and Hess saw strong interest in similar assets last year. While still only contemplating a sale, Murphy has plenty to work with. Its Malaysian operations account for a sizable 40% of the company's oil and gas production.
A Murphy Oil "breakup" value
One way to value a divestment situation is by using a sum-of-the-parts method. In Murphy Oil's case, there are three main oil and gas operating segments: Malaysian assets, Canadian operations, and U.S. properties. By valuing each segment separately using peer comparisons and then adding up the results, a company breakup value can be estimated.
For Murphy's Malaysian assets, Newfield Exploration's sale looks to be a reasonable comparison. Newfield's Malaysian properties produced around 7.6 million barrels of oil equivalent (boe) and generated roughly $822 million in sales last year. The purchase price of $898 million equates to a value of about $118 per boe of production, or about 1.1 times sales.
Murphy's Malaysian business produced about 29.7 million boe, generating revenue of approximately $2.3 billion in 2013. At a Newfield-like valuation, Murphy's Malaysian assets could be worth around $3.5 billion on a production basis, or $2.5 billion on a sales basis.
Murphy Oil also has significant Canadian operations, delivering 20.5 million boe and sales of $1.1 billion in last year. Canadian Natural Resources, a producer that generates nearly 70% of its product from Western Canada, looks to be a reasonable comparison. Canadian Natural's market value is equal to about $174 per boe, or 2.4 times sales. On an equivalent-worth basis, Murphy's Canadian business could be valued near $3.6 billion related to production, or $2.7 billion based on revenue.
Murphy's U.S. properties may be the most valuable, however. The company's holdings in the Eagle Ford shale play are very promising. Another Eagle Ford producer is Carrizo Oil & Gas, which has more than 70% of its proven reserves in the region. Carrizo, expecting total production to reach 10 million boe in 2014 with sales rising to $666 million, currently trades at roughly $230 per expected boe, or 3.4 times sales. Murphy's American properties could be worth about $4.7 billion based on production, or $6.1 billion from sales if given a like valuation.
On a sum-of-the-parts basis, Murphy Oil looks like it could be worth in the range of $11.3 billion to $11.8 billion -- a value not meaningfully different than the stock market's current assessment.
An asset-sale leader
Hess might be a more interesting investment consideration, however. After making nearly $8 billion in divestitures, the company is now focused on being a leading U.S. onshore oil producer -- mainly by exploiting its Bakken shale properties. The company is so optimistic on the region's potential that peak production guidance was increased to 150,000 boe per day for 2018 from a prior estimate of 120,000 boe per day for 2016.
If valued comparably to Carrizo Oil & Gas, Hess could be worth around $26 billion to $30.9 billion -- given its 2013 deliveries of 113.2 million boe generating $9.1 billion in revenue based on average sales pricing. That's a value roughly in-line with where the company currently trades.
This estimate may be too conservative, however. Hess Bakken production could be more valuable. Continental Resources, a leading Bakken producer, trades at a much higher 5 times expected sales. Hess shareholders may also benefit from a spinoff of the company's retail-marketing operation. That business could be worth an additional $1.8 billion based on a comparison with peer CST Brands.
A refocused bargain?
Newfield Exploration might offer the most compelling opportunity. The company, after the sale of its Malaysian business, is now concentrating on U.S. development. The Anadarko Basin in Oklahoma has the most potential. While only producing about 7.1 million boe last year, the area is expected to double output in 2014. Utah's Uinta Basin and the Bakken's Williston Basin hold other exciting fields. Uinta Basin production is expected to rise 5% in 2014; Williston Basin deliveries, which were up 40% last year, are looking to grow another 40% this year.
Newfield produced roughly 40 million boe in 2013 and expects around $2.2 billion in sales this year. Given an 80% discount to Carrizo Oil & Gas valuation factors, Newfield might be worth around $7.3 billion on a production basis, or $5.9 billion based on sales. This is noticeably higher than the company's current market capitalization in either case.
Why the discount to a Carrizo-like valuation? Newfield's significant production of less lucrative natural gas and its relatively high debt load suggest a meaningful discount could be justified -- although its field-development plans emphasizing more oil and the expected sale of Chinese properties helping to reduce debt might argue for a lesser cut. While some value concession is probably appropriate, each investor will need to decide the appropriate amount.
Companies that have undertaken large-scale divestitures like Murphy Oil, Hess, and Newfield Exploration can deliver shareholder value unrecognized by the market. While Murphy and Hess could have upside from current trading levels, Newfield might have the most to gain. Keeping an eye on companies going through a significant reorganization is usually a good idea. They sometimes present a potentially profitable buying opportunity.