Murphy Oil Corp (MUR) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the murphy oil corporation first quarter conference. At this time all participants are in a listen-only mode. Instructions will be given for the q&a session after the conference. If anyone needs assistance press star followed by zero. This conference is being recorded today april 25th, 2002. I would like to turn the conference over to claiborne deming, president and ceo of murphy oil. Police go ahead, sir.

Thank you. Welcome to our conference call. I'm joined by john eckart, our controller, mindy west, director of shareholder, and kevin fitzgerald. I will turn it over to mindy.

Thank you. We will be using our usual format. John will begin with a brief review of first kuwait results, claiborne will follow and we will have the q&a period. I need to remind everyone some of the comments made during this call will be considered forward-looking statements. As such, no assurances can be given these events will occur. There are a 72 vit of -- variety of factors that may cause results to differ. Many of these have been identified in murphy's january form 8 k filed with the sec. I'll turn it over to claiborne.

No, to john.

Sorry about that.

This is john. I was going to spend a few minutes talking about our results of operations as announced in the press release that came out yesterday. As announced our earnings were $2.5 million for the quarter. 6 cents a share. Compares to $97.8 million of earnings in the first quarter of '01 which equated to $2.16 last year. By segment. I should note that really all of the segments are down a bit. Good bit from where we were last year at this time. Our enp operations earned a little under $21 million for the quarter compared to $80 million in the first quarter of '01. Downstream operations generated a loss of about $14 million in the second -- in the first quarter of '02 we made $20 million last year in the first quarter. Our corporate interest and unallocated overhead and gna generated a cost of $4.5 million this year compared to $2.5 million last year. Speaking to the decline in enp earnings, it's probably clear in there, but it's primarily caused by a significant decline of about 65 percent in gas prices quarter-to-quarter in both the u.S. And in canada. So that was the significant piece there of the decline. Oil prices, I should note, are also off by about 13 percent worldwide. I will also note that our exploration expenses were up about $4 million from where they were last year in the first quarter. As particularly attributable to our malaysia operations where we had higher dry hole expense and get no tax relief based on those exploration costs at this time. I should mention our oil and natural gas production volumes are records. Both of those are records. We produced 74,000 -- nearly 74,300 barrels a day of oil. And 309 million cubic feet a day of natural gas. Those were atribe youthable to teranova coming on in january. Which added significant amount of oil production. Lady fern gas field in western canada was the cause of the increase in the canadian gas production. That was somewhat offset by lower u.S. Gas sales. Before I leave the enp area, i wanted to comment that you probably have seen that the u.K. Tax authorities have announced an increase in the tax on profits in the oil and gas business there. Even though it saves us taxes -- cash taxes this year of about $5 million we have estimated, on an overall income bases, it hurts our earnings by between four and $5 million based on our current projection production. Moving on then to our refining and marketing operations. The results there, as i mentioned before, were weak. As we had extremely poor refining margins in each of our three refining markets in the northern and southern u.S. And also in the u.K.. I'll comment briefly on the fact that our corporate earnings are -- corporate costs were a bit worse by about $2 million. And last year in the first quarter we had a good bit more interest income. We had more cash in the bank and generated based on a higher interest rate earned, we generated more interest income, which wasn't nearly as high this year. That's the primary reason for our corporate costs being down. That concludes my comments. I would like to turn it over to claiborne for operating comments at this time.

