Murphy Oil Corp (MUR) 2006 Q4 法說會逐字稿

Welcome to the Murphy Oil Corporation fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS]

Before I begin today's presentation, I'd like to turn the conference over to the President and Chief Executive Officer, Claiborne Deming, please go ahead, sir.

Thank you. I'm joined by Kevin Fitzgerald, Senior VP and Chief Financial Officer, John Eckart, VP and controller, Mindy West, VP and treasurer, and Dory Stiles, manager of investor relations. I will turn it over to Dory at this time.

Thank you, Claiborne, and welcome, everyone. We will be following our usual format today. Kevin will begin by giving a brief review of the fourth quarter of 2006 and year-end 2006 results. Claiborne will then follow with an operational update, after which 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. Many of these have been identified in Murphy's January 1997 Form 8-K filed with the SEC.

Now I will turn the call over to Kevin.

Thanks, Dory, and I'd like to welcome everybody. Our net income for the fourth quarter of '06 was $87.6 million or $0.46 per diluted share. That compares to the fourth quarter of '05 where net income was $154.6 million or $0.82 per diluted share. For the full year of 2006, net income was $638.3 million or $3.37 per diluted share compared to $846.5 million in the 2005 year, $4.51 per diluted share. And in 2005, that net income number included an after-tax gain of $104.5 million related to the sale of Gulf of Mexico shelf properties. The fourth quarter of each year also included income tax adjustments, mostly from the settlement of prior-year income tax matters. 2006 included such benefits of approximately $12 million and 2005 include benefits of approximately $21 million. The fourth quarter of '06 also included hurricane-related costs of $3.3 million, while the same quarter of 2005 included costs of $32.7 million. The 2006 quarter also included an after-tax charge of $25.1 million for an educational assistance contribution commitment, and I'll talk more about that in just a minute.

Taking a look at the segments, the E&P segment the fourth quarter of '06 earned $90.5 million, compared to $128.7 million in the fourth quarter of '05. The lower earnings in '06 were primarily caused by lower oil and natural gas sales volumes. Also natural gas sales prices were lower, while production expenses were higher. Crude oil and gas liquids production for the quarter averaged just over 83,000 barrels a day compared to 91,700 barrels a day for the corresponding quarter in 2005. Most of the 2006 reduction was due to lower volumes at Front Runner and at Terra Nova, which was off-line for repairs for half of the quarter. Natural gas sales volumes were 56 million cubic feet a day in the fourth quarter of '06 compared to 72 million cubic feet a day in the fourth quarter of '05. And a bit more than half of this reduction relates to the amethyst field in the UK North Sea, where the 2005 figures included volumes for makeup gas. In the downstream segment, fourth quarter of '06 we earned $29 million compared to $31.4 million in the fourth quarter of '05. This slight reduction was due to lower margins and profits in both the North America and in the UK.

Corporate charges -- net corporate charges for the fourth quarter of '06 were $31.9 million compared to $5.5 million net charge in the fourth quarter of '05. This is -- reduction is due mainly to the corporate contributions and lower income tax benefits in the current quarter, partially offset by lower other administrative expenses. As I mentioned earlier, the fourth quarter of '06 included a $25.1 million after-tax charge that relates to what is called the El Dorado promise. In December, our board approved a commitment of $5 million per year for ten years to help pay college tuition costs for every eligible graduate of Ed Dorado high school. Because the commitment is unconditional, we had to book the after-tax present value of the stream of future payments in the current quarter. At year-end 2006, Murphy's long-term debt amounted to $840 million or 17% of total capital employed.

Total CapEx for 2006 amounted to about $1.26 billion. Anticipated 2007 CapEx is $1.9 billion. Of this amount, $1.6 billion constitutes upstream expenditures, with nearly $1.3 billion earmarked for development expenditures, including those at Kikeh, Sarawak natural gas development in Malaysia, Thunder Hawk in the Gulf of Mexico, and Azurite Marine in the Republic of Congo. About $300 million of CapEx allocated for downstream, which includes a continued expansion of the Murphy USA retail program and some additional tankage at the Meraux refinery and the purchase of some property adjacent to the Meraux refinery that was part of the terms of the settlement litigation related to the oil spill after Hurricane Katrina.

That's the extent of my comments. With that I'll turn it over to Claiborne.

