Murphy Oil Corp (MUR) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time I would like to welcome everyone to the Murphy Oil Corporation third quarter earnings release conference call.

At this time all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Wednesday, October 25, 2006.

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

Thank you and good afternoon. I'm joined by John Eckart, Controller, Kevin Fitzgerald, Treasurer, Mindy West, Director of Investor Relations and Dory Stiles, Senior Investor Relations Analyst.

Now I will turn it over to Mindy at this time.

Thank you, Claiborne, and welcome, everyone, to the call. Today we will follow our usual format. John will begin by giving a brief review of third quarter earnings, and then Claiborne will follow with an operations update and then we will 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.

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

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

Net income in the third quarter of 2006 was $222.8 million which equates to $1.18 per diluted share. That compares to $231 million in the third quarter of '05 or $1.23.

If you exclude the relatively small amount of discontinued operations in the last year's third quarter, we are flat in the third quarter '06 with '05 on a continuing operations basis. However, the composition of the earnings was made in different areas of the business this year versus last year.

In the third quarter '06 our results include improved profits from the Company's downstream operations due to stronger North American refining and retail marketing margins during mostly the second half of the just completed quarter. Our downstream operations earned $126 million in the third quarter of '06 compared to $32 million in the third quarter of '05.

The third quarter '06 results for the E&P business were $119 million of profit and they were less in the third quarter of '05 by almost $86 million mostly due to lower oil production. Terra Nova was shut down for the entire quarter for repairs.

We also had higher expiration expense, we had higher repair costs and maintenance costs at Terra Nova. In 2006 we commenced to have revenue sharing with the government of Ecuador that didn't exist last year and that cost us about $5 million and we had tax charges this quarter, third quarter of '06.

Tax charges included a $17.8 million expense in the United Kingdom for a 10% rate increase retroactive to the beginning of 2006 on oil and gas operating profits, so the effective tax rate now in the U.K. is 50%, and that consists of a normal 30% rate for corporation tax plus a 20% supplemental tax on E&P profits. This tax charge was partially offset by a tax benefit in Canada related to a favorable adjustment of prior year's estimated tax provisions.

In our third quarter '06 results we had $27 million of cost associated with hurricane, which is really Meraux repairs and settlement of oil spill litigation. Our corporate costs were about $8.5 million higher in 2006 third quarter compared to 2005 period with the increased costs mostly by higher interest costs on borrowings and higher stock-based and cash-based employee incentive compensation costs.

For the first nine months of 2006 we earned $551 million of profit on a consolidated basis. That's down from $692 million in 2005.

Results are lower in 2006 due to a combination of lower oil and gas production, higher hurricane-related costs and a 2005 period had $107 million gain on sale of certain oil and gas properties on the continental shelf of the Gulf of Mexico. The 2006 period did include higher oil and gas sales prices and lower exploration expense for the nine months.

And finally, as of September 30, '06 our long-term debt amounted to $790 million, about 16.3% of total capital employed.

Now I'd like to turn it over to Claiborne for his comments.

Thanks, John.

I would like to begin today by covering our production forecasts. Then I will cover upstream developments and upcoming exploration wells and then provide an update on our downstream activities.

As we have discussed before, third quarter production was hampered by a number of issues, some of which are behind us. At Terra Nova, following a full turnaround, the production vessel is back in the field and scheduled to resume production in the first week of November. Field volumes will ramp up during the fourth quarter.

At Syncrude, after an uneven start, the third coker is operational and processing right at 85,000 barrels per day bringing Syncrude's overall production up to 385,000 barrels per day. Maintenance at out fields in the North Sea was also completed during the third quarter.

Murphy's forecast for production in the fourth quarter is 94,000 barrels of oil equivalent a day. Our initial 2007 forecast range is between 95,000 and 105,000 BOEs per day.

Some production issues still linger from the third quarter and have implications in the fourth quarter and next year. The previously announced fire damage of the non-operated seal battery in Canada is expected to be repaired and back online in December. And as previously mentioned, the Terra Nova field comes back online soon, will ramp-up throughout the quarter.

