Murphy Oil Corp (MUR) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Murphy Oil Corporation second quarter earnings release conference call. All participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded today Wednesday, July 27, 2005.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference to Mr. Claiborne Deming, President and Chief Executive Officer. Please go ahead, sir.

Thank you, I'm joined by John Eckart, Controller, Kevin Fitzgerald, Treasurer, Mindy West, Director of Shareholder Relations, and I will turn it over to Mindy at this point.

Thank you. Welcome everyone to the call. Today we will follow our usual format. John will begin by giving a brief review of second quarter results. Claiborne will follow with an update on operations, and then we will 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, many of these have been identified in Murphy's January 1997 Form 8-K filed with the SEC.

And with that said, I will turn it over to John.

Thank you very much Mindy, and a good day to everyone. Our net income in the second quarter of 2005 was $347 million or $1.85 per share. That compares to nearly $350 million in the second quarter of '04 at $1.87 per share. Both quarters however, include a significant gain from sale of exploration and production properties, in the second quarter of '05 there was a $106 million gain which was $0.57 a share on sales of mature properties on the continental shelf of the Gulf of Mexico. This gain is included in our conditioning operations.

In the second quarter of 2004 we had discontinuing operating results that included a gain of $167 million, from the sale of most conventional oil and gas properties in western Canada. A larger gain in the second quarter of '04 than '05. When you exclude of these gains in each quarter the company's what I would call the 'normalized' operating earnings or a quarterly record in the '05 period. This company-wide consolidated record includes record operating results from both our exploration and production and our refining and marketing businesses in the current quarter.

Please note that all of our earnings per share figures that I have given reflect our 2-for-1 stock split effective in June of '05. By segment our E&P business earned nearly $290 million in the second quarter of '05, including the gain of 106. That compares to $139 million in '04 period. Our refining and marketing earned $67 million compared to 39 in the second quarter of '04. And our corporate net costs were about a 1.5 million less this quarter than a year ago.

So excluding gains, our E&P earnings were up 31%. Refining and marketing was up 70%, and our corporate costs were down about 14% overall. Our higher E&P earnings were attributable to, not only the gain, but when that is excluded we had higher oil and gas prices, and higher oil production. These were partially offset by higher exploration expense in Malaysia, and also in Congo, and we had lower natural gas production.

Our average oil prices were about $9 a barrel higher in the '05 period compared to '04 and North American natural gas prices were up about $1 an MCF. Oil sales volumes were up about 15,000-barrels a day, mostly due to Front Runner production coming on in '05, and higher heavy oil volumes in western Canada, our Seal field. Natural gas volumes were off about 16 million cubic feet a day, and that's primarily due to lower volumes produced on properties that we sold in June of '05.

Our improvement in our 2005 refining and marketing earnings were mostly related to stronger Gulf Coast refining margins compared to the second quarter of '04. Both our refining and our retail marketing were nicely profitable in the '05 quarter. Net cost of corporate activities was lower by 1.5 million.

We had lower net interest cost and lower average borrowings and we capitalized a higher percentage of our interest cost on our exploration, on our development projects in the E&P business. Also had higher point exchange profits in 2005, partially offset by higher administrative costs, the biggest portion of which related to stock-based incentive compensation.

For the first six months of 2005, we earned $461 million of profit versus 248 in the first half a year ago, an improvement of $212 million. The explanation for the variances in our year-to-date increases are very, very similar to what we went just through in the [Corley zone] and I will go through that again, and I will close then by saying that our long-term debt stood at $609 million at the end of June. That computes to a debt to capital ratio of 16.7%.

With that I would like to turn it over to Claiborne.

Thanks John. I'll review development projects, production both current and forecast, exploratory wells and downstream activities, and at that point I will take questions. Front Runner is producing 43,000 barrels equivalent day from 4 wells. Next well comes on-stream September 15.

Medusa is producing 40,000 barrels equivalents a day and Habanero 18,000-barrel equivalents a day. In Malaysia, Kikeh remains on-schedule for second half 2007 startup. Still development plans for Kenarong and Pertang in peninsula Malaysia will be submitted to Petronas in the third quarter.

