Murphy Oil Corp (MUR) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Murphy Oil Corporation's fourth quarter conference call. At this time participants 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 the conference, please press the star followed by the zero key. As a reminder this conference is being recorded Wednesday, January 29, 2003. I would now like to turn the conference over to Mr. Claiborne Deming.

Thank you, I'm joined by John Eckart our Controller, Kevin Fitzgerald our treasurer. Mindy West, our director of shareholder relations. I'll turn it over to Mindy.

Thank you, Claiborne. I would like to welcome everyone to the call. We'll be using our usual format today. John will begin with a brief overview of fourth quarter results. Then Claiborne will follow with an operations update and then we'll take your questions.

I must remind everybody that some of the comments made during this call will be considered forward-looking statements. As such, no assurances can be given that these events will occur or that the projections will be attained. There are a variety of factors that may cause actual results to differ, many of these have been identified in Murphy's a January 1997 form 8-K filed with the SEC. With that said, I'll turn it over to John.

Thank you, Mindy. A good day to everyone. Our fourth quarter of 2002 net income was reported as 57.6 million dollars. That's 62 cents per diluted share and that's roughly double the 28.8 million dollars that we reported in the fourth quarter of 2001 and it was 31 cents a share. I should mention that the prior year earnings per share number reflects the two for one stock split that we had this year on the 30th of December.

The fourth quarter of 2002 amounts include two partially offsetting nonrecurring items that reduced our net income by $4 million or 4 cents a share and those items were as follows: we had a 14.6 million dollar after tax write down of our investment in Destin Dome 56 and 57 offshore Florida. Partially offsetting that was a 10.6 million dollars after tax gain from the sale of our Ship Shoal 113 field on the shelf of the Gulf of Mexico that was completed in December.

At this time, because of the confusion caused by the way the numbers have been reported in the I thought I would comment on our the way we view our fourth quarter numbers. It was commented in the press that we were short of consensus and we believe that in fact we were better than consensus figures as shown in some of the press releases. The reason we believe that is because the press releases themselves talked about discontinued or sorry continued operation results and we don't believe that the consensus figures were prepared on this basis, a difference between continued and discontinued. So we believe the right way to look at it is that you take our net income number of 57.6 and add back our special items of $4 million to equate to a $61.6 million which is 66 cents a share which is actually a good bit better than what consensus says.

At this time in association with that, I want to comment on two accounting matters, one of which relates to that and it is fact that when we sold our Ship Shoal 113 field in December, we have now reported that operation including the gain as a discontinued operation and that is based on the rules that were issued under statement of financial accounting standard 144 which became effective at the beginning of '02.

So essentially we've taken our gain of 10.6 million and our regular production operating results combined those and showed those as discontinued operations on our income station, below our continuing operations results.

One other accounting matter to speak to briefly, and that is that we've also adopted the EITF 02-3 consensus that accounts for how to account for crude oil trading operations and in fact all trading operations. It requires to us present the results of our crude oil trading operations net in our income statement. Therefore our net margins on trading activities only are now included in revenues and this change effectively reduced our 2002 total revenues and cost of sales by the same amount of about $225 million in total. Of course this change had no effect on net income.

A comment briefly for the full year effect. 2002 net income amounted to $111.5 million or $1.21 a share. And that compared to 2001 net income of 330.9 million or $3.63 a share. Excluding special items this year was $107.6 million or 1.17 a share and of course last year we had the gain on sale of Canadian pipeline assets in there, you take that and the remainder of our special items out we were at 263.3 million dollars or $2.89 a share.

With that I want to conclude my comments and turn it over to Claiborne at this time.

Thanks, John. What I thought I would do is go over our various drilling programs that we anticipate participating in 03, talk about status of our various development projects upstream and then mention our budget and then field any questions that you might have.

First then with an overview of '03, proposed or anticipated drilling programs first is deepwater Gulf. I'll start with one for the roses which is in Green Canyon 735 and 736. We had 100 percent. We sold down to 50 percent. We've retained the other 50 percent. We're in 4,700 feet of water. The prospect is 100 to 125 million barrel equivalents in size and we should spud some time at the end of the first quarter.

Second one is the Cool Papa (ph) Green Canyon 380. We have a 37.5 percent interest. It's in the west part of the front-runner mini basin. 3500 feet of the water. 80 to 100 million barrel equivalent type size. Target should spud in the early second quarter. We don't operate that particular prospect. LaCompt (ph) is number three. Green canyon 427. We do operate that. It's at the bottom part of the front-runner mini basin. We have again, 37.5 percent of that. 3,500 feet of water. 100 to 125 million barrel equivalent target. Dalmatian (ph) and that LeCompt (ph) should spud somewhere in the third quarter.

