Murphy Oil Corp (MUR) 2003 Q4 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen. Welcome to the Murphy Oil Corporation fourth 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 the conference, please press the star followed by the zero. As a reminder this conference is being recorded today, Thursday, February 5, 2004. I would now like to turn the conference over to Mr. Claiborne Deming, President and Chief Executive Officer. Please go ahead, sir.

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

Thank you, Claiborne. I would like to welcome everyone to the call. We will be following our typical format today. John will begin by giving a brief review of fourth quarter results, then Claiborne will follow with an operations update and then we'll be happy to take your questions. Please keep in mind 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 and many of these have been identified in Murphy's January 1997 form 8-k filed with the SEC. With that said, I'll turn it over to John.

Thank you, Mindy, and good day to everyone. The results for the fourth quarter of 2003, our net income was $58.7 million or 63 cents a diluted share. That compares to the fourth quarter of 2002 of 57.6 million or 62 cents a diluted shares. Our full-year 2003 net income was $294 million, $3.17 per share and that's compared to $111 million last year in '02, $1.21 a share. In comparing the fourth quarter of 2003 to 2002, our exploration and production earnings were $84 million in this fourth quarter. And that compares to our earnings from continuing E&P operations last year of $57 million for an increase of $27 million in profits. Our downstream results in the fourth quarter of '03, we lost $13 million compared to a loss of 4 million in '02.

Our net costs retained in our corporate segment is $12 million of net costs this quarter versus $7 million in '02. Our better exploration production earnings were due to a combination of factors including higher oil sales volumes, higher natural gas prices prices and a Canadian tax benefit from rate reductions enacted by the federal government in Canada and the Province of Alberta in the fourth quarter of '03. Plus in the fourth quarter of '02, we did had have an impairment in the gulf of Mexico. Our oil production of 90,500 barrels a day in the just completed quarter was up 10% over the 2000 period, and that was a quarterly record for the company. The increase related to West Patricia, in Malaysia, the shallow water field that came on in May of 2003 and new production from fields that came on in the fourth quarter in the Gulf of Mexico that we call Medusa and Habanero.

Our natural gas production was off by 22% in the 2003 period mostly due to the decline at the Ladyfern field in Canada. Our downstream operations generated a larger loss in the 2003 fourth quarter mostly attributable to worst refining margins in the U.S. Our downstream operations in the UK, however, enjoyed much healthier margins and therefore posted stronger earnings in the 2003 period. Our net costs to corporate functions were higher, as previously mentioned, due to higher net interest expense, higher retirement plan costs and lower corporate tax benefits. For the full year 2003 compared to 2002, our E&P earnings were $326 million in the current year, and that's up $165 million, and that's better natural gas prices and wholesale prices and a gain earlier in the year on the sale of our Ninian and Columba fields in the UK north sea.

Also, our downstream results, which were losses in both years, but the losses were lower in 2003. And that's despite a $17 million after tax loss from the erosion of fire at the Meraux refinery that occurred in June. Both north American refining and retail marketing margins were improved in 2003 compared to 2002, and again, our UK results were nicely profitable in 2003 as they earned $10 million compared to a small loss in '02. Finally, our total long-term debt was slightly less than $1.1 billion at December 31, '03 leaving our debt to total capitalization rate at 35.5%. With that, Claiborne, I'd like to turn it over to you.

Thank you, John. I will review development projects, production, reserves, current drilling and then downstream activities. Then I'll take questions. So story (inaudible) development. At Medusa, we have two wells producing a bit in excess of 20,000 barrel equivalent a day. The next well starts up the first week of March, then we have three more to complete and we should be at our 40,000 barrel a day target around mid year. At Habanero narrow we have two wells that are tied back and completed to auber(ph) producing in excess of 30,000 barrel equivalence a day right now.

Lot 16 Ecuador, the heavy crude line's complete and we're producing 52,000 barrels a day below the plan of 75,000 barrels a day. And we have some work to do with our operator there to see what we can do. At front runner spar hull (inaudible) to buy in the fourth quarter it will be put on location in March and first production is set for September or October of this year. On production we should average around 130,000 barrel equivalence a day in '04 after the sale of our 20,000 barrel equivalence a day in Canada, this completed in the second quarter. That process is going well with the data rooms opened next week and there's a lot of interest in these assets.

On the reserve end, we'll not be booking Kikeh in '03 because project sanction by Hiboard(ph) and our partner, the host government, occurs around mid year of this year. As I have previously highlighted, the balance of our exploratory program had a poor year in '03 therefore absent a Kikeh booking, our reserves will be down. As a result we're in the awkward position of being in possession of the largest discovery in the company's history but reporting less reserves. Obviously, we have work to do in our other programs and we're all very well aware of that.

On the Durian front in the Gulf of Mexico 406 and Garden Max 357 is a dry hole. Our net exposure is $9 million after selling down the previously 100% owned prospect. The rig will now move to Medusa South where we have an 85% interest. Medusa South is a 20 million barrel satellite located near Medusa. Thunderhawk in Mississippi canyon block 734 spuds the first half of this month. Dalmatian in deSoto canyon block 48, where we have a carry 50% working interest and has 150 bcf prospect, spuds around the first of March. South Dock in 50% and Lloyd Ridge 200 bcf prospect and it should spud in the third quarter.