Production guidance remains at 125,000 barrel equivalents a day for the year, the third quarter will be 113,000 barrel equivalents a day. As we experience planned shut-downs, maintenance at Terra Nova, [Shahalian], West Patricia, and [Mongomonian]. In the fourth quarter will be 130,000-barrel equivalents a day.

Exploratory drilling we pick up in the Gulf we pick up the Ocean Victory around the first of October, and will re-enter the Thunderhawk #2 well, and drill down to see if there is a third sand. We'll then likely drill a #3 well at Thunderhawk as an appraisal and development well.

At that point we will move to Mississippi Canyon block 819 where we have a 37.5% interest, and test the prospect called Thunderbird, which is in the 80 million-barrel range. In Malaysia offshore Sabbah, the ocean rover is currently farmed out to another company. We will get it back in the late third or early fourth quarter. At that time we will either re-enter the Kikeh Kecil downdip well, which never got down due to mechanical reasons, or drill one or two prospects in the northern part of [Watkay]. Offshore [Sarawak] we're finishing up an appraisal well at [Seranpang] #3 which will be flow tested.

The Ocean Epoch then moves to Endau to drill an appraisal well, and conduct a flow test there. The additional well could be drilled at Rompin at that point and then the rig moves to peninsula Malaysia where we drill two wildcats at the south end of PM3-12, and two wildcats at the north end of P3-11, all back-to-back and all prospecting for oil.

In Congo, we will get a rig back in September and drill an appraisal, a sidetrack and then conduct a flow test at Azurite Marine, we will then follow that with two wildcats. First well or wildcat is located southwest of Azurite at Syncline separated. It's a [salt-cored] four way dip with stacked channels that's in the 100 million-barrel plus or minus range. Afterwards, we will move either northwest or south to drill one of two 4-way dip prospects, also with stacked channels, and also salt-cored. In our downstream business margins have retreated in the last week at [Mareau], as crude has come down, or gasoline has come down relative to crude. And current margins are around $1 dollar a barrel, and they are down from $3 a barrel about two weeks ago.

Superior under pressure is asphalt prices are fixed, and crude has been quite strong and distillates have also been weak of late, and our current loss is 2 to $3 per barrel. At Milford Haven, we were back up after turnaround and our current margin is right at $4 per barrel, also in the U.K. we acquired 56 additional retail sites that we brought into our system in June, bringing our company-owned site total in the U.K. up to 151.

At Wal-Mart we have 829 sites in operation. We have a strong second quarter, especially first two months. Current margins are right around $0.10 to $0.11 a gallon. With that I will answer any questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the Q&A session. [OPERATOR INSTRUCTIONS]

Our first question comes from Andrew Lees with [HAIM] Investments. Please go ahead.

Hey, guys. Wondering about your tax situation, cash taxes. In the first quarter, you had almost 100% cash tax rate versus deferred. Second quarter 98%. That's kind of versus 65/35 last year. I'm wondering if this is a two-quarter anomaly, or if you expect that to continue?

Part of the tax issue relates to the sale that we had in the Gulf of Mexico. We had a low tax basis for that property so we have a bigger gain for tax purposes than we do for the book. So it reflects the fact we will pay current tax chunk on that gain. I think it will be more normal to go back to what we had seen in prior periods. 70/30 top split, 75/25 would be more of a normalized way of looking at it and should be what we see going forward.

75% current and 25% deferred?

Yes.

Thank you.

Thank you. And our next question comes from Paul Cheng, Lehman Brothers. Please go ahead.

Good afternoon, guys.

Paul, how you doing?

Very good, how you doing?

Good.

Several questions about Malaysia. I thought that you guys have already resolved, and so that because I remember last year that you have a I think a tax adjustment to bring down your overall tax because now you should be able to start getting the tax benefit from all of the exploration wells? Is there any reason why in the second quarter that the income tax is so high? Going forward, are we still looking at 38% or do we have to assume your exploration expense is not going to be taxable?