Thanks very much, Kevin. As we close the books on '06, I thought it would be appropriate to reflect on the year and give you my thoughts on the Company as I see it in our strategy going forward. '06 was a challenging year in which we dealt with the lingering effects of Katrina on our refinery operations and production issues in some of our main fields, both operated and non-operated, and a poor exploratory drilling record, culminating with the fourth quarter announcement dry holes at both Thunder Ridge and Batu Kapur. '06 also posed challenges on a macro scale, as oil prices have retreated from their highs in the upper 70s to settle out currently around the low to mid 50s per barrel, which erodes profit from the levels that we grew used to. One might expect that given these conditions I might be entering '07 on a down beat note, but I'm not.

'07 will be a year of transformation for this Company, and I'm very optimistic about where Murphy goes from here. From a base of current production levels of 100,000 barrels per day, the Kikeh field in deep water Malaysia, which is expected to be placed onstream in the second half of the year, will provide 80,000 barrels per day net to the Company when it ramps up to its plateau production levels during 2008. Layered in with Kikeh will be contributions from other projects currently in development. Offshore Sarawak natural gas from multiple discoveries will be developed and sold into the Bintulu L&G facility beginning in late 2008 at a volume of between 250 million and 300 million cubic feet a day for the next 15 years. Our board has sanctioned the project, the agreements have been initialed by the proper authorities in Malaysia, and upon signing, we expect to book some initial reserves for the project year-end, 2006.

Our Thunder Hawk discovery, located in the deep water gulf, and the Azurite discovery offshore Republic of Congo were also approved for development in '06, and both target first oil in '09. Lastly, we look forward to the sanctioning of our Kecil discovery in deep water Malaysia, which will be part of a unitized development and will be a nice complement to Kikeh production when it begins producing early in the next decade. The addition of Kikeh production volumes when combined with other developments currently underway will transform the Company from a 100,000 barrel a day producer to one producing upward of 200,000 barrels a day within the next few years. I've grown accustomed to thinking of Kikeh production as something in the distant future, but it's here. While we have yet to firm up our year-end reserve numbers for '06, let me tell you where we're headed. Assuming things happen as we expect, reserve adds should be in the neighborhood of 75 million barrels, including a good portion of initial bookings of Sarawak gas as previously mentioned. Reserve additions of that magnitude would indicate replacement of 200% of our '06 production at a finding and development cost number of approximately $14 a barrel.

Strategically, '07 will also be transforming for Murphy. As most of you saw, we announced some dramatic changes and shifting of personnel company-wide in the fourth quarter. David Wood, who ably ran international E&P, including our efforts in Malaysia, will now preside over the entire E&P business worldwide. Along with that change, he will be bringing over some of his talent from Malaysia and incorporating it into our Gulf of Mexico operations where, admittedly, we have struggled of late. I have nothing but the strongest of expectations from him and his team.

Harvey Doerr, an extremely capable manager who formally headed up our Canadian E&P operation, will now serve as president of our worldwide downstream operations. His capital discipline and extensive knowledge of the oil and gas industry will serve him well in that role. I have much optimism and confidence his skill and the highest of expectations. Kevin Fitzgerald, our former treasurer, has been promoted to senior VP and will serve in the long-vacated role of Chief Financial Officer.. Kevin's strong financial background will serve our Company well in this new centralized role. And of course, Mindy West. formerly director of investor relations, replaces Kevin as treasurer, and Dory Stiles, your new primary contact, in turn replaces Mindy.

Murphy's strategy in the past has emphasized organic production growth and reserve additions through high risk but focused exploration. Given the increased cost of drilling and increased difficulty of accessing plays, we will broaden our thinking to include acquisitions, whether they are assets or companies, which would provide meaningful up side or the entrance into a new targeted area or play. We're not completely changing what we do. However, we simply realize that as a Company we have to adapt to altered circumstances. We will continue our grass roots exploration, but in a more measured way.

'07 has started out better already. And as you have read. this week we announced natural gas discovery at Rotan in Block H deep water Malaysia. Rotan represents the derisking of a new play type on the Block, which contains several other similar prospects. Additionally, we plan to firm up a drilling program offshore Congo during the year. And as mentioned, Dave in his new role is doing an extensive assessment of our Gulf of Mexico prospect portfolio and will come forward for his recommendations for that program in the coming months.

In closing, it's an opportune time to be a shareholder at Murphy. In addition to the dramatic increase in production and resulting cash flow starting later this year, today's environment is one in which we excel. Lower oil prices, as I mentioned, erode margins, especially in light of the increased costs we have all experienced, but for that reason, also brings opportunity for companies that are diligent and careful about investment. Murphy picked up some of its best assets during less than robust eras, including Hibernia, Terra Nova, Syncrude, and our acreage position in Malaysia. I'm confident opportunities for further growth are out there. I'm also further confident we have the people in place to find and create our share of this growth.