But at Frontrunner, as we noted in previous calls, production levels continued to be challenging. Production from the field during the first nine months of '06 was 20,250 BOEs per day with five of the eight wells producing.

We continue to monitor field performance and perform remediation work in the field to boost production levels. This work will continue into '07. A team comprised of all partners to study in the field to assist in determining our forward plan and give it the attention it needs.

Additionally, at Medusa during October the most prolific field well sanded up due to a mechanical failure and will require several months to acquire a rig and then do the remediation work necessary to correct the problem. Our expectation is that the A1 will be back in service in March at the same rates it was producing prior to the failure.

During this downtime volumes at Medusa will be approximately 6700 equivalent per day net to Murphy down from 13,700 barrel equivalents per day before the outage.

At the non-operated 17 Hands natural gas field, the downhole safety valve was failed requiring intervention in order to replace. Therefore, the field may be offline the remainder of the year resulting in a loss of 12 million cubic feet per day.

Quite obviously, our main producing assets in the Gulf of Mexico are underperforming and we are very aware of these shortcomings, however, Malaysia is a different story. The West Patricia field offshore Sarawak continues to outperform very steady production levels. Gross field volumes continue to be over 20,000 barrels a day.

And most importantly, the Kikeh development is being executed extremely well with the field expected to be placed onstream in the second half of next year, five years after the discovery and within the original schedule. To give you some additional color, the entire project is over 80% complete. The topside modules have been installed on the FPSO and the turrent installation is scheduled for November.

The spar is now being anchored on location offshore with the mating of the topsides to the spar also scheduled for November. A total of 20 producing wells have been drilled in a back set operation plus three subsea injector wells, all of which were completed on time and on budget.

The field is drilling out as envisioned. We expect the initial field production rate to be 40,000 barrels per day with a one-year ramp-up to a plateau of 120,000 barrels per day which will provide meaningful production for Murphy from the latter half of '07 through '08.

In addition in Malaysia, recently a memorandum of understanding was signed to develop several natural gas discoveries offshore Sarawak. The project includes development of several fields which will supply natural gas to a nearby LNG facility beginning in 2008 or '09 depending upon timing of concluding a gas sales agreement.

Production volumes are expected to be as high as 300 million cubic feet per day for a period of up to 15 years. This project will complement our Kikeh oil production in Malaysia as well as West Patricia and will serve as a predictable and low decline anchoring asset in our international portfolio.

As Azurite, offshore Congo development plan analysis is ongoing. We continue to evaluate development options and expect to announce our decision by our next call.

In the deep water Gulf of Mexico the Company operated Thunderhawk field, we have sanctioned a development including a standalone semi-submersible floating production unit with an estimated capacity of 45,000 barrels per day with expandable capacity to 60,000 barrels per day with slight modifications, and will have the capability of further expansion to accommodate additional production from any satellite discoveries or third-party tiebacks if needed.

The facility will be installed in Mississippi Canyon Block 736 and will be leased based on a production handling agreement for an initial period of five years. Facility installation is scheduled for late 2008 in preparation for first oil in 2009. We're developing the field using a range of 50 to 80 million barrels of reserves.

Turning to exploration. During the third quarter successful wells were drilled offshore Sarawak, Malaysia including several gas discoveries at Tiram and Sapih and a successful appraisal well all at Merapuh, all at an 85% working interest.

Building will continue through much of the fourth quarter and includes a significant well offshore Sarawak at Batu Kapur and an 85% a carbonate prospect targeting natural gas potential of up to 1 tcf. Discovery by Batu Kapur would open up a new play on our acreage where we have experienced our previous outstanding success.

Offshore Sabah, Malaysia we will build a Rotan prospect in Block H, an 80% interest targeting potential of approximately 150 million barrels of oil, or 1 tcf of natural gas.

In the deep water Gulf of Mexico, the Thunder Ridge well in Mississippi Canyon is still in progress. The next prospect to be drilled will be Badgers located in Green Canyon Bloch 425 and 426 near the Frontrunner production facility.

We have a 37.5% interest in the prospect which will target 100 to 175 million BOEs potential. The discovery at Badgers could be easily tied back to the Frontrunner facility which, obviously, has capacity.