In Malaysia, the Kikeh number 6, Crustal Wall drilled in the Kikeh field in the fourth quarter, found the similar same pay zones in the other wells in the field, as we expected, so we have almost completed our appraisal field. Unfortunately, we drilled dry holes at Ia and Sea-a-cap. Each, importantly however, have the same sand package as in Kikeh Cacheal, which they flagged, but they're wet. In IS case it was a down dip fault block, and in the case Sea-a-cap(ph) it was up dip. But rather than separated by a syncline, it was separated by a fault which is below the resolution of our seismic. It had lots to shows but likely had a busted seal. The rig has moved to drill the Kikeh 7 which is down dip appraisal well at Kikeh and then will likely move to drill the Sanagin(ph) prospect which is outboard of Kikeh Cacheal.

I always said that after a year and a half of drilling successful wells in the Kikeh area that we would drill dry holes. I have to admit I didn't expect we'd drill two in a row. Fundamentally, the play remains the same. If we didn't have sands in the two last wells, that would tell you a different story. But all the same packages were present. Trap was the issue and that is a prospect not a play specific issue. The downstream business, refinery margins are breakeven on the Gulf Coast, poor in the upper midwest and fairly robust in the UK and Meraux is much improved operationally. We have 645 Wal-Mart sites in operation and a plan to build out a bit more aggressively in 2004. So with that, I'll take any questions that 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 decline from the polling process, press the star followed by the 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 the first question. Our first question is from Tyler Dann of Banc of America Securities. Please go ahead.

This is Cody Dick, Tyler had to step away.

Hi, Cody.

Just a couple questions for you. I don't know if I caught it right, did you say the 406 is dry?

Yes, it is.

Could you give us a little color on that?

30 foot gas sand on water on shale, a real dense shale that was a real bright reflector is what we found.

Okay. And could you give us a little color also on how you feel about Medusa and Habanero progressing relative to initial expectations?

At Medusa we're producing 20,000 barrels a day out of two wells, and that's what we expected, maybe it's a bit better. We've got the number three well, the A-3, to complete March 1 and then we'll have three more to complete. They're coming up slower because we're taking our time completing them. It's all in the completion because they're all, it's real loose unconsolidated sands. So you need to do it right, and we have. So I'm real comfortable with it. I think we'll be at 40,000 barrels a day at mid year. Habanera, two wells. As it worked out, the number one well was actually completed in the same sand as the number two well. And rather than being completed in a bottom sand or lower sand. So our operator had to work that well over, and so we lost, I don't know, two or three weeks of production. Then we've since recompleted it in the lower sands, which is primarily gas. And it just came on earlier this week, in fact. And we're producing, I said 30 plus thousand barrels a day, it's probably closer to 35 or even 40,000 barrels a day. They are two strong wells. So we're in good shape there.

Appreciate it, thanks.

Yes, sir.

Thank you. Our next question comes from David Wheeler with JP Morgan. Please go ahead.

Afternoon, Claiborne.

Hey, David.

First question on Malaysia. So it sounds like you don't feel like anything's really gone wrong here and there's no reason to slow down the exploration effort in Malaysia?

David, it's a black eye. And I'm not happy about it, but if you analyze what happened and you understand that all of the sand packages that we saw in Kikeh, then followed by Kikeh Cacheal, were present in these two wells. That was the primary risk. There is typically not a charge issue here. There's always a seal issue. But because the sands were there, that really was the one that you have to be concerned about. All there, and so the prospect that we would go to, after Kikeh 7, is Sanagin, which is outboard and I won't commit to you that we'll do it because we have to keep looking at these prospects and make sure, have we missed something? Is there something else going on? But that's what my expectation is. My expectation is we'll move to Sanagin, which is 300 million plus prospect and the seismic shows you sand. It doesn't show you hydrocarbons but it reflects sands. It's got good reflectors here. So I think you have to say gee, your risk is higher, and I accept that. But it's an absolutely fabulous place to be drilling oil wells. And that remains the same.

And beyond the next prospect, how many additional new prospects do you think you might do this year?

David, a work in progress. There's one called Jangus(ph) which, if Sanagin worked, would be enhanced. There's one south of Kikeh that we would think about from time to time. So I can name two more that are relatively robust that would be able to drill and list. Again, I didn't expect two dry holes. And Sea-a-cap was up dip to Kikeh Cacheal would all full the base. We didn't see a fault that existed. We were relatively confident that we'd have a pretty good discovery. So we got a black eye. And so it's certainly caused us to look and think harder, but the prospects are still there, and a fair amount of success in the area. So I think you never get too excited and you never get too down. I think you have to keep kind of the big fat middle, look at all of your risk factors, look at how you want to spend your money. I think it's still as good as I've ever seen in my career to quite be honest. Place to be drilling.

Okay, good. I appreciate that. And on the 2004 production number, can you clarify that? I think you said 130 after 20,000 of sales?

Yeah. We were forecasting 150.

Right.

We're going to sell 20,000 barrels a day in Canada so we're going to be around 130.

So that 20,000 is the full year effect?

Yeah that's the full year effect.

Okay. Wal-Mart, as you look back at '03, do you have any sense on the performance there, how much money did that make for you? I know at one point you wanted to make returns in the mid teens. Are you feeling that that's achievable long term?

Done. It was a great year for us. And really I'd like to do it back-to-back. I'd feel my confidence level would go up a bit more, but we had record volumes. We had, really, a nice, profitable year. We don't break it out, so we're not reporting separately, but it was a really great year and covered some horrible refinery performance by the way. We're going to build up to 150 this year. I'm, as I've been for the past 18 months, pretty comfortable and excited about making the investment. I think it's going to be one of the truly outstanding long-term moneymaking cash flow generating assets in the downstream business.

Good. One last one for you. Hedges. Are there additional hedges as we go forward this year, or are we all done with the hedge program?

I can almost promise you oil and natural gas prices will go down because we don't have hedges this year.

