Murphy Oil Corp (MUR) 2003 Q2 法說會逐字稿

Good afternoon, and well welcome to the Murphy Oil Corporation Conference Call. 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 "*0". As a reminder, this conference is being recorded today, Thursday, July 31st, 2003. I would now like to turn the conference over to Mr. Claiborne Deming, President and CEO. Please go ahead, sir.

Thank you. I'm joined by John Echart, our Controller, Kevin Fitzgerald, our Treasurer, Mindy West, our Director of Shareholder Relations, and I will now turn it over to Mindy.

Thank you, Claiborne, and welcome, everyone, to the call. We will be using our usual format today. John will begin giving a brief review of our second quarter results, Claiborne with follow with an operations update and then we'll be happy to take your questions.

Please remember there may be some forward-looking statements. There are no assurances these events will occur or the objections will be obtained. There will be a variety of factors that may cause actual results to differ. Many of these have been identified in Murphy's January 1997 form 8-K filed with the SEC. Also included in our discussion will be certain non-GAAP measures which have been reconciled to net income in the earnings release, and a reconciliation is included on our website at www.murphyoilcorp.com/ir and with that said, I'll turn it over to John.

Thank you, Mindy, and good day to everyone out there. I will begin by discussing our consolidated net income, and it was in the second quarter of 2003, $79.7 million and that is 86 cents a share that compares to the second quarter of 2002, which was $14 million or 15 cents, a share. Included in the second quarter of 2003 were two special items, and I would cover those now, but also let me say there were no special items in the second quarter of 2002. The first special item in the current quarter was a gain equivalent to $34 million on an after tax basis on the sale of our Ninian Columbian field in U.K. North Sea. Secondly, we had an after tax charge of $12.3 million associated with the fire at our Meraux, Louisiana refinery that occurred on June 10th.

The cost included in that after tax charge on a pre-tax basis includes some insurance deductibles for rebuilding the unit, crude oil losses that arose as we determined that we would sell the oil rather than hold it for future processing, and this was oil that we had purchased to run in June and July, and in addition, there were $6.6 million of operating costs for the period from June 10th to June 30th, where we had no corresponding revenue due to the refinery being down. When I take out those two special items from our 2003, second quarter earnings, we made $58 million or 63 cents a share, and again, that is compared to 15 cents a share same quarter last year.

Turning now to reviewing our quarterly results by business type, and these exclude those special items, we made $53.7 million in the second quarter of 2003 in our exploration and production business that is compared to $28.6 million last year, so we were up about $25 million, almost 90%. Our downstream business generated a profit before special items of 12.6 million. We had a loss in the second quarter of 2002 of 8, so that is about $20 million better, and our corporate results net cost on an after tax basis were a little over 8 million versus being a little under 8 million last year in the second quarter. In discussing the exploration and production earnings increase, the primary reason there relates to the fact that we had lower exploration on Malaysian operations this quarter than last year as we had two unsuccessful wells in blocks K with no current tax relief available last year in the second quarter. Also natural gas prices were better this quarter this year.

However, natural gas sales volumes were down, and that is primarily due to the Ladyfern field in British Columbia and the Gulf of Mexico. Oil production increased this quarter versus the 2002 quarter, and that is related mostly to our west Patricia field in shallow water, Malaysia that has commenced production in the second quarter of this year. Our sales, however, from that field did occur during the first week of July. Our sales volumes for oil, I should mention, were about 8,000 barrels a day in the second quarter of 2003, below our production levels, so our sales levels were less and we had under sales, and as primarily attributable to the first sale of Malaysian crude and lower lifting's due to timing in the offshore East Coast Canada.

Moving over to downstream earnings, again, excluding special items as I said before, we were about $20 million better this quarter than last quarter, and that is a combination of much improved refining and marketing margins in our North American operations. Operating results in the UK were flat this quarter with last year's second quarter. Briefly talking about the six months that ended June 30th, 2003 in comparison to 2002, our net income was $166 million or $1.80 per share. It was $16 million last year, 18 cents a share in the first-half of the year.

On an excluding special item basis, we earned $132 million this year in the first-half and both our exploration and production earnings were much improved, and that improvement is due to our higher natural gas and oil prices, as well as the lower explore exploration previously mentioned in Malaysia, and finally our refining and marketing year-to-date earnings of about $9 million compared with the loss of $20 million last year on a year-to-date basis overall margins were much improved again in both the U.S. and the U.K. this year over last year. And with that, Claiborne, I will turn it back over to you for operating discussion.

Ok. What I thought I'd do is start with the status on development projects, talk about asset sales briefly. Pretty good detail next on our drilling program, close with downstream, and then take questions. So first development project is West Patricia, which is in our offshore shallow water Malaysia program came on stream in May and is currently producing 12,500 barrels a day net, and we should stay here for the balance of the year, in fact, on into next year. Medusa in the deepwater Gulf facility is now being commissioned. Production startup is delayed from August to mid October. There was a variety of reasons, and I'll give you four.

