Murphy Oil Corp (MUR) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you very much for standing by, and welcome to the Murphy Oil Corporation third quarter earnings release. During today's presentation, all parties will be in a listen only mode and following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, October 25, 2007. At this time, I would like to turn the conference over to Kevin Fitzgerald, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thanks, operator. Good afternoon. In Claiborne's is absence I'll be handling today's call. I'm joined by John Eckart, our Vice President and Controller, Mindy West, our Vice President and Treasurer and Dory Stiles, our Manager of Investor Relations. I'll now turn it over to Dory.

Welcome, everyone. Thank you for joining us. Today's call will follow our usual format. John will begin by providing a review of third quarter 2007 results, Kevin will then follow with an operational update, after which we'll 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 8K filed with the SEC. I will now turn the call over to John for his comments.

Thank you very much, Dory. Let me wish my -- give everybody listening in a good day, for my part.

Net income for the third quarter of 2007 was $199.5 million, that's $1.04 per diluted share. That compares to the third quarter of '06 where there was $224.1 million of earnings and that was $1.18 a share a year ago. The 2007 third quarter earnings are below those of the same quarter of 2006 primarily due to lower earnings in the company's refining and marketing business, which experienced much tighter refining margins and lower retail marketing margins as well. Better earnings, however, in our exploration operations offset a part of the decline in the refining business. On a year-to-date basis for 2007, we earned $560.4 million, $2.94 a share. And for the year-to-date 2006, $556.3 million, the same $2.94 a share, so we're flat year-over-year for the nine months.

Looking at the third quarter results for our separate businesses, in our exploration and production business, we earned $150.8 million, that's compared to $118.7 million in the third quarter of '06. The earnings increase was attributable to higher oil sales prices and sales volumes. No repeat of heavy Terra Nova repair cost which occurred in the third quarter of last year while the field was down; and an income tax charge of $17.8 million that occurred in the third quarter of last year and this elated to a 10% rate increase in the U.K. on oil and gas profits. Total oil production was 87,962 barrels a day in the 2007 third quarter. That compares to 79,642 barrels a day in '06.

The most important production event during the quarter was a start-up of the Kikeh field offshore Sabah, Malaysia. This field produced 9,553 barrels a day, but the first sale of Kikeh crude did not occur until early October. There was no revenue in the third quarter of '07 from Kikeh.

As we make our preliminary earnings release, we're still working with our independent accountants to determine whether the lease associated with the Kikeh floating production storage and off-loading vessel known as an FPSO should be accounted for as an operating lease or as a capital lease. We've tentatively accounted for this as an operating lease. If the final determination is that it should be a capital lease and use that treatment, we would increase our balance sheet long-term assets and our long-term liabilities by similar amounts. There would be little cash flow or income impact but our balance sheets would increase by about $550 to $600 million on both sides of the ledger. This determination will be completed before we file our form 10-Q for the quarter.

Our average oil sales prices were $63.96 per barrel in the third quarter '07 versus $55.50 in the 2006 period. Natural gas sales volumes were $56 million cubic feet per day in '07 versus $74 million in the 2006 period, with the decline mostly of fields in the Gulf of Mexico and on shore South Louisiana. Natural gas prices in North America declined from an average of $6.90 per Mcf in 2006 third quarter, to $6.22 in 2007 third quarter.

Exploration expenses were $42.5 million in third quarter '07 versus $36 million in the third quarter of '06. And the 2007 expenses include an unsuccessful well in the Terra Nova Far East area offshore in Newfoundland. Our administrative expenses in the U.S. are higher in 2007 period and this includes a donation of a former administrative building in New Orleans. The 2007 quarter includes income tax benefits in Canada of just over $8 million and these are favorable settlements and other adjustments related to prior years estimated taxes that were accrued. Similar amounts, however, of Canadian income tax benefits also occurred in the third quarter of 2006.

