Murphy Oil Corp (MUR) 2006 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.

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 Wednesday, July 26, 2006.

I would now like the turn the conference over to 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 Investor Relations and Dory Stiles, our Senior Investor Relations analyst. I'll turn it over to Mindy at this time.

Thank you, Claiborne. I would also like to 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 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 8-K filed with the SEC.

With said, I will turn it over to John.

Thank you very much, Mindy, and good day to everyone.

Net income in the second quarter of 2006 amounted to $214 million, that was $1.13 per diluted share and that compares to $347 million of earnings in the second quarter of 2005, which itself was $1.85 a share. The second quarter of last year 2005 included a gain on the sale of Gulf of Mexico shale properties and is this gain added $106 million to last year's quarterly earnings, or which equates to $0.57 a share.

The 2006 quarter, second quarter, includes Canadian income tax benefits of $37.5 million which equates to $0.20 a share and these arise from recently enacted rate reductions for Canadian federal as well as Alberta and Saskatchewan provincial taxes.

Excluding the tax benefit in '06 and the property gain on sale in '05, our E&P earnings improved in the '06 quarter versus '05 primarily based on higher oil prices which averaged about $11 a barrel better for the Company in the current period.

We did have lower oil and natural gas production and therefore lower oil and natural gas sales volumes. These partially offset the higher oil prices. We did have very low dry hole costs in the second quarter of '06.

In Ecuador we received a partial settlement in the second quarter '06 from two of our partners, and this settlement related to oil volumes that were withheld from us since the second half of '04. Offsetting this essentially was the fact that the Ecuadorian Congress established a revenue sharing provision effective April 25, 2006 whereby the government shares 50% of oil prices above an inflation adjusted price which was in effect at the time of the contract.

The Company continued its repair work at the Meraux, Louisiana refinery following Hurricane Katrina and most, but not all, of these repair costs are expected to be recoverable under our insurance coverage. We took a total charge to the bottom line of $26.5 million in the second quarter of '06 for costs not expected to be insurance recoverable.

Without the Meraux refinery running for a portion of the quarter of '06, coupled with unrecoverable repair costs and other ongoing refinery fixed operating costs, our downstream operations posted a loss of 13 million in the second quarter of '06 versus which was a record profit in the second quarter of '05 of 67 million.

Corporate after-tax costs increased in the second quarter of '06 versus '05 by about $8 million and a significant part of this difference arose due to foreign currency exchange impacts which were caused by weakening of the U.S. dollar versus the Canadian dollar and the pound sterling and euro.

Regarding our year-to-date results, we earned about, almost $328 million in the first half of '06 compared to 461million in the first half of '05. Higher operational E&P earnings were more than offset by the Gulf of Mexico property gain in June of '05 and by losses in downstream in '06 due to the Meraux refinery downtime and repair costs.

At June 30, '06 our long-term debt stood at $875 million, or 18.5% of total capital employed. Most of our operating cash flow in the second quarter of '06 was used for working capital needs and we had crude oil purchases for Meraux restart.

We had more purchases of finished products, insurance premiums for annual policy renewals and payment of contract repair costs at the Meraux refinery. These were the reasons for the use of the operating cash flow for working capital.

With that I'd like to turn it over to Claiborne.

Thanks, John.

I'll cover production, upstream developments, exploration activities and downstream.

Production for the full year is now expected to be 100,000 to105,000 barrel equivalents a day down from a projected 105 to 110,000 barrel equivalents a day for the following reasons which are primarily a series of mechanical mishaps bunched together in time at various non-operated fields.

2,000 barrels a day is due to the fire at the Seal tank battery. Blackrock had a major fire at their facility on June 30th.

One third of the battery, which is about 8,000 barrels a day should be operating shortly with full recovery, which is about 23,000 barrels a day, likely later in the year. Our portion of the estimated damage is around $5 million which should be covered by insurance.

1500-barrels a day of the decrease is due to premature field shutdown at Terra Nova.

There's no impact on our previous estimate of third quarter production as the facility was already expected to be down for the entire quarter. However, the shutdown occurred earlier in the year than originally anticipated and effects full year rates.