Paul, you have to recall we have a number of different production sharing contracts and each one of them is slightly different. So on Block K and our Sarawak where we have production, we were recording tax benefits on those. We are currently paying taxes on Sarawak because we are generating income.

Our economic show that with Kikeh coming on in 2007, we will generate tax benefits for all the past expenses that we had. So we recognize those benefits and continue to do so on block K when we have significant exploration in the peninsula Malaysia side, or say block H, and some of those other PSEs we were not recognizing any tax benefits on those, so it becomes down to a mix of where the exploration expense is.

You have the exploration has been conducted in the peninsula and the block H or L to have that not receiving any tax benefit?

No tax benefits recognized on those at this time.

John, since I got you here. In the past release in terms of the realized prices in Malaysia, you have a footnote saying that price is net off contractual supplemental payment under the terms of the production sharing contract for the SK309. Can you tell us how much is that, and incidentally what are the terms or how frequent that [covet] adjustment will occur?

Based on a price above that escalates that over time. So when we signed the contract years ago, it was like a $24 price that escalates. And so based on that when the prices are high, we have to share a significant portion of that with Petronas. When the price is $50 and they get like, 70% of that upside. And it will continue.

It will continue.

Yes, it relates to the profit oil.

If this one is a retroactive adjustment or just adjusting for the current quarter?

That's the current quarter.

Interesting. Okay.

It will continue as long as the prices remain high. If the price go back below this threshold which varies every year, is escalates by year, then it goes away. But as long as prices are higher, we'll continue to do that.

To give you an idea, our current price threshold is right around $32.

Right now it's about $32. And of the $32, 70% would go to the government?

That is correct. And supplemental payments.

I see. Okay. And Mindy, on the -- what do you have -- exploration expense range that you can share with us what is built into your $1.00 and $1.10 per share estimates?

Sure, for the third quarter we're expecting exploration expense exposure, this is total exposure, of around $55 million and that is inclusive of dry-hole costs somewhere in the $23 million range, which includes a well we are drilling in the U.K., two wells that Claiborne mentioned, in shallow-water Malaysia which together total about $15 million, plus one of the wells we should get down in the quarter at PM-3-12 which we have in there about $4 million.

At the end of the June 30, there is any other mixing or underlifting residual here or that we have pretty much caught up?

You are asking about what our inventory is?

Yes.

At the end of the quarter our inventory in the U.K. is right around 142,000 barrels. Our inventory offshore Canada is 152,000 barrels. Our Ecuador inventory still remains at 1.5 million barrels.

On that, any kind of update we are going to resolve that pretty soon?

Paul, yeah. We are pretty good negotiations and we are getting pretty close, and I think you will see resolution in the very near future.

Okay. So we are working in this year?

Yes, that's my expectation.

And also, John, wondering, you have a breakdown in the second quarter in the 60 million or so due as downstream profit between refining and marketing?

Typically Paul we don't give that split. Both of them were nicely profitable. I think I commented before. That includes Wal-Mart made a nice profit as well. But the real improvement was on the Gulf Coast refining business because --

Is it sequentially, how about from the first quarter, is it majority of the increase in earnings, is it from the refining side or marketing side?

Combination. Both were nicely improved over the first quarter.

And on this, how about on the Wal-Mart same source sales year-over-year, if you will be able to give us marketing intelligence. Have you seen your sales number going higher or flat or going down?

Paul, we are up. We are up year-to-year just looking at same store sales somewhere around 5%, maybe a bit more than that.

That much. You definitely didn't see any impact from the high prices, there is no down to demand.

We haven't, no, we haven't. In high price environment is because we bottom at the end of the market, we probably see more volume than others. We will be a more preferred choice in this type of environment.

So it doesn't surprise me. Their buy has been extremely strong.

I know I probably overstayed my welcome already. Last question, conceptually in the Gulf of Mexico, given the company has become much bigger today than maybe several years ago when we are looking at your prospect that you are targeting, should we start to target something bigger, looking at you mentioned about Thunderbird, 80 million-barrel is it really not going to be able to move the needle, is it?

