Murphy Oil Corp (MUR) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Murphy Oil Corporation first quarter earnings release conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Thursday April 26th, 2007. I would now like to turn the conference over to Claiborne Deming, President and Chief Executive Officer.

Thank you. Good afternoon. I'm joined by Kevin Fitzgerald, Senior Vice President and Chief Financial Officer, John Eckart, Vice President and Controller, Mindy West, Vice President and Treasurer, and Dory Stiles, Manager of Investor Relations. And I will turn it over to Dory at this time.

Thank you, Claiborne, and welcome everyone. We will begin our -- we'll be following our usual format today. Kevin will begin by giving a brief review of first quarter 2007 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 the events will occur or that the projections will be obtained. 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 good afternoon, everyone. Net income the first quarter of '07 was $110.6 million or $0.58 per diluted share. That compares to an adjusted net income in the first quarter of '06 of $116.0 million or $0.61 per diluted share. Effective January 1st of this year, the company adopted a Financial Accounting Standards Board staff position on accounting for planned major maintenance activities. The new guidance no longer permits the accrual in advance of estimated costs associated with future refining turnarounds and other planned major maintenance.

Murphy has chosen to use the deferral method will be the deferred and amortized expense until the next anticipated turnaround. Adopting this change in accounting resulted in an increase of stockholders equity of $68.6 million, which was recorded as of 12/31/06. And additionally, all comparable periods shown needed to reflect this change and that resulted in an increase of the first quarter '06 net income compared to what we had reported last year of $2.1 million or $.01 per diluted share.

Looking at the income per segment for the E&P segment, we had net earnings in this quarter of $88.8 million compared to earnings in the first quarter of '06 of $161.9 million. These lower earnings for 2007 was caused by both lower oil and natural gas sales volumes and lower realized prices. Crude oil condensate and gas liquids production for the quarter averaged approximately 84,600 barrels per day, compared to about 98,100 barrels per day for the corresponding quarter in '06. Most of the reduction is due to lower volume of the deepwater fields in the Gulf of Mexico and the heavy oil properties in Canada. These reductions are somewhat offset by increased production from Syncrude.

Natural gas volumes of 61 million cubic feet per day in the first quarter of '07 compares to a little over 83 million cubic feet per day last year. Most of this reduction was due to lower volumes in the deep water gulf and from fields onshore South of Louisiana. In R & M segment, the first quarter of '07 we reported earnings of $35.7 million compared to a loss last year of $35.6 million. The increase is primarily driven by favorable results at the Meraux, Louisiana refinery, which was operational during the first quarter of this year while in the 2006 quarter it was shut down and incurred significant repair costs following Hurricane Katrina.

Downstream net income is below the range we estimated in our previously issued guidance, largely due to crude contracts that had to be mark to market at the end of the quarter, but were not considered when putting together the guidance. In the corporate segment, the first quarter was a net charge of $13.9 million in '07 compared to a net charge of $10.3 million first quarter of last year. The end of the first quarter in '07, a long-term debt amounted to approximately $970 million or 18.6% of total capital employed.

And with that, I'll turn it over to Claiborne.

Thanks, Kevin. As we move deeper into '07, I'm optimistic about our progress, and to that end, I want to provide you with an operational status report. Firstly and most importantly, our Kikeh project in deep water Malaysia continues to proceed on track. A small production facility is installed in the field and is in the final phase of systems commissioning. We are currently drilling development wells from the facility, using the tender-assisted rig as in place as well as the ocean roper.

Following the saleaway of the FTSO, which occurred earlier this month, the project now moves to the final hookup in commissioning phase. In fact, the FTSO should be on location and ready for risers in early May. More over, since exiting our main weather window at the end of February without any material delays, we have now become more specific about the timing of the field's first production. Changing our estimate from the second half of 2007 to the third quarter of 2007. Indeed all looks to be on track to make that happen.

Also during the first quarter, a natural gas sales agreement for multiple discoveries in Sarawak was executed in the development of the first three fields which will comprise of the initial production phase has begun. Our commitment is to supply 250 million cubic feet per day for the first 5 years and up to 350 million cubic feet per day for an additional 10 years. Additional development work also continues at Azurite, offshore Republic of Congo, and Thunder Hawk in the deep water Gulf of Mexico. Similar work continues with our nonoperated Kikeh field in deep water Malaysia.