Thanks, john. What I will do is review drilling and upcoming wells. Talk a bit about production, talk about downstream and field any questions you might have. I'll start in the u.S. We are currently taking a core for our south discovery well. The reason I mention that it will be about a 30-day operation. We need it to further evaluate the reservoir because we are soon going to get after development drilling in the field. When that's completed, then we will use that rig, move it over and spread the qau train prospect which is in green vannon 382 likely around a 70-day well. Pretty long reach. It will take a little over two months. Secondly, we are looking at a rig that suddenly came available sooner than we thought, and we may spud the experience prospect as soon as we -- within the next three weeks. This is in green canyon 300. It's an af feed cost of around $15 million. It's a 80 to a 100 million barrel prospect. We currently have 100 percent. There's some likelihood that we could farm that down. Thirdly, cool popa which is a prospect in the mini-basin, a round front-runner located in green canyon's 336 and 380 is a pro sect that will operate by do minimummon will likely get an afe and spud that in the third quarter. 80 to a 100 million prospect. We have a 37 1/2 percent interest in that. 17 hands also upcoming wells. If a lease is awarded to us in the lease sale, we think we'll get it, mississippi canyon 2343. It's right below a die discovery we made last year. If it's awarded we'll likely spud a well there within two months. And prospect size and range of 80 to 100 bcf. We'll -- if we are fortunate there, make a discovery, we will develop that in connection -- conjunction with the discovery we already made. Lastly side winder, one I have mentioned from time to time we have 80 percent interest. It's in green canyon 25. And not firm but perhaps a third or fourth quarter spud there. In canada, the annapolis well offshore nova scotia respud on april 17th. Most of you have seen the news. We had a gist inkurd incursion which is above the objective. We should be down within the next 30 to 45 days. We will be a bit more careful with our casing program as we go down. We should, somewhere in the next month or month and a half. The western basin of canada, we will spud foothills wild cat at a prospect called store berg or swauns hill 3 to 500 bcf potential. $12 million u.S. Afe. We'll pay 30 percent for 35 and -- likely a june spud. It's a long well. Probably a five-month well. We won't have news until the end of the year. In the devonian play, we finished shooting proprietary 3 din three areas we previously purchased land in. Baeton river we have a 50 percent interest. The willow area where we have a 50 to 100 percent interest and the white man area where we have 50 to 100 percent interest. We'll spend the spring and early fall working up prospects. And begin drilling next winter freeze up. The big news on the exploration front is the dry hole prospect in the deep water malaysia. We encountered a lot of gas bearing stands above the thrust. Below the tluft we encountered low gas saturated sands that provide a sizeable commit. We probably have 3, 400 bcf in the well. Likely if you looked at a 2 p case they could get on up to a tcf. But that's not enough gas and we are looking for liquids, anyway. We decided to go ahead, lick our wounds, take the dry hole and move on to the next well. Now, to compound the problem, we had a mechanical failure in the ricer systems on sunday. And the contractor is going to need at least, a minimum of two weeks, probably more to effect a repair. There's a possibility, a strong possibility, in fact, we can't use this rig for several months. And so the next prospect which is called lias which is 150 kill om ters away, we may have to wait and spud that in the third quarter. Comments on balance. The northern end of the block which is where we just thrilled the dry hole is at least in our view diminished from a liquid stand poit. And now we are moving, as i suggested about 100 miles, 150 kilometers to the south to drill the next well. The clock is a little over 4 million acres. It's equal in size to the garden banks area of the gulf of mexico. Or the mississippi canyon area in the gulf of mexico. And this is the first well in it. So obviously we have a lot more work to do. We are disappointed, don't like it, but it himself early days and there's a lot more work to do. The production side we are currently producing awound 130,000 barrel equivalents a day. Oil is doing a bit better than forecast. However, lady fern should start seeing some decline about now. And then the second half of the year you should see a pretty rapid decline in the field. Our estimates are up in the range of 50 percent this year. In addition on the production front, which impacts really the second quarter, syn crude will experience a turn around in the coker in may and june. We will lose about 5,000 barrels a day there temporarily. We just met with shell about a week ago. They informed us they will only put one well on stream at habanera next year which will net us only 7500 barrels a day. We thought there would be two. There's not enough space on the platform to accommodate that. The second well will have to wait until 2004. Downstream business. Refinery margins are improved from the first quarter. Only had one way to go, that was up in the middle of february, for sure. They faltered a bit in the last week. Rose in the black barely. We were pretty good in the black two weeks, three weeks ago. Now we are just over break even. Superior, which is continued to be hurt by real narrow spreads on light heavy cruise is still losing money, not losing nearly as much, but still losing money. And wal-mart, however, which had a dismal first quarter is substantially improved and very nicely profitable right now. We have 420 stations in operation and our volumes are over 200,000 a month. That concludes my remarks, and I will now take any questions you might have.

Thank you, sir. Ladies and gentlemen, if you have a question, please press the star followed by one on your phone. If you would like to decline from the polling process press star followed boy two. You will hear a three-tone prompt acknowledging your selection. The questions will be polled in the order they are received. If you are using speaker equipment lift the hand set before pressing the numbers. The first question comes from tyler dann.

I'm on warner brothers records in case you need to know that. Tyler dann banc of america securities. How are you guys?

You're a rock star, man. laughter ].

Yeah. All right. Tell it to my heart. So the question I have, claiborne you mentioned right at the end, that you basically need to shave off about 7.5,000 barrels a day at habanero for next year I'm not mistaken?

Yes.

I assume that means you'll want to trim your guidance for next year?

Yeah.

Or did you just do that?