Paul, in that particular instance, what we are going to do is because it's near Thunderhawk, likely you can see some type of benefit of clusters there. So Thunderhawk, Thunderbird work, there's another one called Thunderidge and start putting together prospects, which together are quite material to the company. Really that's the goal that we set for ourselves in that particular mini-basin. It's anchored by Thunderhawk obviously, but then you have these nearby 70 and 80 million-barrel prospects, and we have at least two that we think materially will make it a significant asset for the company.

If not because of they are close to the Thunderhawk and other discoveries you already got, should we assume that we should start looking at something bigger at least 150 million-barrel kind of range?

It depends again. Because you have to take advantage of infrastructure, that's competitive advantage. So, for example, if you look at Medusa we have a prospect called Krakatoa which is 80 to 100 million-barrel range which will be drilled next year, and that obviously becomes profitable, something that you as a shareholder would notice. And likewise at Front Runner we have two [miacim beaver] prospects, a little bit bigger than that, 100 million-barrel plus range. But because they are near Front Runner, the spar, when there is room there, we will be real, real nicely profitable.

So for those you are comfortable at anything from 50 to 100, now if you are obviously looking at something away from your infrastructure, you are looking at something bigger. And currently over in Garden Banks we've got 2 big acreage positions that we're reprocessing seismic and doing a lot of G&G work on, that have potential to be significantly bigger than the one in that region.

Those those would I think meet your criteria, but I would argue the others meet your criteria as well, just because of the closest infrastructure and if you add them all together they become significant, and that's something that everybody does and we need to do more of.

Very good. Thank you.

You're welcome.

Next question comes from Jennifer Rowland with JP Morgan.

Question on the production guidance, you mentioned 05' guidance is unchanged at 125 yet the 3Q guidance is lower, given the storm impact. Had you already factored in an allowance for storm impacts when you first gave the production guidance of 125, or does this mean you expect fourth quarter to be a bit better than originally thought?

Right now we are expecting fourth quarter to be about 130,000 BOE a day, and to answer your question, the maintenance downtime that we cited as a reason why 3Q production is down was all planned, and we always have that factored in and we had some degree of cushion factored in for hurricanes. I can't quantify what it was, and how much it changed. But for third quarter we are anticipating a little over 6000-barrels a day being off-line in the Gulf for hurricanes. But I can't quantify what it was, previous to this hurricane season beginning.

Okay. You have a busy exploration program more so in the fourth quarter than third. Can you quantify what your total dry-hole exposure might be for second half of '05?

It's probably early, because the timing of the things will be the driver. I suspect that the two wildcats in Congo on tax relieved will make it into the fourth quarter. We will get the rig and I think it's pretty certain beginning of September and we will conduct these operations as a right 45 days plus maybe. It will be plenty of time to get two wildcats down. Those likely make it. In the Gulf, whether or not we get to Thunderbird is problematic. We probably will, but I can't say that we will.

And in Malaysia it depends to a certain extent, where we go, and how we utilize the back end of the year. In the deep water program. The peninsula and I'm answering this too long, the rig we will use there is being held up a bit at Sarawak as we are doing some testing and delineating first at Serenpang and next at Endau, and we may even go to Rompin and test there because we will perhaps try to fast-track Rompin and Endau.

So the PM wells I could see more likely than not falling over into the first quarter of next year, I don't know if that helps or not. All a bit up in the air , with the Congo wells more certain. The Gulf well less certain. PM wildcat well is even less certain. And it will be certainly more likely than not some Sabbah Buho exposure in the fourth quarter.

Okay, that helps. Thank you.

Thank you. And our next question comes from Mark Gilman with Benchmark Company.

Claiborne, how are you?

Good.

Just a few things. The supplemental payment with respect to Malaysia, are there similar provisions in both the peninsula Malaysia, as well as the blocks H and K, PSEs?

Yes, there are.

Okay, can we quantify what the foreign exchange gains and losses were, John, both in this quarter and the year ago?

I can. But I don't know if I can do it right this second for you. I can.