This group of developments will allow us to nicely layer in incremental production beginning this year with the commencement of oil production at Kikeh, and over the next several years as gas from Sarawak and oil from Thunder Hawk, Azurite, and Kakap serve as a meaningful complement. In fact, within two years, Murphy will be able to achieve 200,000 barrels of oil equivalent, daily production. Which to put in perspective is more than double our current rates. As you might expect the cash flow generated from such high levels of production will be quite large to a projected $2 billion plus in 2009 and in the $2.5 billion range in 2010 and 2011 on a company wide basis.

Funding these developments will be important over the next couple of years as our capital budget will approximate 1.5 to $2 billion a year and will likely require an increase in debt levels to cover capital needs above our generated cash flows. Our debt to total capitalization, which is currently 19% is expected to peak at the end of this year in the high 20% range, be fairly flat next year and then in 2009 in absence of future developments will dramatically decline as our current developments and corresponding capital expenditures wind down and production and cash flow accelerate.

Therefore, our focus on the E&P area is to first to ensure that our major developments are on time and on budget. And second, to look for the next batch of developments to profitably invest in this cash flow and supplement growth beyond what we already have in place. And to that end, here's what we are focused on. The Gulf of Mexico is still under review as evaluation of the program continues under David [West's] leadership. Our commitment to the Gulf has not changed. We will continue to explore in that area. We want to do so prudently in what is as we all know a very high-cost environment.

In the meantime, an initial prospect list is coming together specifically in Green Canyon and in the eastern Gulf, and a near-term spud is planned to test a prospect called Robusta, where we have a 20% interest in Mississippi canyon blocks 524 and 568 with potential of 100 plus BCF.

In Malaysia deep water, currently the emphasis is naturally on bringing Kikeh on string. However in the third and fourth quarters of this year, we do expect to be able to do some follow-on drilling around our potentially significant Rotan natural gas discovery in block H that was announced in January. This discovery clearly provides encouragement for additional exploration of several prospects in the Rotan vicinity. We will become prospect-specific with our drilling plans in this area in the coming months.

In addition, interest has accelerated here of late in the Congo. As you recall the Azurite discovery was made with the very first well we drilled in the region which we then followed up with a spate of unsuccessful drilling. Results such as this required us to take a step back and further analyze our prospect inventory before proceeding with the new drilling program.

As part of this analysis, we decided to employ control source electromagnetics to CSCM technology to see if it could help. In the meantime, we have used it in Malaysia to help identify and high grade what ended up being the Rotan discovery. As a result of the work in the MPS block, a number of prospects in the Congo have now been identified.

More work needs to be done, but we achieved the type of response that we had hoped for and further study of these prospects is underway to put us in a position should we get a rig and we're seeing some become available, would allow us to drill towards the end of this year. Meanwhile the Azurite development proceeds, but obviously would be nicely complemented with any additional discoveries we would make.

As I mentioned to you in the last quarter, our reserve report for year-end '06 was favorable. As we replaced 230% of production. Largely assisted by initial bookings of natural gas from Sarawak, we added almost 75 million barrels of oil equivalent of total conventional reserves as a finding and development cost of just under $15 per barrel. Let me emphasize to you again that the majority of barrels for Kikeh and now also Sarawak gas, Thunder Hawk gas and Kakap are yet to be booked and remain available to support our future metrics.

In the downstream business, margins at our US refineries continue to be stellar as tight refinery capacity, low inventories, and strong demand continue to keep product prices high. Additionally refinery operations have been markedly stable with Superior averaging 33,500 barrels per day and Meraux averaging 112,000 barrels per day for the quarter. Currently Superior and Meraux are running at a barrel per day rate of 37,000 and 116,000, respectively.

Murphy USA retail gasoline program began the year with tremendous momentum, only to have it checked in February followed by a tough March and April. The relentless increase in wholesale gasoline prices, rising about $0.85 in 90 days hindered the retail system from catching up. However, our multi-year history in this program assures us that we have seen this before and once wholesale prices stabilize, or better yet for this business segment decline, then strong margins quickly follow. Meanwhile, per site volumes continue to rise and nonfuel margins are up significantly from last year.

Currently, 1006 stations are in operation and more are in the queue for construction as we continue to emphasize Murphy USA as being a game changer and only for Murphy downstream for the entire US retail market sector.