I'll tell you we built some slack into it so the number that I have pretty consistently used is 175 in '04. And I still feel pretty comfortable about that because there's a couple other spots we may have a bit more. As you know, ecuador will probably be less. The negative side. We have taken it from 100 to 75 gross. But I'm hopeful that everything will kind of offset and by '04 we'll be at 175. Next year will certainly, i think it was scheduled to come on stream the second half of the year.

Right, mid-year.

We'll lose 7500 barrels a day for half a year or 37, 500.

Okay.

To give you some comfort the field is 80 million barrels.

Right.

One well won't drain it.

Sure.

I don't care how prolific. So you have to have two. So it will happen. They just need a platform. So it will be delayed.

Okay. That's fair. Now, just a real -- I guess a comment then, if you could, on the annapolis developments. Can you give us a little bit more flavor as to kind of exactly, I mean obviously it was unexpected. But just a little bit more in terms of how severe the event that you experienced there was? Is and exactly what steps you are taking to try and remedy the situation there?

Tyler, yes. It was totally unexpected. It was a very significant well-controlled event that certainly caught everyone's attention and was a big event. Fortunately everything worked out wolfy. The bops worked and there wasn't any uncontrolled event. But certainly there was a very large influx of natural gas. Now, it was above the objective and what I have told people is that I wouldn't get excited one way or the other because I don't think it means anything. Now, I like it because it's the first time this has occurred in three wells so far, this being the fourth nova scotia shelf. So you have to say it's encouraging. Nonetheless, I would not draw any conclusions and I have not on it. I think it's in the nature of good news. I would leave it at that. Obviously the well we are drilling now that marathon is operating has got contingency casing programs in it. So we'll -- our goal, of course, is to be prepared for whatever we might encounter. I don't think it will happen again. It certainly was unexpected.

Okay. Well, anyway, thanks a lot for the update. I appreciate it.

Yes, sir.

Operate operate next question comes from steve enberg.

Petrie parkman. Hi guys.

Hi, steve. Claiborne, I just wanted to make sure I followed the rig difficulties in malaysia. The problem with ariser. Did you say minimum of two weeks, but then implication was this could be delayed several months? Could you go through that again?

Steve, it's ongoing. It happened last sunday. The well is plugged and abandoned by the way. No events at all. But the ricer parted and it's -- they have been in business for 35 years and ran our contract drilling plate when we had one, and this is just something new. And we will have to take a while, or the contractor is -- they made a press release yesterday afternoon by the way. They are better -- you're better served to talk to them about really what exactly and specifically happened. But it's going to take a minimum of a couple of weeks to try and see if we can retrieve the riser and kind of get back to status ". At that point, I think the decision has got to be look, we have, perhaps, many couple thou feet of damaged riser, are we prepared to move to another location and use damage riser or maybe riser which is suspect and the answer is probably not. They probably will have to take a couple of months and effect some repair on the riser so we have confidence as we go forward. It's brand-new. The rig was just refurbished. The riser was remanufactured. It was a massive failure. I don't know what caused it. Metal fatigue, anything sorts of things are in the real many of possibility. It will just be, I would suspect we'll spend two weeks solving something this problem, maybe more, and then the rig will go back to the ship yard and we'll do some work on it. Then we'll, perhaps, take the rig back in two months. Nothing has been decided.

I have you now. Do you have first call on that rig, or because of the windows that you guys had signed up for, is it possible you get delayed behind somebody else?

I don't think that we will, steve. But it's a moving target right now. They are trying to decide what to do. We are trying to decide what to do. Doing lots of talking, doing lots of meeting. It's really early days. Kind of breaking news. In the next week or so we'll decide on a course of action. There's a lot of decisions they have to make and we have to make ongoing forward. I suspect there's a possibility we'll end up with the same rig, and we'll go forward. Perhaps not.

Okay. And then gee logically, I know blias is a different plate type from begang. Are there other very separate plate types as you see it now beyond those two so that, you know, there are additional prospects to test really independent of what you might kind at blias?

Oh, yeah. Yeah. That trend that, of course we are right next to brew 9. There's a big sediment dump that occurs off the branai in the barometer delta. The said yimts continue fingering out are going out into deeper water. That's the area we are playing now. So blias is a four-way dip in that trend. There are two or three other four-way dips in that trend closer to brunai, that we could absolutely work on after this. Then there's a prospect called jangus which is a more of an elongated that has big-time amplitudes in it. It's not a four-way dip. It -- we could also go to. There's another prospect called todak which is on our list. What I'm looking for now is a real simple four-way dip in a good basin. With a good sourcing system. We tried a prospect which was lots of amount tud it was on shelf with trend discoveries. It was thrusted and faulted. I think we paid a price. I think we will find a simpler four-way dip in a good basin and see what happens.