We can take it off-line if you don't have it handy.

We'll do it offline.

Do you have a sense as to when the Terra Nova royalty for you guys kicks up to an income participation kind of level?

Mark, I'm hesitating, I think it goes up in 1% increments.

And I think it's big step-up when you hit payout, I'l led to believe it's probably fourth quarter this year. I'm wondering if that's applicable to your position, or it's the operator or others in the field?

No I'm sure it's the same fiscal regime and I'm maybe confusing Hibernia and Terra Nova. it has less significant role through step-up. But if other companies have the other same -- show a step-up in the fourth quarter, then I'm sure it will impact us at the same time.

Okay, one more. Tahoe now back on, how much production is that?

We have four wells on. And net or gross -- I will stab at it a bit in the range of 50 million a day, plus or minus. I won't be too far off there,

Is that net or gross -- I don't know which one you're talking about.

Gross. Right around 50 million a day. That may be a little light but it's not too far off.

Your interest in Tahoe?

Is -- drawing a blank.

35? 30%, Mark.

And there was essentially no Tahoe production in the second quarter?

Very little.

Came on --

There was workovers, storm events but very little.

Okay, guys. Thanks a lot.

And our next question comes from [Brian Kuzma], RBC. Please go ahead.

And I just had two real quick questions here. Won was remind me again which block the Thunderbird prospect is on?

It's in block 819.

And where is that in relation to Thunderhawk?

It is to the southwest.

Okay.

About four blocks, three blocks maybe.

And the second question was, in terms of rig availability, what kind of problems are you seeing and is that what was behind Krakatoa being moved next year?

Rigs as everybody knows extremely tight. Basically booked up this year, close to 90% next year for deep water.

Yes.

That is partially a driver for Krakatoa but not the primary driver. We are not the operator. Another company is. And it was their call. They had another prospect that they ended up preferring drill this year rather than Krakatoa, so it is deferred to next year. We weren't the driver behind the deferral.

I got you. It doesn't really change anything about --

No, it's a good prospect. It's close to Medusa, and as I was outlining earlier and it has a reasonable shot.

Great. That's all I had.

Thank you. Our next question comes from Ray Deacon with Harris Nesbitt. Please go ahead.

Hey, Claiborne, I was wondering if you had any kind of update on the Syncrude expansion, and what would your net cost do you expect, what will they be and what kind of incremental production are you looking for out of that?

I can't tell you our net cost. We will get it to you. It should come on-stream, Coker should be up first quarter of next year. That's what I would put it. And our current stab at production net to the company next year from Syncrude will be around 15,000-barrels a day, in that order of magnitude versus say 11 now.

Great. That's all I had. Thanks.

Thank you. Our next question comes from Steve Enger, Petrie Parkman.

Hi guys. Couple of things. On -- in the Congo, with a little more time to look at what's worked and hasn't there any new thoughts on what may be the key attributes to which of these things may be successful?

Well, first of all, we are moving in a different direction so that's simplistic but that's the first thing a landman would do. Moving basically to the south and west and we were in the north and east drills [Sofiranonix]. Having said that, we are looking for prospects that really mirrored most exactly what Azurite was, and it was a salt-cored 4-way dipped faulted feature. And that had a faulting down to the source rock.

Yes.

And we got plenty of structure. We know the structure holds up and plenty of reservoir. We can see reservoir seismically. I don't think those are the risks next two wells. The risk will be charge. So trying to determine where charge was coming from, and trying to get it into the reservoir, was and is the biggest challenge, and we think we got prospects that have the same attributes as Azurite that obviously worked that we think was charged from source right below that came up the fault. You can clearly see faulting down to the source rock. You can see sands into the structure. A real good-looking prospect. Real reasonable shot of having success here.

Okay. All right. And then on the drilling program in deep water Malaysia, once you get the rig back, at some point it sounds like you want to do a Kikeh Kecil appraisal, maybe that's first. What else do you see -- put it this way, needs to be appraised before you get to the development drilling with that rig on Kikeh in the second quarter of next year?