One, or first, there were some unfinished top sides work from the ship shipyard, which had to be completed off shore and it was a bit more extensive than we had reckoned it would be. We had some design modifications in our production risers, again a bit then we thought it would be. Thirdly, when we were installing the buoyancy cans on the spar, there are six of them, the last one didn't seat exactly right, which cost us a bit of time, and then lastly, we had two hurricanes, which we built into it but we didn't build into them that early in the season. Add them all up and it is going to push us back and this is happening real time, and so these things that you begin to see and you think you can catch up. In fact, you don't, and so that is exactly what happened. The new date, October 15th, has got a little bit of hedge in it and contingency built in.

Hopefully, we will beat it, but I think it's a good date. Next is Habanera. Shell tells us startup should be the week of October 22 October 22nd, again, that is a bit later than the window, which was September or October, that is the latest news, and we should have about 8,000 barrels a day equivalent, when we exit the year there. Block 16 Ecuador, we are bringing on the heavy crude pipeline, which starts up in September and we should exit the year around 10.5 to 11,000 barrels a day in Ecuador up from about 3000-4000 barrels a day. Frontrunner, development drilling is now complete with seven wells, first production is scheduled for midyear of 2004.

We have the sail away of the spar sometime in the second half of the year, perhaps October, and everything looks pretty much on schedule. The topsides are being fabricated and at Gulf island, and you know, and it looks pretty firm. Okay, in the asset sale category, just a real quick recap for the year. We announced in March that we were going to sell or had reached an agreement to Ninian in Columba closed in June, and is $36 million in cash, and then we wrote back and remainder of that liability of $15 million bucks. Western Canada, we announced it in April, closed it in June, various properties, $35 million bucks. In the Scotian shelf, we sold a part of our exploration position there primarily in the Corponate Bank and we retained our deepwater acreage for $10 million.

Add it all up and we have brought in about $90 million cash and then with the write back, about $140 million this year. Obviously, getting out of more mature properties with high exploration or high lifting cost and putting the money to work in other basins. Add all of this up, and we should exit the year somewhere between 140 and 145,000 barrel equivalents a day, and that includes about 10,000 barrels a day for Medusa, by the way. Okay, deepwater programs, start with north Medusa, which was a Wildcat just north of Medusa field that was successful. It came in right as we thought it would, about 7 or 8 million barrels, you tie it back to Medusa, when there was room in the platform.

There were no surprises there. The rig moved over to the west and we were currently drilling a prospect called Stone maker, which is in Mississippi Canyon 493, we have got 85% 40 to 50 million barrel prospect, could be bigger, covers a pretty big area. It is successful, it is another candidate for a tieback to the Medusa spar, and that's about $11 million dry hole cost. In the fourth quarter, we have got scheduled Johnny's Wagon in the Frontrunner mini basin just south of Frontrunner at Green Canyon 383. We have 37.5% that is about a 50 to 75 million barrel target. There is anther prospects in the Frontrunner area, which are being discussed by the group, and so Johnny's Wagon, which has got a sign day by everybody likely will be drilled but certainly there are other opportunities there.

We have two other prospects in Garden Banks. One is called 406 and one is called fighter Pete in various stages, probably won't be drilled until the first quarter of next year. We have 100% of both right now and likely we will sell down and there is a fair amount of interest in that. If you go into next year there is a prospect over in De Soto canyon, in the eastern Gulf (inaudible), we found it out. We'll have a full carriage, but a 250 BC of prospect. It is going through the permitting right now, which in that part of the world is pretty torturous, but I suspect we will get it and that will get drilled, and then probably late the first quarter of next year, I am getting pretty far out there, but currently it is under discussion, we will split Thunder horse, which is the prospect that we have in north of Thunder horse, which is a good-looking prospect. Leaving the deepwater Gulf, quickly in the Ireland, we have got a prospect called the Cong prospect in license 594 it is an obligation well, We have farmed down.

We are going to pay 10, end up with 15%. Gas prospect near the core discovery. Dry hole cost around $15, $17 million bucks. Malaysia, real active there, first in Block K, we are currently drilling a prospect called (inaudible), where we have an 80% interest. It is a wildcat; we are using the ocean rover. Anywhere from $100 million on the low side to $300 million perhaps plus on the high side: It is north of Kikeh, but close by, it is got a four way component at the top, relatively small and then it has got a fault assisted closer as you get deeper. Good amplitudes to tie to the field. It is a down dip, so it is got that risk, but it is a real first class looking prospect. Likely would be part of the Kikeh development if we were successful. Dry hole cost is about %18 million bucks; net to us is about $14 million bucks or something like that. The next well is the Kikeh 4. It is an appraisal well in the Kikeh feel we just finished coring. It is in the middle of the field. We have got six cores, great recovery. We are going to move off in about a week, and then it's being drilled by the 534, the ocean rover leaves Kikeh (inaudible) and moves over to the number four location and we will production test it, which we will do August or September and that will take a while.

We will have various flowing periods and shutting periods. The limitation on the rig is about 10, 12,000 barrels a day, production, that is the highest number you will see, but it will be an extensive test and primarily below a sum, by the way. Next is the Kikeh number 5, where we have an 80% interest. We are going to use the 534 it is a wildcat. We are going to move here from the number 4 location, which is currently coring and, as I said about will move off in about 10 days. It is across a fault, and on strike from the number 3 well, which is a furthest west well in the Kikeh field, so we are going further west across the fault looking for new reserves, and we could add, I don't know, anywhere from 50 to 150 million barrels of additional reserves here.

