Murphy Oil Corp (MUR) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Murphy Oil Corporation third quarter earnings release conference.

(Operator Instructions)

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

Thank you. I am joined by John Eckart, our Controller; Kevin Fitzgerald, our Treasurer; Mindy West, our Director of Shareholder Relations. And I will turn it over to Mindy at this time.

Thank you, Claiborne, and welcome everyone to the call. We will follow our typical format today. John will begin by giving a brief overview of third quarter results. Claiborne will then follow with an operations update, 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, and many of these have been identified in Murphy's January 1997 Form 8K filed with the SEC.

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

Thank you, Mindy, very much and a good day to everyone. I will start out by commenting on net income in the third quarter of 2005. It amounted to $231million, $1.23 a share, and that compares favorably to the 118.7 million we earned in the third quarter of '04, which was $0.63 a share. Backing off our discontinued operations, which I'll comment briefly on in one minute, our income from continuing operations amounted to $222.4 million, $1.18 versus $115.8 million, $0.62 a share last year in the third quarter of '04. So we are up 92% in terms of earnings.

The discontinued operating number of $8.6 million as reported relates to the gain that was reported last year on the sale of Western Canada properties upon filing our -- and completing our Canadian tax returns. In fact, we owed less money on that gain than we had accrued for. And thus the gain recorded in the third quarter of '05 of $8.6 million arose.

Although earnings were up in 2005 versus 2004, the Gulf of Mexico storms did have an effect on our results. Our total production was lowered, as reported in our press release, by about 15,000 barrels of oil equivalent a day from storm downtime and the Meraux refinery was down for all of September following Hurricane Katrina. The total expenses associated with Hurricane Katrina -- Hurricanes Katrina and Rita-- were about $34 million, and primarily consisted of additional property insurance costs, self-insured and non-recoverable losses, voluntary payment of salaries to our employees that were affected by the storm, and voluntary contributions to St. Bernard Parish. Additional costs are likely to be incurred in future periods as we continue on assessing the damages.

In accordance with our Company's accounting policy, our property insurance premiums have been allocated to all operating segments. And thus, the hurricane costs, as reported, have been charged to non-US entities within the E&P and refining marketing segments as well.

In looking at the results by segment, our E&P business earned $204 million this quarter. That was up about 72% from last year. Our refining and marketing earned 32 million. That was up again more than 70%. And our corporate net costs were $14.2 million, and that's down about a third from where we were last year. Our E&P improvements related to higher oil and gas sales prices and lower exploration expenses. Our realized oil prices were up about 32% quarter-over-quarter, and our North American natural gas prices were up 42%. Our exploration expenses were $37 million lower, mostly due to lower dry hole cost offshore in Malaysia and Eastern Canada. And our dry hole cost were fairy minimal in the third quarter of '05.

Downstream earnings were up particularly due to a strong quarter in the UK, which benefited from very good refining margins. Our North American downstream operations were down a little bit, about $2 million. That includes the effect of the hurricane expenses in Meraux downtime. Profits in our retail business were a bit stronger.

On a year-to-date basis, we had $683 million of earnings on a company basis from continuing operations, versus $364 million in 2004, and that's up 87%. In terms of where we stand at the end of the quarter, at September 30th, our debt was really unchanged from where we were three months ago, $609 million. This is 15.5% of our total capital employed.

With that, at this time, I'd like to turn it over to Claiborne for his comments.

Thanks, John. This has been an unusual -- an unusually trying two months since Hurricane Katrina came through New Orleans. Our Company got significantly impacted in a number of ways.

For starters, our domestic upstream home office in New Orleans was flooded and many of our employees lost their homes. We moved this office and our people to Lafayette from New Orleans and were up and running within two weeks. All of our Gulf production was shut in from Katrina and then Rita. Although our platforms are fine, downstream pipelines are slow coming up. As of today, we're producing in the Gulf 10,000 barrels a day of oil and 39 million cubic feet a day of natural gas, or about 40% of our productive capability. We expect to be producing around 29,000 barrels of oil a day and 74 million cubic feet a day of natural gas sometime in December.