1,000 barrels a day of the decrease is due to the start-up with an immediate and prolonged shutdown the third Syncrude coker due to pervasive odors in the area. Syncrude has taken a very cautious approach in an effort to resolve this issue and the coker is scheduled startup next week.

500-barrels a day is due to a Schiehallion shutdown planned for late July that we only were informed of in June. Our operator informed partners that more in repair work at Schiehallion would require a full 21-day shutdown for essential repairs and inspection beginning in late July.

2,000 barrels a day of the decrease is due to revised workover schedules at Front Runner and Medusa. 1300-barrels a day of the 2,000 of this decrease is from delay of the recompletion of the A-6 well at Medusa into 2007 from the third quarter of 2006. That's because the A-6 well is doing better than we anticipated.

The balance is due to slippage in various Front Runner workovers.

On the development front in Malaysia there's no change in Kikeh's second half 2007 startup status.

During the quarter we announced a Heads of Agreement for a gas sales contract for offshore Sarawak gas discoveries for up to 15 years and 250 to 300 million cubic feet per day. Negotiations are ongoing for a final gas contract and the submission of a field development plan for this project.

In Congo we're working on development options at Azurite so that we can make decisions concerning field development in the fourth quarter.

In the U.S. at Thunder Hawk we are now headed towards a standalone facility that will be capable of 45,000 barrels a day. In the drilling front in the U.S. as previously announced, we made a discovery at Thunder Bird in Mississippi Canyon Block 819, will be appraised later but preliminarily it is a subsea tie-back to one of several nearby facilities.

The Ocean Victory is now drilling Thunder Ridge in Mississippi Canyon Block 736, which is a 100 million to 200 million-barrel prospect in the eastern Boarshead basin that comes with $70 million dry hole cost. After Thunder Ridge we will redrill Exactobox subsalt, which has been renamed Badger, in Green Canyon Blocks 425 and 426, which is a 100 to 175 million-barrel miocene subsalt prospect.

In Malaysia and Sarawak where we have an 85% interest, during the quarter we successfully drilled gas discoveries at Pemanis, Gasing, which is now called Patricia and Wangsa and are currently drilling a prospect in SK 311 called Tiram located Northeast of Serampang. This will be followed by and appraisal well at Bellum within a yet unnamed oil prospect in SK 311.

Highlighted previously we will have a rig active all year in this area.

In Sabah the ocean rover is drilling development wells at Kikeh and will free up for one or two wells location not yet determined towards the end of the year.

Downstream Meraux will average 95 to 100,000 barrels a day during July with only the alky unit offline. This should bring this unit back up by the end of this week and at that point can increase runs and have a full product [slay].

Total repair costs are estimated to be $200 million with the uninsured portion being around $50 million.

Superior margins are benefiting from wide differentials from around $10 a barrel. Milford Haven margins are $4 a barrel and U.S. retail margins were under pressure in July after two profitable months.

Currently have 945 Wal-Mart sites in operations.

And I'll take your questions now.

[OPERATOR INSTRUCTIONS] Our first question is from Jennifer Rowland with JPMorgan. Please go ahead.

Thanks. A couple questions.

First on the Thunder Hawk standalone facility can you provide some more details as far as development costs and timing of first production?

Jenn, it's early because we haven't seen sanctioned it yet, so I'll defer on that, but assuming that we get sanctioned relatively soon, we could be two-and-a-half years away, something like that.

Okay. Also, any update on the lawsuits in New Orleans?

No. We've settled around 2700 of the various residences so far. Within the area that was directly impacted by the crude, that's 70-plus percent, and the overall area formed by the federal judge class action area it's about 45% have been settled. Many of those homes don't have oil in them or didn't have oil in them.

That's the status. There's a trial date October 2nd or October 4th has been set, and I think people are getting ready for trial.

Okay. And lastly, just one more.

On the Floyd shale, I know you'd planned to drill five or six wells this year. Just wondering if you could provide an update for activity in that region and any results you might have had?

