Murphy Oil Corp (MUR) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Murphy Oil Corporation third quarter conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during today's conference, press the star followed by the zero. As a reminder, this conference is being recorded, Wednesday, October 30, 2002. I would now like to turn the conference over to Mr. Claiborne Deming. Go head, sir.

Thank you. I'm joined by John Edward, our controller, Kevin Fitzgerald, our treasurer and Mindy West, our Director of shareholder relations. I will turn over to Mindy now and rejoin you in a minute.

Welcome, everyone, to the call. We will use our usual format today, John will begin by giving a brief review of third quarter results. Claiborne will follow with an operations update. Then we will take questions. Keep in mind that some of the comments made today will be forward-looking statements. As such, no assurances can be given that they will occur. There are a variety of factors that may cause actual results to differ. Many have been identified in Murphy's January 1997 form 8K filed with the SEC. Over to John.

Thank you, Mindy and good day to everyone. As reported, our net income in the third quarter of 2002 amounted to $37.4 million or 81 cents per diluted share. That compares to $41.7 million or 91 cents a share in the similar quarter of 2001. The -- the 2002 third quarter did include four special items that are highlighted in the tables of the press release and amounted to 17 cents a share or $7.9 million on an after-tax basis. Those four items include $14 million worth of benefits from franchise and other tax matters that are settled. $2.3 million on the gain on sale of assets.

Those two were offset by asset writedowns for two non-operated profits in the Gulf of Mexico due to poor performance. The after-tax number was $5.9 million. And we had a $3.2 million after-tax charge related to costs that were accruing for repairing damages caused by the recent tropical storms in the Gulf of Mexico. Those are not anticipated to be covered by our insurance program. The line of business excluding special items are exploration and production business earned $48 million in the quarter that just ended, that compares to just under $27 million in the slr quarter of 2001. Our down stream loss, $13.8 million, compared to a gain of $19.6 million last year in the third quarter. And corporate was a loss of $4.7 million, about flat with the same -- with the same period of '01.

Our ENP earnings improved in this quarter, mostly due to lower after-tax exploration expense, primarily Malaysia where we had a seismic program going in the third quarter last year. We also had higher oil production in the current quarter. It was higher by 5800 barrels a day. We brought on our first production in the first quarter and that production led to the increase. It was partially offset by a maintenance down time in the U.K. and slight decline in other areas.

Our oil sales, I should mention, were about 13,000 barrels a day below our production levels, that's primarily off the east coast of Canada where we collectively are under at the end of September by 730,000 barrels. We should make up part of that in the fourth quarter. Our natural gas volumes down slightly in the current quarter as decline continues at the field in Canada.

We did have some storm-related shut-ins at the very end of the third quarter, it equates to 225 barrels a day of oil and 3.5 million cubic feet per day of gas. That's about 800 oils in the third quarter. I want to mention there are natural gas price in Canada was benefited for some -- for some swaps and collars that we had as highlighted in our 10Q at the end of June. We had a gain of about $6 million on those and it increased our per-unit sales price of about 33 cents in MCF. Our refining and marketing operations I mentioned before was weaker and lost $13.8 million. That's really due to poor refining margins in the gulf coast refinery Louisiana.

The results of our other U.S. operations were weaker than the similar quarter of last year, but break-even on a combined basis overall and the U.K. was a bit weaker, due to poorer refining margins there, as well. For the nine months, excluding special items, we generated a profit of $46 million, that's compared to $234 million last year. Lower gas prices in North America in 2002 was a main reason for a decline in ENP earnings which are $98 million for the first nine months of this year compared to 168 last year. Again, our downstream results are much worse than last year. We -- we have a total year to date loss of $35 million compared to $76 million last year of profit.

And our corporate costs are a bit higher this year, we have costs of $16 million versus nearly $10 million last year and we've got higher long-term borrowings coupled with less interest income on invested cash balances. I want to speak briefly to our fourth quarter estimates. We based our fourth quarter estimate as listed in the press release on a $27 WTI price and a $4 North American gas price.