We posted excellent results in our downstream segment this quarter led by our Murphy U.S.A. retail program However, this month, these margins are being squeezed.

With almost 1,000 stations in operation, this program quickly generates substantial profits, especially in a declining crude oil market. As a result, this investment acts as a natural hedge to out upstream oil production. And the third quarter was a testament to the type of impact that program can have on our bottom line.

The Meraux refinery restarted during the third quarter from the extended outage caused by Hurricane Katrina. Crude runs are presently 110,000 barrels a day hampered by a couple of lingering issues which were affecting plant operations.

The FCC is running at about 75% of capacity reducing our gasoline production by approximately 7,000 barrels per day. This issue will be resolved by bringing the unit down for a week in November after the hurricane season officially passes.

Also, both sulfur plants have suffered some reduction in capacity due to various minor problems causing us to reduce the sulfur content in our crude mix and limit total precharge. This will be addressed during the same outage period of the FCC. On balance these issues are manageable and as noted will be taken care of this quarter.

As you are aware, our class-action lawsuit concerning the Meraux oil spill has been settled. The memorandum of understanding with the plaintiffs concerning the Meraux oil spill matter which inked in September and received the preliminary approval for the settlement from the judge in October.

Settlement amount is for approximately $330 million and includes a credit for prior settlements and remediation costs of $135 million. This figure also includes an estimated $55 million for property purchases adjacent to the refinery which will allow us to increase the refinery footprint.

Property purchases and additional settlement payments are not forecast to begin the first quarter of 2007 at the earliest. Its final approval by the court is not expected until January.

In any event, we placed a priority on resolving this matter in a timely manner, which is quite unusual in today's world, and we did. There will be ongoing individual lawsuits, but the settlement of the class-action disposes of the great bulk of this matter.

In closing, admittedly we're struggling with production issues in the Gulf which will be with us for a while. Internationally we would like to increase our acreage and achieve greater geographical spread outside of Malaysia and the Republic of Congo. We're working on several opportunities currently and I expect to be in a position to make some announcements concerning new areas soon.

While near-term we grapple with these issues, I feel extremely confident concerning the future. For starters, the class-action oil spill litigation is behind us and that is very important. The Meraux refinery restarted in time for downstream operations to provide a significant contribution to this quarter's earnings.

Murphy U.S.A. retail initiative is now well established, growing and unique in the market. And the Kikeh field development continues to stay on track and will provide a meaningful step change in company production and cash flow when the field is brought onstream.

That production will be followed by Sarawak gas once a gas contract is confirmed, Thunderhawk in the Gulf, Kakap in Malaysia, once sanctioned and then possibly Azurite.

So in spite of our current production issues, this company's future production will grow substantially. The question then becomes of course what's next?

It's important that we establish this in the near future and we're well aware of that. But our significant production growth in front of us, which will require quite an allocation of capital, gives us the time and ability to establish that path.

I'm now ready to take your questions.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Please go ahead.

Hi. It's Kate Lucas for Jen Rowland.

I have a question about, in your K for 2005, you mentioned borrowings of $100 million expected for the Kikeh development. Are you still looking at that figure or are you looking at augmenting that based on your operational results this year?

I think at the end of the day we'll be somewhere in that range. That was based on your capital projection that we made in our budget last year and, in fact, we may spend a little bit less.

I don't think it's significantly different from what we said. I think it might be a little lower.

Okay. Thanks very much.

Thank you. Your next question comes from Steve Enger with Petrie Parkman. Please go ahead.

Hi, guys.

Hey, Steve, how are you?

Good. You?

On Sarawak Claiborne, can you update us on you guys have been negotiating pretty diligently, I think, on that gas contract. Did there look to be any big issues or do you think it's just something that kind of has to work through their system, something that still can be done this year?

I'm not in the position to comment real specifically, Steve. We certainly don't see any big issues out there that we can't overcome and we're optimistic that we're going to get it done.

Okay.

And on drilling there, outside of the obvious, the traction of drilling Batu Kapur which is potentially opening new play, how much more drilling do you do? Is there a goal in terms of the resource, gas resource that you'd like to get to?

