Murphy Oil Corp (MUR) 2007 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Murphy Oil Corporation second quarter earnings release teleconference.

During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for your questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Thursday, July 26, 2007.

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

Thank you, and good afternoon.

I'm joined by Kevin Fitzgerald, Senior VP and Chief Financial Officer, John Eckert, 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.

Thanks, Claiborne. Welcome, everyone, and thank you for joining us.

Today's call will follow our usual format. Kevin will begin by providing a review of second 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 these events will occur or that the projections will be attained.

A variety of factors exist 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.

I will now turn the call over to Kevin for his comments.

Thanks, Dory, and welcome, everyone.

Net income in the second quarter of '07 was $250.3 million, or $1.32 per diluted share. That compares to income in the second quarter of '06 of $216.2 million, or $1.14 per diluted share.

For the six months in '07, we had $360.9 million net income, or $1.90 per diluted share compared to $332.2 million in the first six months of '06, or $1.76 per diluted share.

Net income in the second quarter of '07 included after-tax costs of $24 million, $0.13 per diluted share related to the closure of 55 retail gasoline stations, 47 in the U.S. and eight in Canada. These closures are in conjunction with our previously announced agreement with Wal-Mart to purchase parcels of property currently leased from Wal-Mart from our Murphy U.S.A. retail gasoline stations.

The second quarter of both '07 and '06 included non-cash income tax benefits related to Canadian income tax rate reductions. These amounted to $4.8 million, or $0.03 per share in the 2007 period and $37.5 million, or $0.20 per share in 2006.

Looking at income by segment. In the E&P segment second quarter net income in '07 was $149.3 million compared to $245.1 million in the second quarter a year ago.

Both quarters include the Canadian income tax benefits I just mentioned. The 2007 quarter was unfavorable and had lower sales volumes for both oil and gas in 2006, but we did experience higher pricing.

Crude oil and gas liquids production for the quarter was just under 80,000 barrels a day. That's compared to 90,700 barrels per day in the corresponding 2006 quarter. The climb was primarily attributable to lower production in deepwater Gulf, offshore the U.K., heavy oil area of Western Canada, and at the West Patricia field offshore Malaysia.

Production at Terra Nova, offshore Eastern Canada was significantly improved in the 2007 quarter. You might recall the field was shut down for about half of the 2006 quarter due to mechanical equipment failure.

Second quarter of '06 was also favorably impacted by a sale of crude oil volumes previously withheld from the Company in Ecuador which added almost 9400 barrels per day to the 2006 sales volumes.

Natural gas sales were 56 million cubic feet per day in the second quarter of '07 compared to 87 million cubic feet a year ago. Most of this reduction was due to lower volumes in the Gulf and onshore South Louisiana.

In the R&M segment net income for the second quarter of '07 was $124.2 million compared to a loss of $11.1 million in the second quarter of '06. The just completed quarter included the aforementioned after-tax charges of $24 million associated with the closure of retail gasoline stations in the U.S. and Canada.

Refining and marketing margins were strong in the second quarter of '07 and the Meraux refinery operated throughout the quarter. For approximately half of the 2006 quarter, the refinery was down for repairs following Hurricane Katrina, and last year's quarter also included $26.5 million of unrecoverable repair costs related to the hurricane.

U.K. downstream business also show improved results in the '07 quarter relative to '06, mostly due to stronger refinery margins at the Milford Haven, Wales, refinery.

Corporate charges in the second quarter of '07 were $23.2 million compared to $17.8 million in the second quarter of '06. This cost increase mostly attributable to due to higher foreign currency losses due to the continued weakness of the U.S. dollar.

At the end of the second quarter of '07, Murphy's long-term debt amounted to approximately $1.1 billion, or 19.4% of total capital employed.

Now I want to make a couple of comments about our guidance. Earnings estimate for the third quarter is $0.80 to $0.95 per share. This assumes total production volumes of 92,000 barrels of oil equivalent a day with the Kikeh field coming on early in September but the first sales from the field currently projected for early fourth quarter.

We're projecting worldwide sales volumes to be approximately 85,000 barrels oil equivalent a day for the third quarter, primarily explained by the timing delay in Kikeh sales but also in other areas in which the timing of production and sales volumes differ. The estimate also assumes total exploration expense, including dry holes at 40 to $60 million and a downstream contribution of 45 to $55 million as refining margins have retreated significantly from levels achieved in the second quarter.