We kept it tight so far. It's a real competitive area and we'll keep it there for a while.

Okay. Great. Thank you.

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

Claiborne, just to follow-up on Thunder Hawk, has the standalone development position a function of improved assessment of the reserves there or is it contemplating tying in Thunder Bird and some of the other discoveries?

Arjun, it's primarily because after a lot of discussions with various people, it became the best option for us to pursue, to get production on as quickly as possible with as much control over the production as we could have.

Does Thunder Hawk alone fill the 45,000 barrels a day or is it being oversized for other discoveries?

The current plan is Thunder Hawk would fill it up.

Okay. And is there any narrowing of the reserve range there, I think it was 50 to 150 at one point in time on a gross basis?

We'll come out with that later when we come up with our sanction.

And it's all oil?

No, it's barrel equivalents.

That's BOEs a day. Do you have the gas/oil split?

No, I don't.

And then just lastly, on the contribution from Meraux to your Q2 guidance, I think if you heard you correctly you said you'll get the alkylation unit up this week and then you can run this thing full out. Are you assuming two months in Meraux with kind of maybe not current margins but good margins or does your guidance have maybe a more conservative assessment of refining contribution?

The guidance is pretty conservative. I think that we're seeing in Meraux at 100,000 barrels a day in August, and we're at 100 now, and we should be -- we would hope -- up pretty quickly to 125. So it's relatively conservative.

But the last stages of drying out are alky unit and then we should introduce feed, knock on wood, this weekend.

That is terrific. Thank you.

Our next question is from Robert Lind with Simmons & Company. Please go ahead.

Thanks. My questions were asked.

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

Hey, guys.

[Inaudible] for Meraux, are they profitable now based on today's margin? I know that for Meraux I know that you still have the alkyline unit you need to bring back so it's not running at normal, but based on the current configuration of current run at today's margin, are they profitable?

Yeah, yeah. You know, the issues -- there's still some cost that we have to expense there, and so that's built in.

We've got most of them flushed out of our system, but there's still some of these repair costs uninsured that have to be expensed. But if you take all that away and you run a plan at 100,000 barrels a day without the alky unit, it's pretty profitable.

Right. Because I mean the remaining costs for the uninsured repair is I think you guys indicated is 10 to 15 million, right?

That's correct. That's correct.

All right. For the, you have given us a production guidance for the 2006 100 to 105. Do you have the breakdown between oil and gas and also do you have a number for 2007 that you can share?

Mindy will give you the breakdown between oil and gas and I don't have a number for '07.

And do we see the mechanical issue or the problem that we facing here is going to spill over into next year or any of them is going to have a spill over effect?

Paul, they're almost flukish but as sure as you say that something else happens. The Seal tank battery should be fully up by the beginning of December, Shell bought Blackrock and that's what Shell now operator tells us. Of course, Terra Nova's supposed to be back up the beginning of October.

The Syncrude coker, which went up for about two weeks, ran pretty well but then they had this issue with odor, is supposed to be back up next week, start coming back up this week, be back up next week.

Schiehallion's a discreet 21-day shutdown. We just didn't know about it.

And then Front Runner and Medusa, the Medusa issue was delaying a workover to next year and so it shouldn't be an issue there, just the A-6 is doing better.

And so I wouldn't think so. They're all [inaudible] kind of very vexingly discreet to this quarter. They all came together. So I don't think that they're going to spill over to next year.

Claiborne, when you're talking about Terra Nova the operator, Petro-Canada has talking about the fuel to restart sometime in mid-September. Is that you just have a little bit more conservative guidance here or that over the last one or two that you guys have learned anything new for you to coming up saying that is going to be October starting up?

No, no. It's just being conservative. I don't know anything different.

Okay.

How about Syncrude? I mean that maybe I interpret or read it wrong. It seems like continue to be problem child with liability continue to be an issue. Did any of the partners that really trying to look at your fundamentally is the structure either from a management structure or whatever is the structure in that operation having some issue?