Note there is a wide margin there in our fourth quarter earnings projection, that's due to the in fact we are -- don't, you know, we await drilling results and the lower end of the range includes the month's drilling. And we built into the low end of that range, the possibility that a Hibernia crude oil scheduled for the end of December may follow over into January depending on weather. That concludes my comments. Now I will turn it over to Claiborne.

Thanks, Jon, I will start with drills and talk about upcoming wells in the fourth quarter and first quarter of next year, provide developments on the upstream side, close it downstream and take questions. On the oil and drill front in the gulf, we're drilling the gulf on the boom sling prospect. We're paying 13% to end up with around 27% because we farmed it out and farmed down. We made the discovery in '98, 15 20 million barrel equivalent discovery. We're delineating it now and hope to bring it on stream in early '04.

In Canada, we're still drilling and are paying 30%, will end up with 35% with swan hills gas, big prospect into the 500 BCF range. We should be down by year end. We're also drilling in Canada in the foothills, looking for swan hills gas, striking prospect, we have 20% interest. It's about 50 BCF, but has upside of up to 100 BCF if it all works. In Malaysia, we're drilling the KK No. 3. This is located about two miles in the KK No. 2 well and about two miles from the original discovery well, the No. 1. We're on strike, we're headed west down the structure.

We should have results early December, dry hole costs are around $20 million, and as you know, we're paying 80% of this as our carry of 20% expired after the first well. And at the completion of this, we'll have a pretty good sense of the size of -- of the prospect. This involves the side track as well as the second well involved a side track. This time we will go up depth from the side track because we've got a shallow gas going on that masks the top of the structure at the end of the structure. We need see if we have a gas cap. We don't think we do, but want to be sure that we don't.

Upcoming wells in the fourth quarter and into the first quarter of next year in the U.S., 17 hand prospect, Mississippi canyon, 343. We have 37.5% we operate. We're bringing about 640 feet of water. We're looking for around 100 BCF of gas plus or minus. If successful, we tie it back to a shelf. Souvenir prospect, at one time called northeast medusa, it is in Mississippi canyon 495, we have some of that. 27 barrels plus or minus. If successful, we tie it back to medusa if there's room on the platform.

Green canyon 380, part of the greater Front Runner area, 37.5%, probably is going to be pushed into the first or even the second quarter of '03 as rig availability is a modest issue the company currently using the rig may exercise an option there. In Canada, we will start a pretty aggressive program during winter freeze-up up to 7 or 8 wells as we continue to explore west of -- west of the discovery there. And then there is some likelihood of a spud drill on the Scotian shelf. We have 40% interest. This is north of the deep Penu discovery on the an [INAUDIBLE] shelf. It's still in discovery, we don't know, but there is possibility of that as being an expensive well, about 25, $30 million, we have 20%, pretty good looking amplitude.

Malaysia, we're going have a pretty aggressive exploration program next year, but they won't start until the second quarter and get going into the third quarter and fourth quarter of next year. It is pretty back-end loaded as we digest what we have now. On the development front, medusa starts up in the second quarter. April/May and ramps up in the course of the year as we complete the six wells we've predrilled there. Front Runner is on track for first half of '04, it is early days there. West Patricia and Malaysia, rigs on location and drilling development wells now, we should be up to start producing or drilling second quarter of '03.

Ecuador pipeline should be finished in the second or third quarter of '03 and we will start producing additional volumes in the third quarter and pretty aggressively produce it in the fourth quarter. And then Hibernia -- Hibernia starts in '03. And margins are plus or minus, superior is $4, plus or minus. On the Wal-Mart side, we're going to open our 500th station in the U.S., it opens this week in Houston. And in Canada, margins are pretty healthy in the retail segment. And construction of the Moro is on schedule, on budget, we're more than 50% complete and I think we will be ready to tie it in when we take the plant down for a turn around third quarter next year. So, that completes my remarks.

Now we can take some questions.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press the star found by the 1 on your push-button phone. To decline from the polling process, press the star followed by the two. We will hear a three-tone prompt acknowledging your question and your questions will be pulled in the order they are received. Lift your handset before pressing the numbers. First we have a question from Tyler Dann. Go ahead.