Well, our contract, if we enter into it, if you just do the math at 250 a day for ten years is about a tcf and we think we can take it up to 300 a day and we could go up to 15 years. So I think the immediate resource is one to two tcf and I think that we believe there's a reasonable chance we could increase that substantially.

Don't forget the [ENDEL Romping] area. It's been on hold for us a while because we've debated a bit on how to develop it. But we've been drilling some wells there recently and we're starting to get some additional confidence that that may get to the market sooner rather than later.

Nothing to announce but I think that's just an additional resource to have.

Okay. Because I recall, you were going to do a flow test there. Is that underway or is that still to come?

We haven't announced results, Steve, and let me leave it at that.

And then anything in terms of an update on some of the new ventures, new countries you guys are starting to explore?

You know, I'm not in a position to comment specifically, but I added that in my remarks pointedly, so I think we ought to be in a position here by the end of the year to have an announcement or two.

Great. Thanks.

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

Good morning, good afternoon.

Hey, Paul.

How are you doing? I'm getting old. Well, anyway.

Claiborne, talking about Malaysia gas sales contract, if the PSC terms, I presume that is also going to be under PSC term when you actually get produced is that drastically different than what you get on the Kikeh?

It's modestly different, Paul, and I'll mess up the details a bit. But it's called -- it's production over capital basically, I'm going to get the nomenclature a bit wrong. And the government take stays relatively benign until you get your money back and then between 1 and 1.5 times your money back their take goes up between 1.5 and 2, their take goes up more between 2 and 2.5 it goes up more.

So it's got the same basic philosophy as Kikeh, but it's tweaked typically for smaller fields, which is what we were expecting to find in this particular area.

Should be better, right, the terms?

Well, in fact, I don't have all my numbers in front of me, but we certainly look at lots of models. It could be and it could be substantially better because we're going to be spending money as we go along the whole way.

This is not one big field if we get our gas contract, I'll quickly add, but it's a number, it's 300 and 350 bcf fields and then a number of smaller fields after that. So there's a fair amount of capital ongoing that you spend so your take stays pretty high.

And Claiborne, I know that you're in the middle of negotiations so you may not be able to comment. What kind of roughly gas price that you guys may be able to charge on that? Is that going to be similar to currently the local gas price that Exxon is selling to Patina or is that going to be quite different?

You're right, I'm not in a position to comment.

Let me try another way. In order for, this is a different question. In order for the [inaudible] to be onstream in 2009, when will be the job that latest day you need to sign the definitive agreement?

That is clever. We'd certainly like to do it either this year or in the first quarter of next year.

If it is later than the first quarter of next year then we should assume it will be somewhat later than the early 2009?

I think that's a fair shot at it.

Okay.

And that on Kikeh, when that come onstream, is your capitalized interest is going to be dramatically different? In other words, is there a lot of debt currently or there is a lot of interest capitalize accordingly?

We're capitalizing the interest on Kikeh on a monthly basis. So everything else being equal it would come down.

Any idea how much?

In terms of how much we're capitalizing?

Yes or how much it would come off once you come onstream?

We're capitalizing somewhere in the neighborhood of $10 million a quarter.

How much, I'm sorry?

$10 million.

$10 million. Okay. Very good. Final question.

Claiborne, wondering if you are in a position you can share a little bit more about your Wal-Mart joint venture, their service station profitability and maybe in the third quarter you can give us a rough [inaudible] how much money in the U.S. you're making from refining and how much from marketing?

Paul, so far we really haven't broken it out and we have signaled that it was material in the third quarter because crude prices dropped very quickly, wholesale gasoline prices dropped very quickly and we track the profit. But we haven't yet broken it out and likely we soon will but we're holding firm yet.

Okay. Very good. Thank you.

Yes.

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

Claiborne, going through your development comments, you didn't mention Thunderbird and I was wondering why and if you can comment on that?

Secondly, one of your partners in that Laurentian channel play had indicated that there might be a couple wells in the budget for next year. Can you comment on that?

On Thunderbird, I just overlooked it. We have to drill another well. We're going to sidetrack our current well but I think the working assumption is that we'll develop it and the working assumption is we'll likely bring it onstream in 2008.

Would that be a Devil Star tieback?