I'm now ready to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question will come from Kate Lucas with JPMorgan. Please go ahead.

Hi, good afternoon.

Hello.

Hi, I have a question on Congo and Azurite. You've got some capital earmarked for it for the coming year. And I was wondering about the development plan for the asset, how you envision your position in Congo going forward? And then whether you're going to partner with any other companies on your activities in the Congo?

Kate, our board has sanctioned the project. It's going to be a floating production and development platform, and we're going out now and we contracted for it. And we should be, at least preliminarily, first oil is targeted for '09 and we feel pretty confident in that. On the partnering issue, we certainly considered it, and we'll continue to consider it. It's a nice development and in addition to that, it's a large acreage position that has pretty, pretty nice upside as far as exploratory potentials. I know we drill dry holes around Azurite, but we barely scratched the surface, as well as potential on the balance of that block and the block to the north.

Okay. And just another question on just looking at your geographic reach, does your -- continuing to go ahead with the development in the Congo, does that preclude you're entering another geographic region? I know you had opened a Jakarta office last year. Is that where you're still considering expanding into other regions, as well?

Kate, there, but also other regions. I hope we're going to be in a position sometime toward the end of the first quarter to make an announcement on another area that we're entering.

Okay. Great. Thanks very much.

Okay.

Our next question will come from the line of Arjun Murti with Goldman Sachs. Please go ahead.

Thank you. Claiborne, just hoping to follow up on your comments on possibility of doing acquisitions or broadening your thinking, as I think you put it. In the past, you do have a history of, when commodity prices were down and out, making kind of very selective or focused acquisitions. Hibernia -- I think it was Oh Canada in Canada that brought the [Ladyfern] interest, that kind of stuff. Are you -- are those the type of deals we should be thinking about? Or what others have done, maybe the more mega merger type thing, adding a large North American gas presence or something like that? Can you put any parameters around how you're thinking about acquisitions relative to how you've done them in the past?

Arjun, we're most comfortable as a Company with targeted acquisitions that complement what we have, and it's worked nicely for us in the past. And we typically do it when things are a bit out of favor and we typically understand the asset pretty well. And the seal acquisition, both Canada -- most recent both have turned out for us. The one that created the most extraordinary value, of course, were done in the early mid 90s, that are really in many ways the backbone of the Company, until Malaysia comes on string. So those we understand, we know, and I think we can continue to do those when and if they become available. And you know we're starting to see some. Having said that, I would never turn my back on something that I thought created lots of value for the Company. And if there was something unusual out there, which I think would be accretive for us from a value standpoint that would be larger than those, I certainly wouldn't be adverse to pursuing that. I think that's less likely, but conversely funny things happen. And so something may become -- might become available.

Murphy in the past has also been very careful about issuing shares; i.e., you don't really do that. More willing to if it is the right strategic opportunity than you perhaps have been in the past?

Oh, yes, I think we'd be -- we'd certainly look at it, and if necessary, I think we'd do it. There's no law that says we won't. We've just always thought that our equity was worth a fair amount, especially with what's coming before us, and we would be reluctant to give it to someone unless we thought we got something like in return, If we see something like in return, I think that we'd be more willing --more willing to do it. On balance today's environment us better, and I guess that's the message I was trying to impart. When everyone is flush with cash and margins are wide in our business, it's hard for us to have a competitive advantage. Margins get compressed, costs go up, there's a bit more distress in the business --not that it's distressed, but it's a little bit on the margin more difficult to invest -- I think that's when we probably do better. And so that's -- that's what we're shifting our thinking to take advantage of.

That sounds like exploration will definitely be a lower portion of the budget for 2007?

It will, but it would any way, just because these costs have gotten so extraordinarily high it adds an additional measure of risk. When we first went into Malaysia, for example, dry holes were $14 million a pop. The Company was smaller, but nonetheless. it was -- it was significantly less. And when you get these things that are now on the deep water gulf routinely over $100 million, I think you just have to be wise about it and say, okay where's the best way I can create value for our shareholders? And you still do that if you have something that you particularly like, but conversely, you probably look at other things, as well, that you think can create value.

That is terrific. Thank you very much, Claiborne.

Okay.

Thank you. Our next question will come from [Nikki Decker] from Bear, Stearns. Please go ahead.

Good afternoon. My question is on the reserve replacement. The 200%, Claiborne, does that -- would that include reserves from Thunder Hawk and from Azurite?

You know, I don't want to get specific per field other than to say it's driven primarily by Sarawak natural gas. We do -- we did include reserves from all of our areas that we currently produce in. But I'd prefer not, just because we haven't finalized it, to get specific per field and how it works.

