Vietnam Discoveries And Tupper Montney LNG Sales Will Improve Future Prospects

Key Takeaways

• New oil discoveries and strategic international projects position Murphy Oil for production growth and revenue improvement.
  
• Financial stability from debt reduction and commitment to shareholder returns enhance earnings potential and shareholder value.
  
• Operational and project management challenges could lead to revenue volatility, impact margins, and strain financial resources if not effectively managed.

Catalysts

Operates as an oil and gas exploration and production company in the United States, Canada, and internationally.

• The recent oil discovery at the Hai Su Vang 1X exploration well in Vietnam and the planned appraisal well, along with future exploration in Côte d'Ivoire, suggest potential increases in reserves and production, positively impacting revenue growth.
  
• Ongoing deleveraging strategies, with significant reductions in debt since 2020, provide financial stability and potentially lower interest expenses, improving net margins and earnings.
  
• The strategic operations in Tupper Montney, with increased natural gas sales outside of volatile markets and proximity to expanding LNG projects, position the company to benefit from rising demand and prices, potentially boosting revenues and net margins.
  
• Capital allocation prioritizing development of high-return offshore and international projects, such as Lac Da Vang and Gulf of Mexico wells, supports oil-weighted production growth, expected to enhance revenue and earnings.
  
• The commitment to return capital to shareholders, evidenced by an 8% increase in cash dividends and substantial share repurchases, anticipates improved earnings per share while maintaining shareholder value.

Murphy Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Murphy Oil's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.6% today to 17.3% in 3 years time.
• Analysts expect earnings to reach $513.3 million (and earnings per share of $3.84) by about April 2028, up from $410.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $627 million in earnings, and the most bearish expecting $311 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 10.2x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 4.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Murphy Oil Future Earnings Per Share Growth

Risks

• Operational issues, such as mechanical failures and adverse weather conditions, have caused significant production downtime, which could lead to volatility in quarterly revenues and earnings.
  
• The company faced completion challenges in the Eagle Ford Shale, specifically with a revised completion design that underperformed expectations, potentially impacting future revenue and margins.
  
• The substantial capital expenditures planned for new development projects, such as offshore Vietnam and various exploration programs, might not realize expected returns if these projects face delays or cost overruns, which can affect net margins and cash flow.
  
• Given the significant spending on exploration and long-term development projects, any failure in exploration success or underestimation of costs could impact future earnings and strain financial resources.
  
• The company plans a high level of offshore workovers and development activity, requiring precise execution and management to maintain production levels; failures here can lead to revenue fluctuations and increased costs.

Valuation

• The analysts have a consensus price target of $34.412 for Murphy Oil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $51.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $513.3 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 8.3%.
• Given the current share price of $28.75, the analyst price target of $34.41 is 16.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.