Murphy Oil Corporation (NYSE:MUR) was up over 5% last week on the news that Third Point believes the Murphy’s shares should be 60% higher. Although Third Point does not have an activist stake, and only owned 1.5 million shares at the end of 2Q, they are taking an activist role.
Coming off a successful activist battle with Yahoo, that got the fund a board seat, Third Point’s Dan Loeb outlined in a shareholder letter earlier this week key changes to be made by Murphy that could unlock value for its shareholders, such as a spinoff of its retail business or sale of its Canadian natural gas assets. Third Point notes that Murphy’s disparate asset base makes the company cumbersome to value.
Loeb is mainly pushing for the sale of Murphy’s retail segment—its fuel stations—which would bring it closer to completing the process of shedding its downstream operations—see more how to play oil, both upstream and downstream.
Another notable company spinning off its retail segment is Valero Energy Corporation (NYSE:VLO). Valero is in the process of spinning off its retail business and could get more than $3.5 billion for it. A few other smaller integrated oil companies have made the same split include Marathon Oil Corporation (NYSE:MRO), who is spun off its refining arm Marathon Petroleum, and ConocoPhillips (NYSE:COP) separating from Phillips 66 earlier this year.
Big name fund manager, Steven Cohen, who owned shares of Murphy at the end of 2Q also owned Valero, having upped his stake over 1800% from 1Q. Valero should benefit from higher exports and hydro-cracker projects. The company spent $3 billion on capital investments in 2011 and will spend $3.6 billion in 2012. The strategic initiatives from this spending should drive EPS to meet ($5.04) 2013 estimates, up from ($3.80) 2012 estimates.
Marathon’s 2011 production was down 7% in 2011 due to shut-ins in Libya. The company is spending aggressively to fund growth projects now that its downstream operations have been spun-off. The new exposure to upstream projects in international markets should help drive Marathon’s growth, with expected topline growth of 4% next year. Unlike Murphy’s convoluted asset base, Marathon’s streamlined asset base, with 75% oil, is one of the more diversified portfolios among its peers.
ConocoPhillips is one of our 10 high-dividend stocks that could afford to pay you double. ConocoPhillips is also a favorite of big name fund managers, including Warren Buffett and Bill Miller. ConocoPhillips began trading as a standalone exploration and production company earlier this year. The company plans on finishing up a three-year portfolio optimization plan, and plans to spend $15 billion on CapEx this year. ConocoPhillips looks to grow production 3-5% per year through 2016.
One of the other big-time names in the sector is Chevron Corporation (NYSE:CVX). The company has been working through downstream restructuring to make its operations smaller and less complex. Chevron is looking to reduce its refining footprint and focus on large upstream projects with higher margin potential. The company is also working on liquid natural gas projects in hopes of building a top gas position in Asia. Chevron’s refocused initiatives will drive EPS to $14.60 in 2013, compared to $13.55 in 2012.
At 1.5 million shares at the end of 2Q, Third Point is currently not the largest shareholder of Murphy among the funds we follow. Steven Cohen of SAC Capital topped Third Point, owning 4.8 million shares—a 19% increase from 1Q. Compared to other peers, Murphy does trade at a rich valuation on a P/E basis, at a 14 P/E, versus a peer average of 11.5. This is in part due to the slight run-up in Murphy’s shares due to Third Point’s comments. On a P/S basis, it trades on the cheap side, with a P/S of 0.4, versus its peers of around 1.0. We believe that Murphy’s could pose a solid investment assuming that it can actually follow through with reducing its retail business and focusing on its non-retail operations. Murphy’s pays a 2% dividend—which has grown 10% over the last five years—for those who choose to wait.