Murphy Oil has announced that a subsidiary has signed a sale and purchase agreement to divest the fully issued share capital of its two primary Malaysian subsidiaries, Murphy Sabah Oil and Murphy Sarawak Oil, to a subsidiary of PTT Exploration and Production ('PTTEP'). PTTEP will pay Murphy US$2.127 billion in an all-cash transaction, payable upon closing and subject to customary closing adjustments, plus up to a US$100 million bonus payment contingent upon certain future exploratory drilling results prior to October 2020.
The transaction has an effective economic valuation date of January 1, 2019, with the closing expected to occur by the end of the second quarter 2019. Closing of the transaction is subject to customary conditions precedent including, among other things, necessary regulatory approvals. Under the terms of the transaction, Murphy will exit the country of Malaysia.
The year-end 2018 proved reserves (1P) net to Murphy were 816 million barrels of oil equivalent (Mmboe) of which 16 percent or 129 Mmboe were attributable to Malaysia. Of the 129 Mmboe of proved reserves, 70 Mmboe are characterized as proved undeveloped. The proved reserves are comprised of 468 billion cubic feet (Bcf) of natural gas and 51 million barrels (Mmbbl) of liquids. Total production net to Murphy in 2018 for the properties to be divested was over 48,000 barrel of oil equivalent per day (Boepd), comprised of 62 percent liquids.
PROCEEDS FROM THE TRANSACTION
Murphy intends to allocate the proceeds from the transaction to advance its strategic priorities. This includes returning cash to shareholders through share repurchases and strengthening the company’s balance sheet by reducing debt.
Murphy’s Board of Directors has approved a new $500 million share repurchase program, expiring on December 31, 2020, of which approximately $300 million is planned to be executed in the first tranche, with the remaining $200 million expected in the second tranche. In addition, the company intends to use a portion of the proceeds to pay down approximately $750 million of outstanding debt, with $325 million allocated to pay off Murphy’s senior credit facility to a zero balance and $425 million targeted to the repurchase or redemption of outstanding senior notes.
The company plans to continue its current oil-weighted strategy in both the Eagle Ford Shale and the Gulf of Mexico, while maintaining its focused exploration plan. To this end, $750 million of the remaining proceeds will remain on the balance sheet earmarked for U.S. oil-weighted opportunities through potential acquisitions and/or the funding of both deep water projects and U.S. onshore opportunities. The company will continue to employ a measured, disciplined approach to capital allocation that is aimed at generating the greatest value for Murphy’s shareholders.
Murphy expects to record a book gain on the sale between $0.9 billion to $1.0 billion, and plans to repatriate essentially all of the cash proceeds to the United States.
'After 20 years of successful operations in Malaysia, I am pleased to announce this all-cash transaction benefiting our shareholders by fully monetizing our proved and probable reserves. The tactical repositioning of Murphy allows us to simplify our business and focus on our core assets in the Western Hemisphere. The transaction will provide us with greater financial flexibility and allow us to continue returning cash to our shareholders through share repurchases,' commented Roger W. Jenkins, President and Chief Executive Officer. 'We would like to congratulate PTTEP on their purchase and we will support them in a smooth business transition over the coming months. I would like to thank our long-term partners in Malaysia, PETRONAS, PETRONAS Carigali and Pertamina. Most importantly, I would like to thank our committed Malaysian staff for their hard work and endless dedication to our company and we look forward to their successful transition to PTTEP,' Jenkins added.
NEW 2019 PLAN
The new 2019 annual plan reflects the company’s ongoing commitment to the goal of aligning spending within cash flows, while simultaneously returning cash to shareholders. The company’s previously announced annual production guidance was 202 to 210 Mboepd, of which 46 to 48 Mboepd was attributable to Malaysia. Murphy’s previously announced capital plan for 2019 was expected to be in the range of $1.25 to $1.45 billion, of which $106 million was attributable to Malaysia.
Beginning with the first quarter 2019 earnings release, the Malaysian operations will be reported as a 'discontinued operation' and classified as 'held for sale' for financial reporting purposes.
MULTI-YEAR PLAN
The company is well-positioned for long-term value creation. Following the Malaysia divestiture, $500 million share repurchase authorization and $750 million debt reduction, the company believes it can generate over $1.2 billion of free cash flow, before dividend payments between 2019 to 2023, when applying a $55 per barrel WTI flat price. Over the same time frame, it plans to generate approximately an 8 percent compound annual growth rate from its three core producing assets in U.S. onshore, Canada onshore, and North America offshore.
'Our strategy of delivering moderate production growth over the next few years while generating free cash flow above our planned dividend levels continues when applying conservative oil prices even following the risk-free monetization of our Malaysia assets. We will continue with our plans of investing in our high margin, oil-weighted Western Hemisphere opportunities, especially the Eagle Ford Shale and the Gulf of Mexico while maintaining our focused low-cost exploration program,' Jenkins added.
Bank of America Merrill Lynch served as advisor to Murphy on the transaction and Tudor, Pickering, Holt & Co. served as financial advisor to Murphy. Gibson, Dunn & Crutcher LLP acted as legal counsel to Murphy.