In our downstream business our refinery at Meraux in St. Bernard Parish was flooded with from two to five feet of brackish saltwater in our process units and water much deeper in our tank farm. Our preliminary operating budget for next year has this plant starting up at the beginning in the second quarter. And as you know, the weekend after Katrina landed, we discovered a crude oil spill from one of the tanks at the refinery that went into an adjacent flooded neighborhood. Approximately 25,000 barrels were spilled and as of today, almost all of this has been recovered or has evaporated. Of course, law suits have been filed.

On Monday of this week, after seven weeks of testing, we published a map outlining the affected area and announced the opening of five offices to settle claims. In addition, we will remove oil from all impacted residences and businesses with the owner's consent. Our goal is to quickly and fairly deal with this issue, and as per our 8-K filing, we believe we are adequately insured and do not expect any material adverse impact on our company.

As you can tell, we got hit pretty darn hard by Katrina, but the good news is that given the spread of this Company's assets and our earnings power, we were more than prepared to handle it. Our upstream producing assets in Canada, the UK, Ecuador and Malaysia benefited. And although Meraux, our single largest downstream asset, is down, our two other refineries have done quite well as has our US retail investment.

Now for the rest of the Company's business. First, an update on production news, and then the status of various oil and gas developments. Front Runner is producing 30,000 barrel equivalents a day from five wells and is underperforming. The wells are demonstrating less reservoir connectivity than expected due to greater field compartmentalization. This will require sidetracks and additional subsurface tiebacks, which will clearly add costs and means a significantly lower production plateau. We now anticipate Front Runner will average on a gross basis around 26,500 barrels equivalent a day next year and 30,000 barrel equivalent a day the year after.

Preliminarily, we now anticipate an '06 DD&A rate at Front Runner of $9.65 per barrel and an '07 DD&A rate of $11 a barrel. Medusa is shut down and should come back up at the end of November when the natural gas pipeline is repaired. Habanero is shut down. It should be up mid November. Shehaline (ph) in the UK went into a planned 35-day turnaround earlier this week, and Terra Nova is just now coming out of a planned turnaround. As a result of Front Runner's performance, the risking of an extended turnaround at Terra Nova next year and higher commodity prices, which translate into higher government takes, we are reducing next year's production target to 120,000 barrel equivalent a day.

In developments, Kikeh remains on schedule for a second half '07 start-up. (Inaudible) is shaping up as a very nice field and development plans are under discussion with the operator. An area development plan for Kenarong and Pertang in Peninsula Malaysia was submitted at the beginning of the month with definitive benefit plans to start-up in the 2008-2009 timeframe. In the US, we are looking at development options for Thunderhawk. And in the Congo, we are studying preliminarily development options for Azurite.

In drilling in the Gulf of Mexico due to storm-related delays, we now estimate we will get the Ocean Victory to start a year's contract towards the end of November. We will re-enter and deepen the Thunderhawk Number Two, and then drill a wildcat at Mississippi Canyon Block 819 where we have a 37.5% interest, and which is called Thunderbird. And then go back to Thunderhawk for an up-dip appraisal, and then drill a fourth well in the field in an unpenetrated Northern fault block.

In Malaysia and Sabah, the Ocean Rover is due back in mid November. At that time, we likely reenter the down-dip Kikeh Kecil well. And I'll anticipate a Block K question and say that we are in discussion with Petronox concerning renewal, but it is still premature. In Sarawak, we are finishing up on a wildcat on a gas prospect, called Morapu, after which the rig moves to ramp in oil discovery to drill a third well and then conduct a flow test.

Peninsula Malaysia at Labere (ph), where we have 75% interest, the straight hole was complete and a sidetrack recording operation is planned. Following Labere, the rig moves Southeast to the Kirean (ph) oil prospect also on PM312, then moves to PM311 to drill two more oil prospects.