Okay, great. Understand. Just on your exploration program, if I could. You talked about potentially drilling offshore Congo. Would that be in the north block or the south block? And what about the Gulf of Mexico? You had mentioned in the past Badgers, is that something, especially in light of your comments about higher cost, that you're still considering?

In Congo, more likely the not, when we get back to it it'll be in the southern block, initially. But we're doing lots of work on the northern block and I wouldn't discount that. But I think sequentially we'll do some additional work in the southern -- drilling in the southern block first. With respect to the gulf, we're taking a pretty deep breath and doing a lot of remapping. We're not going to lose our appetite for a lot of these prospects that I previously highlighted. We're just going to make sure that the current team understands them and has mapped them to their satisfaction and their understanding. But they're still there, and they're -- and they're grade A. I suspect we'll get around to them, but we need to give these folks a little time to get their arms around them.

One more if I could. Could you just comment as to what the status is at [Wespat] with the -- whether or not the production that had been shut-in has been -- has been brought online?

You know, we had a small shut-in into the fourth quarter, but it was very brief, I mean a day or two. And so I don't think there's anything prolonged there you need to worry about. Our share of production has gone down over time as the contract kicks in because we made a lot of money. That's the good news. The bad news you get less barrels sooner. But otherwise the field has really been an astonishing field, going from what we thought was 20 million barrels to certainly 50 and probably more.

Great. Thank you.

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

Hi, Claiborne, how you doing?

Hi, Paul, good. How are you?

Very good. it's a good day for you guys.

Thank you.

Several quick question. 2007, last quarter you give a guidance, I think is 95 to 105 on the production fund, is that still in the ballpark correct?

Paul, it is.

And on the Congo, you [inaudible]the project maybe I'm missing, I'm sorry for that, did you say what is the capacity of the field going to be? And are you going to build it [inaudible] so that in anticipate that maybe you have some better [inaudible] in the future exploration success, or that you're just going to build it right to whatever is the level?

Paul, the FDTSO, which is what we're going to build, is going to have capacity of 40,000 barrels per day. That is very close to the productive capacity of the field. However, the plateau for the field is quite brief, 18 months, two years at most. And so there's plenty of capacity in the near term, or in intermediate term to bring in other production, which I'd hope that we'd be able to do.

And what's is the quality of the oil over there, I'm sorry?

The gravity is right around 25 degrees and it's sweet.

Okay. And, Claiborne, when you're talking about acquisition, there's a bit of the change in strategy, understandable, I guess, in the [ratcheting up] of the exploration cost. Can you elaborate a little bit more, maybe put some [parameters] in terms of what kind of areas or geographic region you may be more interested in, what [kind of play] that you will be more interested?

I really prefer not to, because one of our strengths is that we have gone to places historically where others have shied away. And if you look back at our history, particularly with Syncrude, Hibernia, Terra Nova, who would have thunk it and who would've thought they would have created so much value? So I think one of our strengths is to be pretty open-minded and not give away too much in advance as to where we might be -- might be looking. Similarly, [BoCanada], we hadn't bought a Company before and we certainly did at that point, we did it for a specific reason. And also the [Seal] acquisition. We had a sense of what we had and we had an opportunity to buy something that appeared to be full value at the time, but in the fullness of day really was quite an advantage deal. And so, for all those reasons, which really played our strengths, I'd prefer not to get too specific about where we might be looking and what types of assets we might be looking for.

That's fair. And how about can you tell us what kind of capital structure you will be comfortable at, in the event that's a larger than the historical deals that you have done that is you're looking at very attractive? What kind of capital structure you may be willing to go up to?

One of the keys for us, of course as you well know, is with the start-up of Kikeh and then follow on by these other fields in '09 -- late '08 and '09 -- and then even into '10, we're going to have lots of cash flow. A lot of this has got to be financed out of cash flow as we get to 200,000 barrels a day and then, in fact, in excess of 200,000 barrels a day. And that's kind of the starting place. And then historically, we've typically gone up to at least 40%. Now if there was something truly unusual we'd have to understand the macro environment that we were in. We may -- we may want to go in excess of that, but historically, that's been a place where our owners have typically said, hey, let's think about it.

That's --

So I think in terms like that.

And Claiborne, on the $1.6 billion in 2007, capital spending for upstream, do you have among that how much is related to development of Kikeh and how much is for exploration? And presumably with Kikeh finished this year should we assume your capital spending, unless that we have a far more new project [in expansion], otherwise that you should be an substantial drop from the $1.9 billion that we see for this year?