Paul --

It seems every year that we ran through that and is somewhat frustrated that every, say, two or three months that seems now something go wrong and then it come down.

I would say it's a function of this: whenever you bring up a big new unit, things can happen, and so I place the blame or fault for this coker going up and going down, it's just a normal startup, and year-round refineries [are] a lot and these types of big upgraders that happens and so that piece doesn't worry me that much.

And then second, the ongoing kind of nagging issues at Syncrude, which are real, probably reflect the strain in northern Alberta from every pipefitter, every welder, every boilermaker in that area, the rest of Canada, the northern the U.S. and now shipped in from other parts of the world coming in. It's a really strange system, and so all these projects under a fair amount of pressure and all of them are reporting issues like this. I don't think they're unique to Syncrude.

Really? Have you compared the Syncrude operation to [suncoal] in that why apparently that [suncoal] seems to be able to perform in a more reliable way?

You know, I know Syncrude the consortium, benchmarks against everybody nearby, yes, I'm sure they do, and I'm sure there's different -- yes, the answer is yes. They benchmark very closely.

Okay. Just one final question.

Refining. Many years ago at one point you guys was thinking about [inaudible] rate off or exit that business I think at one point, at least thought about it, but the price was too low for you to feel comfortable to do so and with the refining [inaudible] selling at such a high price, when we're looking at refining, how should we view that business going forward within your portfolio?

What we always said or said for the past year is let's get our plants back up. Now they're back up and they're close to operating.

So then we just look at all of our assets including that and say what's the best configuration for --

So you're open to whatever may be the option?

Well, the best decision, one of the best decisions we've made is keeping the refining assets over the next five years and with a lot of admonitions and advice not to, and so I'm delighted we have them. They've caused us a lot of angst but they can be and will be immensely profitable assets.

So then once we determine how profitable they can be and especially given the uniqueness of the Wal-Mart asset, which is unique in the business and grows pretty rapidly, we'll see how strategically it fits with Murphy. But that's a decision which won't be actively looked at tomorrow.

I see. Very good. Thank you.

Our next question comes from Steve Enger with Petrie Parkman. Please go ahead.

Hi, guys. A couple of things.

Kikeh start up, Claiborne, what's your best estimate of when? And then I can't recall how many wells you may have online and kind of what the initial rate there may be.

Steve, we stuck to the second half of '07. We've deliberately been that wide and so I'm going to stay there.

On your second question, I just don't have the facts in front of me. I'm trying to think what we-

You'll have some wells predrilled as I recall.

Oh, yeah, we're drilling wells now, but you complete them -- I just don't have the numbers in front of me. So I'd rather not take a stab at it.

But basically you understand that we start bringing it up in the second half of '07, and we bring it up all during '08, and we reach plateau during the fourth quarter of '08. So it's a full year of startup, of gradual increase.

Okay.

With a decision now on Thunder Hawk, can you give us some indication of what you found in the deep zone there?

You know, we actually haven't decided on Thunder Hawk. I haven't gotten sanction from our board. What I said was we're headed towards a standalone facility, and so, no, I'm not in a position to talk about deeper zones.

Thunder Bird, I think there was some small amount of dry hole expense in the second quarter associated with Thunder Bird. Can you explain what that is?

We had a deeper exploratory tail that we dry holed.

And was that equivalent to this deep zone that you were testing in Thunder Hawk or something different?

I think we deepened it beneath that, Steve, and that's the piece that was dry holed.

Okay. All right.

Last from me, Front Runner, how's it performing now with some additional data and what do you see as the issues and the opportunity?

We're about 17,000 barrels a day equivalent. We're about to do a side track on a well which should get us up in October to 21or 2,000 barrels a day, and then another side track into the end of '07 which gets us up closer to 25 or 30,000 barrels a day then it declines back down to about 15 into '08, then you, we have a couple o f plugbacks and we get it back up to 25.

It's going to be balanced between 15 and 25 to 30 for many, many years. It's performing about, now that we understand it a bit better and understand what's on our hands, about like we expected. I wish it were better, but it's not.