No, it'd be our current plan assumption is Devil's Tower. But all these are assumptions because we need to tieback and see what we have, I mean, we need to sidetrack and see what we have to size things properly.

On the Laurentian channel, gee, I always hate it when someone says I talked to partners and partners say because I would be surprised if we drill a well there next year, even though there's a lot of seismic being shot. What I understand is that current news is pretty favorable as far as structure, but I haven't seen, I don't have enough detail in my own head to confirm that or not to.

That's good enough. Thank you.

Thank you. Your next question comes from Niki Decker with Bear Stearns. Please go ahead.

Good afternoon.

My question is on Sabah, Malaysia. Claiborne, where are you on the path to sanctioning the Kakap development?

You know that's a, we're a non-operator. And best left to operator.

You've got some other discoveries there. What's happening at discoveries like Senangin and Lapu, and well, Lapu is not a discovery, but Kikeh deep?

Of the two, which are going to require third metal work, are Senangin and Jangas. Jangas in particular is a very large structure with a lot of pay in the well. It's stem deads. A meter of pay, high-quality, a meter of shale, a meter of pay.

There's lots of issues about connectivity between that and flowability between that and one of the options we have next year is to conduct a flow test at Jangas. It's a big prize and given the way the world works today, it's one which we will likely access or certainly try to and it could be very meaningful to us given our 80% interest.

But we're kind of all hands on deck with Kikeh right now and so it's taken a bit of a back seat and also it's technically going to require some heavy thought. We've got a team working it. But that's the one I would point to most, more than the others.

And just finally for me, in the Gulf of Mexico you've spoken in the past about Exacta Box and you talked about a prospect that appears to be in the same block. Have you incorporated two prospects into Badger or what's happening with Exacta Box?

It's the same one. There's actually two Exacta Box prospects. One is a pliocene, which is the same as Frontrunner. And given Frontrunner heartaches, it's been downgraded.

The other is called Exacta Box Subsalt which is a little bit further to the west and that's now been renamed Badgers by our operator. We'll operate the discovery well or the well if we make a discovery, haven't even spudded it, but if it is a discovery, then Dominion will operate it and so they named it Badgers.

Great looking prospect, super looking prospect on trim with some adjacent next door big-time discoveries. We have big, big structure so. It's one to drill and we'll drill it. It's the next prospect we drill after the Victory leaves Thunder Ridge.

And how long would it take to get to TD?

I would guess 100 days, 110 days.

Thank you. Your next question comes from Jeff Hayden with Fisher [inaudible]. Please go ahead.

Actually Mark Fisher.

I was wondering with Thunderhawk now sanctioned and you're viewing it as a 50 to 80 million barrel discovery, I would imagine you'll be booking something in the range of your net interest. Should we expect 15, 20 million barrels booked at Thunderhawk this year?

If booking was as easy as that then my job would be a lot easier. We'll book something but it will be less and I don't know how much less.

Got you. On the Sarawak gas, you mentioned there was still a possibility of getting that contract signed this year. If that happens, would you expect some meaningful bookings of that gas this year?

A lot of things would have to line up but that could happen if we were fortunate enough to do it

Okay. Thank you very much, Claiborne.

Thank you. Your next question comes from Ray Deacon with BMO Capital. Please go ahead.

Hey, Claiborne, I just had a question on the gas contract. Is it too early to talk about realizations and how do contracts tend to be priced over there? Is it a fuel oil based formula?

You know, Ray, I'm not in a position.

That's great. Thanks.

Thank you. Your next question comes from Don Texture with Dorsett Energy Fund. Please go ahead.

Good afternoon, Claiborne. Just going back to Kikeh, did you say 80% was completed or did I mishear you?

Yes, we're about 80% complete.

All right.

And do you have most of the costs lined up on the rest? In other words, have you ordered the materials? Do you have everything else sort of locked in so you have a high probability of what the cost is going to be now?

Yes, we have a very high probability of what the cost would be.

So I mean the chances of a cost overrun are, I guess, minimal?

What we've previously announced is that we're 18% over. We've said that for about a year and a half because it was an early thing that we noted that, but since then we've been pretty firm.