Dalmatian is the fourth prospect I'll mention. It's at the northern end of Sale 181 which is in the eastern Gulf. We had 100 percent. We sold half of it to another company. We'll get a full carry on it. We're in 5800 feet of water and the target's about 250 BCF and the pacing item here by the way as for all the wells in eastern Gulf there's going to be permits which is being pursued.

Fifth is a near field wildcat to Medusa called Medusa north. We have a 60 percent interest. It's oh, ten million barrel equivalent type size. We were going to drill a prospect called Souvenir (ph) which we will probably still do, but we have moved Medusa north up ahead of it due to some recent reinterpretation.

In Canada, our Davonian reef, winter program is under way, we're going to drill somewhere from five to seven wells, perhaps a bit more. Started December 1st and we're looking for Ladyfern (ph) type prospects but smaller. And we're going to defer announcing any results on this program until the end of the program which will be at the end of the winter. So April time.

Other Canadian drilling, Stolberg (ph) which is our Foothills well. We have a 30 percent interest target in around a half a TCF of gas. Slow drilling and we should be down now around the second quarter of this year. Scotian Shelf prospect will be drilled this summer by the name of Crimson (ph), it's on the Annapolis license. We're at 6,000 feet of water, we have 19 percent. And the partners are all ready to go. Also on the Scotian Shelf, we're going to shoot seismic over the two Outboard deepwater blocks to Annapolis which are called Courtland (ph) and Empire. We have a 25 percent in that and that will take place this summer.

In Malaysia Block K, 80 percent interest will return to the field at the end of the second quarter to drill initially an appraisal well at Kikeh which will be called the Kikeh number 4. We'll production test it and then we'll move the rig and drill two additional wildcats in block K following that program. Block H, there's going to be a third quarter spud of one or two wells as you probably know we got the 3D on H a bit after the 3D on K. So we're mapping now, but we're going to find lots of good targets to drill for. We have an 80 percent interest in H as well.

Other news in Malaysia. We announced earlier this month the signing of two PCSs covering blocks L&M which together are three million additional acres in Malaysia. Same fiscal terms as K. We have a 60 percent interest in L and 70 percent interest in M. Block L is southwest of Kikeh contiguous and M is southwest of L and contiguous to L. These blocks will be explored in conjunction with K.

Development projects, Medusa we now expect to start up at mid year. The hull (ph) is on location, Mississippi Canyon, the top signs should be installed in April, commissioning in May and first oil should be July is a good estimate. Front Runner, the rigs on location doing development drilling and we're looking at a mid year '04 start up there.

West Patricia, 85 percent interest there. Rig on location, doing development drilling. And the development by the way consists of at least FSO and two platforms and we are on target for first oil in April of this year.

Ecuador, the heavy crude pipeline is well under way or actually nearing the end. The finish date should be in the third quarter of this year, '03. In fact, block 16 line fill should start up in early second quarter of this year. Habanero (ph) should be on stream in September, October, of '03 as scheduled.

Production estimate for '03 is 135,000 barrels a day. It's a bit lower due to the delay at Medusa and two property sales as we just announced we sold Ship Shoal 113 which is about 2,000 barrel equivalents a day. Then we've sold various western Canadian properties over the last two or three months which is another 1,500 barrel equivalents a day. By the way, it's a great time to be selling low end properties. Because of events that are happening in Malaysia, I think worry going to have lots of free board on reserves over time. So it's a nice event, nice time for us given prices to be cleaning out our portfolio, which we're doing.

Downstream, we ended the year with 506 Wal-Mart stations in operation, we expect to build 100-plus during '03. Margins at Meraux are nicely in the black now. They haven't been. There's been improvement in the past couple of weeks. Superior is below break even. We're not running any heavy crude there, which is a our highest margin crude. The reason is you make asphalt, you make asphalt when heavy crude is at today's price, put it in storage, sell it in the summer, probably better chances that crude is going to drop during the course of the year and you'll be selling asphalt at a loss. So we're simply running the plant at 20,000 barrels a day on a light slate.

Also earlier in the year, the product prices in Chicago by the way were actually below Gulf coast prices and that shouldn't be. Because you should be able to add pipeline transportation costs to get a product barrel up to the Midwest, but it wasn't. It was reverse and that hurt upper Midwest refining margins. That's improved, but still not great. Meraux expansion project is reaching its final stages and we should tie in the hydrocracker in the third quarter of '03.