All right. Thanks again.

Sure.

Thank you. Our next question comes from Arjun Murti with Goldman Sachs. Please go ahead with your question.

Thank you. Claiborne, any update on the timing of block h drilling in Malaysia, I guess, as well as Congo and, if I'm not mistaken, there's a peninsula in Malaysia well this year.

Yeah. In fact, I should have mentioned the latter particulars. Block h, Arjun, we're probably going to defer for a while. We're going to shoot some more seismic there. There's no particular reason why except for so much other activity in Malaysia and plenty of time on the block. We probably need to do a bit more homework there. So that's going to be deferred. On peninsula, we'll pick up a rig March 1, I think. And it's going to be in the Bundy area, and it's a reasonably good prospect to be drilling. We're looking for gas, and we're plugging to the grid and to the market. So we'll see. And then in addition to that, we picked up some additional acreage last year south of west Patricia that we just shot our 3d on and mapped. It looks really quite good, and we've got up to six prospects to drill there of the same kind of order of magnitude as west Pat, but there's two that we're focusing on initially. So that will get done. We'll pick up a rig there April, but we'll drill some development wells for phase two West Patricia then we'll take the rig probably about May, I would suggest, maybe June and drill a exploratory well on this new acreage. And that will occur.

Congo?

I'm sorry, Congo. Probably second quarter, third quarter. We're in the throes of deciding do we want to bring in a partner. The more we have it, the more we like it. I hope we're not falling in love with our own prospects as you look at them, but I think what we've got two excellent blocks there. The work's pretty much done and get a rig and go drill a well. So I'd say mid year to be safe.

That is terrific, thank you.

Thanks.

Thank you. Our next question comes from Fred Luther with Bear Stearns. Please go ahead with your question.

Good afternoon, everybody.

Hi, Fred.

Claiborne, a couple of questions. One, you had a couple of potentially high wells maybe on the docket for '04 in Malaysia, Lualu(ph) and Lalong(ph), what's the status of those two?

Fred, Lualu we have previously drilled. It was actually renamed to K-5. And that's been done. Lalong is actually a prospect that we don't own.

That's block L, right?

Yeah. So there's nothing to do there.

Because of the dispute?

Yeah, I think that's a reasonable conclusion to draw.

Where does that all stand? I mean, they were talking about having that resolved in '03.

Fred it's opaque. And that's just the term I've been using for the last six months. Simply, I don't know. It's very heavily guarded process that we're not a part of. We're sideline sitters, and I hear what you hear and I've heard what you've heard but I can't add to what you know.

Has your position changed on fast tracking the exploration of Malaysia, that is bringing in some partners, farming some of the acreage out?

No, no. We really don't have plans to do that at this point.

Are you worried about lease expirations?

K expires in the first quarter of '06, which is two full years away, big block, naturally. Even if you brought in a partner, you are not going to fully explore. So we've got plenty to do and the answer is with K, in particular, because that would be the near-term issues, plenty to do, lots of opportunity and I think lots of ways to make money for our shareholders. So I think we're pretty pat where we are. H has got, gee, I think two more years beyond that. Then West Patricia and the blocks around there, which are admittedly smaller but attractive, have got plenty of time. I think we're on balance okay and I think on balance the best approach in K is to keep it.

Okay. Can you give us a little detail on the reserve replacement and finding cost numbers, how they are going to show up?

No, I've said from day one they were horrible for '03 because we can't book Kikeh. We're going to show a downward revision and reserves, or not a revision, just production wasn't replaced. Haven't got all of the numbers together but I was somewhere in the range of 25, 30 million barrels less, I would suggest, is where we'll end up at the end of the year, something like that.

And any comment on finding costs, F&D?

I haven't done the calculations because I haven't wanted to know, quite frankly, but it won't be hard to do it. It's just a big number. No surprises. I've told everyone for the last three to four months that's the case, and if we could book the biggest discovery in the history of Murphy Oil Corporation, everything is a non issue. As I mentioned, March is awkward. Here we are sitting on a well delineated field that's got a production test on it that I think out of an abundance of caution is why it's not to book. So excuse our numbers, but that's just the way the world is.

And just lastly, you made a comment about Ecuador and the ramp up of production?

Yeah.

What's that issue there?

I don't think there's any one issue. Our plan, our operator's plan was 75,000 barrels a day we're at 52. There was an early issue of water handling, wasn't enough. I think that's still there. We've got three or four wells that have been drilled, not hooked up. I think it's more trying to get the attention of our operator and trying to get some oil rigs up and better performance. The oil's there. Always has been and always will be. I think it's just having the facilities, drilling the wells, getting it out. It's just an issue of getting your partner's attention and making sure it happens.

Appreciate it. Thank you.

Yes, sir.

Thank you. Our next question comes from Steve Enger with Petrie Parkman, please go ahead.

Thanks. Several quick things. Kikeh 7, Claiborne, since you are going down structure and looking for an oil/water contact sounds riskier than other wells you've drilled at Kikeh. Do you agreed with that? How are you looking at that?

Yes, there's no question about it. We're looking for more oil down there. And you can look at seismic and try to draw some conclusions, but the better part of valor is to go drill it and see. But clearly there's water somewhere, and we're going to find it. And we haven't found it anywhere yet in Kikeh. But undoubtedly we will and we will in this well. It's just how far down can we take the oil column.

And on the other side of that, then, do you have potential to add to the reserve assessment at Kikeh if, in fact, you find water lower than you might expect now?