And there's a few issues out there that we have out there with a particular contractor that we'll fight over but I think we're in good shape.

And secondly, on the 120,000 barrel a day gross number for Kikeh, given, I don't know you're going to answer this question, but given the nature of your cost recovery contract, can you give us any guidance or a range in guidance on what you think, given the $60 oil price we have, what your net production would get up to?

Don, I've seen the number. It's probably in the range of 80,000 a day.

Okay.

Roughly plus or minus, somewhere in that number.

Thanks very much.

Thank you. Your next question comings from Ron Oster with A.G. Edwards. Please go ahead.

Good afternoon.

I was wondering if you guys could provide some of the assumptions that go in your guidance for next quarter of 40 to $0.60? Potentially the oil price assumption and some of your margin assumptions that go into that.

I'll be happy to do that, Ron.

Our 40 to $0.60 cent range is based on oil production of around 94,000 barrels a day. We expect to be a bit undersold during the quarter of about 1,000 barrels a day.

Realized worldwide oil price we're estimating to be in the range of about $46. Realized gas price of about $6.75.

Our total dry hole cost exposure during the fourth quarter is almost $50 million, plus we have another $32 million of other exploration expense which includes G&G and lease amortization costs.

For the downstream, we're seeing a retraction in margins at the refinery level and at retail so we're expecting income for downstream to be somewhere in the $20 million range.

Great. Thanks. That's helpful. Can you also, Mindy, run through the major components of the dryhole exposure?

Sure.

We have Thunder Ridge well which is still drilling. The fourth quarter exposure for that well is around $11 million.

The Batu Kapur well and SK 311 is $16 million. We have the Permas Number 3 well in our Sarawak acreage of $10.5 million.

The Rotan prospect in Block H is $8 million and that one will be on tax relief. And then we have a well scheduled at the far eastern portion of Terra Nova which is almost $3 million.

Great. Thank you.

And then one more on the drilling program. Can you kind of beyond the Badgers prospect run through some of your, the additional, you know, what might follow that in terms of working into '07 a bit?

The acreage that we have, which is untested, is west of that in Green Canyon. We've got 35, 36 leases which is miocene, middle miocene.

We've got three prospects identified, still mapping but one in particular looks pretty firm. So we're putting our budget together now so I've got some of the numbers and that well, what is called Nautilus is in at a probabilized number whether we'll do it or not.

And one of the issues is that the Ocean Victory may end up doing a little bit more remediation work than we had initially planned two or three months ago. Specifically, it may end up drilling a well at Habanero and it may do some other work as well.

There's some -- production's an issue for us in which we'll remediate a lot of it if we get equipment. So it may postpone that well a bit. So that's the ambiguity or the uncertainty.

And then one final one in our prospect in Block H this quarter. What are the predrill reserve estimates for that well?

We're about 150 million barrels, something like that. It's a good-looking prospect. It's one of these turbodyte fans, it's three way up against shale, shale die pier.

It's got great seismic amplitude. It's got a flat spot. It's one of the best seismic reflectors we've seen in the area better than Kikeh initially, in fact.

But it's remote. It's 40 miles from the closest discovery and there hasn't been any oil discovered in that part of the Sabah trough yet.

And you have to consider it risky, but If you just looked at it in a vacuum, you'd say, oh boy, it's a hell of a prospect and it is. And so that's why we moved it up. We had some other options and we decided this was a better shot.

Okay. Great. Thank you.

Thank you. Your next question comes from Ken Carroll with Johnson Rice. Please go ahead.

Hey, guys. How you doing?

I'll just follow-up with that a little bit following the [Rotan] prospect on Block H. What are you looking at kind of for '07 in terms of your rig time and other prospects on the explorations out there?

The rover is primarily going to be drilling wells, development wells at Kikeh. It's just the way the world works.

We're going to lend it to a third party for a 30-day well in there so there's a wildcat someone else is going to use the rig for. We'll drill Rotan and then we'll get back to drilling development wells.

The way that the schedule works at Kikeh and, you know, you don't know till we get in it. So far things have worked beautifully. We think we can free it up for one to three wells, wildcat wells next year, but clearly, development has got priority so we'll just see it like that.