The dry hole cost is $17 million bucks a date so again about $14 million plus or minus for us net. Good-looking prospect, great amplitudes, and we will see. Now, after the Kikeh number 5, that is the last firm well for the 534. We have options to drill more, which we haven't exercised at this point, but it is there and on the ocean rover, we will have one more firm well after the Kikeh number 4 test, and the location of that is undetermined. We are going to see how we do at Kikeh Cacheal, see how we do at the number 5 location before we start pulling some triggers on locations. Again, we have options on the rover as well. So depending upon what happens, availability of funds, etc, but primarily driven by what we see in the wells were currently drilling we need to drill more wells and outlined our stop.

Now moving over to Block H, we are currently drilling the Dinkus number 1 well, we were in 1300 feet of water. We are about 35 kilometers away from Keebabogen, which was the gas discovery deepened and found oil, and we were looking for the same deeper section in Dinkus. As is said before, the riskiest well we well that we will drill this year in Malaysia. We are looking for mass interpradite sands 200 million barrels plus, big structure, but it is wildcatting, and the amply amplitudes are pretty opaque, but it is a real big structure, and you could tie it in to keep a volume. So it is one that I think it has got promise and when using the Edward Falcon to drill that prospect. Still in Malaysia, we are going to drill a well probably late in the third quarter in our shallow water program in SK 308 license called. WAU number 1, it is in 125 feet of water, it is a 5200 foot test.

We were going for the equivalent to the west pad pay sands; we were about a mile from the west pad number 4 well, good tie in 15, 18, and 20 million barrel prospect, and we will obviously tie it in to the west Pad facilities when there is room available there assuming we were successful. Okay, turning to our downstream business, arose full turn around, which was advanced up from our August 1 date because of the fire. The cleanup and repair from the fire is ongoing. The rose unit, which is where the fire started, and which was, in essence destroyed. We will be out 12 months plus or minus, so when we come back up, which will be sometime in mid September, maybe a bit earlier, but September 15th is probably a good date. We will come up with 125,000 barrels a day with our hydro cracker, which we are integrating in and tying into the plant, in its mechanically complete now, but not the rose.

Now we have got business interruption insurance and that will cover the difference between the money we would have made with the rose and without the rose during the period that we were running without that unit. Superior margins recently strong, there has been a real surge in wholesale gasoline prices in the upper midwest, and heavy oil differentials have widened a bit, so we were looking at $3.50-4 of barrel right now, and that is stronger than it has been. It has been slowly increasing over the last two to three weeks. Well mart with at 570 in operation, margins range from 6 cents to 9 to 10 cents bouncing around. We had a real good second quarter. Margins weakened, however, in July. So that is it, and I will take questions now from anyone.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press "*1" on your pushbutton phone. If you would like to decline from the polling process, please press "*2". You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our first question.

Our first question comes from Bruce Lanni with A.G. Edwards.

Hi, Claiborne. How are you doing?

Good, Bruce. How are you?

Oh, hanging in there. Just a couple quick questions, I guess the first one would be on refining and marketing. Could you provide us with just maybe a direction as to the contribution that is came from superior, Meraux and Wal-Mart? Because I would assume that superior probably had a pretty good quarter because of the asphalt sales, and you said the Wal-Mart margins looked pretty good too, so can you kind of put that in perspective, number one, how those three matched up so as we progress into the third quarter, we can kind of put things together for our model? And then I guess the second question I have which is going to ab little tougher for you, Claiborne, is reserve replacement. You've had a couple wells in the deep water this year that haven't panned out. Can you tell us what you think you may be booking this year to give us some guidance on that too?

Sure. First with downstream, the primary contributor in the second quarter was Wal-Mart. It was 70%-plus of what we did, and next was Superior. Caught in beginning of the asphalt season, which helped, differentials on heavy crude in at least in the midwest are kind of narrow from where they are now, so you didn't see near the margin that is we're enjoying now. So those are the primary drivers.

So before you go on to the next one, Claiborne, so will Superior trickle over into the third quarter too as far as the profitability of that refinery goes on the asphalt sales?

Yeah, Superior is looking strong now, Bruce. It wasn't as strong at the beginning of July, but it's just progressively gotten stronger, and we're looking $4-plus now. Primarily it's been a surge in the last week because if you just look at this, Nimex and then you look at Gulf Coast, the group 3 upper midwest, gasoline prices in particular, there's been a pretty good widening. And they're wider than they typically are, so I'm not sure it's going to last at this $4, but it's strong now. And asphalt obviously helps, even though these budget crises have impacted the ability of state governments to go out and repair roads. And obviously they're our biggest customer up there. So the asphalt market at least in our area is probably down 15, 20% where it's been in prior years. I think we'll sell close to what we sold last year, but we certainly won't go past it.

Ok.