Yeah, we do, Steve. There's certainly opportunity here to do that. There is. And we just need to see how much further we can take it down. Is it one cent thickness below, are we right at it? Is it substantially below that? When you find oil that flanks these things it adds up, just the geometry of it. So we'll see.

Right, big area. How long a well should Thunder Hawk be?

I think the AFE is 85 days, 84 days, something like that. It's a hard well to drill. We're not operator, but it is a hard well to drill. I think that is a reasonable number. Maybe it's more. I doubt it's less.

Okay. Then on R&M, you've put up some first quarter guidance. Can you give us some sense for range of R&M results that you expect in the first quarter and then more broadly some sense for the impact on margins of this more expensive crude slate you are going to run at Meraux this year?

It's all margin related, Steve. The Wal-Mart piece is influential now. As crude prices rise, wholesale prices rise and so retail margins get squeezed. So we've been fighting that through January. Improved at the end of January. Got worse last week, got better recently. On balance, we're maintaining margin pretty well but it is a constant fight there. When wholesale prices stabilized to decrease, it gets a little bit easier to make money. So we've been fighting the hardest piece of it but doing a real credible job. On the piece of more expensive crude, you have a better product slate coming out and, depending upon crude differentials as far as so important, you can actually run a sweep slate and make as much money as a (inaudible). Right now we'll breakeven on the gulf coast, running, basically, west African crudes, some Latin American Syncrudes on Anoco area. And I won't say your guess is as good as mine, but margins improved, but I don't know. We have to run our plants right, which we are getting down. Then we'll see how margins work out.

But it sounds like you would maybe categorize that more as a minor impact as you would look over 2004 rather than a major impact?

Yeah, I think last year clearly was anomalous because of our fire and we had a pretty lousy start up coming back, had new units, new control rooms, repairing from the fire turn around and we did a sloppy job of it. So I think that's behind us. So the issue really is what are margins going to be? And how far can we push the refinery, the Meraux refinery in particular, on volumes?

And one last broader question. I think you said that you've got relatively robust prospects around Kikeh in the form of Sanagin and Jangus, which is better if the first one works. Is that as big as you are willing to draw the circle at this point or do you see some change in the geologic model or seismic, or your interpretations as you get farther away? Why just those two?

Well, if you look back at our history, we start off with a dry hole at Began, then we moved and we drilled the dry hole at Bliast.

Yep.

So you have to look at the dry hole at Bliast and use that as an outboard limit. Well, not limit but a data point that's dry. And so we would try to concentrate inboard of Bliast and those are the prospects that are big fat amplitude belated on block k, in that little particular triangle that we've been so successful at. At least so successful until of late. So, you drill more and you learn more. Those, if you look at them now, are real robust. I'd be reluctant to go much further than that until I get more data.

Okay, thanks. Okay.

Thank you. Our next question comes from Gene Gillespie with Howard Weil. Please go ahead.

Hi. Couple things, Claiborne. One to piggyback on Steve's question regarding Kikeh number 7. It appears that this well's going to be considerably deeper than the other Kikeh wells. Is there another objective down there, number one? Secondly, unless I missed it, there was no mention of the LeComte or Johnny's Wagon, which I thought was going to be drilled in the first half. And lastly, can you characterize, size-wise, Jangus and Senagin in relationship to let's say Kikeh potential?

Okay. Let me start at the back-end. They are roughly the same structural size, so it's a function of sand. So we always said Kikeh, when we went in, was kind of 1 to 300 million and we really said 300 million was what we were looking for and we got lucky and got bigger. So the number we're using today is 300 million. I think that is a good starting spot. Jangus likewise. Let's see. What were you -- oh, yeah, Johnny's's wagon and LeComte. We still have partner issues there. It's just the way it is. So we're going to have to, until we can resolved and get some agreement, I think we're just kind of stymied there on those south of front runner prospects. Would we like to drill them, yeah. Will we get to them sooner or later, yeah. But for a variety of reasons, we're not going to do them in the first half of the year that's for sure. Kikeh 7, we're certainly going to go down-dip, we're going to see where the oil/water contact is. There is some thought that we might go deeper. Yeah, that's a possibility.

Can you be a little more specific? What would you be looking for deeper?

Gene, there are some deeper reflectors there. I think it's risky, but there are some deeper reflectors there that we're going to go for.

Okay. Thank you.

Yes, sir.

Thank you. Our next question comes from Paul Cheng with Lehman Brothers. Please go ahead.

Good afternoon, guys.

Hey, Paul.

You shouldn't be too harsh on yourself or Malaysia. I thought dry hole was part of the business.

Oh, yeah, well, the last one I took kind of personally, so probably that's why.

Anyway, several quick questions. Claiborne, in the capital spending, this year you are spending less or you're target to be somewhat lower, in the event of your cash flow end up to be better, are you going to stick with it and trying to prepare yourself for the happy late hour of the TK development in the coming years or are you going to increase the spending level?

Paul, probably won't. It's by design to have it less. We're selling our Canadian assets and we'll, obviously, avoid the capital and pull the monetize the assets. We're spending a bit less money in other parts of our company to get ready. If you followed us for a long time, and you have, we try not to get too levered because you never know what's going to happen to commodity prices and you never know what opportunities are going to be out there. You never know if we make another discovery in some part of our business, we want the opportunity to deal with that as well. I think we're just being prudent. And trimming back and getting ready. Because it's going to be a great event for our shareholders when this production comes on.

Sure.

Don't want to screw it up.

When we're looking at Malaysia, you had three discoveries. I know you are sort of premature, but have you leaned one way or the other whether those three is going to be stand alone development on themselves or are you going to develop all at the same time since that they are really at the close proximity in terms of location?