Thank you much.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is a follow-up from Paul Cheng. Please go ahead.

Claiborne, sorry to have to ask the question again.

On the capital spending, do you have a rough number 2007, how's that look like?

We're working on it now, Paul, and our Board hasn't sanctioned it yet so it's premature but we'll put a number out. It's going to be up. We've got 22k and if we do Sarawak gas, Thunderhawk, there's a mountain of work to do out there.

And the mix will likely change for us. It will be substantially more development than exploration. And pretty high return projects so I'm modestly optimistic but I can't get the cart before the horse. So we'll let our Board approve it, see it, and then we'll come out.

And also, Claiborne, if you look at the current, all the projects that is currently on the table, after next year that we should see if there's no additional new project due to explorations assess or the other [inaudible] we should assume a pretty substantial dropoff in your capital spending after next year, right?

Paul --

Let me ask you in another way. What is the sustainable capital you require to just maintain your operation?

I haven't answered the first one before you ask it. It's too early for me to say that but if we get some of the things that we're negotiating for, I think you'll see some pretty high capital in Malaysia certainly through '08. So I wouldn't see a big [inaudible].

Do you have a number you can share with us what will be the maintenance minimum requirement to maintain the ongoing operation for the corporation?

I don't for you. We'll see if there's a number we can generate for you, but I don't have one.

Okay. Two last questions.

One at today's margin environment in is the U.S. refining operation making money? Can you share with us what kind of crack spread you may be generating in Meraux and also Superior?

We're breakeven plus a little bit at Meraux and we're making substantial profits at Superior.

You're only breakeven in Meraux?

Yes, I mean we're missing 7,000 barrels a day of gasoline. We had to run some less sour crude because we had some sulfur plant issues. I may be understating it a bit but it's about that. Remember, with us we made 12% [inaudible] and we don't destroy bottoms and it's an issue that's just there.

And the final question.

If we look back over the past couple years of the drilling in Malaysia deep water between Block K and Block H, H unfortunately that so far has not been very lucrative for you guys, what have we learned?

Is there major geological distances between the two Blocks? Why that you've been very successful in Block K and not so successful in H? Have we learned anything that is different?

No, Paul, we've learned a lot. Clearly, the issue more than any other is presence of sand, where it is.

It comes out in pulses. It comes out from the island of Borneo and how thick is it and where is it and typically where we've found piles of sand, there's some exceptions, we've done well. But we haven't found sand, obviously we haven't.

The other issue is going to be the type of charge. We found wet sand so don't get me wrong [inaudible]. But as you go towards the north end of K and into H, it's been more gas [pump].

There's some exceptions to that, but it's been more gas [pump]. And so that gas so far has been stranded even though there's something, things have put to change that. So I think it's hydrocarbon [inaudible] phase in presence of sands, which are the big issues.

And so you're still optimistic that you may be able to find something meaningful in Block H?

Oh, goodness gracious, yes. I mean it's, even the small size of Block H and the newly renamed I'm sorry, Block H hasn't been altered, but K and the newly realtered P, sure.

How many more prospect or potential prospect you already identify in Block H?

In Block H? Five.

We'll see how Rotan drills out. Obviously, if it doesn't work we'll rethink it but we'll see.

Very good. Thank you.

And your next question is a follow-up from the line of Jeff Hayden. Please go ahead.

Yes. I was wondering if you could run through the fourth quarter production by oil, gas, and by country, the guidance?

I can do that. For the fourth quarter U.S. gas about 36 million cubic feet a day, Canada a little over 8 million cubic feet a day. U.K. 7.5 million cubic feet a day.

On the oil side, U.S. oil about 13,000 barrels a day. Canadian heavy a little over 12,000 barrels a day.

Offshore Canada around 17,000 barrels a day. Syncrude 15,000 barrels a day. U.K. 7800 barrels a day.

Ecuador, 8600 barrels a day. And Malaysia a little over 11,000 barrels a day.

Great. Thank you very much.

Thank you. Management, I'm showing there are no further questions. I'll turn it back to you for closing comments.

Thanks very much and I'll look forward to talking to you at our next conference call. Thank you.

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