Right. Okay. Last question on quatrane i was surprised that may be a 70-well. Is it that -- 70-day well. Is that --

It's a much longer reach. We are drilling it from the drill center if you will, front-runner. And so it will be a real long reach well.

Why not skid over to a better surface location?

If we are lucky enough to do that, be successful, then we may move over and drill more right there on the closer to it. But we were -- thought was we could produce it back to front-runner, have that option and use the same spar, rather than do a sub-c.

Thank you.

Next question comes from ar gin murtri.

It's arjun with goldman saix. You guys have had a little bit of time to think about the first three wells offshore the east coast of canada. Should we think of annapolis the last shot up there or it's clearly a big acreage position. How are you theiring about that now? Timing on sported kings looks like it may be pushed into '03?

Yes. Nova scotia first. I think if we are not successful with ann april list we need to pull away and let other companies explore. There's a fair amount of activity going on out there. Farm end is being discussed and wells -- rigs are being contracted. So there will be a flurry of ongoing exploration. If we are 0-4, we have 4 million gross million acre net position, we will participate some form or another. But I think I prefer to let someone else do some exploring and not murphy oil corporation.

How long do you get to keep the acreage for?

Four more years. We will lose some acreage that is north we call the details blocks we initially got about two years ago. But the ones we douth, we validate with these wells, and I think we have four more years on those. I think -- plenty of time. Perhaps even longer. Now, there may be some wells next year that are proposed by our partners further down the scotian shelf that we have to decide how we want to participate and if we do want to participate in them. We will have lots of options going forward either directly drill or farm out. It's early days. It's disappointing. I don't like it, but I think we have to minimize our costs after this last well and lick our wounds and see what other folks are going to do.

Absolutely. In support of kings timing?

It's definitely going into next year. Gain, we don't control it as much. It's operated by dominion. They are working, technically, the prospect and trying to decide how to trial Dr. It. Who will drill it and do more mapping. I would suspect it's first quarter, second quarter of next year. Something like that. Our plate's full for this year, anyway. Especially given that we will drill the experience sooner rather than later. Then cool papa and 17 hands and side winder's a possibility in the second half. So it suits me fine to defer it into next year. I'm sorry in terms of deep wat why are malaysia if it did turn out to be more gas prone, 10 tcf gas is what we need to have a viable lng or some other line of prospect?

No. It's less than that, arjun. Obviously when you have gas in a frontier area, the more the better. I don't want to give you requires this many tc -- if we found 2 -- I would not be as happy if we found lots of oil. I would say hey, it's something that will provide some value for us. We would certainly have a way to mon advertise it. As I tell people, quite frankly, we are seven years away. Maybe 10 years away. That's just life. You know, we'll try to speed it up and do all the work we can, but I think that's the most likely scenario.

Terrific. Thank you very much.

Next question comes from bruce lanni, please state your company name followed by your question.

Hi, claiborne, bruce lanni, sg edwards. You talked about the u.K. Tax law change and the impact it will have on our earnings. Fill sof cli, does this cause you to change your opinion about operating in the area or doing future exploration work?

No, it doesn't. But I don't like what happened. I mean, as you know the way we view the u.K. Is we are harvesting it and taking the money and reinvesting it elsewhere. It was just people like us that they were after in this because you pay less taxes if you continually reinvest your funds. Having said that, it still turns out, literally, tens and 20s and 50 millions of dollars of cash flow for us. And a lot of net income. And will this year. So that basin and now the janda art basin are some base yins we will take from and reinvest in other areas. You could speed that up by selling it, but at least i haven't seen anything which makes me want to do that right now.

Okay. Are you actively negotiating with the government on this issue, or have you been brought in on it yet?

On the tax?

Yes.

No. We were caught by surprise. That's typically the way it is. I mean the chance of the -- he gives a speech and tells you what the heck he is going to do. It's very different from our system as you well know. So we were not brought in and others weren't either to the best of my knowledge.

Okay. One other question on lady fern. I did come in a little bit late. I want to make sure I heard you correctly. Did you say the decline rates towards the end of the year will approach 50 percent?

Yes, I did.

Okay.

