EUR 850.00 For Business Accounts Only

Morningstar | Divestiture of Malaysia Assets Buoys Our FVE for Murphy

On March 21, Murphy announced plans to sell its Malaysia subsidiaries, which amounts to a total exit from the region. The transaction will raise $2.1 billion in cash when it closes during the second quarter (with the potential for a further bonus of $100 million contingent on future exploration results in the region). This compares favorably with our previous valuation of $1.7 billion for the assets being divested. Accordingly, we are raising our fair value estimate to $23 per share from $20. The firm expects a gain on the sale of about $1 billion.

Management does not anticipate using any of the proceeds to augment its capital spending, as living within cash flows remains the primary goal. Instead, the cash generated will fund a $500 million share repurchase program expiring December 2020 ($300 million for the first tranche). The remainder will go to the balance sheet, either to reduce debt or to be held as cash. That includes $425 million to repurchase or redeem outstanding notes as well as $325 million bank debt (wiping clean the firm's $1.6 billion credit facility). Due to this deleveraging, we have updated our uncertainty rating to high from very high. This reflects the reduced sensitivity of the firm's equity to commodity price volatility.