We've got two collapsed casings we have to work on, and that will help it a bit, but it's just going to be that type of field. It's got low perm out away from the well bores and it's just going to be a real slow draining thing. It's going to take a fair amount of money and that's the downside.

The only good thing in it is it's going to give us production for a long, long time.

Do you see drilling more wells then or is it more side tracks and recompletions in existing well bores?

Our current plan is both. Our current plan has got five additional wells and up to 20 recompletions. That's over many years now.

Okay. Great. Thank you.

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

Claiborne, I know it's early in the year to be talking about this, but it would seem to me that, and I'd like to, I want to make a comment and I'd like you to follow, with the Hibernia upgrade with Thunder Hawk and Thunder Bird, Sarawak gas, a potential perhaps getting sanctioned for Kenarong and Pertang later this year should be a pretty good year for reserve replacement.

At one point, Gene, reserve replacement and reserve were, I [won't] say they're ever easy but they were predictable. It's just a lot harder now. And so I'm just going to have to defer on you.

We're going to have to get sanctioned fields, we're going to have to get gas sales contracts in places, we're going to have to get field development plans approved. All these things are very technical and have to be done and then you have to get wells in fault blocks, and it's a, it's a more complicated world.

And I've resigned myself to it. I hate it. I fought it for a year and screamed and yelled and finally I just came to peace with it, and --

As a follow-up more specifically, you'd filed a development plan for Kenarong and Pertang quite a while back. I haven't really heard anything. Is that still a negotiation?

Yes, yes, and that hasn't advanced particularly far. I mean there's a lot of barrels out there that we own that aren't reflected in our books, and there's a lot of [high bargainers] and some at Terra Nova.

There's a fair amount at Medusa. If we get a gas sales contract or when we do in Sarawak, there's a fair number there. There's a enormous amount at Kikeh. It's all there.

But in today's world, I just can't push it. It's like pushing a string. I can't push it. So it'll come when it comes.

All right. Thank you.

Our next question comes from Kenneth Pounds with Novak Securities. Please go ahead.

Hi.

I'm rather confused about guidance of 50 to $0.70 for the next quarter. Last year you did I guess, what, $1.18 in the quarter. Could you breakdown a little bit how you get to that number?

I can do that for you.

It's based on, as we said in the release, production of 90,000 barrels a day but sales of only 83,000 barrels a day. Embedded in the estimate would be a realized worldwide oil price of almost $60 and a realized worldwide gas price of a little over $6.

Exploration expense during the quarter including dry hole cost is estimated at $45 million to almost $100 million. The reason for the range is the dry hole cost portion, which our exposure during the quarter could be up to almost $55 million including the well and the deep water Gulf at Thunder Ridge, plus more wells expected and shallow water Sarawak.

Also in the estimate is corporate charges should be between 15 and $20 million and we're expecting a return to profitability in the downstream operation somewhere in the low $30 million range.

Okay.

You said downstream meaning Meraux and the other refinery operations? That's what you mean by downstream?

Yes. Downstream is refining and marketing.

Last year in that quarter you did about 62 million in refining. It looks like. What's the variance between your saying 30 million and the 62 million from last year?

Well, we had our Meraux refinery operating optimally during the third quarter last year since that was pre-Katrina, and we are only now getting our refinery back up to full speed. And so as Claiborne mentioned, we're being fairly conservative on the refining front plus the retail part of our business is extremely volatile and so quarter-to-quarter results can been very different.

Okay.

The other question on Meraux, it said you're getting it back to 125,000. Has some of this money been spent toward looking to expand that over the next year or two or allow it to process other types of crude? Is there any technological changes or capacity changes that might be coming for that refinery?

We have a planned upgrade of our cat cracker in 2009 from the upper 30s to the upper 40,000 barrels a day, no, from 30 to 40,000 barrels a day.

Okay.

That's in '09. From this, no, there's no particular enhancement. It's improved, better, but it's, there's no technological breakthrough.

Is there any improvements regarding potential footing and Katrina-type things in the future? Dikes or whatever?

No.

No. So the refinery is as vulnerable as it was before essentially?

