Net-Zero Trends Will Diminish Oil Margins Despite Cost Cuts

Key Takeaways

• Heavy dependence on oil and gas, slow diversification, and global decarbonization trends threaten future revenue growth and margin stability.
  
• Operational concentration in mature, politically sensitive regions increases risk of asset impairments, regulatory burdens, and limits sustainable returns.
  
• Strong operational performance, disciplined cost management, and strategic capital allocation position Murphy Oil for sustained profitability and enhanced long-term shareholder returns.

Catalysts

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

• The accelerating global push for decarbonization and the adoption of net-zero policies by governments and major institutional investors is poised to erode the long-term demand for oil and limit capital access, which threatens Murphy Oil's future revenue growth and could impact valuation multiples as funding constraints emerge.
  
• Widespread market adoption of electric vehicles and alternative energy solutions is set to reduce the total addressable petroleum market over the coming decades, putting sustained pressure on oil prices and shrinking predicted sales volumes, undermining Murphy Oil's long-term top-line potential and ultimately compressing net margins.
  
• Murphy Oil's heavy reliance on upstream oil and gas, coupled with limited progress toward diversification or integration of renewables in its portfolio, leaves the company increasingly exposed to commodity price volatility, likely resulting in unpredictable revenue swings and limited visibility for margin stability over the long term.
  
• While the company touts cash cost reductions and operational efficiency gains, its continued concentration in mature or politically sensitive regions such as the Gulf of Mexico and Western Canada raises the risk of asset impairments, regulatory burdens, and escalating costs, jeopardizing both future net income and sustainable returns on invested capital.
  
• Long-term ESG scrutiny and the risk of stricter environmental regulations will drive higher compliance and litigation costs, heighten reputational risk, and restrict operational flexibility, ultimately pressuring Murphy Oil's earnings trajectory and undermining its ability to maintain competitive profitability into the next decade.

Murphy Oil Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Murphy Oil compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Murphy Oil's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.3% today to 12.6% in 3 years time.
• The bearish analysts expect earnings to reach $352.1 million (and earnings per share of $2.5) by about September 2028, up from $285.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, down from 13.0x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 2.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Murphy Oil Future Earnings Per Share Growth

Risks

• Strong production outperformance above guidance in core assets like Eagle Ford Shale and Tupper Montney, combined with improved well productivity and sustained inventory, supports a favorable outlook for revenue and long-term production stability.
  
• Significant high-impact exploration and appraisal activity across multiple continents, targeting more than 500 million to 1 billion barrels of unrisked resource potential, creates catalysts for large reserve additions and future earnings growth.
  
• Ongoing operational efficiency initiatives, including sustained reductions in general and administrative and bond interest expenses totaling over $700 million since 2019, are structurally lowering costs and driving improvements in net margins and free cash flow.
  
• Favorable capital allocation strategies with a near-term focus on share repurchases over further debt reduction, together with continued cost discipline and a nearly achieved net debt target, enhance per-share value and long-term shareholder returns.
  
• Direct physical connectivity to the LNG Canada facility and a robust hedging/diversification strategy in the Montney asset improve realized gas pricing and position Murphy to benefit from future structural increases in North American LNG demand, supporting profitability and cash flow.

Valuation

• The assumed bearish price target for Murphy Oil is $23.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Murphy Oil's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $37.0, and the most bearish reporting a price target of just $23.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $352.1 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of $26.07, the bearish analyst price target of $23.0 is 13.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.