You know, I don't know yet. What we do know is that we're trying to get Kikeh on as quickly as we can, define the project, scope it and then get the approvals to develop it. And then we'll start making some decisions on our other discoveries there.

With all the well that so far you drill in Malaysia, Claiborne, do you have any update of reserve estimate on the three discovery? I mean, previously, you are talking about TK at 4700, Kikeh to sell at about 300 and the other one at about 150. Are those still on the ballpark of reasonable estimates at this point or do we have some fine tuning?

Paul, we're still comfortable with 4 to 700 on Kikeh. On Kikeh 5, it's a 1 to 300 prospect, some of which we're not going to own all of it at this point, and Kikeh Cacheal is probably smaller than that, then 300.. We always said 1 to 300, and after the disappointment at Sea-a-cap I think you have to go to the lower end of that.

Okay. Over the past several years because you've been focusing on the deep water explorations so you allowed the U.S. production to come down naturally that your unit cost has been rising pretty sharply. With the new production now coming on stream, do you have any thought that you could share with us what is the unit cost, operating costs and DD&A for your US E&P operation and also for the Canadian operation after you have the after sales may look like?

You know I don't have a thing on hand, but at Medusa, we're about $11 all in, something around that range. And at Habanera we're about $7. I'm fetching a little bit. $7 something like that. Maybe less there. And in Canada, I don't. It's going to be dominated a bit by Syncrude. What we've done in Canada is whittle it down to our best assets. So Hibernia and Paranova are 250 lifters and $6 barrels. Syncrude is a $12, 13, last year $15 operating cost barrel and about a $2 DD&A barrel. So that will be the big Canadian assets. The heavy oil that we keep is probably $8 all in, Op Ex Cap Ex, something like that.

Claiborne, I think you mentioned several times in the gulf coast right now you're refining operation is only breakeven despite a strong margin that we have seen?

You know, Paul, they improved and then they dipped down a bit. Ours is breakeven, yeah.

So you are only breakeven. Interesting. If I could, two final questions. One in Malaysia, Patricia, from the third to the fourth quarter looked light (inaudible) Claiborne, wondering what is the kind of rate we should assume on that field, you in the 15% year for year going forward? Then finally, in the Gulf of Mexico in Malaysia, I don't think that that's any surprise that you are going to drill some dry hole, but in the Gulf of Mexico that seems now you have a series of unfortunate dry holes and there'll be more than I think you would like to see. After all this we saw, have we looked at the model? Is there any changes that we need to make why that all of a sudden that we're hitting all this dry hole over there.

The latter one's a great question. On West Patricia, the field itself has got more reserves than we initially thought and probably getting closer to 50 million barrels recoverable so you can expect on an 8-8's basis that it's going to be flat for a number of years. Any decline you might have saw from quarter to quarter, we had an issue in December, a mechanical issue, a hose that was disconnected. We were down for about a week. But on balance, it is a fabulous prospect. Net barrels over time go down because as you pay out, you get less. And every time you pay out, 1 - 1.5 times, 2 times 2.5 times, your net goes down.

So Claiborne, we should assume about 12,000 barrels a day net to you for 2004, right?

Yeah, that's a good number. Gulf of Mexico, we've had a horrible record since front runner. We've got one discovery at Medusa North but otherwise we're just shooting blanks. Yeah, I'm extremely concerned about it. I'm extremely concerned about it. We're moving to the Eastern Gulf where success rates been higher. We've got a real nice lease position, primarily from leases we bought, when you still could, before the moratorium and before they reopened 191 and 189 areas, they were bought on 2-D and they're actually, the only thing you could buy were big, robust structures. We have some really nice things to drill. One called Dalmatian, we have a full carried interest. Then Dachshund is a big, multi-thousand acre fully dipped. It's compartmentalized so it's not that easy but it is just a big structure that's got nice amplitudes. I think there is a reasonable chance that those have real regional chances.

When you will be moving your adjoining program, actually, into the new place?

When? Did you ask when?

Yeah, when. When that you would start to doing actual drilling?

I mean, the Dalmatian prospect starts March one and South Dachshund's probably mid year. In the meantime, we're going to drill Thunder Hall which is one of the better prospects around and we'll see what happens there. Medusa South is a satellite to Medusa. And you take what we call the T-4 sand and you map it. Then you have a nice amplitude. Maybe it won't work but it is a nice prospect to drill and probably less risk than certainly what we have been drilling. I think on balance we're scratching our head. We've been drilling prospects for less amplitude strength than we had before. If you look back at the front runner, Medusa, Habanera amplitudes, Quatrain they are boomers. And these have less intensity to them. We could always explain it because it was close to salt or there was an overburden issue. There was always a reason. But on balance, it was probably a mistake. They were probably prospects that in 20/20 hindsight were not of the same quality. So, yeah, we're doing a lot of second guessing. We're doing a lot of thinking. We're doing a lot of talking internally. And we're responding.

I see. Very good. Thank you.

Yes, sir.

Thank you. Our next question comes from Robert Klineschmitt with Tocqueville Asset Management. Please go ahead.

Hi, Claiborne. This is Sarin Nuda, Robert just had to step away. We've expressed to you previously our frustration with your refining and marketing business. The question is how many times in the last five years have you earned your cost of capital there?

Well, we earned $90 million three years ago. And so I know we did it once in the last five years. And I can tell you exactly strategically where we're headed here.

Okay.