Paul, it goes down. Kikeh this year is right at $450 million and then there will be a drop, unless something else comes forward. And of course, that's our job is to find accretive things that we think make money for our Company, and --

Good problem to have.

For a couple of years we haven't been able to do that, I have to say. But now I'm seeing that there's going to be a bit more opportunity going forward.

And how much is -- of the $1.6 billion is earmarked for the exploration?

It's about $300 million.

$300 million? I know I'm taking up a long time, just final. Can you just briefly wonder what is the assumption that you use on the first quarter earnings forecast -- or the guidance the $0.40 to $0.50, what kind of a oil and gas price assumption or exploration?

Paul, I'll handle that one for you. For our range of $0.40 to $0.50 a share, we are assuming a realized worldwide oil price of around $42.50 to $43 and a realized gas price around $6.75. Exploration expense we are expecting to come in within the range of $35 million to $55 million, which is inclusive of dry hole costs, which will range from $4 million to$24 million.

Perfect. Wonderful. Thank you, guys.

Okay.

Thank you. Our next question comes from John Herrlin with Merrill Lynch, please go ahead.

Yes, hi, Claiborne. I understand why you don't want to front yourself in terms of acquisitions. [LAUGHTER] The last time you spent 50% of your budget in terms of costs incurred on acquisitions was 1993. You were right, the early 90s. That ten years you've been averaging 2%. If I look at your assets and your strategy, you've always gone for leveraged situations, high-risk reward. That's been your claim to fame. Acquisitions tend not to be high-risk reward situations. How much -- philosophically, how much labor intensity do you want with future acquisitions? Do you want to buy North American leveraged assets? Are you looking for stable cash flow? Or do you want to maintain your same kind of risk profile?

John, I think we'd be open. The reason that we went so strong in the early 90s was because instinctively we knew that it was a once in a lifetime shot. And that's just how -- we've been around long enough to appreciate it and so that's where we went. The deals kind of went away in our view, and so that's why we went to exploration. Well now, exploration, I think, is a more difficult game to play. There's much fewer places that you have access to, and because of deep water and rig rates the cost has gone up. And as a result, I think the risk element in exploration for us has gone up exponentially. And so that means that, given the squeeze in margins that other people are experiencing, including us, I think there's less cash flow in the business and I think there's room to find opportunities to acquire some things.

It's not a wholesale abandonment of what we've done by any stretch. It's just we're going to broaden the aperture a bit to see what is out there. Our job as management is to make money for you guys. I think the last two years we've done a pretty poor job. For the five years before that, we did a hell of a job. And so, obviously, we changed things up management wise here, and we're going to look at some things in a bit different way. And it happens to coincide with the fact that I think there's some opportunities that we're starting to see. I wouldn't read anymore into it than that. And when the opportunity shows up, which they -- like they did in the early 90s, I don't think they'll be that good, but I think they'll be accretive. And I think you'll see us a little bit more aggressive in going after them.

Are you indifferent as to whether you operate or not operate these situations?

You know, in a perfect world we prefer operatorship. We certainly do. But having said that, that wouldn't be anything that would preclude us from doing something.

Okay, last one for me is on the reserve additions. How much was Sarawak for the --

You know, we haven't gone into the specifics because we haven't finished our books on it. It was certainly the largest single piece.

Okay. Thank you.

Yes, sir.

Thank you. Our next question comes from John Mansfield with SAC Capital. Please go ahead.

On the acquisitions, what you going to do? How big are you going to issue equities?

Okay, John, I didn't hear you.

We'll move to the next question from Mark Gilman with the Benchmark Company. Please go ahead.

Claiborne and folks, good afternoon.

Hey, how you doing, Mark?

Hey, pretty good. I had a couple things. On Azurite, are you comfortable with the cost number yet?

Mark, what we're looking at from a CapEx standpoint is somewhere in the range of $700 million.

Okay. Any update on where things stand on Kenarong and Pertang?

No, but I will say I'm optimistic. But I can't give you a specific there and don't want to.

Okay. Yes. I think you mentioned in your comments that Rotan represented a new play type. I wondered if you could flush that out just a little bit and whether the prospectivity within this new play type is largely gas as opposed to oil, and how that fits into your thinking regarding the availability of liquefaction capacity in Malaysia?

Mark, they're younger upper Miocene rocks than we've seen before that are paying. The source is a bit different, as well. Just the sourcing fairway is further up the coastline of Borneo, so where we're sourced at Kikeh is from one area and where sourced here, the sediments are sluffing off from another area. And that's why, it's a different play type. There's follow-on and there's an additional fault block to drill in this particular prospect,, which should work. And there's nearby prospects that are within tie back distance, which have similar amplitudes, which we'd sure like to get to. There are a cluster of fields, gas fields nearby. Not in our block, but in adjacent operators block. And those are, if you recall, [Comansu], [Comansu Resopthrone], [Kebobogin].