Ok. Reserve replacement is going to be driven by Malaysia. There's nothing of significance to look in the deep water Gulf. If Stone maker works, there could be a nice bump there even though the new booking rules are going to give us some heartburn, have to understand that. Malaysia, particularly Kikeh, given a production test l have some pre-board. Obviously if we're fortunate at Kikeh (Inaudible) the number 5 welcomes in, if Dingus comes in, a lot of opportunities here, but again these booking rules are going to be something we're going to factor in strongly. So that's where I see it happening. And it's -- you know, there's a lot of opportunity. Of course some good things have to happen to us. We pretty much have a handle, better handle on the range at Kikeh, so we'll have some options there then.

So can you -- I guess can you give some type of guidance on the Kikeh bookings for this year?

No, I can't. The range that we have is 4 to 700 million in the field, and we're going to have to get our hands around really what the SEC numbers or regs and their guidance really drive us. But the models -- the model is there, and we have an 80% interest, and the range of 4 to 7 is a good firm range. So I'm just not comfortable enough letting you know -- we'll have a production test, but on the bottom -- it's the biggest sand called the bottom sand, what we call the 150. Have to understand how it works. The field is going to require water injection from day 1, which is typical, I'll quickly add, and so we have to understand what that means as far as booking now too.

Just to round it off, Claiborne, then I'll get off, how about the fields outside of Malaysia, are natural field decline rates going to come into play this year into your bookings or is that pretty stable?

I don't see anything big out there. Typically we haven't booked everything that we ultimately have -- typically there's some room there. Ecuador, we're probably not fully booked given what the new rates are going to be, but there's not a lot of room there. You know, I mean, typically there's room, but not enough room unless you have some new discoveries to show good numbers. I mean, clearly we're going to be driven by the drill bit and what we can book from Kikeh.

I understand. Well, great. Claiborne. Thanks a lot, and good quarter actually.

Thank you.

Our next question comes from Arjun Murti with Goldman Sachs.

Thank you. Claiborne, any change in terms of thinking on potential typing of startup of Kikeh if appraisal continues to go up? I think you were thinking a 07ish type of time frame?

Arjun, no. The only factor that I would introduce, we are assuming that we have an FPSO and shuttle tanker. If you pile up enough reserves, you ought to be thinking about a pipeline at some point, and if we do that, that pushes us back into the first part of 2008. It's a good news story, I'll quickly add, because it means that you've got something bigger than what we have now, so what I would do is -- what I'm doing in my own head is assuming first half of 2007, and then, of course, you always look at early production schemes, et cetera, and so there may be some scope there even though it wouldn't hold out a lot, but it's certainly under study, so it could be a little bit sooner than 2007 if one of those early production methodologies works, and if we have to lay a pipeline, it could be pushed back to 2008. But I think those are the drivers, and I think 2007 is probably a pretty good number.

And -- thank you, and just one follow-up. I know you all have desired to not make comments on Lapu. Is it reasonable for one to think, though, that whenever Malaysia and Brunei comes to term on the border dispute sometime after that we might hear on Lapu?

No comment.

Fair enough. Thanks, Claiborne.

Ok.

Our next question comes from Aubrie Fine (ph) with J.P. Morgan. Please go ahead with your question.

Hello?

Our next question comes from Mark Gilman with First Albany Corporation. Please go ahead with your question.

Claiborne, good afternoon. How are you?

Hey, Mark, how are you?

Good, thanks. Claiborne, can you give us some sense of what all the delays on Medusa are going to mean in terms of your all-end costs there?

You know, the one item that it impacts is there is what's called an independent project team which is an overhead item which is put together and all the owners are members of it, and that's where all the engineering and reservoir work, et cetera, gets done, and the longer you stretch out, the longer those costs, which are, I don't know, a million dollars a month, something like that, go on. Otherwise it's fixed price contract, and our contractor pretty much gets stuck with it. So I think that's the big driver. I can't think of anything else. I mean, there's always something else, but in terms of big drivers, I think that's really the biggest one.

Any capitalized interest also that you're going to be booking on it?

Yeah, yeah, capitalized interest. I don't have a number for you, but that's also a number.

Ok. When you were referring to the SEC booking rules, it sounded as if your comments were of a going-forward nature. As you see it, are there any implications with respect to what you got on the books now?

Mark, no, like everybody, we got lots of help from the SEC recently, and I think we have pretty good indication of what their interested and what they're keen on, which are pretty reflective of what we've got.

Ok. So you don't envision any revisions associated with the existing base?

Mark, I don't of anything of a material nature. And I can't ever say that you won't find a million barrels here or an undrilled fault block that nets down to 2 million barrels there, but I don't think it's material.

Ok. And just one final one. Can you give us your sense of the way in which progress is or is not being made between Malaysia and Brunei on the border dispute? There have been some generally constructed indications in terms of discussions. Do you have any sense?

You know, I read what you read.

Ok. Thanks a lot.

Ok.

Our next question comes from Mark Maier Simons (ph) and Company.

Good afternoon. Question on (inaudible). You went non-consent on a drill that your partner drilled in May. Can you walk us through that decision process?