In closing, as I emphasize last quarter, it's an opportune time for Murphy. This year we should see a dramatic increase in production beginning in the third quarter with Kikeh volumes and Kikeh combined with our other developments in a more reliable downstream operation providing us with substantial, additional cash flow. How we deploy this cash flow is the question from here. And I think we have the people, acreage, and assets in place with which to generate the next tier of developments to layer on what is in progress today.

As is prudent, we will remain extremely development focused in the first half of this year, but will return to our exploration routes more in the second half, looking to secure that next layer of future profitable growth. We are now ready to take your

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Arjun Murti with Goldman Sachs. Please go ahead.

Thanks, Claiborne. A couple of follow-ups to your comments. On the Block H Rotan, You mentioned your encouragement about some of the other prospects, are you viewing that as a gas province now? Are there still some hopes that in and around Rotan, you might make an oil discovery?

Odds are it's gas. But we haven't ruled out liquids because it's too early to. Rotan had a pretty classic response; amplitude response and we certainly thought it was going to be gas. We see similar responses of the surrounding prospects. And so we think the follow-on drilling will likely find gas. But we haven't drilled a whole section yet. We haven't drilled the whole section yet and other areas in the block obviously need to be explored. And so I wouldn't rule oil out over time. Near term -- I wouldn't rule it out, but I don't think it's likely.

And when you say liquid, is there a condensate component to this?

No, it's dry.

Okay, and that's second half drilling consistent with your exploration commentary?

Yeah, it's probably in the third quarter.

Okay.

It depends on when the rover is freed up from PK drilling. But right now the schedule shows end of third quarter.

And then just on Congo, you had a second block there. I think it may be NPN. What are the plans there?

Mapping. And there'll be work to do. We're concentrating on what we now see as renewed interest in prospectivity in NPS, but there's work to do. It's likely going to be a different play type. But there's work to do.

That's great. Thank you very much.

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

Hi, Claiborne, how are you doing?

Hey, Paul, how are you?

Very good. Wondering if you can share some marketing [intelligence] with us. What is the same source sales for the year for your station in the first quarter?

Paul, we're roughly up about 7 or 8% year-over-year.

Seven to seven and --

Yes, year-over-year.

Is that same store sales or total (inaudible)?

No, same store sales.

Same store sales. Do you know if the margin is growing at that rate? I presume not. Any idea how much that you're capturing the others (inaudible)?

I'm sorry. I didn't hear your question.

No, I'm saying that -- I presume that you're capturing other people's market share. Any rough base on what you guys can see in your marketplace? What is the margin was growing at in the first quarter?

Well, general gasoline demand was up consistent with the past trends, Paul. I don't know if I can get you localized to the 21 states that we're in. But as you know, US gasoline demand was up 1.5% something like that on trend for the year. And clearly, we take market share from other people. And we've been doing it now for 5 or 6 or 7 years.

Right. And, Claiborne, in the first quarter if I look at the US downstream, can you give us a split, is it 70% coming from refining, 30% from retail, or any kind of information you can provide?

We haven't broken it out. We probably likely will pretty soon. But it was a higher percent than that, came out of refining. And to break the quarter down, Paul, you could almost just do it to the day. Crude prices and wholesale gasoline prices fell pretty markedly through about the 20th or 21st day of January. And we made a fair amount, a large amount of money during that time period. And then they started what has become a relentless march up. And as you know if you're a retailer, when you have these dramatic moves sometimes it's $0.01 a day sometimes it's $0.04 or $0.05 a day.

It takes a while to catch up. We made all of our money basically in the first 20 days of January. And then from there until now, it's been a difficult road for us to go down to make money. We've grown our volumes. And our nonfuel sales have grown nicely, but our profits have not been particularly stellar there.

Okay. And for TK, with that coming on stream in the third quarter, how quickly on the production is going to ramp-up? Is it going to be pretty ratable, or is that going to see (inaudible) at the beginning?

Well, the start was 4 wells that we project will do 10,000 barrels each. So we'll be 40,000 barrels a day. And then we'll come on around 3 or 4 wells at a shot. And, I think, the plateau next year we'll have 14 wells going 120,000 barrels a day, somewhere around there.

So by the middle of 2008 (inaudible) then?

I don't know if it's the middle or not. I'm not looking at a schedule in front of me. But third quarter, I'll just take a stab at. Something -- we'll give you more detail -- depends upon when we start up, naturally in the third quarter. And then we'll come up with a little bit more information for you.