In the refining and marketing end of our business, we earned $73.2 million, down from $128 million a year ago in the third quarter. The earnings decline in this business is mostly due to weaker refining margins in the Gulf Coast U.S. market and lower retail marketing margins as well. These margins were adversely affected by rising crude oil prices which outpaced the sale prices for refined products.

Operating results in the U.K. market were also lower on the just completed quarter compared to 2006. Our corporate net cost after taxes were $24.5 million in the third quarter of '07. That's up slightly from 22.6 million a year ago and these higher corporate after tax costs were caused by a combination of higher net interest expense and higher administrative expense.

At September 30, '07, our long-term debt amounted to $1.5 billion, approximately. That's 23.5% of capital employed. With that, I would like to turn it back over to Kevin.

Thanks, John. Since our last earnings conference call, a couple of key announcements and milestones occurred, which have quite favorably altered our asset and earnings mix of the Company. Milford Haven refinery purchase was announced in August. Murphy's purchase in the remaining 70% of 108,000 barrel a day refinery from [Philtow] for $250 million plus inventory and we expect the transaction to conclude at the end of November. But for purposes of our guidance that we issued in the release, we'll assume the year end close. Having an effective 100% owned large refinery in our downstream system, particularly one located in the U.K. will improve overall diversification of our downstream portfolio and it provides us with needed scale. Refinery purchase combined with the purchase of property underlying our Murphy U.S.A. stations in the Wal-Mart parking lot, it's a transaction we announced last quarter, puts Murphy in a much more favorable position regarding our downstream operations for the long term.

Also, on August 17th, production began from our Kikeh field offshore Malaysia. Current field rates are between 45,000 to 50,000 barrels a day from six wells ramping to an expected 50,000 to 60,000 barrels a day by year end. Those are gross rates; and reaching a plateau level of 120,000 barrels a day by this time next year.

Not only significant for Murphy, Kikeh field achieved a variety of firsts. The first deepwater producing field in Southeast Asia. First use of a production spore outside of the Gulf of Mexico. And by achieving first production within five years of discovery, the fastest seaport or stand alone development outside of the Gulf. Most importantly, however, we're very pleased with the well performance. We had our first lifting from Kikeh in early October. The Kikeh field provides substantial reserve additions and cash flow to Murphy in the coming years and will become a cornerstone of the overall upstream portfolio.

Also, as you might have seen, Murphy was very active in the October OCS lease sale, where we spent over $100 million and picked up 26 of the 31 blocks we bid on, in what was, as expected, a very competitive sale. We're already active in the eastern gulf with two producing fields, 17 hands in northwest Mondo and our new blocks extend our position in this Miocene Age, amplitude supported play. We also picked up several blocks which have attractive Jurassic-Cretaceous Age prospects that while carrying a higher technical risk, do provide larger oil and gas targets. We'll looking to be active in this part of the Gulf and with these larger inventory of prospects we'll be bringing forward our drilling plans in the coming months. In fact, this season's Gulf of Mexico program will be a focal point in our future exploration plan, and it's a nice complement to our already strong acreage position over in Green Canyon.

Speaking of exploration, in the deepwater Gulf, we're currently drilling the Robusto Prospect which we have a 20% working interest in. Spread in early October, targeting an amplitude supported Miocene prospect in the Mississippi Canyon. It is evaluating a structure with the potential to hold between 100 and 200 Bcf for gas and results are expected next month.

In deepwater Malaysia, with Kikeh now in production, the Ocean Rover will be available to drill a few exploratory prospects in Block H this quarter. The first floor will be on a prospect called Kimani, a three-way structure which has both oil and natural gas potential. This well will be followed by the [Berous] natural gas prospect in the southern part of the block. In British Columbia, drilling will also commence in our Tupper acerage we acquired this summer, and most of the beginning of what is planned to be an ongoing drilling and development program, with first production estimated by late 2008. Upper area acquisition provided us entry into what could be a significant to Murphy, onshore North American natural gas play and importantly one having low risk but good growth potential.