In Congo, we're on location drilling Asroy Number two appraisal well. We will drill a straight hole, sidetrack, core and conduct a flow test in one zone. These operations are in process and should be complete in approximately 40 days. The rig then moves Southeast to drill the Malachite prospect, which is similar in structural size to Asroy, and then another wildcat named Beril (ph) more due south of Asroy.

In the downstream business, I've already covered Meraux, so we'll move to Superior, where margins have been strong and are still quite high. Milford Haven has also seen robust margins which persist. US retail margins suffered with the wholesale price run-ups associated with the two hurricanes, but have since recovered nicely. In balance, our strength is unusual, long-term production growth and potential. Our development lineup, which is not all sanctioned, includes for now Kikeh, (inaudible) Kenarong and Pertang in Malaysia and Thunderhawk in the US. In addition, a successful flow test at Azurite will likely mean adding this field to that list.

On the exploration side, prospects near Thunderhawk in the Boarshead basin in the US, two more deep-water prospects near Azurite in the Congo, numerous prospects in Sarawak, Malaysia, and four wildcats in Peninsula Malaysia, and additional prospects in the northern part of Block K in Sabah Malaysia round out an extremely high potential set of opportunities. And I'll take questions now. Thank you.

Thank you, sir. (Operator Instructions)

And our first question comes from Paul Cheng with Lehman Brothers. Please go ahead.

Thank you. Good afternoon. Hey, Claiborne.

Hey, Paul. How are you?

Very good. Best wishes for all your people down there.

Thank you very much.

Just a quick question. Did the retail operations in the US make money in the third quarter at all?

Paul, it did. It was an unbelievably volatile month with dramatic increases in wholesale prices, which were hard for us to recoup, and then dramatic decreases in wholesale prices where we had an ability to make money. And so, on balance we did pretty well.

In the third quarter, you actually did pretty well.

Yes, we actually did-we did well.

Because we have heard from several companies talking about they lost money in the third quarter from the Rita.

No, we didn't. We did well.

Claiborne, everyone is focusing and talking about the amount of destruction. What is the same store sales trend that you have seen, say in August and September in comparing to October? Is there any significant event that you can share with us?

Paul, our same store sales have been up continuously all year, especially compared to the same month a year ago. And so we haven't seen it, but in this type of environment we probably would not, because we are, as you know, a low price offer in the marketplace. And so people will trade down to us to the extent that they are leaving a branded customer coming down. So it doesn't surprise me. But ours have been very strong.

And on a different subject, you mentioned that the rest of the structure of the company is more compact and more compressed. And so the extend we cut it away (ph) is going to be lower. What is the reserve -- the capital reserve that we are now talking about, is that going to lead to a write-down in the 2005 number?

No. I don't think in '05. And maybe not at all, but it's too early for me to know that. We're going to remove some reserves some proved to probable this year. And then we're going to do some sidetracks and some re-completions next year and observe it. And so it may end up that we've got -- I think around 45 million barrels booked in that company that we have no right downs. But I can't represent that yet. I'll be in a better position some time next year.

So why not do you have 35 million barrels that is on your book.

Sorry?

You have 35 million barrels that is on your book as proven reserves, and you are not 100% whether that you have to take that down or not.

Well, what are we going to do is we're going to observe some wells that we are doing now. We're going to move some that have been proven to the probable category and then next year we're going to do some sidetracks into a different reservoir and watch performance and then see if there is an issue there.

And when you talk about the DD&A on fund when the next year is going to be $9 and then in '07 is $11, or 9.60 and then $11, I presume that is based on the assumption you're going to have some reserve reduction on the expectation -- on your recoverable rate, I presume? Or that is this due to the -- do you expect even with the same reserve, you just have to spend more money to get it? So you have to increase it. What is the assumption behind?

It's more expense. Yes, that assumes there is no reserve right down and that's just additional expense.