That's correct.

So regarding Wisconsin refinery, is there any potential to expand that or would there be advantages to doing that?

There would be. We typically have been bound by a very small market which is Superior, Wisconsin and Duluth, Minnesota, but certainly now that there's going to be additional streams of heavy crude and different slices and dices coming out of Alberta, there are opportunities there.

But there's no plans on paper for that? That you can talk about or anything?

No.

Okay.

And last question, regarding the North Sea you mentioned in the next quarter is going to be a charge because of higher taxes. That seems to be a real trend around the world and maybe they'll even raise them more. Is there some -- would it make sense at all to try to get out of the U.K. market?

Not at this point. It's stable cash flow, and we consume lots of cash in other parts of our businesses we grow them and we just use that in our Canadian assets as sources of cash to grow the business, and we sold a fair amount of high cost properties over the last couple of years, and so we pretty much cleaned out what we wanted to sell.

Great. Thank you.

Our next question comes from Ray Deacon with BMO. Please go ahead.

Hey, Claiborne, I was wondering how many wells in the deep water you'll be drilling kind of for the rest of this year? I was curious about Hemmingway, Cat South and Nautilus if those, you think, will still get drilled this year.

Probably not but I wouldn't rule it out. For sure we'll get over to what's now called Badger, and then depending upon if there's a rig out there, we could go to one of the other two.

They're not quite finished mapping, but they're close, and one of the two in particular, I won't say which, has really shaped up to be quite a nice prospect as is Badger's going to be a gorgeous prospect.

Okay. And that would be, is that also expanded miocene or?

Yeah, it's a middle miocene, it's expanded section of middle miocene and it's potentially a real big section, and we have structuring on what we've got, and you can put sand in it pretty easily. So it's probably sourced more than anything else.

Okay. Got it.

Just as far as Terra Nova goes, do you expect plateau to still be at least a couple of years operational issues aside?

No, I think that we're in decline at Terra Nova.

Okay.

I think last year and it's not going to be precipitous but it's pretty steady. I think Habanero's plateau is going to end up being remarkably long. And I would have thought, gosh, I can't even remember when the field came onstream now, but it's been at least five years.

I can see several more years of plateau there, but I think Terra Nova likely is going to be -- will be [arrested] because we've got the Far East that we'll bring into it, but I don't think it's going to be enough to overcome decline in other parts of the field.

Okay. Got it.

And as you head into bringing TK online, is there any reason to think that Cap Ex is going to be radically different from the 1.4 or 1.5 billion this year?

No.

Okay. All right. That's all I had. Thanks.

The next question comes from Mark Gilman, Benchmark Company. Please go ahead.

Claiborne, how are you?

Good, Mark, how are you?

Good thanks.

I wanted to go back to Thunder Hawk without belaboring the point too much. I assume the 45 number is a gross number?

It is a gross number.

I'm a little bit confused I guess as to why at this point you would seem to be leaning toward standalone, that Thunder Hawk alone would fill, when you have the potential to tie at least Thunder Bird back and therefore have a more capital efficient development on a larger scale.

Mark, it's going to be available over time, that facility for other fields in the area. Thunder Bird may have better options out there. And so that may be the most expedient way to go there rather than to go to a Thunder Hawk facility.

Well, except that if maybe I'm misreading you, but it seemed that as it related to Thunder Hawk one of the considerations was the lack of processing options. Is that not accurate?

I'm not following you exactly.

Well, one of the reasons you're considering leaning toward a standalone is the absence of attractive regional processing options. So maybe it's a scale issue, but either they're there or they're not there. Or else I'm just confused.

It just depends on who you're talking to and what options are out there and for Thunder Bird there's probably a best option for us that gets it on fastest and with availability right away.

Okay. Let me try just one other quickie.

The 17 Hands, how's that doing?

It's doing well. It's -- we haven't seen any noticeable decline.

And I was a little bit confused about your comment on the A-6 well at Medusa and the fact that that was contributing to a reduction in the production forecast. If it's doing better than you thought, why is it a contributing factor?