With that, I'll turn it over to Claiborne.

Thanks, Kevin.

With 2007 half way over, I'd like to recap our progress so far this year as well as give you an idea of what to expect in the second half, especially with regard to our major developments and the ramp-up of our exploratory drilling program.

Oil and natural gas production for the full-year 2007 remains in our previously announced range of 95,000 to 105,000 barrel equivalents per day as current levels of production will be enhanced by the start up production from the Kikeh field during the third quarter.

Currently we expect Kikeh to begin production by the beginning of September, perhaps a bit sooner. The project is in its final hookup and commissioning phase and continues to proceed on track. More wells will come on at the beginning.

We will ramp these up over a 30-day period to a gross production level between 30,000 to 40,000 barrels a day. Additional wells are scheduled to be placed online before the end of the year allowing us to achieve exit rates of 50 to 60,000 barrels a day. The field is expected to continue ramping up through 2008 and be at full plateau production of 120,000 barrels per day by the end of the year.

While conducting routine field development operations, one of the shackles and a spar mooring line broke and was replaced. The defect was discovered in some of the spare shackles and therefore all are scheduled to be replaced beginning this quarter. This program is not expected to impair our first production timeline.

The production start-up of the Kikeh field represents a significant milestone in the history of Murphy Oil and will be a meaningful production layer for Murphy for many years. A great job has been done by David Wood and his group in Malaysia and I could not be more proud of their efforts in bringing this field onstream in what looks to be record or near record time.

Our Congo exploitation license to develop the Azurite Field was received in June and will now allow that development to formally proceed towards first oil in 2009.

In the deepwater Gulf of Mexico, development work continues at Thunder Hawk and at Thunder Bird, a side track is planned to assist in sizing the field [and] high grading development options. Work also continues in Sarawak to develop multiple fields to supply our natural gas commitment into the Bintulu LNG facility beginning in 2009 for initial volumes of 250 million cubic feet a day for five years, and up to350 million cubic feet a day for an additional 10 years.

Earlier this month we started production ahead of schedule from our Northwest Mondo field, which is tied into the Independence Hub. The single subsea tie back well is currently making over 40 million cubic feet a day and we have a 50% working interest.

After a quiet first year on the exploratory front, the first half of the year on an exploratory front, you can expect us to be more active as we near the end of the year starting with the Robusto prospect scheduled to spud in August, in which Murphy holds a 20% working interest. Prospect is located in Mississippi Canyon Block 568 and we'll evaluate a structure with the potential to hold 100 to 200 bcf of gas.

In Malaysia, following the completion of its work at Kikeh, the rig will be moved to test our potentially significant follow-on potential in the vicinity of the Rotan natural gas discovery in Block H which was announced earlier in the year. We're encouraged by this initial discovery and look forward to appraising Rotan and testing additional prospects in this area.

I mentioned to you at the beginning of the year a slight strategy shift of supplementing our grassroots exploration program with complementary bolt-on acquisitions to provide better access to greater opportunities. To that end, during the second quarter we announced the acquisition of the Tupper asset in British Columbia for Canadian $155 million.

The Tupper acquisition provides a significant entry into an onshore North American natural gas play with a low-risk profile with good economics and growth potential. Exactly the kind of opportunity we were looking for. While it's too early to speculate on reserves or production at this point, we will be active in analyzing seismic data and plan to drill additional wells this year to further assess the play.

Also importantly during the quarter, we announced the award of Block 37 in Suriname, offshore South America. Block 37 covers 2.1 million acres and Murphy holds and 80% working interest with the National Oil Company holding the balance.

Tee PSC we signed covers an initial six-year exploration phase with a 2-well commitment an acquisition of 3D seismic. Multiple play types exist in the Block and we think this acreage position adds further breadth to our E&P program and nicely complements our other worldwide focus areas. Meanwhile, [work] continues to access opportunities in several other areas, which can hopefully be discussed and detailed in coming quarters.

In our downstream business the Murphy U.S.A. program continues to deliver impressive results with sales volume currently averaging over 300,000 gallons per month per site allowing us to trap meaningful profit quickly during the times of healthy margins.