Capital budget previously announced it should be around 950 million bucks about 730 or so of that is to E&P. 250 to exploration around 480 to production and the balance around 215 million is allocated to downstream. And by the way, we used 22 bucks in coming up with our budget for this year and about 325 natural gas.

And also as previously announced we entered into a hedging program. I've never been a proponent of it, but decided we needed to protect a bit of this year's cash flow and naturally I'm wrong, but the prices that we used are 25, 30 for light crude, $16.70 US for Canadian heavy and 3.85 for natural gas and we did about 30 percent of our production by the way. That's for the whole year. So actually in the course of the year, if I was a betting man, I would suspect that we probably will make some of that up in the latter part of the year. With that, I'll open it up for any questions you might have.

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 followed by the one on your push button phone. If you would like to remove your question from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received and if you are using speaker equipment please lift the handset before pressing the numbers. One moment please for the first question. The first question comes from Steve Enger (ph) with Petrie (ph) Parkman. Go ahead.

Hi guys. Claiborne, maybe to get a little more detail on production profile from some of the new projects you've given us start-up timing. Can you give as you sense as to how quickly Medusa Habanero West Patricia may ramp up to capacity?

Yeah, I can. The wells are all pre-drilled at Medusa, Steve. But we're going to have to gravel pack them and complete them. So it's going to come on in stages over the course of the year and our current estimate is that you average Medusa for the whole year we'll be at about at 6500 barrel equivalents a day. Habanero comes on in September, October and for the whole yore we're looking at 2,000 barrels a day. And I could find something, I could give you a number on both of them. We're still on track, by the way to be at 25,000 barrel equivalents a day on Medusa and about seven or eight thousand barrel oil equivalents a day on Habanero. I'm having a hard time finding the numbers. End of the year. No, I can't find it right now. I'm looking at a lot of numbers and can't find the right one, but that gives you a flavor of it.

April is when West Pat comes on and it should come on pretty quickly up to around 10,000 barrels a day. There shouldn't be any really delay there. There's no unusual completion processes going on.

So by mid year is reasonable on West Pat?

Yeah and maybe sooner than that, but I think that's reasonable. And then Ecuador you'll see a pretty good bump up towards the third, you'll see it in the fourth quarter and we should be up around 10,000 barrels a day in the fourth quarter there. We're showing leaving the year around barrel equivalents, a hundred and twenty five. And about 220 million a day on gas. I think it's around 160,000 barrel equivalents a day something like that.

Okay and what are you looking at in that forecast for Canadian gas production to be at by the end of the year?

We're saying that fourth quarter gas for Canada should be somewhere in the 110 million cubic feet a day range for the fourth quarter. Reflective of further declines at Ladyfern of course.

Ladyfern has been declining at about 10 million cubic feet a day a month for about the last five months, something like that. Which is as predicted, I might add.

Yes. Okay. Then the other question, how are you looking today at your strategy offshore Malaysia blocks K and H's potential to bring in a partner sell down some interest. When would you do that?

Steve, what we're going to do is obviously get a rig/rigs and get out there and do some more exploring. We'll have a great sense of Kikeh by the end of the year, well have another well in it, we'll production test the well. We may end up drilling a down dip well there, too. We haven't found water. We probably need to establish definitively where the water leg is. By the end of the year we'll know what we have pretty well. And that's when we'll make decisions on Kikeh and anything else we might do. I think the news there is really going to be quite good. I think we're all quite enthused. I think we all have something that's going to be something that we're all exceedingly proud of here.

Great. We'll look forward to that. One final detail, Claiborne on timing on the Medusa and Front Runner facilities, are you -- you're awfully close now on Medusa obviously. Concerns about McDermott's troubles as it may relate to Front Runner timing at this point?.

You know, I think you have to be aware of it, I think you have to understand their predicament and I think you have to prepare accordingly. They're struggling. They're doing the best as they can. Right now, I think we're okay. I think Medusa won't be an issue. I don't think front-runner will be an issue. But you have to be aware of where they are and we are.

But for now, you stay on that horse while you can, huh?

Yeah. I mean I think so. They're our contractor. Now they subbed out a lot of the stuff for Front Runner by the way, they subbed out the top sides as well as the buoyancy cans and just have the hull of the spar and the construction over in Dubai which is on schedule. And so I don't you know if you just look at schedules, I think we're in pretty good shape on Front Runner. Medusa has obviously been delayed due to troubles, but I feel pretty comfortable that our latest estimate is pretty good given how close we are and we're down to punch list, et cetera. So I think we're realists, but conversely, so far, I think we're in the game and they're in the game.