Yeah, there were two wells, in fact. One was drilled by the old -- Canada, now Conco, now Philips, in the middle of the field in a block that was never part what if we did. And it came in at about 10 million a day, and the second one was drilled by Apache, good well it came in at about 18 million a day. It was a real easy process. That field has been hugely overcapitalized. And it's a regrettable event which we all pretty much saw coming but were powerless to stop. So we know what the reserves are. And we know really how much capital we've already poured into it, and so you can put additional capital into the field to get reserves but they're not incremental.

So there are no drainage issues as it relates to your net?

Well, I wouldn't say that. If someone else is capturing molecules that are there, that you otherwise would have got with a well bore that you have a 60% interest in, then it is, but in the overall scheme of 500 BCF field, no, it's not material. So it's just a different philosophy amongst companies. Some people like to drill wells and it makes sense for them, by the way. I don't begrudge it a bit. Just different business philosophies. I see the field, we see the field as overcapitalized. Now especially the Apache well is a great well, and so in hindsight, I would have preferred to have participated than not, but in the overall scheme of life, it's not that huge of a deal, and we had a real specific kind of business rationale logic to walk our way through it and feel good about the decision then and now.

One question about Frontrunner as it relates to the delays that you had on the top sides in Medusa. Heard a number this morning on the Frontrunner top sides of 40% completion. Anything related to this delay on Medusa that makes you a little concerned about the timing overall forefront runner?

You know, if I was smart, I'd say yeah, but I don't see it. I see the spar hole going on track and I see the top sides going on track. And so, you know, I guess you always worry, and obviously we didn't do a particularly good job of understanding the issues with our contractor at Medusa, even though we saw them early, didn't understand the magnitude quite, but, you know, having that knowledge, I guess we're - forearmed is forearmed. We're pretty diligent about where we are in kind of checking on things. So I feel relatively secure with a mid 2004 date.

Very good. Thank you.

Our next question comes from Irene Haas with Sanders Morris Harris.

I just kind of would like to have some color as to why you guys -- I guess the next well you're going to drill in the Frontrunner area is going to be Johnny's Wagon. Just want to hear what you like about the prospects, and secondarily, if you have any thought of when Thunderhawk might have a spud date. That's all I have.

I can tell you our reasoning on Johnny's Wagon. Threes three prospects down in that part of the mini basin, comped, Ex-actabox and Johnny's Wagon. Let's get a test in the mini basin south of Frontrunner and test the section, and see if the prospect works. If it works, then you enhance the quality of the remaining two, and there could be scope for a second development down there. And so I think it accomplishes a lot. Is it a risk? Sure. It's a stratigraphic test more than a structural test. It's got real good amplitudes, but it certainly is -- and you're drilling in a basin that's got lots of sand in it, and so I don't think there's a sand risk. I think there's a seal risk if there is one.

But it's got a lot of strategic as well as immediate development, and just booking reserves is reason to drill it but there's options. One of our partners wants to drill west of Frontrunner and it's a good prospect, but there's no rim on the Frontrunner platform for a while, so you find it but you keep it there in suspense for a while. So you could probably drill it next year and from a net present value standpoint, probably do yourself a bit better, but nonetheless, it's a good prospect. So those are all the things that we talk about in that partnership and different companies have different views, which you would predict, which is healthy. And Thunderhawk, I'm sorry. We don't operate it. But in general, discussions that I hear is that maybe March, maybe March of next year. But, you know, it's moving. We probably will drill it sooner, but it's going to be a complicated well, by the way, so in a way, I don't mind it being looked at extensively before we actually get to the spud. A lot of salt, a lot of pressure, deep, so you need to really be careful about it before you drill it.

Thank you.

Our next question comes from John Girdis (ph) with Southwest Securities.

Claiborne, good day. Well, let's start with Kikeh number 4, your coring operations. Talk to us a little bit about what you're seeing as far as just structurally. Does this section come in about where you expected? Give us a sense of maybe rock properties, permeabilities, porosities, how does all this look to you?

John, we've cored it but we haven't analyzed the course. In fact, we just pulled the last core, sixth core, about three or four days ago, so I can't -- I'm not in a position to tell you. In general, it came in just as you would expect, and you would expect it to, because it's the fourth well in this particular fault block, it's a little bit higher in the section, in the middle of the field and we already know that these sands are continuous through the field because of the three previous wells. So if it hadn't come in as expected, we would have been awfully, awfully unhappy people and that certainly is not the case.

Good. Good. The petro physical analysis, the log analysis, though, I guess that also came in nicely as kind of expected then?

Yeah. And again, we don't have all our work done because it's just work in progress. But so far, I mean, I'm not on the rig looking at it, of course, but what I'm advised is that things look fine.

Great. Good. North Medusa, you mentioned success and you mentioned 7000-8000 barrels a day. I believe that's probably a net figure, maybe it's not, correct me if I'm not -- was that as expected and what kind of reserve size are you really looking at there?

Now, what I said was 7 or 8 million barrel gross reserves, we have an 85% interest, and that's exactly what we were looking for. It was a real nice amplitude, tracked exactly into a Medusa pay sand. We'll tie it back, cost $40 million to do it, and you have additional capacity, one of capacities available in the platform. So it's just kind of getting ready for the day when there's spare capacity, because you want to keep a bull likewise stonemaker that serves the same purpose.

