Is Murphy Oil Corporation’s (NYSE:MUR) Balance Sheet A Threat To Its Future?

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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Murphy Oil Corporation (NYSE:MUR) with a market-capitalization of US$4.3b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at MUR’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into MUR here.

See our latest analysis for Murphy Oil

MUR’s Debt (And Cash Flows)

MUR has built up its total debt levels in the last twelve months, from US$2.9b to US$3.7b – this includes long-term debt. With this growth in debt, MUR currently has US$286m remaining in cash and short-term investments , ready to be used for running the business. Moreover, MUR has produced US$1.3b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 35%, signalling that MUR’s operating cash is sufficient to cover its debt.

Does MUR’s liquid assets cover its short-term commitments?

Looking at MUR’s US$1.6b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$2.6b, leading to a 1.61x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:MUR Historical Debt, June 5th 2019
NYSE:MUR Historical Debt, June 5th 2019

Can MUR service its debt comfortably?

MUR is a relatively highly levered company with a debt-to-equity of 70%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MUR is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MUR’s, case, the ratio of 3.93x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MUR’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although MUR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MUR has been performing in the past. I recommend you continue to research Murphy Oil to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MUR’s future growth? Take a look at our free research report of analyst consensus for MUR’s outlook.
  2. Valuation: What is MUR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MUR is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.