In May, we had the opportunity to purchase rather than continue to lease the real estate underlying most of our stations and we took advantage of that. At those locations, the rent structure will be replaced with full ownership by Murphy. With the track record this program has established, we felt it important to own rather than lease these locations.

The acquisition in total is expected to be approximately $315 million and will take up to a year to complete as stations will be released to us in multiple tranches. Currently we have 967 sites in operation after the closure of 47 underperforming sites.

Margins at our U.S. refineries, while impressive during the second quarter, have pulled back dramatically to start the third quarter. Run rates at our refineries are 34,000 barrels a day at Superior and 100,000 barrels per day at Meraux as maintenance is being done to the platform. Meanwhile retail margins have begun the quarter quite strong and when combined with high sales volume per site quickly add to the bottom line on that side of the business.

In closing, I want to continue to emphasize how important the year 2007 is to Murphy. The increase in production volumes, which will begin to be generated by the Kikeh field when it is placed onstream this quarter, will change us as a company.

In fact, Kikeh combined with other layered in developments will more than double our current production within two years. Importantly, we will also be getting back to the basics of exploring again in the second half of the year. Downstream meanwhile, is regaining the traction it lost post-Katrina as evidenced by this year of outstanding profit.

And lastly, the new management team put in place at the beginning of the year is making the presence felt. And I am confident are making the changes and decisions necessary to steer this company in the right direction.

I'm now ready to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Ben Dell from Sanford Bernstein. Please go ahead.

Hi, Claiborne.

Hello.

I had a couple of questions really around your acquisition strategy.

You sort of highlighted complementary and bolt-on acquisitions. Just wondering (inaudible) background sort of what led you back to Canada. Obviously it's an area you've been in before, but I guess it's an area that's been mixed success in terms of people's cash flow generation versus the amount of money they put in.

Ben, when we were looking at another opportunity, we came across the Montney play that was captured by this Tupper property. And once we had run the economics on it and saw what the wells could do and the repeatability of it and the cost of the wells, it became clear to us that this was a pretty good shot at putting together an extensive multi-rig multi-year program to add natural gas production and reserves.

And we looked at a number in the U.S. and took a stab at it, in fact in the Black Warrior Basin. The rest of the opportunities that we saw either to buy or start de novo weren't particularly appealing.

This one had all of the elements we were looking for in terms of predictability, in terms of good rate, in terms of pretty good sense of a sheet sand covering an extensive area and good infrastructure that we could put in. And so of all the ones we've looked at, this one ranked pretty high or came up pretty high on the list.

So I guess that captures it. And we didn't bet the Company. I've never been a proponent of that. And so we went in and spent what I thought was an appropriate amount of money for us to get down a learning curve. And then, but there's room to run here. So I thought it met a lot of criteria for us.

When you look at additional acquisitions going forward, do you think there'll be a more step out into new geographies? Or do you think the focus will tend to be on where you're currently based?

I wouldn't pen a stamp. I think that the ones that we've looked at, some have involved new geography. Most have not but some have and so I think the hallmark I would look for if I was you would be size.

I don't think you'll see them huge for us but I think they'll present opportunity to run. And also, I would hope some pretty high quality of assets, which I continue to believe is terrifically important.

And maybe if I could just have one last one which is more of a technical one. On the gas sales into Bintulu, how much gas do you expect to book from that contract this year maybe into '08 and '09?

We did our main booking last year when we signed the contract. And so we've got it in [a regnum] now until we get onstream and we can book more.

Now having said that, there may be some field development plans on some other than the three fields that we might file this year that might give us an opportunity that would be part of the contract, because we've got three fields initially and then we've got five or six other fields which make up the bulk of the gas. So there's other fields if we file field development plans and if they're approved, may present an opportunity this year.

Am I right in saying that on Kikeh when you get your production data through the end of the year, will that allow you to book more reserves or will you have to get to full volumes before you can book the incremental?

Don't know yet. The variables are going to be we've only booked what we can get from primary production and if we see pressure maintenance, or pressure response from our injectors, which we're going to be injecting from day one, I think it gives us an opportunity to book more.

We're probably starting up a bit earlier than we thought we might. Therefore the wells are going to be on longer, which gives us a better opportunity to see the types of pressure responsive that we need to book. And so I simply don't know until we kind of get into it.