Okay. So in the event, if we have any reserve right down there, will they get there and the charge will be even higher? That's one what we say here.

Yes. And what we've done, Paul, is we've added money in there for some of these additional sidetracks and additional work, but we did not budget that they will be successful at this point. And so as a result, we don't have any -- production could be better next year, I guess is another way of saying it. We are just being kind of conservative....

Sure.

...what our production rate's going to be. Reasonable chance they will be, but they might not. And then if they are, then we're going to have to look at reserves.

Okay. Two final questions. One, international (inaudible) is a very impressive number. I know margin has been stronger but the sequential jump seems to be substantially in excess of what the benchmark indicated and we suggested for the UK market, because I thought the retail margin in UK was actually down and given your exposure in that market. So wondering if you can maybe shine some light with us to see why it is doing well. And secondly, I'm not sure I understand why you would book any of the hurricane related expense outside the US? What's the methodology behind?

Okay. On the UK downstream, we had a property tax adjustment in the quarter for $2 million -- $2 million. Otherwise it was just performance.

Yes. And mainly in refining or in retail?

It's just a combined number. We really don't break it out in that system -- just a combined refining marketing number in that system. But that's pretty much -- it's a real-- when it works, it works. And it's a real clean system.

Yes. I mean, it's a terrific number.

Thank you. Why don't you - John Eckart, why don't you address the methodology of allocating the reserves?

In terms of what our accounting policies are, we have property insurance coverage that covers all of our assets, and that part of the-- because of the hurricane, we have been informed by our insurance companies that our property insurance for 2005-- in other words, the premiums we have to pay related to 2005, are significantly higher. They have incurred significant losses because of mainly hurricane Katrina. So we have recorded the impacts of that higher property insurance cost in the third quarter, but according to our accounting policies, we spread those costs to cover all of the assets of the enterprise. So in consistency with our accounting policies, we have allocated a portion, which is not a huge portion, but a portion. About 15% of that winds up going to non-US pieces of the business. So we are following our accounting policy. It was related to the losses incurred on the hurricane Katrina. We have included that extra cost into hurricane cost, but we have allocated pieces of it, although relatively minor pieces of it, to outside the US in accordance with our accounting methods.

I assume you also allocate that to-- in the downstream outside the US?

Yes, that is a piece of that in what we call Merco, which is downstream UK.

Okay. Very good. Thank you.

And our next question comes from Bruce Lanni with AG Edwards. Please go ahead.

Yes. Good afternoon, Claiborne and everyone, and congratulations on your quarter.

Thanks Bruce.

Going back to Front Runner-- I have actually two unrelated questions. But with Front Runner, when you cited -- it's only a modestly lower production for next year, we're at 120. Again, I just want to clarify. Is that solely due to Front Runner and also Terra Nova?

No. It's primarily Front Runner, but Terra Nova is in there because we're risking having extended turnaround.

Correct.

And we don't know if we will or not, by the way, it's under discussion about the partnership. But we just put a factor on there. But also the government take issue is pretty significant. Both Terra Nova pays out and goes to a 25% royalty interest. I think it happened in September. And then our Canadian heavy oil barrels more of them have been taken away by the government. West Patricia ends up having higher government takes. And so to add all that together, you end up with this overall lower production. There is some modest delay in syncrude from what we say budgeted a year ago because the completion of that is now, I think, mid-year and it could have been at the beginning of the year. That's not big, but it's in there too.

Okay. And just refresh my memory on Front Runner. What was the peak that you were expecting to see? You said 30,000 now for '07. What was the prior peak?

The peak, on a sustained level for the year, was about 45,000. We had a capability of getting to 60,000 in the field in an instantaneous basis and could have gotten there, and plan to get there for five or six months. But if you average out for a year, it's about 45,000 for the year.

Okay. And just one unrelated question on refining. Right now with Meraux down for almost two more quarters, where are you getting -- where are you purchasing from and are you getting any long-term contracts to supply, for example, all the retail that you have?

