Taking a quick glance at the year-to-date performance of hydrocarbon exploration specialist Murphy Oil (MUR), the narrative doesn’t seem particularly enticing. For one thing, crude oil prices have been relatively muted, even accounting for early April’s surprise production cut by OPEC+. Therefore, it’s not terribly surprising that MUR stock slipped nearly 10% since the January opener.
Another factor to consider is the debt ceiling fiasco. As Barchart contributor Rich Asplund remarked, the equities market printed red ink on Tuesday as negotiations continue about raising the debt ceiling. On Monday, President Joe Biden and House Speaker Kevin McCarthy discussed matters and while the two called their talks productive, an agreement remains elusive.
Still, a bigger question that doesn’t seem to get much press is, what happens if the debt ceiling ultimately is raised? Whatever decision materializes, MUR stock might perform relatively well.
MUR Stock Might Be an Overlooked Opportunity
With so many distractions at hand, from national debt concerns to stubbornly high inflation to geopolitical flashpoints, investors will be forgiven for not spending too much time pondering about MUR stock. Nevertheless, for those interested in staying in the market through this tumultuous cycle, Murphy Oil could offer an intriguing platform of speculation.
First off, Murphy delivered the goods for its first quarter of 2023 earnings report. According to Zacks Equity Research, Murphy posted adjusted net income of $1.24 per share, beating Wall Street’s consensus estimate of 95 cents by a staggering 30.5% margin. In addition, the bottom line improved by a dramatic 69.96% from the year-ago quarter’s earnings of 73 cents.
On the top line, Murphy rang up sales of $842 million, beating the Street’s consensus target of $754 million by another impressive margin of 11.6%. Further fueling optimism for MUR stock, revenue increased by 52.25% on a year-over-year basis (from $553 million nominally).
Notably, Zacks pointed out that Murphy produced 172,508 barrels of oil equivalent per day (BOE/D) in the reporting quarter, comparing very favorably to the 141,007 BOE/D in Q1 2022.
Encouragingly for prospective investors, MUR stock represented a highlight on Barchart’s screener for unusual stock options volume. Following the close of the May 23 session, volume reached 5,386 contracts against an open interest reading of 21,259. Further, the delta between the Tuesday session volume and the trailing one-month average metric came out to 379.61%.
Drilling into the details, call volume hit 5,350 contracts while put volume landed at only 36. This pairing yielded a put/call volume ratio of 0.01, on paper favoring the bulls. Additionally, the broader fundamentals appear quite favorable for MUR stock.
Murphy Oil May Be a Beneficiary No Matter What
Imposing a dark cloud over the global capital markets is of course the ambiguity over the debt ceiling. Arguably, the sensible solution is to raise the limit; otherwise, both Democrats and Republicans can suffer significant damage for letting partisan bickering create severe consequences for the American people.
As NPR pointed out, folks on Wall Street acknowledge that “a debt default would be devastating for markets and the economy, and most investors believe lawmakers will eventually clinch a deal as they have in the past.” One of the main concerns of course is that the economy could slip into recession. And some experts argue that failure to raise the limit might spark another global financial crisis.
To be fair, it’s difficult for anyone to guide worst-case scenarios. The U.S. has never defaulted on its debt and now wouldn’t be a great time to start such a trend.
Under a recessionary (i.e. deflationary) environment, MUR stock will probably suffer a sharp blow. However, it’s also possible that eventually, the hydrocarbon energy sector will rebound. For one thing, people desperate to keep their jobs will hit the roadways. Almost surely, employers generally will not be in a mood to extend work-from-home privileges at a time when maximum productivity per capita would objectively be needed.
Second, geopolitical factors such as another oil production cut could spike oil prices. Therefore, MUR stock may rise even if no deal is found.
However, what happens if policymakers agree to raise the debt ceiling? While such an action wouldn’t be inflationary in and of itself, Republicans do have a point about concerns of fiscal irresponsibility. If policymakers believe they can always raise the limit as a last resort, they might do so indefinitely.
As the Federal Reserve Bank of St. Louis pointed out, “[a] continuing debt issuance not met by a corresponding growth in the demand for debt is likely to show up as a higher rate of inflation.” Therefore, it’s possible that an agreed-upon solution could lead to inflationary dynamics longer term.
In this scenario as well, MUR stock might benefit as energy is a necessary purchase.
An Undervalued Trade
In full disclosure, the Barchart Technical Opinion indicator rates MUR stock as a 64% sell. In addition, its 60-month beta clocks in at a lofty 2.37, indicating far higher volatility than the benchmark S&P 500 index.
Nevertheless, for contrarian investors, MUR stock might be intriguing because of its value proposition. Right now, the market prices MUR at a trialing-year multiple of 5.74. However, the oil and gas production and exploration sector prints a trailing multiple of 20.68. Even against forward profitability projections, the sector’s multiple stands at 8.58. Thus, Murphy Oil could be a great deal for the bold.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