Two final questions. One, US lifting cost appears to be pretty high. I mean (inaudible) currently around in the $13, $14.

The US what?

The US cash operating costs and lifting costs, they looks like it about in the $13 to $14 per barrel. Is that the kind of run rate that we should expect for the remainder of the years? Or that there's some unusual expense in that we should expect them to be coming down? And the final question is that you guys have been I think previously talking about you may want to look at the acquisition market. I'm wondering if you can share with us what you see out there?

Paul, on your cash cost in the US, workovers, one in particular 17 hands, I think that probably skewed it. But I will tell you our insurance costs are awfully high. And on a per barrel basis, they've become a real significant burden for us. That's dramatically up from prior years. And that's going to be ongoing. The workovers are going to be more one offish. If you take workovers out, we're probably about $9 to 10 a barrel.

So we should assume around $10 going forward.

They both have continued workovers, but they're episodic. I can't tell you when. Depends on when we need help in the field. But that gives you a rough order of magnitude.

Sure.

the question on acquisitions, obviously it's a frothy market. And what we've consistently told people when we said we're going to look at it a bit harder is that we, of course we use our disciplines. And we've learned them the hard way. But as I mentioned recently we had 5 pretty significant acquisitions, at least during my tenure here. And the two offshore Canada were unique and stellar as was Syncrude because they were so buying what everybody else was selling. Those you cannot replicate. There's just too much net present value to be created in those. And the market's not going to give that to you now.

The latter two that we did, both Canada and Seal, I think we probably can. And those are just when we have levered knowledge over other folks, basically. And know something's coming on the market. And we've done that episodically, as well, but the signal I was sending folks is we'll probably be a bit more rigorous in looking at those and pursuing them and looking at them. But rest assured, we're not going to do anything that would represent a departure from our past disciplines there.

Excellent. Thank you.

Thank you. Our next question comes from Nicki Decker with Bear Stearns.

How are you?

Good, how are you?

I'm doing very well, thank you. Just a couple, if I could. Would you just update us as to the status of operations at Front Runner and Medusa? And then I have a follow-up question on the downstream.

Sure. Front runner today is about 10,000 barrel equivalents a day. We'll bring on a well called the A4, hopefully later this week or real close that should add 3,000 or 4,000 barrels a day. So we'll be up that amount. So 12,000 to 13,000 barrels a day. At Medusa, we're about 20,000 -- 18,000 to 20,000 barrel equivalents per day there. And nothing's going off, nothing's going on. It's pretty steady-steady. Natural decline.

You had talked last quarter, I think of sort of a reassessment of the downstream, anything to report on that front?

No. But it continues. And what I've said consistently is let us get Meraux back up and achieve that value, which we've done and the markets are quite strong. Once we get it back up, everything -- we'll certainly see where's the best way to create value. And so that's -- that's a statement I'll stick by.

Okay. Maybe if -- what are the options that you're possibly considering? Is it investment? Would it be divestment? Any color there?

No.

Okay. Thanks, Claiborne.

You're welcome. Sorry.

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

Two quick ones. Getting back to acquisitions, should we assume then you'll look more for kind of bolt-on type things rather something that would be a big strategic change?

Yeah, John, clearly. That's been our history. I'm not a bet the ranch guy at all. And so that just -- likely will be something that would provide new entry into an area very well could be internationally focused. Play to our strengths. Play to our strength; what we know, what we do well. And I think it'll be a nice complement to what we do.

Right. Okay. And next one's kind of the deep water Gulf of Mexico. Obviously the program hasn't gone as well as planned so it's being revamped. How long of an analysis period or a postmortem do you plan on doing, and do you think at the end of the day you'll be changing your risk profile? Will you be staying with the Miocene, will you be looking at the lower tertiary? Do you have any sense of how you're going to go at that province strategically?

John, we're not ready to come out and say exactly how we're going to attack it. Look at our acreage position. It's pretty strong in Green Canyon. Certainly we need to work that, understand it. There's been a lot of value created there. And so that'll certainly be a focus. We're slowing it down, clearly at $120 million a pop. You need to feel a bit more confident about what you're going to be drilling. And so that's what we're working on. And the two plays that you mentioned, I wouldn't rule out. And we'll certainly pursue them. It's just time for us to do a little work and lick our wounds.