There's disagreement amongst our partnership on that. But that's the best stab I can give to you. We don't know, bruce, I'll quickly tell you that. And it may hold up longer, higher, longer but just out of an abun dance of caution I'll give you a worse case and maybe the most realistic case.

On the outgoing years do you expect to see the decline rate taper off?

Yes. You see the initial dramatic drop. Then you get to a point -- there's further decline beyond that obviously. There's a reason for it because you have -- the reasons that the wells are so prolific is that you have these huge spaces there that are extraordinarily porous and permable. I won't say underground karchbs but absolutely extraordinary. Once you have evacuated those, then you have this matrix porosity which is what you are producing. There's goch gas trapped in there. It comes at you very slowly. We will have to produce all of this very porous production and we'll get to a real flat decline.

What are plans in the surrounding area around lady fern going forward? Have you identified other prospects that are similar in nature that you will be going after?

I hope they are similar in nature. We have a minor discovery at squatum to the north. It's not near the magnitude it's right at 40 percent. Probably bring three wells on stream there this year there. We just completed shooting seismic at baeton river which is to the west in bc. Willow to the best in bc and wild man to the south in bc. We identified those on seismic as anom lous. We shot the 3-dto see if we can see some buildup. You can see it pretty darned clearly on 3 d. We drilled a -- it was a gorgeous looking reef. It was. It happened to be tight, tight, tight. You can see the event. It's whether or not you have po ross tee in it. So we'll know what type of prospect we have after we shoot the 3-d.

Just one other question going to wal-mart. Dealing with the 420 stations. I assume still plans to build out 100 stations per year?

Right.

Is there any guidance you can give us on -- what war the volumes, I'm sorry for wal-mart for the quarter?

I was a bit vague. I said in excess -- right now we are in excess of 200.

Okay.

200,000 gallons a month. I would assume, bruce, is 100 a year for the next five years.

Okay. 20 a year in canada on top of that.

Okay. 20 in canada. That's what I was looking for. This year we will only build seven in canada because our first one will open in july.

Great, claiborne. Thank you very much.

Our next question comes from ken bear. Please state your company name followed by your question.

Hello it's ken beard.

Hey, ken. A follow-up going back to malaysia for a minute. After blias, I'm assuming that's pretty much it for this year. Is that still correct?

You know, ken, that's a $64,000 question. But it's a lot more than that question.

Yes.

If we are successful, then I would assume that we'll probably delineate follow-up and pursue success. I mean I think that's what the mo is to do well. If we drill a dry hole, it depends on the quality of the next prospect. And what we have learned, and you have to -- I keep coming back to the fact that we got all of mississippi canyon in front of us. We have one well in it and we are right next to some of the most prolific hydrocarbon generating base yins in the world. So it would be a mistake to give up early or let something like this really interfere with your rational judgment. So if it's successful, I think we pursue it. If we drill a dry hole, i think we need to take a deep breath and probably stop for a while and understand some science more. I will say this. There will be lots of additional wells drilled by others surrounding us. Lots in the next 18 months.

Okay.

Not one, not two, and not three. A lot more than that. We will have lots of information between our wells and their wells over the ensuing 18 months. You know, I'm disappointed. I'm not discouraged a bit.

Okay. Just on that, obviously you elected to go 100 percent on the first well. Is that still the mo, at least on the second and maybe, you know, are you going to stick with the 100 percent working interest in the plug?

So far.

Okay. Might as well keep rolling the dies.

Wait. Wait. Wait, ken. One other comment. Petronos which we carried on the first well participate in the second well. So they will be at 20 percent, we'll be at 80 percent in the second well.

Okay. Also just on the rig problems, there's really no financial impact at all to murphy on that, that's really their issue it might be an aggravation because it will be delayed, but there's not a financial hit at all?

No. I wouldn't assume-shall i would assume there is no financial hit on that.

All right, guys. Hang in there. Thanks.

Next question comes from mark gillman. Please state your company name followed by your question.

First all about a me. Hi, claiborne.

How are you doing, mark?

Good. I got a couple questions. First, could you comment and clarify what appears to be a difference of vus between yourself and your partner vis-a-vis the size of the front-runner resource?

Gosh, I don't know what you mean.

My understanding is that they are more comfortable with a little bit lower resource estimate than you are. If that's incorrect, please say so.

Why don't you give me some information so I can react to it.

I was curious as to, frankly had this discussion with mindy, what appeared to be a change in your character sdaigs of the resource in your presentation at howard weil away from the 200 million equivalent number that had been the mid-point of your range.

Okay. You still need to give me some more information. You mention another party.