It's a little counter intuitive. We thought it would do worse than it is now so we recomplete the well up hole sooner to a sand that we hadn't accessed yet and so we'd get flush production sometime this year instead of milking another sand that was near depletion. That's the issue.

Gotcha. Thanks.

Our next question comes from Cinio Jawani with Citadel Investment Group. Please go ahead.

Good afternoon.

My question was just, I guess I have a couple but firstly in Malaysia, if you can update us on what your conversations have been like recently with the government and we've seen regime changes and terms and conditions change in a number of areas and I was hoping to get some color from you to see if anything like that is at risk in Malaysia.

Gosh, it's one of the most stable countries and governments and societies that we do business in.

Okay.

So we should consider it to be pretty safe and pretty stable from here.

The other question was you mentioned earlier that there is an upgrade plan in 2009 for Meraux for the cat cracker. Have you ordered any equipment for that already?

We're doing some preliminary work on it, and I don't think that we've ordered any yet but we're close.

Okay. And any rough Cap Ex numbers associated with the project or is it still too early?

We'll surmise $100 million, somewhere in that range.

Okay. And just okay. And just one last question.

There are so many -- I think there were four or five wells included in the list of dry hole exposure for the second quarter and I think the ones I can think of Permanis, [Surenda], [Maharani] and one other. Could you perhaps give us an update on all of those wells and where they stand or if they've been expensed?

They're all good wells. We really, I can't think of a dry hole we've drilled in Sarawak gas since we began concentrating on looking for natural gas there. They're all solid all discoveries.

All right. Thank you very much.

Next question comes from Ron Oster with A.G. Edwards. Please go ahead.

Good afternoon. Thanks.

Just trying to get a little better feel for the quarterly guidance. Does the 30 million for the R&M earnings, does that include the Meraux repair cost of 10 to 15 million that you mention in the press release?

Yes, Ron, it does.

And then Mindy, can you breakdown a little more the $55 million in dry hole costs? I know you said Thunder Ridge is a big component of that. Can you just go through a few of the others and quantify those if possible?

Thunder Ridge is a main component. It's about 24, $25 million. The remaining $30 million is broken out pretty equally between four wells in shallow water Sarawak.

Great.

And then on your Gulf of Mexico drilling program, beyond Exactobox, I guess you mentioned you'd likely stay in the Green Canyon area. When would you return to the Thunder Hawk area and what would be your next prospect there?

I know Thunder Ridge East had been mentioned previously. I was just trying to get a feel for where that fits into the whole drilling program.

That's a great looking prospect, but it depends upon the success of Thunder Ridge, and we'd get back to that relatively quickly.

So beyond Exactobox would that compete with Nautilus or Hemmingway Cat or what's kind of the priority of those three assuming your next well is successful?

If both Thunder Ridge and Exactobox subsalt or Badger are successful and we're trying to decide where to go to get the nearest nearby analog, that's a great high grade problem I'd love to have and I don't have the answer for you.

Great. Thank you.

Our next question is from Peter Vassy with the [inaudible] News Tribune. Please go ahead.

Good afternoon.

I had a quick question for you guys in regard to the Superior, Wisconsin refinery. I know earlier you guys said that there's nothing on paper in terms of plans out there. But are you guys exploring an expansion there?

I mean recently you acquired some additional property in Superior and certainly there are no hurricane issues up in this part of the states and the Alberta production is obviously been coming on very strong.

Peter, we really were driven initially to buy that and primarily because a lot of the issues have happened in our New Orleans plant where we didn't have a buffer. And, obviously, it's cost us and so we wanted to create a bigger area around our plant at Superior and if then, fortuitously that land could be used to further expand Superior and take advantage of what may be some opportunities and we'd pursue it.

But right now is there an active exploration of that as a possibility or is that really way on the back burner?

We've told people from time to people if that opportunity presented itself then we'd pursue it. So I'll leave it at that time.

Is that hinged, though, then on what you see on the production side up in Alberta? Is that kind of would be the driving force to get something going or when you talk about opportunity presenting itself, I just am wondering what you see as kind of the triggers.