Hi, all, how you doing?

Good, thank you, how are you?

Doing well, thanks way -- I wanted to get some commentary from you all on [INAUDIBLE] and just give us an update if you wouldn't mind. I was on and off the first part of the call and don't know you addressed it, but the production levels there and what you're seeing and anticipating?

No, we haven't discussed it. We're producing now net to Murphy's account, about 110. 110 million cubic feet a day. At peak we were producing about 150, which was early summer.

Yep.

And we're forecasting just a steady decline. It levels off mid-year next year and I think it's early days on our budget because we're going sit down and hash over numbers operating and capital numbers here this week, in fact, but I think next year we're forecasting around $60 million cubic feet a day net to our account there.

Okay.

You have to admit, when we put the budget together this year on Lady Fern, we missed it. We forecast a sharper decline. People are obsessed over this decline, but it's been known to going to have to occurred almost from the outset and -- and we actually are producing a little better than we anticipated.

I'd rather that way than the other way.

Yep, I agree!

And just -- you ran through -- I guess two further questions. Firstly, on the development front, I -- I detect maybe if I -- if I'm not mistaken, I may be reading into this, but the Front Runner may slip a little bit, you mentioned first half of '04 and I think that the target had been the Q1 of '04, just a little curious there? And then I guess finally, block H, would you talk a little bit about the plans for that in Malaysia? And I guess specifically, any industry activity you're seeing around bar cage, as well?

Okay, I wouldn't read much into the Front Runner comment. We'd always should have said the first half of '04. And it is probably my slip-up I said the first quarter of '04. There is nothing going on there that I can see. I don't think there's any huge issues. We know our contractor had issues, but I don't see anything significant there. It is early days, though, I will emphasize, but we're in the shipyard and things are being constructed and I think things are pretty much on track. Block H, we've got, again, preliminary, but what we're -- from talking points, we're talking two wildcats in block H next year, pretty close into where those series of discoveries were made in the adjacent block. The 3D we shot is in that part of the block and should be the southwest corner of that block.

Okay.

And there's a number of features and structures. I saw the 2D on the block six months ago. There is a huge amount of restructuring going on and the 3D has been shot processed, it's in the shop and we're now mapping for prospects and so I think we will get about a probably third quarter next year, maybe late second quarter, something like that. I don't see a lot of industry activity around there right now. That could change, but I don't see it right now.

Okay. Thanks very much.

Yes, sir.

Thank you, sir. Our next question comes from Matthew Warburton. Please go ahead.

Good afternoon, Claiborne, a couple of questions if I may, can you expand on the contract issue around Front Runner? There's been talk in the press of moving the spot to another yard and the asbestos issues, finding it is under a bit on the contract. Can you expand on that firstly? Then a follow on on the questions on Malaysia.

Matthew, again, I don't see a lot in it on certainly medusa. We slipped from November, which is what we thought we'd be into April. And so I think we have a pretty firm fix at those new dates are good. I mean if there is a month's slip, there is, but I don't see it much. Sail away dates are confirmed and heavy lift vessels have been identified and all this types of things and we're talking about setting the platform on location in January. Association that's in good shape. Front Runner is early days, they're in construction. I don't, again, I don't see anything huge. It's a -- our contractor is a troubled company. But they're smart people and understand the issues and they're working their tails off and I like them, respect them a lot and -- and I think they will work through their issues.

And McDermott filed for chapter 11, how would that potentially impact the delivery of Front Runner? Would it have an impact on the delivery in the fall?

I don't know the answer. That's the right answer to the question. I presume that they will go into chapter 11, get protection from creditors and typically you just work through that. You freeze your -- your long-term debt issues and go ahead and complete the work that you've got going. But I mean that's good grief, that's speculation on people's part other than mine, I haven't seen that, certainly there's been no discussion about that and any of my ramblinging on it or speculative, too. All I see is platforms being constructed and work under way.

Great. One further thing on Kay, if I may, obviously with the success you've had, one of the options you've had is a means of financing the development. Any further thoughts on that or any discussion that's have been ongoing on the basis of that?