Okay. Thanks a lot.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Mark Gilman with the Benchmark Company. Please go ahead.

Claiborne, good afternoon.

Mark, you were about to disappoint me.

Oh, Claiborne, I try real hard not to disappoint you, you know that. Couple things. Actually, first thing for Kevin. Kevin, you quickly mentioned the mark to market impact on crude contracts, which is not something that I don't think we've talked about before. I wonder if you could just clarify a little bit the amounts involved here and what's generating it. Whether this was a factor in prior periods as well?

It was a couple million dollars, and it's really what made us miss the guidance because we just didn't consider it when we put it together. It doesn't happen very often for us, but periodically just in trying to match the cost of the crude that you're buying and related to when you're going to run the crude. You try to match up those prices and this one happens across over a quarter ramp. So it's not something that we run into very often.

Okay. So basically you're just hedging the delivery delay?

Mark, this is Claiborne, that's all it is. We do it routinely to match up when you buy crude in a month, you run it next month and that's the margin you're trying to lock in. So you're trying to lock in a crack spread in a way. Doing it to match-up products in crude. And that's what this was. This was a little bit more complicated transaction that involved more than one contract. And in the course of doing all the work, we didn't do as much work as we should have when we went out and got it. So that's all we can say.

Okay. Claiborne, on this robusto prospect that I think you've identified in your rundown, why are we chasing 100 B gas prospects in the gulf given everything you've said about costs?

Mark, it's near infrastructure. We're sharing the prospect with two other companies, one of which owns the infrastructure. It's the bright spot that's very similar to the other plays that work. It's pretty high probability of success that you can tie in pretty quickly. It's something that's a good investment. We had it in our portfolio. It's just time to drill it.

Okay. So this is not part of in any way the reevaluation or new approach that you're moving toward implementing for the Gulf?

No, and that's an apt observation. It's been in the portfolio for a couple of years, and it's just the time in the queue to drill it. And we're not the operator and the operator has the place where the gas will end up going. It's the right thing to do.

Okay. And one more if I could, please. Talk a little bit if you would about Thunder Hawk 4, if there's anything you can say about it at this point. And what you're hoping to accomplish with the well.

Mark, there's not much to say. It's a development well. We went down, we saw our two zones, we sidetracked into another area as well just to see what we got. And we got about what we had thought. So there's no particular color there.

Okay. Thanks very much.

Thank you. Our next question comes from Ron Oster with AG Edwards. Please go ahead with your question.

Hi, I was wondering if Kevin, you or Mindy could give us some more detail on what goes into your guidance for the next quarter in terms of oil and gas prices, downstream profits, and then also cover your dry well exposure that's built into the numbers? And what are the major components of that?

I can do that for you, Ron. Our range is $0.75 to $0.95 based on production of 88,000 barrels of oil equivalent a day. The realized worldwide oil prices that's baked into those numbers is roughly $55.50, and the gas price at $7.50. Our dry hole cost exposure is 10 million to $20 million as we have some carryover charges from first quarter that are already in the second quarter. We will have additional charges for G&G and lease amortizations of another $25 million or so. And the corporate should run around 18 to $19 million, which leaves downstream, which is the reason for the variability in the range. We could post results similar to what we did this quarter or they could range as high as the $60 million range depending on what wholesale gasoline prices do and what crack spreads do.

Perfect. That's all for me. Thanks.

Thank you. At this time, we have no questions -- I'm sorry we did just get a question in the queue. Comes from Mark Gilman. Please go ahead.

Mindy, since you were doing that run through on the second quarter, I guess I have some difficulty understanding why the 7KBD production declined from first quarter levels. Would you be a little bit more specific in terms of where that's sourced to?

I can, most of it is in -- it's divided between Canadian heavy oil, which will see a decline in second quarter of about 3,000 barrels a day due to spring breakup. We have transportation issues up there, which is typical. And then the rest primarily comes from Gulf of Mexico, which for the most part are declined.

Thanks, Mindy.

Thank you. We have no questions at this time. I'd now like to turn the conference back to management for closing remarks. Thank you. Ladies and gentlemen, this concludes the Murphy Oil Corporation first quarter release earnings conference call. If you would like to listen to replay of today's conference please dial 1-800-405-2236 or internationally at 303-590-3000. Please enter access number 11087949. Thank you for your participation. You may now disconnect.