I'm told that 120 to 200 which appears in that presentation was associated with the opinion of another party as opposed to the 180 to 230 kind of characterization you guys used previously.

Mark, I'm still -- I'll respond to your question, but if you are going to refer to another party, you need to say who the party is and what numbers we are talking about.

The host dominion. I spaen spina ker, I'm sorry.

Mark what I told you we put a range in there 120 to 200. We still think it's 200 but we booked reserves on a number far less than that.

Mark, the number that i used repeatedly was 200 plus or minus. 120 to 200 gives you lots of scope. I'll grant you that. But I'm not uncomfortable with 200 plus or minus at all.

Okay. Could we move on to something else. The additional bc devonian acreage that you acquired. The prospects that you have identified and will develop there, basically aanalogous in all respects to lady fern?

Don't know qet. We are shooting 3-d. We will now interpret it. I don't know until we get it, look at it and can make some judge mths on it. What we saw were anomalies on a 2-d line way when are following up. They are 30, 40 kilometers away. Certainly it's not close to the maximum it's more trendology.

Mmmm-hmmm. Okay. Claiborne, inspite of the somewhat mixed exploratory resolves over the past six, 9 months, it would seem that an opportunity has arisen for you as a result of the valuation of the shares to use some curran tee atractively for acquisitions. Can you give me your thoughts on that?

You know, as I have told lots of folks and told you, we will always look. My experience experience, over time, is that it's easier to create value by the drill bit. I didn't always -- that isn't always the case. I think we created lots of value with hibernia and other acquisitions. That type of opportunity we haven't seen since then. I certainly wouldn't rule out acquisitions because those types of opportunities may come back. Something shy of that, I won't rule out, but I wouldn't say is likely. Again, we continue to look. And we are long oil. I mean everyone knows that and I've told folks. We'll get longer oil. So gas is an area, especially north american gas I would like to be a better participant in. If there was something that worked there, then we would certainly be quite interested in it.

But you are not motivated fill sof cli by the current lofty share price to, perhaps get a little bit more active than you might have otherwise?

Um -- well, it's always a factor to consider. I think at the end of the day you best serve your shareholders by looking at the quality of what you are buying, and paying a reasonable price for it. Whether you use cash or shares, to me is less of an issue. It's an issue, but it's less of an issue than what you are buying and what you are paying. In my opinion, there's a lot more mistakes made than successes in the acquisition business. And I think you are pushed sometimes to make those mistakes by overconcentration on the currency that you use.

Okay. Thanks a lot.

Thank you, sir. Our next question comes from todd wilson. Please state your company affiliations followed by your question.

Hi, guys. It's ross smith energy group. Just have a few questions about stalberg. Most of the other questions have been answered. On stalberg, how many wells do you see that will be needed to ex sploit that reserve?

Don't know yet, rod.

It's todd, actually.

I'm sorry, todd. We don't know yet. We need to get this one down and evaluate it. We don't have a well license. Let me qualify myself. We think we'll get one and we think we'll spud in june. It's a deep well. I think we are around 15,000 feet. It will be a long well, as i suggested. Let's see what happens when we get down.

Ip take it you are drilling vertical well apart from the natural drift, foothills drift, is that right?

That's correct.

Okay. What about processing capacity in the area, is there any capacity for that?

Yes. You gotta lay a line to get to it. If you ask me how long the line needed to be, I would guess a bit. But I would say somewhere in the real many of 20, 25 kilometers.

Okay that the capacity is there for sauer gas, I take it?

Yes, sir. Yes, sir.

This question has already been asked but I want to make sure I understood it. Lady fern decline 50 percent is an annualized decline?

From where we are now.

Right.

I think there's a reasonable shot we could have half as much production at the end of the year than we have now.

So it would be more steep than 50 mers per year then if seven months from now you are down to 50 percent, is that what I'm hearing?

What you are hearing is that I think we will be about half -- probably a bit more than half, maybe 65, 70 percent. Maybe 60 percent of where we are now by the end of the year. Ill of let you to the math.

Okay. Great. That's all the questions i had. Thank you very much.

Thank you, todd.

Thank you, sir. Our next question comes from paul cheng. Please state your company name followed by your question.

Lehman brothers. Hi, guys.

Hi, how are you doing?

First of all if I ask a question I asked before pardon me I join you guys a bit late. Claiborne on the capital spending earning in the year because of the low prices you have cut 100 million out it seems that price rebounds pretty sharply. Is there any plan that you may change that budget again?