Yes. Okay. Great, thanks a lot.

Yes, sir.

Our next question comes from Gene Gilespie (ph) with Howard Weil.

A couple of things. One the tax rate was a lot lower than we expected and the release was somewhat confusing and I guess I didn't -- not being a LSU-CPA I couldn't divine the reasons for the tax rate being down. Second question, ThunderHawk and Sidewinder are conspicuous by their absence in the program next year. I do know you have a lease situation with Sidewinder. Just kind of curious if there's a chance or if they're not going to be drilled.

Okay. Let me, I'll address the latter first and then the former I'll let our LSU CPA address that issue. On Sidewinder, we were going to drop the lease. I was waiting for you to ask that question, that's why I didn't bring it up in my comment, Gene. We tried to get a partner, we couldn't. I think the better part of valor is to let it go. It's going to be an expensive well and I think that's the best decision to make. As far as the other ThunderHawk we're still on track, probably a first quarter '04 spud. We don't operate it, Dominion does. And they're still mapping and working, but I don't see anything that would change that. It's just work along. And I think we're in pretty good shape there.

On the tax stuff its mostly year end clean-up, adjusting accruals to actual tax return, things like that. Nothing really out of the ordinary.

Okay. Thank you.

Thank you. The next question comes from Ken Bear (ph) with Johnson (ph) Rice, please go ahead.

Hey, guys. With Medusa and maybe even Front Runner, in terms of the incremental development dollars that Murphy is looking at, what's -- do you have a sense or can you share with us the type of incremental dollar us think you may be spending because of the cost overruns? I know McDermott has to actually eat most of it, but is this less of a cost issue and more of time value of money because the projects keep slipping?

It's time value money.

So truly from a development cost standpoint, we wouldn't be looking to add additional, you know, millions of dollars to the year end development costs?

No. It's a pretty well written contract. And it's fixed costs. And enough said.

Fair enough. That's all I was looking for. Thank you, guys.

Yes, sir.

Thank you. The next question comes from Mark Gilman with First Albany Corporation. Please go ahead.

Folks, good afternoon. A couple of things. Claiborne, I wonder if you could give us an idea on the actual sales proceeds and the reserves on the Ship Shoal sale?

Okay. Mark, we had -- okay, I'm sorry. The sales price was around $9 million. We had an abandonment liability in there which we brought back in to income a bit. And reserves were around 3 million barrel equivalents.

Can you put a number on that abandonment, Claiborne?

The abandonment that we had was $16 million. 14, I've just been correct, $14 million.

So it's an effective price, if you will of about 23.

Yeah, if you say it that way, which I think is a good way to say it.

Okay. Claiborne, it's looking to me that Terra Nova's performance has been exemplary. Looks like put this into a question that it did 150 gross or maybe even better in the quarter. Curious as to your thinking as to the potential of a reserve upgrade there aside from any east flank potential?

Mark, not yet. It has outperformed. I will give you that. We've had a high rate test in November which reflected the ability to produce more. I don't know if the facilities will allow that, there will have to be some de-bottlenecking et cetera. But I don't think anybody right now is talking about reserve upgrades. We're still I think grossing in the 370 range, something like that.

What did it do in the fourth quarter, Claiborne?

Somewhere around 15. At one point, we had -- this is net to Murphy. At one point, 17 or 18,000 barrels a day during the high rate test. Yeah, we did around 16 actually in the fourth quarter. It was a fabulous acquisition and the field was performing fabulously as is Habareno, I might add.

One more thought if I could. Why the Destin Dome writeoff now? What was the catalyst?

The catalyst is that at the end of the year, we looked at the likelihood of development within a reasonable time frame. The regulatory environment has tightened a bit and I think the better part of valor is to go ahead and get it off our books.

Okay. Thanks a lot.

Thank you. Ladies and gentlemen, if there are any additional questions please press the star followed by the one at this time. As a reminder if you are using speaker equipment you'll need to lift your hand set before pressing any numbers. One moment please for the next question. Mr. Deming, at this time I should no additional questions, please continue with any further comments.

Thanks, very much. I appreciate everyone's attendance and we will see you and talk to you at our next quarterly conference call. Thanks.

Thank you, sir. Ladies and gentlemen this concludes the Murphy Oil Corporation fourth quarter conference call. If you would like to listen to a row play of today's conference you may do so by dialing 1-800-405-2236. Your access code is 518759.