One, we've got in our Wal-Mart investment, I think, a very high grade, very investment grade prospect or investment that has less volatility more predictability and great growth prospects than most investments you'll run into, inside the oil business and outside the oil business. I think we have a competitive advantage. I think you can see where it can grow. I think that overtime this investment will get stronger and you as shareholders and I as a shareholder will be quite pleased that we own it. Now, will there be ups and downs in it? Yeah, like any investment. But on balance, I think if you look at the fundamentals of what makes money and what doesn't, this one has all of the attributes. It's got the lowest costs, in my opinion, in a commodity based business with lots of growth before it. That one is, to me, a no-brainer. If you look at all the things in our company, which are offsets to high oil prices or hedges to high oil prices, our retail operation is the best. We as a company, because we are so oily, because our growth prospects in the oil business are so strong, that's one of the risks that we run. We run the risk that if oil prices come down, you as the shareholder and I as the shareholder are going to take a hit. Wal-Mart provides nice growth hedge to that as well as being on its own a nice investment. Okay, so that's one. Two, the refinery at Meraux, we have always thought, since we had our Wal-Mart investment, in particular, was necessary to supply. And now that's up the question. But one of the issues in the R&M business, or refining business as you're aware, is that over time as product specs become tighter, there are some issues that the ready availability of wholesale barrels, which is there now, may not happen. And certainly if you're in the state of California, that's a reality. As those with that mind set travels across America and as regulations become more permanent, I think there is a reasonable chance, if you're out there buying wholesale barrels of gasoline, it's going to be a more difficult game to play. So Meraux serves a purpose. Last year, our performance was lousy, abysmal and horrible and embarrassing. Our first job there is to get all of our units up and going and operate it properly. We have full court press to do that. It's absolutely essential that we perform that task and that we're all focused on it. It's our biggest issue. Superior does fine. It made money last year. We don't have much money in it. Did it return it's to cost capital, yeah. In the scheme of Murphy Oil Corporation, it's not a lot of money so you don't see it but it is a nice asset to own. Milford Havens likewise. It predictably makes money, it's not a lot of money. We're not a lot of money in it. And those two aren't issues. As you probably are aware, six or seven years ago we tried to merge Milford Haven with someone else. We had a super refinery system in the UK and we found that the costs of the succeeding company, which was much, much bigger, was much higher than ours and so the economies of scale that you want, you weren't achieving so we pulled out. So I'm aware of the issue. It's been around ever since I've been involved with Murphy and running Murphy. And it's one I worry and think about. But if you break it down and look at it individually and think about it, there's a reason why we have each of these businesses. But nothing's forever. I've said that repeatedly. We got out of the midstream business in Canada because we got a huge offer for it.

Just a quick followup. When do you think in the beneficial economics of the marketing side will sufficiently offset the refining side?

I'm sorry, what are the beneficial side of what?

The beneficial economics of the marketing side will sufficiently offset the drive the refining has been?

That's a great question. We add 150 this year, we added 117 last year and so we're growing at 15 to 25%. Of the cash flow that we've generated this year in that business, a very nice percentage of it came out of the marketing side. So there's no specific answer to that. I don't know where lines cross, I haven't done that work But certainly that side of the business is growing much faster than on the (inaudible) side.

Okay

It is a lengthy answer because it is a hard nut to crack with us. It is 20% of our business, and it's been a real pain in the neck for the past year. And if it continues to be a pain in the neck, we'll have to take appropriate actions. But I've always viewed Wal-Mart, particular, it's been proven to me three or four times, is a wonderful downside hedge to oil price risk that we run. I think you would like to own it, if your firm owned a single asset and you wanted to raise a family, have an asset and I think prosper, you'd like to own Wal-Mart. A piece of the Wal-Mart marketing piece. Thanks.

Thank you. Our next question comes from Ken Beer with Johnson Rice Please go ahead.

Sure. Hey, Claiborne. Actually, a couple housekeeping questions then one follow on. Just when you talked about Canada, you talked about losing roughly 20,000 barrels a day equivalent?

Yeah.

Is that effective January 1? I mean, are we not going to see that even in the first quarter.

For accounting purposes, we book the production until the sale closes. That's what GAAP accounting forces you to do. So, depending on when it closes that's when you'll cease to see the production on the books.

Okay, but the 130,000 --

it's effective when we close, though, John. It's effective January 1.

It is?

Yeah. Our current plan, Ken, is to make it effective January 1.

But bottom line, when you're talking about 130,000 barrels a day you have excluded the 20 odd thousand from -

Yeah that's correct.

Even though your actual numbers will probably come in higher because you will have them on the books well into the second quarter?

Yeah, that's correct. Stranger things have happened I guess.

The other housekeeping, I think you said at Habanera you had about 35,000 barrels a day. Is that BOE, is that oil and gas?

Yeah.

What's that breakdown, I'm curious. Is it mostly oil? It's going to be around, I will guess here but I won't be too bad off, 26 or 27 or 28,000 of oil and the balance gas.

Something like that. The last question, just going back to Malaysia, in terms of moving forward and laying out a development plan for both the board as well as the government what more are you looking for or do you need? Is that something that as of now you are comfortable doing? Are you waiting for the number seven well? I mean, operationally, do you have everything you want to move forward with a plan of development? Yeah. We're doing all of the pre-engineering. We've pretty much done it. We are just methodically going through it. At one point, I thought our board might sanction it in February, but it's April, is our current plan.

It's not like you are waiting for the number seven well?

No.

Okay.

No, we're ready to go.

All right, guys, thank you.

Thank you.

Thank you. Our next question comes from Bruce Blythe with Bloomberg News, please go ahead.

Hi, Claiborne, I'm just curious as to your outlook on crude prices here in the early part of the year. We've had a bit of a pullback from $36 roughly highs here earlier in January and now we're down to a little under $33. I'm kind of wondering where you see that heading here in the months ahead and considering we have an OPEC meeting next week.