Yes, paul. In fact there's a likelihood we'll get back up to the 850. It may change a bit where we spend it, but 850 is, I think is not an unreasonable number.

And so that is based on the assumption oil price and gas price around at the current level without anything changes, right?

Obviously as you get further into the year you have less control over how to change it, one. Two, we are heavily weighted towards development dollars. So the place where you can change it is the exploration piece, and as a part of our whole pie, because of our success it's not huge. I say part of our whole pie, part of our capital spending. As you get further into the year and you are dealing with the slice of the capital pie which is not half of it, then you have less ability to increase it or decrease it.

Okay. Along those with the heavy oil spread and natural gas price is pretty strong, are we going to see more address degreesive drilling or production program on those two areas for you?

You will see heavy oil start to suspend for us, and -- start to respond for us. There's lead time. You won't see that until towards the end of the year and then next year. But we certainly will, next year, if trends continue kind of roughly where they are now, I could see us getting up to 15,000 barrels a day on the heavy oil side. And, as you know we have had it as high as 14. We are currently around, oh, somewhere between 8 ann 10,000. Resources there, really just depends on whether or not we want to spend it. On natural gas, I wouldn't assume that we would more aggressively spend. We are less limited by funds than by prospects. The best place we have to drill, we are drilling. Well, we can't drill until next winter which is the devonian reefs for obvious only gas prospects. Then we are drilling the scotian shelf which is a reasonable shot, there, too. We could hit a smaller program in what we call the central alberta area, but, you no, i can't tell you it will be a significant mover of our production needle this year, at least.

And also when I'm looking in your, I think in your press release you are indicating your production will be slightly lower than the first quarter level. But I thought in canada both hibernia and teranova productions should be higher. What is causing the decline?

We will have aturn around and syn crude. We will lous about 5,000 barrels a day plus in the second quarter. That's the main driver.

I see. And the last two questions. One is that have you talked about what is the impact to you on the u.K. New tax? And secondly with your guideline a 25 to 75 cents per share for second quarter, what is your assumption that you use for oil and gas prices?

Let me let john eckart take them on, paul.

Okay. Paul, what we are -- we have done based on our production outlook in the u.K. Anest meat of what the effect is on both cash taxes and deferred taxes. In other words the combined total effect on income. And our cash taxes are actually going to be a good bit better because we are getting to duct more capital allowances this year. So cashwise we will probably be $5 million better. However, there's offsetting deferred tax effects on the bottom line. We are projecting, including immediate effects on our deferred tax aspects and net liabilities, the effect of that is overall on the bottom line is between four and $5 million increase in tax expense or reduction in income.

Great. How about in terms of the aassumption -- underlying aassumption you guys use for the earning estimate for -- . [ inaudible ]

Okay. Based on our estimates that we have in the second quarter, we are in the $26, $27 barrel range on a wti basis.

And that's a support basis?

That's an average. And, of course, heavy in such doesn't get that same rate, of course.

Sure. How about natural gas?

In gas we are in the 340 range or so.

340. Perfect. Thank you.

You're welcome.

Ladies and gentlemen, if there are any additional questions, please press the star followed by one at this time. Our next question comes from mark gillman. Please state your company name followed by your question.

First albany. Hey, john, with respect to the u.K. Tax, my understanding vis-a-vis the capital allowances was that it's incremental capital and thus, I'm wondering what incremental capital you are spending in the u.K.. I wasn't aware of any.

Mark, I can hit it. We are going to spend a fair ongoing capital in the fields. Shehalian, mongomonian. There's capital being spent. Secondly we are going to drill a well in third quarter in the central graven area of the north sea that is not big bucks, but I think it's net to us 3 or $4 million. So if you just add all those up. I haven't done the math, but if you add them all up, I'm sure that's what the answer is.

Okay. I notice selectively that both ddna, and production costs in the quarter kind of seem to have bumped up a pretty good bit. Anything unusual going on, production costs in the u.S. Seem to be up. Ddna in canada seems to be way up, even though I would have thought all things being equal, teranova should have brought it down.

Mark, yes. I can address it. On the production side of it, there's really two things going on. One we had a real big work over in the tahoe field. And there's four wells or three wells in the field. We had about a, I think a $10 million gross work over. So that bumped the u.S. Up for the quarter pretty significantly. About a buck. And then in the -- in canada, again on operating expense, we produced around 13,000 barrels a day at syn crude in the fourth quarter because we had a royalty adjustment there. We had underaccrued royalty and we caught up in the fourth quarter. The first quarter was 11,000 barrels a day rather than the 13,000 barrels a day in the fourth quarter. That swing makes a pretty big dirns. It took it from $10 a barrel to 12.50 a barrel. On the ddna with lady fern we adjusted our rates there based on a lot of drilling. We were about 450 we are now 650 barrel equivalent.