Certainly topical. I think our plans are now but as we get into our budgeting process in the magnitude of the funding issues becomes more apparent and our options really become more clear. And that change, but our current plans are to certainly drill out next year, conduct -- when I say drill out, we've got at least currently four exploratory wells on K&H that we have on tap, two on each of the blocks. Then, we have a long-term production test. At least currently planned, contingently planned on K&H. Our current plans are to do that ourselves, mindful if we continue to meet with success that certainly the funding issues become -- occupy more of our time.

True.

Nice problems to have, but problems nonetheless.

Absolutely. That's great. Thank you very much.

Yes, sir.

Thank you, sir. Our next question comes from Mark Stillman. Go ahead.

How are you?

Good, Mark, how you doing? Pretty good. Can you say with a reasonable degree of certain that -- [INAUDIBLE] -- wherever you've assessed it to be? Mark, what we said was after the second well that our range was 2 to 500 and we in the 1 to 15500 range before hand. So, we've moved up a bit after the second well and we're certainly feeling pretty good about it. I wouldn't want to try to leak to any bold statements now. I'd rather get the third well down and see what we have. It is a long step out, a long delineation well.

What I'm trying to get at is let's say it's at the bottom end of that 2 to 5 range. Is that,your mind, economic commercial, all things considered fiscal regime, water depth, et cetera?

All things considered, going into this, if we had found a 200 million barrel field, I think we would have thought we were commercial. That's a fair statement. But, you know, we need to do a lot of work and confirm it and get bids and go forward, but we were feeling pretty comfortable about that.

Okay. It seems the plans with respect to the -- a boom sling appraisal was 9 in the cards, at least in my mind set previously. Why the shift?

I wouldn't read much into it. We made the discovery in '98. It was basically shallow. We have a company that won't in come in and basis proportionately spend to delineate it. We're going end up 27% of a 15, 20 million barrel field if it all works. And we needed to do something. And so we had been shopping around the industry, trying to see if we could get people interested and we found some people. It wasn't worth much talking about before, really. You know, there are two or three things, we're always looking and shopping. That was one of them. If it works, and we confirm the field and there's risks there, that's why we farmed it out. Then we can get about it. It won't be a lot of production, not to Murphy one way or another, a couple thousand barrels a day.

And finally, do you have one more profitability in the quarter?

Break even.

Okay, thanks a lot.

Yes, sir.

Thank you, sir. Our next question comes from Argon Murphy. Go ahead with your question.

Thank you, Goldman Sachs. Just to follow-up on deep Malaysia, I know you're drilling the third well, possible side track. If you get to the point where you get confidence in the reserve base, how should we think about the timing of development there? Do you want to do a long-term production test? Do you then drill out the other nearby process focus see the total area? Or would you move head with the development plan at some point after the third well or the production test?

Don't know yet. Depends on what ends up in the third well and which helps us with size of significant amount. Probably one of the wells next year, I say probably because it's not decided, will be a prospect, which is a smaller prospect, but in the very nearby separator from KK, good amplitudes, you know, I say small, it is 100 or 150 potential size, probably want to drill that out. And production tests are significant. We need to do that. It needs to be long enough to understand what we're draining, what's connected. We have a good sense of that already through the pressure work, but nonetheless, this begs it because it is a new basin, basically. We will be making decisions next year. You won't see the production coming before '70, really lucky would be '06, but '07 would be good shape. A lot's got to happen.

Yep. And given the success you experience in there, you're going ramp up drilling, should we assume you're going to make choices in terms of other exploration drilling there a chance of Scotia in the south will be sold to a partner that needs it more than you do? How do you think about those choices?

