Murphy Oil Expanding Ethanol Footprint - If Price Is Right

Murphy Oil plans to grow its chain of 1,050 retail gas locations in the U.S. in 2010, despite significantly weaker margins realized in 2009. Chief executive David Wood also said on the fourth-quarter earnings call last week that the company was open to opportunities to expand its presence in the ethanol refining business.

In 2010, Murphy Oil (NYSE:MUR) is adding a combined 80 new gas stations to its network of Murphy USA sites, located at Wal-Mart supercenters, and its stand-alone Murphy express outlets. In 2009, the company added 26 new filling stations.

The integrated energy company derives about 69 percent of annual sales ($19 billion in 2009) from its U.S. refining and marketing operations. U.S. retail income fell 59.5 percent year-on-year to $92.2 million in 2009, as margins remained under pressure for most of the year. Wood noted on the call, however, that December "shaped up to be a good month." In addition, sales volumes remained steady at the 350,000 gallons per month range throughout the fourth quarter.

"A penny saved is a penny earned, " said Benjamin Franklin. Given the razor-thin margins of retailing operations, the purchase of the former VeraSun corn-based ethanol plant in Hankinson, North Dakota, last October made economic sense for the company -- especially since the $92 million purchase price (plus about $15 million in additional working capital) of the asset was below replacement cost price: original cost: $145 million -- estimated replacement cost (in my opinion): $200 million.

Of note, Wood said that the plant has been generating net income since operations were restarted last October.

The ethanol plant processes about 39 million bushes of corn, producing annual output of 110 million gallons of ethanol per year. As this volume only covers about a quarter of the ethanol-blended gasoline that Murphy sells through its own retail network, the company would entertain the acquisition of another plant or two, said Wood -- assuming facilities could be found on similarly attractive terms. Possible sites include ethanol plants owned by bankrupt Hawkeye Energy at Iowa Falls and Fairbank, Iowa.

With $1.1 billion in available cash and long-term debt of $1.35 billion amounting to only 15.7 percent of total capital employed at year-ending 2009, the company could afford to pay something more than "below replacement cost."