Ultimately there is a resource there coupled with what we found and what we think we're going to find in the future, which will likely lead to development from that area. I would be surprised if it didn't. And that's what we're doing, is we're building resource in that area, which I think in the fullness of time will lead to a pretty large natural gas development. We certainly don't know if there's liquids or oil in the area. This particular discovery was clearly natural gas and was not particularly rich. We haven't precluded finding black oil in the area. I have to say that because it's too early. An amplitude that we saw going in suggested it was likely going to be gas, but we really weren't sure what the amplitude showed yet until we drilled it. Now that we can see it, confirm it, and we see others, I think the nearby prospects will likely be gas, but we'll see.

Okay. So basically you drilled it with the knowledge that it's primarily a gas prospect?

Well, we thought that it likely could have been. What we told people going in, it was either a TCF or 150 million barrels if it worked, and it ends up that it's -- it's the latter. And so now we think that it's -- that's what we're likely to find nearby because the amplitudes are similar. But it's a big block and there's other structures and other types of amplitudes that we see. It's too early to say that it's all going to be natural gas or gas or there might be some oil. But I would tend to think, especially the nearby prospects where we're going to be gas and I'm encouraged to believe that that gas, coupled with other gas and nearby licenses will be developed.

Can you give us a quick performance update on Front Runner and Medusa, and where you're looking for things to go from here?

Mark, Front Runner is currently producing around 13,500 barrels a day. We just brought on a well, the A6, and it's producing right at 5,700 barrels a day, about what we anticipated, in fact right on what we anticipated. And obviously we're working over wells now. We're working on a well called the A3, which should be completed early this month and won't be a big well, it'll add 500 to 1500 barrels a day. Let me go to the -- to recomplete the A4, which should be done in March and we're budgeting rates there of about 6,000 barrel equivalents a day. And then after that, we go to an A2 well, which is more mid year and we're budgeting about 4,000 barrels a day there. So it's just going to be hard work all year. We highlighted it a year ago or more, when we first saw it and it's just been a struggle. Having said that, we understand it better and our workovers are effective, and so it's just going to be a long, steady slog.

So ultimately you might expect it to get back -- if my arithmetic's roughly right -- to something close to 20,000 maybe even a little bit above that level gross?

No, there's declines, and we're making some pretty hard assumptions, a lot of weather down time and we might have assumed a casing -- just to be ultra conservative, our numbers don't get there. But certainly we add wells that if you add it to our current production, would get there 20,000 barrels a day, but that assumes no problems and assumes no depletion. And so we simply haven't done that.

How about Medusa Claiborne?

Medusa's producing right at -- if you include north Medusa, oh, 18,000, 19,000 barrels a day. And our only issue there was we had a well that sanded up at the end of the year that was producing 10,000 barrels a day equivalent for us. We thought we'd have to work it over. We could do it -- we ended doing it with a coil tubing unit and that well is back up to about 3,000 or 4,000 barrels a day. Obviously not to the 10,000, but a cost that was $3 million and not $20 million. So what we're hoping is that we produce it and it kind of cleans up as we go along and we maintain it and perhaps even increase production. I don't see any big issues there. I wish that well was still on at 10,000 barrels a day, but I don't see any big issues as far as what we think it's going to do this year.

Okay. One final one for me. You mentioned what, I guess I would call a bit of a reassessment of the deep water gulf prospect portfolio and in particular remapping. Any other changes with respect to your general exploratory approach to the deep gulf, either in terms of methodology or philosophy?

Mark, I don't think so. I think we -- it's all about people and it's all about results, and I want to see these folks in charge of this program. I want to see what the maps look like, I want to see the tools they use to generate the maps. I want to hear the explanations, and then we decide which way we're going to go. I don't think you'll see anything too dramatic. I think we've got some fabulous leases, and I suspect we'll make some nice discoveries. But it was obviously time to do something, so we did.

Thanks a lot, Claiborne.

Thank you. Our next question will come from Ron Oster with A.G. Edwards. Please go ahead.

Good afternoon. I just had a question, You've announced some changes on the strategic direction in the upstream. I was just wondering if you could kind of go over your thoughts on the downstream? You mentioned several times about creating value and we've seen with some other equities when they shed some of the non-emp assets they're ordered to higher multiply, was just wondering if you could kind of comment on the downstream and your thinking there?