Argon, the Scotian shelf has a significant amount of potential. I wouldn't undersell that thing yet. There's been appointments, but I spend a lot of time thinking about that, looking at stuff, talking. I think that's a thank you that's alive. And worth delineating, there are other big structures on the block. We have two outboard blocks that have massive structures on them. And we have a lot of gas. You need a heck of a lot of gas for commerciality. I think that's why there is some, you know, there is muted optimism there, but -- but that's -- could be quite real. So, I think that's -- that's defined much our deep water gulf program, we need to farm out more because our electricity are so high. And the -- interests are so high. And the gulf shelf is anywhere from 20 to 30%, there is no reason to farm down, but we've done an excellent job in deep water gulf of [INAUDIBLE] that are quite prospective. They need to be farmed down. There is no doubt about that. That's where the give will occur. That's what's happening. We're out there, showing prospects, have lots of interest and I think it tha will happen.

Thank you very much.

Thank you, sir. Our next question comes from Jim Gillespie. Go head with your question.

Claiborne, I guess Kevin is nice and tan from his cruise! [ Laughter ]

Yes, I am! Thank you! [ Laughter ]

He's always red, what are you talking about? [ Laughter ]

Two things, one,the boom slang area, side winder seems to have dropped off the radar screen again. Isn't there a lease issue there? And what is the situation with that?

Yes, there is a drop in the third quarter of next year. If I was a betting man, I'd bet it would be drilled next year.

It will?

We need help. We need help there to make that happen. Even though I wouldn't -- I wouldn't rule out us taking 100%, but I don't think we will, I think we're going get help there. It is 900 feet of water, it is one continuous amplitude, probably 100 million barrels if it works and it ought to be drilled. And so it's being worked hard, hard, hard.

And so your partner is non-consent?

Oh, no, I wouldn't say that. No. No. I mean there is no official word from anything, but I think we're all parties are in agreement there.

Okay. Secondly, and this is small, but you had a very modest amount of income from Malaysia. I'm curious where that came from?

Yeah, I think it was a writeback -- we had initially thought we'd drill three wells and we had allocated MO based on three wells. After our first two -- first well -- no, I tell you what happened, after the third well, we decided to do the fourth well, then, and then the fifth well changed the mobilization and reallocated it, spread it over five instead of three wells. The first couple of wells we drilled, we wrote back dry hole costs.

Okay, thank you.

Thank you, sir. Next we have a question from Paul Cheng. Go ahead.

Hi, good afternoon.

Hi, Paul.

A couple -- several quick questions. On the 2003 capital spending, I know it's a bit early, can you give us a kind of direction comparing to the 2002, what that may look like?

Boy, it is early! Ute I will tell you this, we're going to struggle mightily to keep that down. We've got a lot going on. I was tallying up must-do development stuff the other day and I got to $45500 million easy! And then you could explore $100 million worth in Malaysia really easily. In fact, we will. And so you -- you can get -- and downstream we're still constructing Wal-Marts and hydro crackers. This year we will be 875, something like that, pushing00. And I'm going try to keep it around there, working hard, hard, hard, but -- and what we will probably do is monitor it this year -- next year and depending on cash flow, be really tough about not spending money or being a little bit more liberal.

Oh.

We don't have as much free board as we did a couple of years ago, so we have to manage it a little more aggressively.

With that in mind, are you trying to manage it from a [INAUDIBLE] office sales, saving some property, either in Canada or -- even in the Gulf of Mexico, you're funding whatever needed capital spending?

Yep, I think that's part of the mix.

Um, on the -- in the U.S. operations, over the past two years because the company is in transition, moving away from the shallow water into the deep water, office needs, the unit costs has been on the rise. Now, with the medusa and the other parties coming on stream, if they have talk you have in mind, what is -- I mean do you need operating costs in the U.S. for next year or the year after?

Not yet. It's -- the shelf unit cost rise has been volitile as heck for all of us and unavoidable. That's just a pain in the neck. Medusa will have great operating costs and we're currently booked up to 60 million barrels and will have around $6 DD&A. And beyond that, Front Runner, well, [INAUDIBLE] will play into the mix well. But it will certainly flatten out and trend down but I don't have a number to give you yet. We're going to work through it.

Do you have a number, you know, what your production will look like for 2003?

Yeah, the number I'm using, is company wide, is, you know, low 140s. And let me caution everybody that, ramps up in the course of the year, we will be at 122 in the fourth quarter. We're not starting the year off at 140.