No, we've a lot of different sources and we've been remarkably successful during real stressful times -- pressure packed times of getting all our sites supplied and I brag on our people. In many instances, in many towns in the Gulf Coast, we were the only place that had gasoline. Running by generator, and it was real important to be there because a lot of people, for a lot of variety of reasons, simply didn't open their shops that week either because of supply reasons or concern about pricing. We were there. I'm real proud of our efforts.

But you don't see any difficulty doing that going forward in other words over there?

No, we survived the last two months there and done pretty well. I think that it's a real good asset test. I don't see any -- I mean, we are working our tails off. But we are fully supplied.

Okay. Excellent. Thanks very much again. Again, good job.

Thank you.

And our next question comes from Ray Deacon of Harris Nesbitt. Please go ahead.

Yes. Hi Claiborne, I had a question about CapEx in Malaysia. You spent about 135 million this quarter there. How much of that was related to Kikeh? Will it continue at that level and how much CapEx do you have remaining to get that online?

Let's see, Ray. I don't know if I can specifically address it. The capital at Kikeh is going to be ongoing from now of course 'til the fuel start ups and we're generically saying the second half of '07. We are starting up a pretty good exploration program there. We'll have of course rigs going to Peninsula Malaysia and Sarawak Malaysia. So that's part of it. So the balance of that would be Kikeh. So I'll take a stab and say $100 million at Kikeh. We will get you a better number.

Okay.

Part of the issue is that the milestones you have with your contractors and so you won't be spending a lot of money. Then they'll meet a milestone and you pay them, so there's a slow to capital. And you will see that from now until the fuel comes on strength.

Yes. Got it. And just kind of unrelated, but as far as the refineries go, I was thinking that Meraux supplied something less than 10% of the throughput at the gas stations. Is that in the ballpark?

If you actually talk about liquid gasoline barrels originating at Meraux and going to a gasoline station, it's probably higher than that. But that's probably in the ballpark. But that production is a nice back stop and provides for lots of exchange opportunities that end up supplying our stations. And so it did have a greater impact in just that say 15% that may have gone directly to sites. It's a way you can trade around to deals to get the station supply.

Got it. And just one last question, what would the target be with this down dip leg of the Kikeh well that you're bringing in the new rig for? What do you see on the seismic that -- how large of a prospect is it or what could it do to that?

I will give you a range-- anywhere from 35 to 100, something like that, million barrels gross.

Okay. Great. All right. Thanks.

Welcome.

And our next question comes from Nicky Decker with Bear Stearns. Please go ahead.

On your plans to bring Medusa back up, how do you plan to transport production there?

I don't know if I can give you real specific answers. There is a natural gas pipeline owned by another company and an oil pipeline owned by another company. The natural gas pipeline is what has given us problems. There is a platform, I think in the West Delta, where it goes up and down. There was a riser part of it. Or there was an issue with the riser. And we anticipate that will be complete-- repair complete by the end of this month. And then we'll come back up, probably slowly at first 'til we see that everything is fine, and then take it all way up to the top. We are actually producing -- producing today about 1,500 barrels a day gross of oil and flare a bit of gas. We tried to get permission from the MMS to produce more and flare more, but we were denied.

And what was the issue at Habanero? Is that platform damage or is there also a transportation issue?

I'm pausing (ph), but I think it's transportation issue.

So again, you would likely tie into another pipeline as opposed to say barging the production?

Yes. We are not operator there. And so that goes back to Augger (ph) and then leaves from Augger. So whatever Augger's issues are, those are Murphy's issues.

Okay.

And barging is not contemplated.

Claiborne, you also-- just switching to Congo for my -- you went through your plans there quite quickly. What was the timing on the Algeri (ph) appraisal?