Okay. Great. Thank you.

Thank you. Our next question comes from Arjun Murti from Goldman Sachs.

Thanks.

Claiborne, you mentioned some of the management changes you had and of course, some of those were in the downstream business. You obviously had a very strong refining marketing number this quarter in part because of the environment. Can you just talk about Meraux specifically and where you think you are in terms of having confidence that thing can run reliably?

You've got new personnel in place as the (inaudible) day-to-day management going forward? Or is there other more meaningful things you think still need to occur there from some sort of investment standpoint?

Arjun, I think from a management standpoint, we're in pretty good shape. I feel pretty confident we have our hands around the issues. What we're seeing a bit is some lingering effect from Katrina.

We lost a number of tanks during the storm and so we don't have as many as we'd like so we're doing a little juggling as far as storing crude, when to run it. We're using loop more as a storage area for us and some of it's caused us some headaches. Not [anything] you can't overcome, but it does sometimes prevent us from running quite as ratably as we'd like.

Some lingering mechanical issues, nothing that's huge. It's just the its and bits, our cracker was down for about 30 days in June, back up doing fine. Our platformer is going to go down for about two weeks. Plan turn around. And it just has to be done.

And so it's likely more kind of coming back up from Katrina, some lingering issues there. Feel pretty good about having our handle around just kind of general management systems issues.

Of course, we have other issues in the sense of manpower. Average commute for our folks at the plant now is, gosh, I've heard the number but let's say 45 to 50 miles whereas before, half our work force lived right there in the Parish near the plant. That's a bit of an issue for us. Recruiting's a bit of an issue for us.

All things you can't overcome but just they mount up and they do provide some pressure on us. But we're aware of them and we work them pretty hard.

That's terrific. Thank you. One other one.

I don't think you mentioned Congo exploration drilling. I believe you're shooting the CMES over there. Any update on timing of Congo drilling?

Not really. It's probably going to be driven by rig availability. We got a dandy of a prospect to drill up in the northeast corner of the Block that we for now call RR, and we'll get to it.

I doubt it's going to be this year is why I didn't mention it, but likely next year. It's there to do. It's just getting a rig and drilling it.

That's great. Thank you so much.

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

Good afternoon.

Claiborne, just remind me what sort of production volume you were expecting out of Azurite?

Nicki, I think we're in the 40,000 barrels a day gross range.

Okay.

That's where we ran our economics.

Great. Will you drill anything at Suriname next year? Will you be ready to do that?

Unlikely. We're going to shoot a 3D seismic program probably beginning of next year. We have commitment to do that and then two wells. If we did, it'd be in the second half of the year.

Okay.

Depends on getting a boat, kind of hard to get sometimes in this environment, shooting it, but It's all to do. We have a six-year exploratory period so unlikely I wouldn't commit to you that we'll drill a well next year, but we'll certainly shoot seismic.

What kind of well costs are you talking about there?

Likely $30 million, 35 to $40 million in that range. I'm fishing a little bit, but I'm recalling from when we looked at the play and assuming some growth in rig rates. But I think that's a rough range.

And then, just back to Malaysia, has anything more been accomplished at Kakap in terms of the FID there?

Well, it's driven by our operator. So we're kind of in the throes of waiting for them to tell us when they're ready to go but we're awfully close and I would expect to sanction this year.

Great. Just one more.

The guidance that you gave for exploration expense 40 to 60. That's a high number but, Claiborne, based on your comments, it doesn't sound like the activity level's going to be that high in the third quarter. Can you just talk about what's baked into that number?

It's more G&G, Nicki, than it is drilling. And we've got some seismic in Blocks 309 and 311. There's some tougher seismic thrown in there. And we're doing some specific Block purchase of 3Ds in the Gulf to define some prospects a bit better. And so that as much as or more than drilling is going to be the driver this quarter.

Great. Thanks a lot.

Thank you. Our next question comes from John Herrlin from Merrill Lynch.

Yes, hey, Claiborne. With tougher, I'm assuming horizontal developments in the Montney, is that correct?

Yes, that's correct.

What do you think your spend rate will be kind on an annual basis in that play?

No, I don't have a number for you, John. The wells to drill and complete frac are somewhere between 5 and $6 million Canadian. I think it's a pretty good number for you.