What caused that kind of adjustment on lady fern?

Just a lot of drilling. As I have kind of inses i can'tly told folks, just with three companies out there unable to agree on a production sharing agreement, that was reasonable. We are just grabbing all the molecules we can which causes you to drill too much. The field is basically overcapitalized. It was an adjustment there.

Okay. This I assume is going forward?

That's correct.

Okay. Thanks a lot.

Our next question comes from bruce lanni, please state your company name followed by your question.

Ag edwards. John or claiborne a follow-up really to paul cheng's question. The 25 cent to 75 cent range that you gave for the second quarter, I guess I'm a little bit might haved because if you use the price deck that you suggested for -- I would expect you would be at the upper end of the range. So my question is why such a widespread? What are you milding into that? It's exploratory expense. If we drill additional welgs in malaysia and the annapolis well, a dry hole, and if we drill the blias well, you have a big swing. Blias may well get pushed out of the quarter. Way are just learning this in the last 24 hours, in fact. So we could probably narrow that for you a bit now. But I'm talking and thinking at the same time, which is a problem for me. So I -- on reflection, we can probably give you more narrow range. When we put that together, we were looking at both blias, and annapolis as potential dry holes. That's the main driver.

Okay.

Obviously, bruce, as more news comes in and we figure out what will happen with it we'll come out with addition nal guidance.

Oh, sure. It's such a widespread you could put a truck through there. I looked at it with the numbers you had and it came up closer to the higher end. On malaysia, I think I did understand you correctly the deep water malaysia wells you were drilling, gas, oil, obviously oil is preferable, even if it was gas, gas or oil you have always been looking at a timeframe of at least seven years; is that correct?

Yes. As I said earlier in the call. I would say seven at the low end and 10 at the high end. There's so many moving parts out there, bruise, in the lng business which is what you are talking about, that I wouldn't want to get too far out on a limb.

I undersdand that, claiborne on the gas side. On the oil side, too let's say you made an oil discovery versus seven to ten years, do you think you could get something on in a three to five-year timeframe?

Yeah, I do. I wouldn't say three, but i would say in the three to five-year timeframe I'm not uncomfortable.

That's great. I wanted to clarify that. Thanks again.

Next question comes from jack moore. Please state your company name followed by your question.

Good afternoon. Brimar capital. I'm just wondering I'm sure you discussed this before. I apologize for asking. If you could discuss the connection budget, where it stands, what would cause it to change, and then maybe talk about your capital structure and where you want that to be?

Okay. Imt' sorry who am I talking to?

This is jack moore brimar capital.

Jack, we are around on our budget around $850 million. And that is primarily 600 million of that is on our upstream sides of our business. And of that 600, 450 -- 400 is development and the balance is exploration. And then so we have got the remaining 250 on our downstream business because we are expanding our refinery in new orleans primarily, but also because of our aggressive wal-mart buildout. The 850 which is where we started the year, we took about 100 out early in response to prices. Basically it's back end through a variety of other reasons. So that's where we are now.

Is that contingent on commodity prices? Or to what agree is it contingent on commodity prices?

Well, again what I said earlier is this, because there's a heavyweighting on the development side which, you know you kind of see through the cycle there.

Right.

That will continue.

Good.

As will the expansion of our refinery in new orleans. The exploration dollars are the levers that you can pull. As you get further and deeper into the year you have less leverage there. I would expect 850 really won't change much down.

Good. And the capital structure, where do you see that going? We are about 30 percent debt to total cap. That will increase this year as we continue to really develop these fields. And we could get towards the ends of the year really into next year at 40 percent range. So that's the -- and that likely will turn down after that as our fields come on stream and we start repaying debt.

Right.

I would say 42 percent, at least that's what our internal projections are at the high end.

Great. Thanks very much. Good call.

Thank you. Sir, at this time I see no further questions. Please continue.

Again, thanks very much. And we will talk to you again in three months and vee view the second quarter.

Thank you, sir. Ladies and gentlemen this concludes the murphy oil corporation first quarter conference call. If you would like to listen to a replay of the conference dial in at 1-800-405-2236 or 303-590-3000 enter access number 461787. The number is 1-800-405-2236 or 303-590-3000 with an access number of 461787. Thank you for your participation.