We have untested prospects in the northern end of the block. And we were doing a lot of work on those. We have drilled some wells up there. Penang most recently, And Todak, not quite the area we are talking about but the same general vicinity. And we got two or three additional untested structures. And the issue will be sand, and what type of charge do you have?

Those are the puzzles that we are trying to unwrap, unravel and have a better sense of prospectivity. Likely we will want to do some work up there in the fourth quarter. They are big, fairly sea-seismically targets and I think it's something we will likely want to pursue.

In terms of actual appraisals, you talked about going back to Senangen, is that still high on the list, or fallen a bit lower on the list compared to other opportunities?

I think Senangen remains on the list. It's one that we will want to keep in our inventory, and the issue is going to be thin bed sands and how do you produce them and we are doing a lot of work on it. Those are the issues you will have to address.

And so if you do the Kikeh Kecil appraisal, it looks like with your drilling schedule you would have the opportunity to test maybe two or three new structures probably up in the northern end of the block before you commit to the development drilling at Kikeh, is that how you pencil it out?

That's a reasonable expectation. I think it's reasonable. It's early. We haven't committed to anything. We haven't submitted things to our regulator partners. But that is a general way to think about it.

Okay. Thanks.

You're welcome.

Thank you. Ladies and gentlemen, [OPERATOR INSTRUCTIONS] The next question is a follow-up question from Mark Gilman. Please go ahead.

Claiborne, can you give us an update on Seal production, where it is and where you might expect it to be by the end of the year?

Mark, let's see, on a net basis, an operated and nonoperated piece, and we are about 8000-barrels a day, between operated and nonoperated. We have a number of wells that we are drilling now. I don't have a fore test I'm looking at. Actually, Mindy is looking at something.

If you want to know the field component for the third quarter or estimating and this is together both operated and nonoperated, somewhere like Claiborne said 8 to 9000-barrels a day.

Okay, versus let's say what was it in the second?

And then the second quarter it would have been more like 7000. We were expecting to ramp that up a bit, and maybe end the year closer to 12 or 13,000-barrels a day. That would be an exit rate not an average for the fourth quarter.

And Claiborne, give me a reaction to the results of the [Karisi] well relative to any initial expectations?

Well, going in we had targeted prospect in the range of 100 to 150 million-barrels that could have been standalone, but over time they had been best tied back to Kikeh. Pretty good shot at it and the risk was going to be sands. That's the issue that we have been addressing most significantly as you go outboard at Kikei Kecil -- [Hiatt and Seacamp] if you recall were dry holes but sand wasn't an issue and Karesi is the next one out, and we have gone out farther and run into thin bedded sand. So the issue was which way was Karesi going to go. And in the event it ended up having pretty thin sands. And so it is a well that we think we can tie back to Kikeh, and have real good economics. But it's certainly not a stand alone at this time and a disappointment in the sense that it wasn't a big thick sand body. So tying back to Kikeh is likely the way that we can see that one. See that one going.

Thanks a lot.

Mark, I can take a stab at answering your earlier question if you like.

Sure enough.

We have pre-tax earnings on foreign exchange were about $3 million in the second quarter of '05 versus about 0.5 million in the second quarter of '04. Nearly a $2.5 million improvement on pre-tax basis is almost evenly split between the U.K. and Canada.

The after tax on that, John?

After tax will be -- it's not quite the exact 65%. It's because some of it is tax on tax, if you will. I don't have that one handy exactly. We will come back to you on that one. -- I don't have the exact number.

Thanks a lot.

Thank you. Your next question comes from Mark Fisher with Fisher Sites Capital.

In the past as I recall you provided some more detail breakout of the guidance. I was wondering if any more detail country, gas, oil was available at this point?

We certainly can. Yes. Mindy?

What would you like to get? A break down by area?

Yeah, by area and commodity if you have it.

Breakout by area for the third quarter on the oil side for the U.S. we are forecasting about 29,000-barrels a day. Canadian light production 500-barrels a day. Canadian heavy a little over 11,000-barrels a day. Offshore Canada 21,000-barrels a day. Syncrude about 11,500-barrels a day. U.K. around 6500-barrels a day. Ecuador 8,000 barrels a day, and Malaysia a little over 11,000-barrels a day.