We've got about 40 days of operations left. Initially, I think they're saying 90 but I think it's going to go -- it's going quicker than that. So we were -- we will float test here in a couple of weeks, maybe less. And then we'll move off and move I think first to Malachi (ph), which is a nearby wildcat, and then Beril.

And are those similar in terms of prospectivity to the Algeri?

Yes. They are. They're-- one is 12 kilometers away? That's the person Malachi (ph), same type, same structural size, same structural type saltcord (ph). And Beril's the same way.

Great. Okay. Thank you.

You're welcome.

And our next question comes from Gene Gillespie with Howard Weil. Please go ahead.

Got three unrelated questions, Claiborne. One, is there anything new or what is the status of the negotiations in Ecuador? Number two, what can you tell us about the Floyd Shale (ph)? And number three, you found a lot of gas -- shallow gas in shallow water, Sarawak fairly near Bintulu. There are some indications that there is going to be a new train in Bintulu. Is that a potential outlook for that gas?

Let's see, Gene. Let me take Floyd Shale first. And that's basically a tight hold for us. I think the public data suggests that we drill the well and that we established a second well and that a third well was planned. And that is as far as I will take that now. As far as Ecuador goes, we have a deal with our operator and we should get payment in November. We do not have a deal with our two non-operators. So that's something that we're going to wrestle with for a while -- unexpected. And we'll - we'll see what we can do there. And your third question was gas in Sarawak, and we've been real successful in delineating a fair amount of natural gas. But I'm really not in a position to make further comment on that yet.

All right. Thank you.

Thank you.

Jennifer Rowland, JP Morgan. Please go ahead.

Hi. A couple on unrelated questions. First, on the heavy oil properties in Western Canada that you acquired a little while back. Is that ramping up as you expected? And secondly, on CapEx, has your guidance at all changed for the year? I think last time you talked about CapEx for '05, it was roughly 1.1 billion and you're running a little bit ahead of that if we look at the last nine months. I'm just wondering if we should we expect a higher number for '05?

Heavy oil in Canada is on track. We are primarily in the connection or the production is coming from the seal area. And wells are being drilled and are coming on as we expected, and some still have yet to be drilled to come on. So there some in there that that have to perform as we hoped, but so far everything has. So I think we're pleased with the performance of that field -- very pleased with the performance of the field. On CapEx, we are ahead. I don't have -- the best number I can give you is probably about 1.3 right now, and see where that goes.

I think that will be a reasonably close number to where we go. It's mainly in Malaysia, and it's mainly acceleration of some of the Kikeh expenditures from what we originally thought, say nine months ago. No increase in the cost of the field development, but it's just an acceleration of how we are spending it. Now, I'll take there is another additional area, how I -- and that's the Congo where we are spending because of success of Azerite, substantially more money delineating and appraising and testing Azerite and then drilling the two additional wells. So that was not contemplated in the budget.

Okay. Great. And just one other quick one. On the earnings guidance for next quarter, what is embedded in there as far as exploration expense and the realizations on the upstream side and maybe guidance for what you're looking for from the downstream?

Hi Jen, this is Mindy. And I'll take that question. On the oil price realization side, we are expecting realized worldwide prices of approximately $47 a barrel and on the gas price about $10.75 per MCF (ph). Embedded in the estimate is expected dry hole costs exposure of $80 million. Then we have another $35 million that will be added into that to cover everything else that's an exploration expense, such as G&G (ph) amortization cost. If you'd like me to break down the dry hole costs portion, I can do that. As Claiborne mentioned, we're doing a lot of drilling. We have four wells in peninsula Malaysia, which is about $26 million altogether for the four, $10 million source of drilling in the Gulf of Mexico, about $8 million being spent in shallow water Malaysia, $20 million expected in deepwater Malaysia, and $16 million in Congo. And if you add all those up and tax effect as well, that's about a $0.35 swing in earnings per share.

On the downstream side, we are expecting a fairly good quarter although we will constrained by having the refinery offline, something in the nature of what we reported at this quarter would be approximately what we would expect for fourth quarter.

