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STRATEGIC CAPITAL GROUP

Murphy USA (MUSA)Benedikt Kroll

Matt Rindelaub


Overview

Owner and operator of 1200 gas stations, operating since 1996. Recently spun out of the larger E&P parent company, Murphy Oil, in August 2013.

Partners will Wal-Mart to develop and operate gas stations in Wal-Mart parking lots

Operates in two segments: retail and ethanol. 90% of revenues come from the retail segment.

BUY Recommendation

Current Price: $39.82

Risk/Return: -15%/+55%

Catalyst: WMT Partnership

Market Cap: $1.86bn

Daily Volume: $16mm

L9M Revenue: $14.1bn

L9M EBITDA: $287mm


Competitive Advantage

High-Traffic Locations

Mid-Stream Assets

Wal-Mart Partnership

Advantage Description

85% of Murphy’s 1200 locations in the Southeast and Midwest are located on or near a WMT parking lot. As a result, Murphy locations obtain up to 2x the industry average in fuel volumes and significantly higher traffic than competitors

Murphy has partnered with Wal-Mart to provide Wal-Mart customers with cheap fuel and compete with gas offerings at Costco, Kroger, etc.Wal-Mart is intent on offering as at additional locations, where Murphy will be a preferred partner.

Murphy owns seven proprietary terminals as well as an ethanol refinery (another was recently sold).Murphy enjoys preferred shipper status on the Colonial Pipeline system, further allowing it to attain lower prices than competitors.


Future Opportunities

Additional Wal-Mart Locations

Value Description

200 additional stores

+330 bps margin

expansion

Reduction in Op. Expenses

Murphy has already contracted an additional 200 stores to be opened in partnership with Wal-Mart. As the low-cost provider, Murphy USA is also the natural partner for hundreds of additional locations in the Southeast and Midwest

Management is working on transitioning from a 280 sq. ft. kiosk to 1,200 sq. ft. stores.Margins for the larger format store are 16.5% versus 12.8% for the small format kiosks due to mix differences

The new, focused management team has already identified opportunities for outsourcing back-office functions in order to optimize operating expenses

Larger Store Format

Optimizing Overhead

$130mm

Murphy sold the first of its two ethanol refineries for $170mm (for a 47% gain on 2009 purchase price of $92mm)Murphy is looking to sell the second refinery. At $1.30 per gallon of capacity, the Hereford plant should be worth ~$130mm

Ethanol Refinery

Sales


Assumptions and Valuation

PT of $66/share based on comparables

Merchandise Margin Expansion

Revenue Growth of 7%

If we overlay the 5% store growth Murphy has already contracted with a conservative 2% of sales per store growth driven by inflation, revenue growth should be north of 7% annually.

Fuel gross margins should remain constant while non-fuel margins should expand 50bps as mix shifts away from cigarettes in the larger stores.

Projections lead to 2015 normalized EBITDA of $410mm. EV/EBITDA multiple established from trading levels of comparables CSY, ATD, & CASY.

EV/EBITDAIndustry 8.0x

2015 Normalized EBITDA $410mm

Enterprise Value $3280mm

Diluted PT per Share $66


Management

Significant Insider PurchasesWell-Aligned Management

The CEO, Andrew Clyde, is required to hold stock equal to 5 times his annual salary, while the CFO is required to hold 3 times his salary.Both have been buying shares in the open market to meet this requirement

Clairborne Deming, the former CEO and COO of Murphy Oil and current Chairman of both Murphy USA and Oil, bought $1.1mm worth of stock at a price of $45.Deming currently holds more than $25mm of Murphy USA stock.


Risks and Downside Valuation

Wal-Mart RisksFuel Margins

Being dependent on WTI, margins can be volatile and generally unpredictable. While all c-stores are exposed to this volatility, Murphy is particularly vulnerable because fuel represents such a large percentage of revenues.

An end of the partnership would greatly impact the company’s ability to build additional stores while negatively impacting volumes.This is highly unlikely since Wal-Marts need to provide cheap gas in order to compete with its major gas-offering competitors.


Risks and Downside Valuation

Replacement Cost: $38/share

Given Wal-Mart’s interest in maintaining gas stations close to its stores, Murphy USA should not trade at more than a 20% discount to replacement cost. It costs at least $2mm to build a Murphy USA site including land, giving a value of $2.4bn for Murphy USA’s retail locations.After the 20%, discount, we arrive at a $34/share floor value.

Replacement Value

Retail Location Value $2400mm

Ethanol Assets $300mm

Terminal Value $35mm

Net Working Capital ($152.8)mm

Enterprise Value $2600mm

Net Debt ($380)mm

Other Liabilities ($160)mm

Equity Value $2000mm

Replacement Value/Share $38


Catalysts

Increased Exposure

Continued Divestment of non-core

assets

Progress on store base expansion

End of the 2-year capital restrictions

Given the nature of its spin-off from a larger E&P company, MUSA is temporarily misunderstood and underexposed.Any incremental research on the company should increase MUSA’s exposure and cause its EBITDA multiple to expand to comp levels.

Having already sold its Hankinson plant at $170mm, the sale of the Hereford plan should yield another $130mm of cash for Murphy.Additional optimization of its terminal assets may identify additional sources of cash.

The margin expansion story should be more fully appreciated as it begins showing in MUSA’s financial statements. Additionally, Wal-Mart has indicated that it plans to add more promotion days in 2014 which should help with volumes.

Management has indicated that there is a two year restriction on returning capital to its shareholders.After this, MUSA will likely implement a dividend policy, causing further reevaluation of the stock by a wider investor base.

Presentations & Public Speaking

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