On the natural gas side we're expecting U.S. natural gas production to be somewhere around 68 million cubic feet a day. A little over 10 million cubic feet a day in Canada, and a little under 2 million cubic feet day in the U.K.

Great. Thank you very much.

Thank you. And our next question is a follow-up question from Paul Cheng. Please go ahead.

I know it's not a big piece of your portfolio. Superior, seems like the facility is not making much profit for the past several years. Given the very high commodity price. I presume it's really not that important to you for that offset, what is your game plan, I mean, to improve the profitability of that that you would be interested perhaps to sell it to someone else?

It's been a disappointment. Because crude has been pretty much on the rise for the last two years. [the rock in] Asphalt prices earlier in the year because contractors in turn did the states and local governments. To the extent that you lock in and then heavy crude prices go up, before you sell you get squeezed, and that's what happened to us last year and this year, and that's the profit driver at Superior.

On top of that, because of the issues with Suncore's plant, lighter crude, syncrudes in the northern tier have been high relative to other prices. It's hard for us, and harder for us to make money on light crudes processing that at Syncrude. And we have to process them, in order to build the process the amount of heavy that we process.

We really in a double whammy getting hurt I think probably more on a temporary basis on the lighter crude, and hopefully on a temporary basis on the asphalt or heavy crude sides. But it has been two years in a row that this has occurred.

We don't have any near-term ways to solve it. I think your assessment that strategically it's not the biggest asset in our portfolio. It's an obvious conclusion that you can draw. And over time if it continues to have difficulties then we will have to do something, have to address it. I don't see anything in the near intermediate term in that regard.

Can you share with us what is the value on your book for Superior right now? I think your total refining is about $200 million or 250?

We will have to get back to you on that.

That would be great. Thank you.

Okay.

And our next question comes from Ken Carroll, Johnson Rice. Please go ahead.

Claiborne, how are you doing today?

Good, how are you?

Good. Quick question on the Mereau margin down to $1 or so, just a little color what's going on there? Is that more of just an overall Gulf Coast margin pulling back a little bit?

If you look at gasoline prices, distillate prices in the last two weeks, they have come down relative to crude. It's just a split, a squeeze, the plant is running great, we running a great slate of crude for us, plus a 2% sulfur, equipment is running fine. But crutch plays have come in a bit. They were five bucks margins, 5 margins for $5 two months ago. And got pretty steady at 3 and then just in the last week ten days, something like that, there has been a steady erosion.

Okay, thanks a lot.

Thank you. Your next question is a follow-up question from Mark Gilman. Please go ahead.

The acquisition of retail sites in U.K. surprises me a little bit. Could you put color on how that fits strategically? It's 50% expansion in your network there.

Yes. And, Mark, in a way a way to look at it that's a very well run business. Last year for us it made $27 million. On our downstream net income, and in my view they deserve additional capital to invest. They run those sites extremely well. They are consistently profitable. Year in and year out. The only difference in income we have over there are much more refinery-related than retail-related. We have been looking for a number of years to expand it, and stumbled upon an opportunity earlier this year to do it. Is it huge and significant? No. But it's a manager if you can deploy capital 15%+ rate of return in this case, it's around 30 million pounds, then I thought it was a wise thing to do.

Smart people. Running the business well. Good opportunity to expand it. And let them have a shot at it. That was the thinking we had there.

Willing to do more?

If the right opportunity came. We certainly would consider it. It's some point you say, gee, that's enough for the size of company we have there, can we run it from a manpower standpoint? What are we going to do? But we certainly see what else was there first. If there was another opportunity we will evaluate it carefully. But I wouldn't commit to say we definitely do.

Okay, thanks.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] Mr. Deming, at this time I show no further questions.

Thank you very much and I look forward to talking about the third quarter.

Thank you. Ladies and gentlemen, this concludes the Murphy Oil Corporation second quarter earnings release conference call.

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