It depends on how many rigs you get going in the area. And I think you can assume that if we see what we think we're going to see and we have five wells already on it that we've already drilled and have been tested by the prior owner, you'll see at least a 2-rig program.

So you could get after it pretty quickly. We'll start producing, at least our current plans are in mid-year next year.

Okay. Another one.

Why do you have to buy the real estate in tranches? Any particular reason or is that just how you decided to do it for the gas stations?

It's driven by the particular ownership structure by the current owner.

Okay.

Last one for me is Gulf of Mexico, you're still declining. Volumes seem to be a bit lower than what we were anticipating. Are we going to stabilize here or should we look for slightly lower volumes going forward?

You know, we hit the quarter pretty hard, John, with down time and because of anticipation of storms and then some additional mechanical down time that we actually haven't experienced so far this year. And so I would think that there's a reasonable chance we'll exceed the number you're seeing.

Okay. Good.

And with the upcoming lease sale, are you going to be aggressive or just what you normally do?

No, I don't see any wild deviation from what we've done in the past. I haven't really looked at the prospect so I don't have a great sense about which way we're going to go. But I don't sense anything that's unusual out there.

Great. Thank you.

Yes, sir.

Thank you. Our next question comes from Paul Cheng from Lehman Brothers.

Hi, everyone.

Hey, Paul, how are you?

Very good. Claiborne, I know that you say is probably still premature, but can you give us some estimated, in Canada, the new properties that you got on the per well basis, what kind of production and reserve expectation that you have?

I can give you some thoughts on production. I don't have [to] hand reserves. These wells go anywhere from 2 million a day to 6 million a day, some are as high as 9, but that's a real outlier. So two's kind of low, so 4 or 5, around there (inaudible).

And what kind of well spacing that we should we be expecting or assuming?

You know, Paul, I don't have that in hand either. I just don't.

Okay. Maybe that if you don't mind have Dory to give me a call?

Sure. Absolutely we'll follow-up with you.

Great.

Claiborne, I know you that don't like to really break down between refining and retail. In the second quarter, I mean if we back in the $24 million of the charge, (inaudible) you really earn 131, that's a huge number. Any kind of rough percentage that you can share?

Paul, if nothing else, you're persistent. I think you can safely say refining stole the thunder of the quarter. And Superior was well placed, Meraux was well placed. And Meraux, if our cracker had been running, quite frankly, could have been significantly better. But the refiners really captured it.

So we should assume, say, 90% plus this from refining?

I wouldn't let myself be pinned down, but I think that's a little bit high. I think the retail guys did pretty darn well, but the refiners just did exceptionally well.

And in Meraux, I mean, this has not been able to, I mean after Katrina, you've never been able to really run that to (inaudible) capacity and I think that the cracking unit is even having a little bit lower utilization rate.

You mentioned that the way to how you manage it. Is that a hardware issue here also that we need to maybe make some investment or that you think is really just the way how you run it?

I think management-wise, we're, as I say before we're in pretty good shape. We need to do some work on preheat in our crude unit and that's been an issue ever since we expanded the plant three or four years ago. That would get us up to the higher rate. That is the single biggest issue that would prevent us from running faster.

Unit outages, hydrocracker outages from time to time, platformer, FCC, combined are what bring us down. But I think if the plant was up and running and everything was properly functioning, you would see 115,000 barrels a day, which is what we were before the storm. And if we did some work around our crude unit, then basically heating the crude up a bit more than it currently is you'd probably get to 125.

Right. And then how much that may cost and how long you may take?

Well, we've got a turnaround planned, I think, in '08, Paul. I don't have it right in front of me what we're going to do at that turnaround but I suspect we'd address at least the crude unit there.

Okay.

And, Claiborne, you I think mentioned in the past that the potential [at] Superior you may want to do some joint venture (inaudible) to expand you to 200, maybe as much as. Any update on that or still just on the table as a joining (inaudible)?

The latter.

The latter. Okay. A final one.

I think that this is for Kevin. Kevin, maybe I miss it. Did you mention that in the $0.80 to $0.95 earnings guidance what is the oil and gas price assumption that you are using?

And also what kind of margin assumption are you assuming the margin of today or you're assuming trending down, trending lower, what kind of assumption you're using?