I'm a perennial bear. When prices get high, given the way the world has always worked unless the paradigms change, you'll see enough barrels coming on the market in response, you'll see enough decline and demand and prices will inevitably, as the sun rises in the east and sets in the west, come down. Query, does OPEC have enough market power and discipline now and understand commodity markets well enough to be responsive and counteract that. I think that's a good OPEC. I think that they've certainly responded in a very effective way over the last six to mine months. My hat's off to them as they run that cartel, but my experience, certainly, in the regrettably 25 years I've been doing this, I say regrettably just because it's been so long, is that prices always come down.

How much further?

You know, I tried to avoid saying when and how much.

I put you on the spot here.

Yeah, well, everyone's opinion is as good as Claiborne Deming's but certainly as we go through the year, I would expect prices to trail down. Mid year they would be lower and at the end of the year they'd be lower still. That's as far as I will go.

You're comfortable with the supply prospects, though?

Yes. There's just plenty. Nothing I've seen in any market, any I've been in suggests there is a supply problem.

Okay. One other question now. Pretty soon we're going to be talking about summer gasoline season and last year we came off and we had record high prices due to various issues. I'm wondering about your feeling under preparedness for you and now the industry in general as to how we're going to meet the increased demand and in addition, to the lower sulfur regulations, the summer grade and the ethanol blended requirements, in various parts of the country, kind of assess that situation if you would.

Well, you've listed all of the issues. They are all there, and I think that the industry's going to respond pretty well. I don't see anything right now which is causing bottlenecks, so I think we have, as an industry, we typically worry a lot about these supply issues, rightfully, and unless there's some weird weather event or pipeline breakage kind of force du jour type, everything's going to work out. There will be plenty of supply. Because we worry about it so much we overreact and we get supply there and we have redundant systems, the whole nine yards. So I'm really cautiously optimistic there will be plenty of supply this summer.

Thank you.

Sure.

Thank you. Our next question comes from James Mahoney with Nichols Energy Group. Please go ahead.

Good afternoon. I guess my question is just shifting focus to Canada's east coast. I'm wondering if you plan to drill on the Annapolis block in 2004 and if you could maybe just give me a little detail if there are plans to go ahead this year?

Yep. I would have told you earlier, absolutely positively, but as you probably are aware there's wrangling going on over rigs. The rig that our group wanted came in a bit cheaper than another rig, which has decided to reflight self Canadian and claim Canadian content protection. Our group, I think rightfully, has objected to that. And it needs to be resolved by regulators and it hadn't been. Those plans, I think you have to say, are on hold or in question now. If it gets resolved and if we can meet weather windows, then the current plan is to drill well offsetting the Annapolis discovery on what's called a crimson prospect. That would be drilled, I would have said second quarter but I'm beginning to doubt that, so probably third quarter unless it spills over into next year.

So it sounds like rig availability is the main issue there.

It's available, but which one and at what price? But it's enough disparity in price to have a fight over.

Okay. And on the Crimson prospect, what are your targets in terms of depth?

Oh, gosh. I don't have it to hand but I would say below 15,000.

Okay. That's great. Well, thank you very much.

Yes, sir.

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 will need to lift the handset before pressing the numbers. One moment, please, for the next question. And the next question is from Fred Luther. Please go ahead with your followup question.

Claiborne, when the board and Petronas sanctioned Kikeh this year, what do you think the initial booking will be in to proofed reserves? What's the time frame to get the whole 400 to 700 million barrels booked?

Oh, Fred, because we haven't officially presented it to post government, I prefer to defer a bit on those specific numbers. But I think it's safe to say we're in the range of 400 to 700. And timing is a good question. I prefer to not do it all in one year. I prefer that we look at it a bit over stages. And so, those haven't been decided at all. But I'd have a bias against one fell swoop.

I mean, would it be realistic to say a third of it is booked in the first year?

Really, we don't want to speculate.

All right, I understand. Thanks.

Yes, sir.

Thank you. Our next question comes from Mark Meyer with Simmons & Company. Please go ahead.

Good afternoon. Just one from me, Claiborne. You mentioned your concerns about people at our Gulf of Mexico results to date on an overall success basis. I don't think you are unique in terms of that experience and some have shifted course a little bit in response to that and maybe taking a harder look at the deep shelf or the ultra deep shelf. I know you are not operating from the largest leasehold position but just what are your thoughts? Is that something you would contemplate or is that a no way, no how, ever?

You never say never. But we've never bought into the play as far as the economics versus risk. We haven't. Maybe that's the wrong judgment, but if you look at the number of penetrations and the number of commercial discoveries, it's just a play that we never bought into. And we didn't have a great lease position on the shelf to start with, which would encourage us to have a bias towards it, I'll quickly add to that. So we weren't the logical company to do that. I hope that the play works, by the way. It would be a wonderful renewal for the shelf, the shelf needs it, and be good for America. I'm a real cheerleader on it, but we're just not players.

Okay.

Thank you. Our next question comes from Will Kidd with Central Securities. Please go ahead.

Hi, Claiborne.

Hey, Will.

What I'm curious about is when this non booking of reserves came up and what exactly is the political issue and then what the year end BOE will be?

Well, Will, the issue is, it hasn't been sanctioned by the host government.

Did you expect it earlier that it would have been?