Right. But after you start.

We have lots of stuff coming on and medusa has to come on. Ecuador, I mean all of it. West pat. So, there will be fits and starts, but one typically offsets the other. That's a reasonable good number.

Two last questions. One, I think earlier that you guys mentioned that some hedging gain, I missed that, could you repeat that for me? In terms of where is the hedging gain being reported? And also how much is that? And do we expect any in the fourth quarter?

Paul, what we did in the Spring, there was a little brief blip, a couple of week blips in gas prices and we took advantage of it in Canada because of Lady Fern. The decline was going to be so steep, I didn't want to screw up and produce a lot of gas at a number that -- that was -- was too low and then when prices started climbing, we don't have any gas. And so, we basically sold around 30, 40 million or 50 million a day, not all of it for six months of the shouldered months basically. And added net in the third quarter around 33 plants MCF in Canada. Not huge, but just safety net. I don't think there's much in the fourth -- there is none in the fourth quarter, very little or none. We're probably going to do a little bit of walking in prices for heavy oil next year, ramping that up. That's got margin issues because sales realization is less because of quality and operating costs can be higher. So, because we're ramping that up and spending capital, I can see us doing work there trying to capture some guaranteed margin.

I see, very good, thank you.

Thank you, sir.

Next we have a question from William Baird. Go ahead.

Good morning. I guess, actually, good afternoon. I would just observe that while Kevin is always red, he's not always well-read! [ Laughter ]

Clever!

That's very good. Bill, you owe me! [ Laughter ] Wait, wait, wait until you see how good my earnings estimates are! [ Laughter ]

Just a couple of questions on -- on -- in general terms about your comments on the budget for next year. And given -- given the acreage heritage that the company has and given its expertise in a lot of what used to be more traditional areas, what price would it take to part with a few of those extra dollars to get enthused about maybe some infill drilling or close indrilling that has maybe a shorter life but a -- attractive return. And secondly, could you give us a flavor of what you see in the oil service side. Oil service costs picking up? Are they under control? Is there any pickup for the program on the oil activity?

On the infill drilling front, really, given the mix of our assets, our opportunities there are r pretty limited. We've transitioned off of the shelf and as a result, we don't have lots of fields which we could do that work in. Canada has more opportunities, especially with our boat Canada acquisition of three years ago an we do that significantly. Spend a fair amount of capital doing it, pretty successful. But on a company-wide basis, it's not an investment wide opportunity for us.

So much of our capital goes into the Medusa, Front Runners, Malaysias of the world. And so we do what we can, but really on a return number that would impact our -- our company it's not going to be significant. The second question service costs, we budgeted, I think we're at least talking about coming up flexing 10 or 15% increase in service costs next year across-the-board. Hadn't stopped us or slowed us down, but boy, it sure it a pain in the neck, I will say that. Service companies aren't making a ton of money and they need higher returns and they're certainly trying to get it from the producer. And we all resist as much as we can. Recognizing their needs.

Thank you.

Thank you, sir. Next question comes from Andrew Lees, please go ahead.

Hi, guys. Could you elaborate a little bit on Front Runner? I think it was supposed to cost all in about $550 million, at year-end, what do you anticipate having spent? And of the 120 to 200 million estimated there, what do you think you will have booked?

Oh, let me see, I don't know how much we saw Front Runner, but we can get you a number through nine months, I think. And our -- and we have booked so far right around 90 or 100 million bills, our share of that. Our share of that. Looking for suspended costs since we're --

Front Runner has it in the south and it is $94 million.

Okay, note us, and this includes Quatrain, is $94 million.

Thanks.

Our next question comes from Steve Enger, please go ahead.

Hi, guys.

Hi, Steve.

A couple of things. In the block KH drilling next year, do you see running one rig or might you pick up a couple of rigs separately for KH, how do you see that going?

Probably two. At least what we're thinking about now, the same rig that does the tests or associated with the production tests at K assume when it happens would drill additional wells in K. And H is shallower water and there is a greater universe of rigs available and probably can get a cheaper rig. So, I can see two rigs running at some point there.