Okay. Great. Thank you.

And our next question comes from Robert Lynn (ph) with Simmons & Company. Please go ahead.

Good afternoon, everyone.

Thanks.

Claiborne, I was wondering if you can walk us through the mechanics of your business interruption insurance for both shut-in production as well as for Meraux?

We have-- this is John. We have insurance policies for business interruption. They don't kick in until 60 days after the event. So for the first 60 days, which is approximately-- hope I get my days right here-- it should be around the end of October, that we would effectively have coverage for. Some of the -- our accounting policy would be that we don't book that of course until we collect it. But there is coverage out there.

Are you capped at any certain dollar amount or commodity price?

Our business interruption on the upstream side is based on a budgeted -- slightly ahead of our budget, but not based on the current price levels. So there is-it's not in there at $60 for oil, for example. It is more in the $40 range. So there are some constraints on that end, yes.

Okay. And one more question. Claiborne you said Terra Nova has moved to a 20% royalty rates. What was the previous rate?

25% -- I think it was 5% before, 25 now.

25 now. Okay. Thank you. That's all I have.

The next question comes from Ken Carroll with Johnson Rice. Please go ahead.

Hi guys. How you are doing today?

Good.

Quick question. Could you just kind of run through again your plans in deep water (inaudible). In block K, I know you're going to do those deeper tests on Kikeh Kecil (ph). But in terms of more exploratory drilling after that, what do you kind of lined up here in their near term future?

We have been opaque on that, trying to decide which prospects to go to next. Once we complete the Kikeh Kecil, we will give you more guidance.

Okay. I know one thing you eluded to in the last call was kind of waiting to see the outcome of a nearby Shell well, which I think they announced a while back. Did that play a part in your decision there?

We really do not have access to the information. And so we're going to drill Kikeh Kecil, and then try to make some decisions.

Are you targeting only two more wells -- one or two more wells this year?

We would have room for two more in Watkay.

Okay. And in terms of some detail on the production guidance, your guidance for the quarter is 101 -- you talked about 23 a day deferred storm shut-ins. In the last conference call, you talked about 130,000 barrels a day for Q4. Kind of walk us through that 6,000 barrels or so difference. Is part of that Terra Nova and Syncrude and things like that just pushed off?

Yes it is. Ken, if you want me to give you a break out for fourth quarter production, I can do that for you.

That will be great, Mindy. Thanks.

On the gas side, we're expecting 82 million cubic feet in the US, about 10 million cubic feet a day in Canada, six in the UK. On the oil side, approximately from only 25,000 barrels a day in the US, 500 barrels a day of Canadian light, 15,000 barrels a day of Canadian heavy, 22,000 barrels a day offshore Eastern Canada, 12,500 barrels at Syncrude, 8,000 barrels a day in the UK, 8,000 in Ecuador and 13,000 in Malaysia, and hopefully when you do the math on all that, its 22 120.

Got you. Thank you, Mindy.

Thanks (inaudible).

You're welcome.

And your next question comes from Smart Bodes (ph) of Bell Johns (ph). Please go ahead

Yes, thanks very much for taking the call. Just wanted to get a little more detail on the status of the talks with the plaintiffs' attorneys and if you can give any more color on the -- you said that you opened some offices there. And also related questions, whether you have a sense of the overall cost of the spill itself to the company after insurance and also whether you're getting any reading from the insurance companies that they intend to fight this.

Boy, that is a mouthful. Because it's in litigation, I really am not in a position to answer most of that. I will confirm that we've opened five offices to process claims and are pursuing that particular path.

Are the insurance companies challenging this?

Well again, because it's a situation in litigation, I'll reiterate what I said before. We're opened up five claims offices and we're out there processing claims.

Okay. Thanks.

And your next question comes from Jen Mistofi (ph) with Platts (ph). Please go ahead.

Yes, my question is I just wanted to see if you'd go over again what those levels were, the production shut-in estimates to be improved by next month from the storms in the Gulf of Mexico?