Well, the issue of whether it was sanctioned by host government is a relatively new issue. It's been raised very specifically by the SEC and informal conferences that have been printed up and distributed amongst the industry. There's a very specific reason why they would look a bit scant at companies that did. Whereas before, maybe we drilled a Ninian discovery of hearken back a long way. But we hadn't gotten sanction one and we booked the whole thing in the first year. So it's just a new world out there as far as being able to book without that. And so that's the issue and on the specific BOE, I've deferred responding because they need to go ahead and get our approvals and get going. But the range of four to seven at Kikeh, we've hung with.

No, but I mean, I meant forgetting about Malaysia, what will the BOE's be at year end?

What I said was we're down 25 to 30 million barrels. I don't have our reserves to book at hand, but we're about down about that much.

So the issue is a SEC issue, it's a U.S. issue, not a Malaysian issue.

It's Malaysian in the sense that we don't have sanctions. The board hasn't met.

Right.

They haven't agreed to do it, but the reason --

The board being a Malaysian institution?

Yeah.

I see.

But it's a new heightened awareness by government regulators in the United States that they want all of the appropriate approvals done.

Well, that --

I'm not arguing with it.

Understood.

Not to (coughing) it's not an officially written regulation that says that. It is an interpretation of a regulation.

You guys are just going to make sure you play it on the safe side of the line.

In today's world, why push it?

I understand completely.

Thank you. Our next question comes from Fadel Gheit with Oppenheimer and Company. Please go ahead.

Good afternoon. Again, I don't want to beat the same subject to a pulp here, but whose government? Why wouldn't the Malaysian government be eager to approve and sanction this project?

Because we haven't delivered a plan to them.

So the ball is in your court really?

Absolutely, yeah, but my only point was in the past after you've delineated a field and after you had a production test, which we've had, and after you've done preliminary economics to make sure it's economic, people were booked. It was common practice. That has practices changed. Now you need the official sanction of your host government to do it. The Malaysian are extremely anxious for us to present them a field development plan. And eagerly await its arrival so they can do their part of the transaction. The ball is clearly in our court.

Yeah, because when you are saying that we're waiting sanctions, you are actually not waiting for their sanction. They are waiting for your numbers to come to them then they can make their decision?

Absolutely. They need a field development plan that we have presented to them before they can say, yes, we want to go forward.

And if I may ask, why is it taking you so long then, to put together a plan?

To develop a field of the size of Kikeh, you have to get all of the data. You have to collect a huge team. You have to do lots of pre-engineering. And the time frame that we've set is pretty speedy. You say that we discovered this field in '02 and we're talking about coming on stream in '07 for the first deepwater oil field in Malaysia, I think, by anyone's standard, that's a hell of a feat. So I don't for a minute think that we've been tardy at all. I'm kind of proud of our speed, in fact, on the contrary, so

So should we expect something in 2004?

Yes, sir. What you should expect is for Murphy to present a field development plan to the malaiseians.

Right.

And what we hope and expect is to be they're approval. Then for us to officially embark on developing the field.

Then I want to take you to a complete different subject. Syncrude, can you give us an idea of where you see Syncrude going forward in terms of contribution to your production, earning and growth. Is this an area where you are releasing long term? You want to be in or is it already mature then there is no upside to it?

Let's see. We are producing currently 240,000 barrels a day. Plus or minus there maybe 250. And we're in the middle of a phase three expansion with the phase four being discussed. And the thought is that we'll definitely be because phase three's under way at 360 to 370 in '05, next year. And then if we agree to go to phase four, we'll be at a 425 number, but that would be an '08/'09. So the growth is actually quite unusual, especially when you consider when we bought it, it was 170,000 barrel a day.

Right.

So it's one of the real corner stone assets in our portfolio.

Okay. So it's the keeper and you think there will be growth now What do the cost structure there on per unit basis? Are you seeing production costs declining or flat or what?

No. For the last two years, they've been increasing because of operational upsets and pretty poor performance in the complex. It's not a field, it's a big industrial complex. On balance, if you look at same (inaudible) I've always said don't get screwed up between the forest the trees there. On balance, if you look at the forest, costs go down because units go up. It is a real scale of a (inaudible) driven project.

Right.

So it's one of these that you'll have bad years, and we have. But our 5% interest is not a driver of the (inaudible) inquiry.

What is your cost per barrel now, roughly?

It was about $15 last year. There's two components to that. One natural gas prices. The project consumes 300 million cubic feet a day. Because they were so high that directly impacts Syncrude in all those projects. And then secondly they had an uneven operational performance and so units were down.

Now the phase three expansion, hopefully, would bring the unit costs forward?

Exactly, yeah.

But not that much forward?

Yeah, I mean that's certainly the expectation. There's been management changes at Syncrude, new guy runs it, and there's renewed emphasis on getting the job done.

Okay, thanks.

You're welcome.

Thank you. Our next question is from Gene Gillespie. Please go ahead with your followup question.

I apologize for holding up your line. One quick thing here.

Oh, hell, I'm not hungry anymore.

Campbell will take care of it, he'll eat your share too. You have kind of a hole in your production profile, for lack of a better term, in 2006.

Yes.

If you make a gas discovery at Bundy, would that be on in that time frame?

Could be, Gene. It sure could be, yeah. That's a way to do that.

Good enough, thank you.

Thank you. Mr. Deming there are no further questions at this time. Please continue.

I very much appreciate everyone hanging around for an hour and ten minutes, so I'll sign off and talk to you in another three months. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes the Murphy Oil Corporation fourth quarter conference call. If you would like to are listen to a replay of today's conference call, please dial 800-405-2236 with pass code 566232. Once again, if would you like to listen to a replay of today's conference call, please dial 800-405-2236 with pass code 566232. You may now disconnect and thank you for using ACT Teleconferencing