Okay. And then should we look for you guys drill additional structures in shallow water Malaysia or is it unclear with your budget constraints as it is?

Hopefully we tie it back to the existing facilities that we're going to have at west Pat. The discovery at comb shack is not bad, 15 million barrels or something like that. I think it is nearby and we can sub see is back to that platform when there is room. I think it's good news. That shallow water play is really going to be 10,000 barrels a day plus for a significant period of time.

And do you see drilling additional shallow structures that you haven't tested yet in '03?

Yeah, I think we're talking about two, maybe. We added some acreage to that 309311 block to the southwest, which is where the trend ended up going. And we treated it and delineated prospects. I think you could see, I think two wells.

Okay. Yeah. And how many Haberno wells are you assuming will start up next year at this point?

Two.

You will get two?

Yeah, that's what Shell is telling us, yes, that's what our operator is telling us.

Okay. And finally in the Front Runner area, you know, sounds like cool pump is maybe getting pushed back again. You guys have identified a lot of potential there, very slow to test the number of structures to the south of Front Runner. Can you kind of talk about what the -- what the constraints are? You mentioned rig availability, but it sounds like there are other things going on there in limiting your -- your ability to get to those specifically.

No, not really. The -- the -- the well at cool poppa is a deep well and it -- it's not a lot of rigs can do it. I won't say there is only one about, out it is not a huge universe. They've identified a rig and it's -- it's under contract, I think, but the company has got the rig and may exercise another -- an option to drill another well with it. And so that was always a possibility. We didn't think it was going to happen. But now it looks like it might. So, I don't think there is much there expect for the normal oil field delay contingency stuff. There is nothing stopping us on the structures south of Front Runner. I think we have one in our budget, maybe two. And we will get about it. You know, second, third quarter next year. You know, we need to understand what we have there and we need a second production facility or do we end up loading up the spar at Front Runner with everything for the rest of our collective lives? You know, where the economics reflect.

Yeah.

You know, continued upon success, clearly.

Yep.

And we need to understand that. We need to understand if there is more capital to be spent in the southern part of that block.

You would still look to drill some of the larger prospects next year?

Yes, in the middle of next year.

Okay. Thanks.

Thank you, sir. Our next question comes from Mark Stillman. Go ahead.

Claiborne, I don't remember you having said anything about a "gas event" previously with respect to key. Can you elaborate a little bit on that and what it was that led you conclude or try to identify whether or not there is or is not a gas cap?

Mark, there is a shallow gas, kind of like a shallow gas hazard you've seen in the Gulf of Mexico, over the western part of the structure. And it mask the amplitudes that we see in the pay sands in the first two wells. The reason we hadn't emphasized it is because we've -- we've had more success than we anticipated or we didn't want to get too far ahead of ourselves it was always there. It's relatively isolated but masks a bit what we have. We haven't seen any gas in any wells so far in this field but just out of an abundance of caution, we want to be sure at the very top of the structure on the far western end structure, that there's not a gas cap. We have no indication of it, but we just can't see that there's not. And it would, you know, it would have an -- be -- have a reserve impact, I don't think not too big, and it -- it would obviously impact development issues. Something you have to know early. I think it's a good move that we're worried about it because we're drilling three miles from the discovery well. That wasn't in the view initially.

Okay. Claiborne, the DD&A rates in each of the principle regions in the third quarter, seem to jump up. Was there something that happened in terms of mixed factors in Canada, U.S. and U.K. or were there, you know, reserve reevaluations that contributed to what seem to be an across-the-board hike in DD&A rates.

No, there is no reserve issue. The one area that we increased the DD&A rate significantly [INAUDIBLE] Just to be sure with an abundance of caution that we amortize all of our capital. So, we're now amortizing that around $8.50 a barrel equivalent out of an abundance of caution. That's the primary driver of of those numbers. I don't think there's much in the gulf, but I could be wrong. But I don't think there is anything significant in the U.S. But as I look at it and think about it, that was the one area that we said, you know, let's just go ahead and get after it and be sure that we're not caught short here. And it was a wonderful heroin high and there's been a little withdraw pain there. And that's what we're dealing with.