And then Ireland, a little bit -- in our eyes, a little bit of it. You're in the U.K., you have a position there, but this looks like it's a little removed from prior activity. If you would talk a little bit more about this 594, please?

It's a leftover from a prior program. It's an obligation well which was really scheduled for last year initially and then was deferred a year, we got some advance from the Irish government and we're not a big player in it. We're only paying 10%. The rig has been obtained and we'll spud here I think this weekend, in fact. It's got issues with it, I mean it's a good prospect, by the way. -- nearby, 800-900 ECF - is had development problems. They were going to land gas on the Irish coast of the terminal and they had some decisions which make that problematic, and so all things being equal, I would probably try not to drill this well, but we're obligated to so we will.

Thanks for the candor on that. What would you argue the piece of best on that prospect is?

That's always kind of an unfair question but -- you mean reserve size?

No, probability of success. Excuse me.

I think it's reasonable. It's 15 miles away looking for the same pay sand, you have amplitude, so 1 in 4, something like that.

Thanks for the response.

Our next question comes from Don Dexter (ph) with Dorsett Asset Management. Please go ahead with your question.

Good afternoon, everybody. Could raise two questions. First on sin crude, with the expansion that's going on there, the royal mine expansion, I guess, phase 3 expansion, do you expect to book anything there this year? Just sort of wondering bookings versus capital spending, how that sorts out. That's the first question.

Don, there's typically room -

You know you've got the expansion you're spending the capital now.

I appreciate it, and I think we booked some last year, in fact. There's typically room and typically we kind of book as we go along, so I think there's a reasonable chance that that might occur, but I wouldn't 100% count on it.

Ok. And secondly, at Kikeh, are you going to file plan of development the end of this year? Is that still the idea?

I'll tell you the basic timeline is this. We're going to firm up how we're going to develop this field by the end of the year, and we will at the beginning of next year come up with the numbers that are the solid numbers under the plan that we've adopted, and we're going to go to our board in March of next year for sanction with all of our final numbers, and so we'll by December, January, pretty much know what we're going to do, and we'll have obviously concurrence with our partner. By that time, we will have drilled these two additional Wildcats right around the field, and I think that it's very material to all this. So we need to get that information. Once we do, then we go forward, and the only issue I mentioned to Arjun was a pipeline possibility, which has been raised, and I think we can't dismiss it. It needs to be seriously considered.

And in terms of excluding any exploratory success from Kekah proper, is there any sort of range you want to venture in terms of gross crude oil production volumes?

You know, I'll be in a better position by the end of the year when I can look at actual forecast. Yeah, I've got some things in mind that have been bandied about, but rather than talk off the top of my head, I'd rather be looking at something that's based on actual reservoir engineering work.

Thanks very much.

Our next question comes from Bruce Wright (ph) with Bloomberg. Please go ahead with your question.

Couple of things. Wondering if you could reiterate the situation with the Meraux refinery, I believe you said September 15th for a restart?

Yeah.

125,000 barrels a day?

That's correct. There's a window that we have from the 5th to the 15th of September when it could restart. I think it will probably be closer to the 15th than the 5th. There's a couple critical path items, primarily electrical switch gear which was burned up in the fire which were just big houses, doghouse looking things that have lots of electrical equipment in them that controlled power to other units besides the rows. When that gets here is going to be the critical path item to restart. Coming back up, we come back up on the 15th. We're coming back up with a brand new unit which if you look at it from a bird's eye view occupies about 30 or 40% of the total space of that pad where that refinery is, so it's a huge unit, this hydrocracker, so bringing up new units are difficult, so I'm assuming it's going to come you perfectly, but sometimes they don't. Sometimes they have kinks to be worked out, but I'm assuming we'll be up at 125,000 barrels a day September 15th, but without erosion.

Pretty much on schedule then?

Yeah, from the day we'll finally went through the rubble and figured out really what we had and didn't have, this is the same schedule we've had for a month.

The person just speaking was?

That was me. Claiborne Deming.

Claiborne. I'm sorry. Final question, just wondering if you might have any sort of forecast for crude oil prices here in the months ahead, maybe through the rest of the year? Any idea what we might be looking at there?

You know, I'm a perpetual bear just because there's plenty of productive capacity in the world and after -- now that the war is over and behind us, more likely than not, there's -- you'll see more crude on the market, so I always plan for something below 25 plus or minus. In the near term. Over time, I'm a raging bull just because of replacement rates, demand growth over time, which is pretty much unstoppable, and then you look at how often big fields are discovered versus ever-increasing demand growth in the world, and then where the big fields are and the age of the big fields which are currently providing such a backbone of the world's productive capacity. It's hard not to be a pretty good bull out there. And that's what makes fields like Kikeh and the basin that we're in there, which is basically unexplored, 12 million acres that we control really, really, really valuable.

So 25 or under by the end of the year?

Yeah, I think -- I mean, that's my best Claiborne Deming guess. Something around there. It could be less. It depends on the ramp-up in Iraq and other things. But I think it's safer and prudent to be more bearish than bullish in the short run.

Thank you.

Ok.

Our next question comes from Aubry Fine with J.P. Morgan.