I think there will be plenty of production coming down the pipe, and so it's an issue of just looking at the cost of building a large plant in an area like that or adding on to our existing planted.

Carefully analyzing what you think the return's going to be over a large, long period of time understanding that today's margins likely won't persist over a long period of time because of the cyclic nature of this business. So we'd weigh all those and then we'd try to say is there an opportunity out there that makes sense for us, and we'd compare that to some other opportunities that we have in our business.

Very good. Thank you very much.

You're welcome.

Our next question comes from John Herrlin with Merrill Lynch. Please go ahead.

Hi, Claiborne.

E&P the last few years has been kind of lumpy, whether it's because of asset sales, OBO issues, performance. Will you be changing your strategy at all because as you said earlier with some of these projects now they're a little bit less predictable?

Would you want more remedial-type assets? I mean you've always been an option value company, but would you look for more stability somewhere else?

John, it's a great question and one I ask myself from time to time because we're historically frontier exploration guys, and typically have been able to pull it off.

It's been harder the last couple of years primarily because competition is so extraordinary out there. And so I think it raises the question, gee, do you need something to bring a bit more upstream stability to your company.

And so I don't have an answer for you, but I acknowledge that it's a good question and acknowledge that if we had something like that over the last two years it would have helped us, and we don't.

We typically -- I typically like very large projects and typically they have lower costs, they're a little bit less management intensive, and they're almost become coupons over time but coupons with a very high yield. And those other type of assets typically are a little bit more I thought risky because of the ongoing nature of having to execute. But you have to rethink that so I think it's not a bad question.

Okay. Thanks. I've got a few more like everyone else.

You do have annuity assets currently, some of which, as you already indicated, are starting to decline like Terra Nova. Why not monetize them since prices are so high be it Syncrude or Terra Nova or things like that?

At the end of the day have you to decide what you are, and we are an oil company, so you need to have oil. You can liquidate everything one by one because prices are high, but typically we'd like to own the asset over time because we see value in owning those types of assets because we understand them and we think we can generate higher returns over longer periods of time owning the asset than liquidating the asset. Those types of assets.

It's not to be glib but I think that's just the best answer. We've obviously sold a lot of what we thought were last leg assets and we did well with them. Now we're at the core of the Company and typically like to keep the core.

That's fine. Upcoming lease sale even if it gets delayed by the Governor of Louisiana, are you going to be aggressive?

You know, we're always, depending upon the quality of the prospect, pretty aggressive. Western sales typically are become more challenged over central Gulf sales, so that's just a general observation I give you.

Right. Thank you. [OPERATOR INSTRUCTIONS]

Our next question is a follow-up from Mark Gilman. Please go ahead.

Hey, Claiborne, where does your dust and dome acreage stand in the debate currently raging in Washington?

Mark, I knew you were coming back. (laughter).

Why'd you know that?

Because you always do.

Bad penny. (laughter).

You know, we retain it, as you know, because we could. It currently really doesn't. Is not part of the fray and part of the discussion in Washington. It's an asset that we own that we think and hope has latent value over time but currently does not.

So there's no ability to do anything with it as it stands right now?

No, there's not. No.

Okay. Thanks, Claiborne.

Our next question is a follow-up from Cinio Jawani. Please go ahead.

I was just wondering Arjun asked the question about potentially monetizing the refinery. Or it may have been someone else. What's the tax basis on the refining assets and also with the Wal-Mart downstream retail operations and how might those come into consideration in your decision even if you were to consider something like that?

Let me have Mindy call you and give you that and whenever you would consider any investment decisions, sale, purchase, whatever, you'd always look at all the aspects of it, one of it being tax.

Okay. Thank you.

You're welcome.

At this time there are no further questions in the queue. Please continue with your presentation.

Thanks very much and look forward to talking with you all when we discuss third quarter earnings.

Ladies and gentlemen, this does conclude the Murphy Oil Corporation second quarter earnings release conference call. You may now disconnect and thank you for using AT&T Teleconferencing.