Ron, we changed management or management was changed in the downstream, as well, and so we need to let new folks kind of get a grip on it. And what I've always said is that once we recovered from Katrina we got up, we take a look at what we got. And so coupled with new management, we are, and we'll see if any is necessitated by that. We're certainly aware that we'd like to create value for our shareholders, which we all are.

Okay. And then just one quick follow up. Does the 2006 reserve numbers, does that include a write-down for Front Runner?

We might have taken some barrels off reserves, some reserves, but minuscule. But basically the number that we have is -- at the end of last year is the number that one of our partners just wrote their reserves down too. I think we're fine there and our capital -- I think our book value in the field was $260 million or $270 million. I don't think we've got any particular issues there.

Okay. Thank you.

Okay.

Thank you. Our next question will come from [Monroe Helm] with CM Equity Partners. Please go ahead.

My questions have all been answered. Thanks a lot. Congratulations and good luck in '07.

Thanks, Monroe.

Our next question will come from [Vodec Polz] from UBS, please go ahead.

Good afternoon. Could you just give a sense of how you going to find the CapEx next year? It's a pretty big number. Obviously the cash flow will not meet that. Are you looking to use your revolver to fund it or how -- can you please enlighten us? Thanks.

Yes, this is Kevin. More than likely we'll go ahead and use our revolver. At this stage, there's no point in going out any further than some short-term stuff, because we're going to have this big influx of cash flow from all this production coming on, that if we don't have other places to invest it, we'll use the pay down and pay the debt right back down. So at this time, we just plan on using a revolver.

Thank you.

You're welcome.

Our next question will come from Justin Tugman with Perkins, Wolf, please go ahead.

Good afternoon, Claiborne. Real quick, you talked a little bit about the change of strategy here. Give me a sense of what you think Murphy will look like three, five years from now?

Well, the first thing to understand is three years from now will be 2010, so the Company is easily going to be twice as big. It's going to have 200,000-plus barrels a day equivalent of production. And so you're looking at a substantially larger entity with double cash flow, more likely than not. And so that's, to me, the first thing. I would think you would see us in a new area or two. And I think the issue that -- what we've raised is historically we've accessed areas like that through the drill bit, but, clearly, maybe we do it a different way now. So I think you'll see us have a wider area or diversity of earnings than Canada, the U.S., Ecuador, in a more modern way, the UK, and then substantially Malaysia.

When you talk about expanding into new or different areas, it sounds like your inclination would be more to the side of the international in terms of looking for acquisitions?

No, that's certainly where we've had our most success, but I wouldn't use that as a template for the future. It's where the value lies. Good grief, we all know there's anomalies in markets and we all know that there's opportunities that pop up, and our job is to identify them. So we're going to find them where we think they are and, heck, they may not -- they might not occur or someone else may get there first. So I'm not going to tell you that, yes, our goal is to be in this area and this is how we're going to do it because our job is to create value. And I think that we're pretty good at it. So that's where we're going to head.

Okay one last question. Could you possibly update us on what your efforts are looking like in the Floyd Shale?

You know, we've been pretty opaque on that. Suffice to say that we're going to drill in the near term a couple of wells this quarter and into next quarter, and then we'll have more data.

Okay. Thank you.

Thank you. Our next question will come from Andrew Leggett with Citadel Investment Group. Please go ahead.

Yes, hi, this is Sunil Jagwani. actually. Do have a quick question on the CapEx and the implication for DD&A. I'm not sure if you already gave the number and I missed it, but with the higher than expected CapEx --at least relative to my expectations -- what does that do to the DD&A rate for say when Kikeh comes on to the Company portfolio?

Yes. Actually this year's capital wouldn't have much of impact on the DD&A rate at Kikeh, because it's going to be what we spent over the last four years and what we intend to spend in the future kind of maintaining the field. And so I wouldn't focus too much on this on the $1.9 billion. It just reflects Kikeh's share of it, which is $450 million, but it's got [Kecap] in there, it's got Sarawak gas in there, it's got Azurite, it's got all sorts of things in there. But in general, have you given guidance for DD&A in '07 and beyond? No, we have not.

Can you give us it generally?

Yes, we're not certainly adverse --

Sunil, it's going to be roughly for '07 $10 a barrel. Mix will have something to do with that, but that's what we envisioned about the time we prepared our budget. And I think it's also important to remember that with Kikeh, our expenditures there have been in remarkably narrow range from where we originally expected them to be. So we're looking at a total $1.7 billion development within 20% of our original projection, so I don't think we have any concern there.

So not specifically Kikeh, but overall you're saying that it's going to be about $10 a barrel?

Correct.

Okay, got it. Thank you.