On a margin, it's basically today's margins trending down a little bit. Let's see. For the realized oil price is about in the low to mid 60s. Gas price of about a little under 7.

Excellent. Thank you.

Thank you. Our next question comes from Mark Gilman from Benchmark Company.

Claiborne, good afternoon.

Mark.

A couple things, if I could. Refresh my memory on the play types in Suriname.

Mark, they're miocene and (inaudible). And I'm fetching back, again, to three months ago when we first looked at it. Structural, basically, we have a 2D, and you can see bumps pretty good structures. And the issue is with 3D, can you light them up a bit more, get more definition on it.

(Inaudible) two plays?

I'll say, yes but I won't commit to it. There's some fans that are also out there that you can see on seismic, but let us get 3D. I'll have a better sense of whether or not these things really are defined more by amplitude or more by structure. But right now you can see pretty good structuring, I'll say that.

Okay. Claiborne, you opened an Indonesian office, I guess, it was back earlier in the year. Anything to say about what you're doing there?

Mark, we've got six people in the office now and we've looked at, oh, I suspect 10 things. I think you'll see us do something by the end of the year. I think you'll see some acreage that we'll pick up. And I think you'll see us be more and more active over time.

We've looked at a number of things, we've bid on a few things, hadn't gotten them. I think you'll see us pick up acreage and I think there's a very high likelihood of additional acreage there by the end of the year.

Okay. Just one more.

The Canadian heavy production in the quarter was a little lower than I thought it was going to be. Any particular reason? Will it snap back second half of the year?

Some of it is driven by BP's issues at Whiting, quite frankly. We're having a hard time placing some of our seal crude in particular. Of course we had road bands a bit in the quarter, but that's predictable and kind of built in. You understand those issues.

And so, mainly that. I will say in general on our seal nonoperated, the new owner has got a much less aggressive stance than the prior owner as far as drilling. So if you compare it to where I thought we'd be on our budget, on that component, we don't have as much production as I would have thought simply because they're going to have a different view of how to operate the field. And they may be looking at tertiary stuff sooner rather than later there.

Okay. Thanks a lot.

Welcome.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Laura Stevens from Arkansas Democratic Gazette. Please go ahead.

Yes, I have a follow-up question regarding Mr. Deming's comments on the Meraux refinery recruitments. How many work there and how many do you think that you might need still?

As far as how many work there, I don't have the number right, but I'll get it for you in a minute.

Okay.

From a salaried standpoint, we're probably 15 shy, 10 shy, something like that.

Okay.

Scattered throughout. No one area that needs it. And we've got about 275 people in the plant.

Okay.

Another question I had for you was Robert Maltby on Forbes.com last week listed Murphy as one of 10 prime takeover targets for private equity players. Do you have any comments regarding that?

You know, it's interesting, we've been included on various types of those lists for at least 10 years.

Okay.

And most especially in the last five. And so there's no news there.

Okay.

It's -- we've got the types of assets that people find particularly attractive and so that attracts attention, which I kind of like.

Okay. Well, thank you very much.

Thank you. Our next question comes from Louis [Rott] from Barr Henley.

Hey, Claiborne, how are you doing?

Good, Louis, how are you?

Good. Congratulations on a great quarter.

Thank you.

Last quarter you guys missed your guidance slightly because of this mark-to-market charge on contracts and downstream, if I understood that correctly.

Yes, it was painful.

Was there any kind of similar impact this quarter or was that just a nonissue this quarter?

No, we had a little over $1 million that we had to mark-to-market, Louis, but we took it into consideration this time.

Okay. So --

We didn't make the same mistake.

Yes. Okay. All right. Great. That was my question. Thanks a lot.

Thank you. And we have a follow-up question from Mark Gilman. Please go ahead.

Hey, Claiborne, I assume giving the specifics of the PSC for Kikeh that your entitlement, at least during the first year of production, is going to be damn close to 100% of your working interest given cost recovery. Is that an accurate assumption?

100%'s too strong and I haven't seen it, but we're at 80% of the cost recovery sign. Let me see --

75.

75% of cost recovery and then our profit share is around 84% on the profit piece. And so if you put those together, 70%, say, Mark, is not unreasonable for our 80% interest.

Okay. So roughly 90% of your working interest? Right?