It's actually Dave Wheeler. Couple of questions pertaining to Malaysia. The Block H well at Dinkus, what was the timing on that?

David, I would say towards the end of August a. It's not particularly deep but we just spudded it.

All right. And then back at Kikeh, I know in the past, you've talked about several prospects around Kikeh. Are the ones that you're drilling, are those the other distinct prospects or are these -- you know, like you gave five. Is that -- have we changed the process, are we going for lower risk near or into Kikeh prospects as opposed to further away prospects?

It's both. Kikeh Cacheal is a distinct prospect north. Now, it could be part after greater Kikeh structure if we got awfully lucky. I don't anticipate being awfully lucky. I think it's a nice four-way, albeit small, then it's got a three-way against the fault, but it's a distinct prospect. The number 5 well is on strike and on structure at Kikeh further west. Across the fault, though, so it's a separate prospect, but it's on the Kikeh structure. And the philosophy here, not hard at all. We just need to understand bet whear we have as we put together our development plan for Kikeh proper, is how many barrels do we have or do we think we have within that immediate area because we're sitting here planning things which are going to impact flow rates. In particular, don't want to beat a dead horse with pipeline, but how big would you make one would be critically important. So we need to have a sense of what we've got here.

Ok. That makes sense. And if there are other prospects to drill around the area, what are you bumping up against in terms of explorations on the leases -- expirations on the leases? Anything where have you to move fast on the other prospects?

Dave, 07 I think is K, obviously H I think is 08, and then there's the L and M blocks are a long ways off. It's a driver in K. And that's why we're drilling six wells with options now. We need to find out where the sweet spots in K are. Obviously we found one, there's four others, and threes three prospects just north of Kikeh, Kikeh Cacheal being first. We need to get around to those. But we need to could the first one first, which is Kikeh Cacheal.

Thanks, Claiborne.

Our next question comes from Paul Cheng with Lehman Brothers.

How are you doing?

Hey, Paul, how are you?

Good. I have two simple questions and two may not be so simple.

None of your questions are ever simple, Paul.

Let me go with the two straightforward. Meraux, when they come back, what kind of gasoline and diesel (inaudible) they going to look like?

Well, it's going to be a sweeter slate than we typically run. And our current plan is to crack Risid and one of the reactors of the hydrocracker. I is say that because one of them was designed for DAO from the Rose unit and we're going to switch that around and so we're going to crack Risid so -- than typical, so, you know, 50-plus, something like that. I haven't seen any yields now, ok, so don't write that in absolute stone, but -

But it should be better than, say, before than previously, right?

It should be. It should be, ok? But again, I haven't sat down and gone over yields on crude slates, but I know it will be a lighter sweeter slate. We've already bought our first cargo, in fact, and we should have given the new unit and the way we're going to use it, I think we should have more light ends. What was your second question?

Second question is for 2004 production, I think all along we've been talking about 160,000BOE per day, and as before -- is that being changed in any meaningful way?

Well, if we leave 140 to 145, we add 20, we'll have declines. 155,000-160,000. I'm kind of floating a bit in there but I think that -

Ballpark, that's the number?

Yeah.

And do you have a number what the third quarter may look like?

Production wise?

Yep.

I think we said in our releases 120.

Oh, I'm sorry for that.

That's all right.

Ok. Two may not be so straightforward question. In the Gulf of Mexico, deepwater, you guys have had more than your fair share of success, but the flip side is the founding development -- total unit comp remain quite high. Is there anything that when you go through your strategy session that you can see perhaps that you have to change your way how you pursue certain -- by maybe no, not targeting some say pretty small in north Medusa, that is a good one, I mean, but 7 to 8 million barrel if you're including the development cost in all that may make your founding and development cost to be high? I don't know if that's a fair question, but that's -

No, I think it's a good question.

And the second question, if I can also come out with that, Sincru, over the past several years they have more than their share of difficulties. Did the partners, including yourself, ever talk about think about change it into perhaps more after traditional operator structure by a joint venture consortium? It seems like from accountability and also from an operational stand, it tends to be working better if it is in operatorship structure. First question. First 7-8 is a good number. Is it high?

Yeah.

Is that where the basin is headed? That is the deepwater.

Yes. 7 or 8 million barrels that is Nofert Medusa, should be a number less than that because we're tying it back to Medusa which is already being amortized, so it should be a $6 barrel, for example. Should work pretty well there. But on balance, I think the basin and there's a lot of mini basins and a lot of different plays and so when you say basin and deepwater Gulf in the same breath, I think you run the risk of simplifying, but on balance, we're getting more mature. And I think you need to be cognizant of that. This whole subsalt Tahiti business is relatively new. We have a nice position in that. We need -- we don't -- aren't the first ones in a new play but we follow up real quickly and we've done that once we understand the play style and how it works, and that may be a lower number over time if the prospects remain big, but it's risky and you're drilling through salt. So on balance, I think you're seeing mid life of a basin and maybe trending towards later life. There will be some surprises plus and sm surprises minus in that, but I think on balance, that's certainly the way I view it. And we got really smart guys, smart people that know how to find oil drilling dry holes right now, so it makes you scratch your head, and it's concerning to me.