Okay, just one other. Within the 122 number that I guess you indicated in the release for fourth quarter production, if I recall it correctly, what's the storm impact you've built into that?

Yes, Mark, we've got about 2,000 barrel equivalents a day that we've built into that number. It's about 600 of oil and the rest of did is gas -- it is gas.

Okay, guys, thank you.

Thank you.

Thank you, sir. We have no further questions at this time. You may continue.

Okay. Well thanks very much.

Pardon me, sir, we have one more question.

Okay.

It comes from Will Kidded, please go ahead.

Claiborne!

Hey, Will, long time no see!

We've been here! I appreciate your updating us today and certainly we've appreciate everything else, but not to bog this down, I remember thinking in my own mind that Wal-Mart solved the Heberno problem. What's the scoop? Is the Herberno problem simply not solvable? How does all this work out? Is it fair for no ask you to just talk to that point a little bit?

No, it's not fair! [ Laughter ] You're asking me strategic things here! We had in a dismal quarter at Heberno in the third quarter. The cracker and the reformer were down in the first part of the quarter. And then in September, margins got so bad we shut down our little cat cracker. Which will be permanently shut down next year when we get the hydro cracker, but nonetheless, it is still there. We shut it down and got down to 60,000 barrels a day for a while in September. And so all of our numbers are skewed there because of that event.

And I think we did the right thing, I'm not 1100% convinced that we did, but we were losing cash and I'm one to typically react sooner rather than later and you can always change and go back and if you made a mistake, but I'd rather make a mistake than hastily cutting losses. So, that kind of half explains the quarter.

It doesn't address your strategic issue because, in fact, in the third quarter, retail margins were depressed and refining margins were hardly depressed on the gulf coast, primarily because at least retail margins were depressed because wholesale prices rose the whole quarter as so-called lower premium with include and wholesale prices climbed.

We couldn't keep up with the retail gasoline level of the increases. We're seeing a reverse of that now as wholesale prices go down, seeing good retail margins, on the refining side, crude was high because of these kind of international issues, concerning Iraq, but demand was -- wasn't stimulated enough pick up enough production especially on the discipline side, get any -- this is my take on it, to get any margin in it.

Gasoline demand doing good all year, but the other side has been pretty awful primarily because of the airline industries implosion and they took up to 10% of the barrel at some point. And so I think there were discreet reasons why the third quarter was so bad. But it certainly didn't help us or Wal-Mart didn't help us a bid bit in the third quarter when the refinery business went bad. One area -- there is a pretty good correlation with Wal-Mart. Interestingly is with the upstream business because you're always looking at things that offset the other. When crude prices go down, Wal-Mart margins typically go up.

I can't say that's true in the refining business because the margin gets [INAUDIBLE] out so quickly, but there is a bit more control in the retail side and we sell 80,000 barrels a day gasoline. And so -- and we produce right now around 8,000 barrels a day of lick witness. So, when there is a decrease, there is an increase in the margin at Wal-Mart it be that it comes strategically, that might be the way to rationalize it, more than offsetting the refinery business.

Okay.

There should be betterment next year with the [INAUDIBLE] by the way. I won't bang the table about. It I have a wait and see attitude. The menu of crudes we select goes up pretty nicely and we will have more flexibility on the types of crude we run which could give us more margin opportunity there. Let's wait and see.

So, the answer is even if the problem is solved situations will crop up from time to time where you get premiums in the oil that just --

You can't pass on. The[INAUDIBLE] let us pass on $30 crude to the consumer.

Gotcha.

And retail and wholesale it didn't happen.

I appreciate it.

Yes, sir.

Sir, we have no more further questions at this time.

Okay, well thank you very much and we'll look forward talking to you at the end of the year. Thank you.

Ladies and gentlemen, this concludes the Murphy Oil Corporation third quarter conference call. If you would like to listen to a replay of today's call, please dial 303-590-3000 or 1-800-4052236 and you will need to enter the access code of 3505767 followed by the pound sign. Thank you for participating in today's teleconference. You may now disconnect.