Thank you, our next question comes from Benjamin Dell with Sanford Bernstein . Please go ahead.

Hi, Claiborne.

Hello.

I just had one question. When you look -- when you would consider acquisitions, how do you weigh those up against your EV for BOE, your evaluation, your organic finding and development? Because clearly. as your organic F&D comes down, that sort of makes the appeal of going out and spending more at market rates probably less attractive, doesn't it?

You know, it's a factor, it's a factor. You've got to see how your capital has been spent over the last four to five years. Then you have to take a view of where you think the market's going, what the opportunities are and then say, gee, is this a good bargain or not? It's all incremental capital, and so I would like at what incremental opportunities are out there. But clearly we'll be driven a bit -- at least our metrics in the future -- by how Kikeh financially impacts the Company. But I wouldn't let that drive us too, too much towards ruling something out or in acquisition wise.

But there's not a set number sort of dollars a barrel relative to your own market value on dollars a barrel that you'd be willing to dilute or go above?

No. If we had one, I wouldn't signal it anyway. I'd -- we've got our own set of metrics. We're certainly -- when we make an acquisition -- if we do, good grief half of this thing is talking about acquisitions and all I'm signaling is that our exploration business has been spotty, poor over the last 18 months to two years, so I think it's wise to look at other things. And I'm not -- it depends on if something out there is available and we like it whether we'll buy it or not. And so I wouldn't -- I wouldn't focus too much on it. I'd just say it's a modest fault that we're looking at things and we think we see some openings out there. No more.

Okay. Great. Thank you very much.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our next question will come from the line of Dennis Coleman with Banc of America Securities. Please go ahead.

Yes, hi, good afternoon. We've had a lot of questions about acquisitions and kind of what you're looking for. As you go through this process, there's a lot of talk out there also about private equity and LBOs, is that something that you're looking at or that you can comment on from the other side as a possible target?

No.

Okay. Thanks very much.

Thank you. Next question will come from the line of [Dave Willer] with Newburger and Company. Please go ahead.

Hi, Claiborne.

Hey.

You've mentioned Sarawak gas, so obviously you've gotten towards the finish line on gas contract for the first tranche, and I guess gas price was a sticking point there for a while. Is this enabling you to sell -- I guess you had additional gas there to sell. Do you see yourselves being able to enter into additional contracts over the next year or so for the spare gas you have there?

What we anticipate was that the levels of production that we're going to achieve in late '08, maybe '09 -- just depends on the timing of when it comes on -- 250 to 300 million a day. We shouldn't be able to maintain that for 15 years. And if there's anything on top of that that we see -- there may be short-term surges -- then we'd certainly look to see if we contract that out, as well. But I would concentrate on the levels and the years that we've currently given guidance on is what we're going to do.

Okay. I was thinking that you were going to be able to supply that from a few of the fields that you had found and that you might have additional fields to contract. Is that --

We do, but the additional fields over time will fill the commitment to go out to 15 years.

Got you. Got you. And can you share anything with us on gas price?

Not yet.

Okay. Up in Canada, Hibernia, Terra Nova have had some issues. Can you kind of tell us about the outlook there and when you think things will be back to higher levels and will we be back to the prior production levels?

Of course, we don't operate, and so we're investors in a way and certainly knowledgeable investors about it. There's been a plague of issues. And there's a -- one of the generators providing power at Hibernia has failed, and so it's impacted production for the first quarter. It'll get repaired, but that certainly happened right after the first of the year. And then at Terra Nova, one of the bearings on one of the pieces of equipment has caused problems, which has caused us to reduce production, or the operator to reduce production there. And both of tho -- and that won't be solved for the short term to the best of my knowledge. The Hibernia issue will be. And so it's-- it's just -- you know in a way it reflects the pressure on the equipment and the people in today's world. And we're pushing it and our operators are pushing it. They're smart people, but we certainly having issues keeping it on time and working to the extent that we'd all like.

So the issue is more utilization rates than reservoir performance?

Oh, yes. Good grief, the reservoirs are horses. There's nothing there, but it's top sides.

Okay, good. All right. Thanks for that.

Thank you. Management, at this time, we have no additional questions in the queue and I'll turn the conference back to you, Mr. Deming, for any further remarks.

Thanks very much and look forward to talking to you nex -- in the next couple of months.

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference. we thank for your participation on the program. If you would like to listen to a replay of the conference call please dial 1-800-405-2236 with the access code of 11080910. Once again if you would like to listen to a replay of today's program please dial 1-800-405-2236 with access code of 11080910. We thank you for your participation on today's conference call. At this time we will conclude. You may now disconnect, and please have a pleasant day.