That means that, I mean, you may not be right now but over the next 12 to 18 months that you would start to be thinking that whether you should shift more of your drilling activity or focus maybe outside the Gulf of Mexico?

Paul, if you look at where we're spending our money now, the Gulf has stayed pretty much firm, but we're spending a lot more money in other places. So the mix has changed and the mix has changed to where we are spending more money outside as a percentage of our overall exploration portfolio. And I see that trend continuing, by the way. As long as we got people that we do looking in the Gulf who are confident they can find economic reserves and they demonstrate it, then I think we continue to fund the program, I think we'll make money. But it's one of those that you monitor all the time, and you come up with different conclusions over time.

But I have a lot of confidence in these guys and I have a lot of confidence in our program. But I worry about it. Sincrude, you know, the way that it's organized is clearly not a deal. We're 5% owner. We've bought it right. We're not a driver there. We have a voice and an opinion, but there's other actors who have more opinions there because their interest is bigger. And so I would tend to agree in general that there's better organizational structures in Sincrude. But one thing I always remind myself with Sincrude is don't get gummed up with the trees in the forest. You're sitting on one of the largest reserves of crude oil in the world with a plant that's been there for 25, 30 years that has over the sweep of time lots of exceptions, driven down cost and increased production. Like every organization, sometimes they screw up for a while, and perhaps the organizational structure that they have don't allow them to jump on and correct it as fast as if you ran the company yourself. But it's - on balance, it's just extraordinarily valuable asset. And so I tend to have a broader view like that rather than a microview just because of our 5% ownership interest.

Thank you.

Our next question comes from Mark Gilman with First Albany Corporation.

On the Canadian (inaudible), I think there's reference in the release to a slower than expected ramp. I'm wondering if you could comment on the reasons there.

Yeah, there's two. One we have a water flood going in (inaudible) that hasn't responded, and I say hadn't responded, we've seen increased fluid levels in a couple of the producers but we haven't seen increased production and it's worrisome. The guy who is run it are confident it's going to happen, but like any manager, I worry. So I don't think anything has shown in our production growth from here forward for that. But it could be material to us if it works. Secondly, there's a new area we're involved in called seal which has got lots of promise, by the way. Seal we've drilled lots of wells but because of wet weather in Canada, we have no pipeline there because it's new, we haven't been able to truck barrels out, so we're not showing any production. I think we've got shut in to our company net -- and right now we're about 2500 barrels a day shy of where we thought we should be. So those are the two areas. There's kind of ins and outs in other places, but those are the two areas.

Thanks, Claiborne.

You're welcome.

Ladies and gentlemen, if there are any additional questions, please press "*1" at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment, please, for our next question.

Our next question comes from Fred Luther (ph) with Bear Stearns. Please go ahead with your question.

Claiborne, can you book Kikeh reserves this year if you're not going to the board for sanctioning? Until next year?

Fred, that's a good question. I hadn't put all that together. Where I've been moving as much as anything is a production test, we've got all of the -- most of the stratigraphic work, extra ti grow fee, petro physical, rock properties, all that's kind of in process, will be done. Four holes plus sidetracks actually is going to be eight in the reservoir, so we'll have everything from a technical standpoint ready to go. If that becomes an issue, then we can always kind of perhaps rethink things from our internal standpoint. But it could be a driver, so I think it's a good question and one that we have a bit more control over internally than those other issues. You want to make sure technically the damn thing works and is there and we'll have that nailed. After that, we'll have to see the best time to book. But believe me, Claiborne Deming wants to book sooner than later.

All right. Thanks a lot.

Your next question comes from Peter Vick (ph) with Ramrock (ph) Capital.

Hi, Claiborne. You earlier opted out of one or two wells on the playoff eastern Canada, and I was wondering if you could give us a little color about what went into that decision.

Yeah. We were going to participate, in fact, were participating and won already one well on either side of that discovery. And how that well came out and how the other well came out, which is on the other end of the discovery, would determine what our ownership interest in the field would be, probably wouldn't have been more than 10 or 15%. There's a very strong likelihood both -- each well will be successful because amplitudes work, and these were not amplitudes. However, because we were going to be at 10 or 15% ownership interest in a field owned 90 to 85% owned by another company, only one other company, the relationship over time like that typically isn't very healthy, and so once we did all the net present values, because it won't come on stream until probably, if it comes -- 2008 if it comes on stream, I think it will and hope it will, the net present values, avoid capital, getting some money up front, we got 10 million bucks, for the interest we would earn, I think from a net present value standpoint, we're the same. And we won't have -- the operator won't have the hassle of Murphy Oil Corporation with a 10% interest bugging him on all that stuff. So that was really how it worked.

Ok. Thank you.

Mr. Deming, there are no additional questions at this time. Please continue.

Thanks very much, and I appreciate you dialing in and listening.

Thank you, sir. Ladies and gentlemen, this concludes today's Murphy Oil Corporation second quarter conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 followed by access number 544144. Once again, if you would like to listen to a replay of today's conference, please dial 1-800-405-2236 followed by access number 544144. We thank you for participating. You may now disconnect.