Okay. Shall we give you -- right now, we are at 10,000 barrels a day.

Right.

And we are at around 39 million cubic feet a day of natural gas. We expect by the end of December we will be coming up during the month, so this is a rate we'll achieve during the month. We'll be producing 29,000 barrels a day in 74 million cubic feet a day.

79?

No, 74.

74. Okay, great. Thanks a lot. That's all. Have a good day.

Okay.

Have a good day.

And our next question comes from Mark Gilman from Benchmark Company. Please go ahead.

Hi Claiborne, good afternoon.

Hi Mark. How are you?

Good, thanks. A couple unrelated things. What is the DD&A rate on Front Runner currently?

It is 920, I think. I think it's 920.

So it's going from 920 now to 965 next year?

I think the way it works, Mark, is that it ramps up in the course of the year as we spend capital and then it exits the year at around 11. And then that is the number that we have for '07 at this point. What I say is this is preliminary, but that's our best stab at it right now.

Okay. And what does all this suggests to you about prospectivity going forward in the Front Runner mini basin?

Well, most of prospectivity from this point forward is going to be in the (inaudible). And I don't think it has an impact on that. I think we've seen most of the Pleyel Pleistocene work done-- exploration done, and so our goals and our plans are shifting to the deeper pay. Hope for a pay (ph).

Okay. I think you very quickly mentioned an increase-- when you were talking about the production revision-- an increase in government take associated with the Canadian heavy program. Could you elaborate on that for a sec?

I might have misspoken on that. Because I don't think-- in fact, I think our royalty rate at seal (ph) in particular is real low, around 1%. I'm not sure that increases. So I think I've just misspoken on heavy oil in Canada.

Okay. So that is not a factor?

No.

Without getting into the specifics of the litigation issues, regarding your liability insurance with respect to this bill, is there a cap on that at all? And to your knowledge, are there any act of God kinds of exclusions in that policy?

Mark, the best thing I can do in connection with the litigation and with insurance is just refer you to the 8K. And tell you that in our opinion, we don't think there's a material adverse effect to the company. And that's the best I want to do.

Okay. Thanks, Claiborne.

Welcome.

And our next question comes from Donald Texar (ph) with Norset Management (ph). Please go ahead.

Yes, hi Claiborne.

Hi.

In your earlier remarks, I am not sure I heard it right. But did you say you were drilling a well in the peninsula Malaysia Block 312 and you said you had drilled it and you were doing a side track?

That is correct.

Could you just - I've forgotten the name of the well. I couldn't remember.

It is called Labere. And since we're in process, we will release information later.

Okay. In terms of-- did you originally give any guidance as to prospect size?

Yes. They're on the low side, 30, on the high side, 100.

And is this one of the stand alone -- or are there-- how many, if you had some success there, would there be some follow up?

Yes, there is a number of prospects. I would say there is at least five more.

In the sort of general area?

Yes. In the area.

Okay. Great. Thanks very much.

(Operator Instructions)

Our next question is a follow-up from Gene Gillespie. Please go ahead.

Claiborne, I've got a question regarding the KCAP (ph). I know you made a comment-in my advanced stage, I write slow and think even slower. But what did you say in terms of the timing of unitization and panned or (ph) first production?

You know I didn't Gene. All I said was it is developing to be a nice feel. That we are talking development with our operator. And that's all I want to say.

All right. Thank you very much.

You're welcome.

At this time, we have no further questions. I'd like to turn the conference back to management for any concluding comments.

Thanks very much. I appreciate everyone. And we will talk to you at the end of the next quarter. Thanks very much.

Ladies and gentlemen, this does concludes the Murphy Oil Corporation third quarter earnings release conference. If you'd like to listen to a replay of today's conference, you may dial 1-800-405-2236 enter the pass code of 11041913 to enter the conference. Thank you again for your participation and you may now disconnect.