Yes, that's a good number, Mark.

That's close, it's close.

Okay.

Can you just update us in light of both the Wal-Mart retail station or the land purchase as well as Tupper what the capital budget outlook is for the balance of this year and next?

Mark, for this year, at the end of the first quarter we had put in the 10-Q to be about $2.2 billion Cap Ex. Now you have to add Tupper to that, which is right under $150 million. Everything else relatively flat.

And that includes Wal-Mart, what we think will close for Wal-Mart this year. Part of Wal-Mart will drag into next year. It's kind of early to do next year's numbers. I think they'd be down a little bit from those kind of numbers.

Thanks, Kevin.

Thank you. Our next question comes from Gene [Gilfey] from (inaudible).

Claiborne, when you're talking about the Congo, you really didn't mention the Northern Block. (Inaudible) determination of timing there prospectivity, whether or not you want to bring in a partner? Whatever you can share.

Gene, likely look for a partner. And that won't slow things down, it's just going to be part of a concurrent operation of working on prospects and likely bringing in a partner. So I would likely think in our budget, haven't foreseen it that we'll put in a well for next year there.

Thank you.

And we have a follow-up question from Paul Cheng. Please go ahead

Hi, Claiborne. Theoretically there's a speculation of what you will or will not do with your downstream operation. Wondering, you may be able to elaborate maybe more in terms of what you look in the future in the long haul whether that downstream will be really part or do you consider or think that downstreams should be part of the core operation in the Company or that your core competency is more (inaudible) in the upstream.

And also that whether when we're talking about downstream, you really need to have refining and marketing together or that you will be okay if you just own piece of that but not the other.

To answer the last one first, I think refining and marketing together makes a bit more sense today than it would have in the past because with the real tight refining situation, there's a better synergy between the two. And one, refining margins go down, for example, retail margins pretty much pop up pretty quickly and offset.

Likewise when refining gets better, retail comes down. It really smooths things out more so than in the past when there was excess capacity in the refining business and they were two independent businesses.

And so putting together the chain when we did, I think in hindsight was it worked out pretty well for us because I think we'll have a bit of competitive advantage over time. But in that particular asset class having by having both and having as large and as productive stations that we have. So I would likely think that those would stay together.

What I've said about R&M versus upstream is that there's been a real increase, accretion in value in the downstream business in the last three years, two years, one year in particular. And we're certainly not unaware of that. And so I won't rule anything out, I won't rule anything in, but certainly it's something that we as managers have to be very cognizant of and understand what's the best way to reflect value for our shareholders. And we're all pretty big shareholders around here.

Sure. Is there any kind of timeline that you may set for yourself or for the board? You may look at this particular strategic issue in more detail, say, sometime in the future a year from now or the six month, two years, or that you just go along with that and don't really have a set timetable?

Paul, I wouldn't impose a timetable on myself or anybody in the Company in that regard for a big strategic issue like that. Let it be said that we're aware of the value increase in that line of business and it's been a good hold for us in hindsight. And so we're certainly aware of it and want to make sure that we maximize returns to our shareholders.

And, Claiborne, it seems that the (inaudible) test in the new head for the entire upstream operations probably about six months now. Anything that you guys can share what is (inaudible) in the U.S. operation?

We've done a pretty good review of our inventory of prospects, Paul. And what I think you'll see on a go forward basis is we're going to likely participate in a pretty extensive seismic shoot called Wide Azimuth in the Western Gulf, particularly in Green Canyon to see if we can better define prospects.

We've got a pretty good view. We know there's structuring there and probably a 4-way dip. But before we drill these wells, which are now, as you are aware, $100 million plus, I think we'll have a better sense of image below (salt) before we did it.

I'm as happy today as I was two years ago to have that acreage in Green Canyon, but with a different set of eyes on it we want better definition before we spend the money on what are now pretty expensive wells. I think that's going to be the biggest change you'll see is a slowing down in that particular piece as we go forward, I don't think that's a bad thing.

Excellent. Thank you.

Thank you. And we have no further audio questions. At this time I'd like to turn it back to management for concluding comments.

Thank you very much.

Ladies and gentlemen, this does conclude the Murphy Oil Corporation second quarter earnings release teleconference. You may now disconnect. Thank you for your participation, and please have a pleasant day.