While next year's budget is still being worked, you can expect us to drill a bit more overall exploratory wells in 2008 than we drilled in 2007. Drilling areas of focus will include several wells offshore Sabah, targeting both oil and natural gas as well as additional natural gas opportunities offshore Sarawak, recommencement of drilling offshore Congo following our CSEM prospect analysis work, initial drilling in Suriname or a new country entry during the latter part of 2008, and finally, several wells in the eastern area of the Gulf as previously mentioned.

Now, before I get to downstream, I would like to make a few comments regarding the situation in Ecuador. As you know, Ecuador has placed into law an increase in the levy it assesses on revenues in excess of a reference price from 50% to 99%. This is reflected in our fourth quarter guidance numbers. The current reference price is a little over $23 per barrel. Ecuadorians have remarked they would like to get away from production share and contracts and replace them with risk service contracts. You might recall that when we first entered Ecuador, we had risk service contracts that were then changed at the behest of the government, to production sharing contracts in the mid to late '90s. While it's still early days our plan is to try to negotiate, also use any dispute resolution procedures that may be available. If the new levy remains in effect, our projects from Ecuador will become uneconomic and could lead to an impairment charge.

Downstream continues to be a strong provider of income and cash flow with margins alternating between refining and marketing segments. Fortunately for Murphy, we're able to position to capture income from either side.

Murphy U.S.A. program continues in posting impressive sales volumes averaging over 300,000 gallons per month, per site during the quarter. You might recall that as part of the Wal-Mart land purchase transaction, we took the opportunity to close 47 underperforming sites in the U.S. Currently, we have 972 sites in operation. Nonfuel sales at these stations are also continuing the rising trend equaling over 12,000 per month per site, a margin sufficient to cover most of our labor and maintenance costs by itself.

We plan to further expand our retail presence by continuing to add sites with Wal-Mart, but at a slower pace as Wal-Mart's own building pace slows. We'll supplement that growth by purchasing select commercial stand alone sites within our core operating area where we see high traffic and the ability to utilize our strong, existing brand and supply chain. This concept is in its infancy currently with only two stations in operation but will lever with our competency in gasoline, nonfuel sales and brand name recognition while continuing our low price gasoline strategy.

Margins at our U.S. refineries while quite impressive during the second quarter pulled back sharply in the third quarter. Run rates at our refineries were 36,000 barrels a day at Superior, 110,000 barrels per day at Meraux. Today's margins were even weaker than those recorded during the third quarter.

As mentioned earlier, we're currently in the middle of our budgeting process for 2008. What we are seeing so far shows strong production growth driven by Kikeh and correspondingly strong cash flow coupled with continued development of existing projects and attractive and impactful exploration program. Development expenditures will include, Sarawak gas, Azurite fuel in the Congo, Thunderhawk in the deepwater Gulf and in the Tupper area in western Canada.

Emphasis on downstream will be increasing strength and reliability on the refining side and expanding and levering our retail opportunities.

As already outlined, we're increasing in a measured way, the face of our exploratory drilling. Of course, Murphy as a company is bigger than we've ever been. I believe we have business opportunities in place to further grow from here. And now I am ready to take your questions.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator INSTRUCTIONS) One moment please for the first question. The first question comes from the line of Robert Lynd with Simmons & Company. Please go ahead with your question.

Good afternoon.

Hi, Robert.

Hey, Kevin. Question regarding Milford Haven. Going to move to -- with the additional interest you acquired there from 36,000 barrels a day at throughput to about 120. Can you give us an idea where cracks are for that refinery today and what the outlook is for the balance of the year?

Actually that refinery is 108,000 barrels a day.

Ok.

The crack spreads over there -- the margins have been pretty decent. They hang in there pretty well over the last couple of quarters. They have declined just like they have here in the U.S. Now, even though we expect them to close in November for purposes of the outlook, we assumed a December year end close so there's no additional numbers in there. There is, however, a charge, about $10 million, a little over $10 million pretax charge, related to some pension costs, for [Tal's] plan, that we'll have to cover upon closing the transaction. So, that is in our third quarter numbers.

Ok.

Fourth quarter guidance.

That is in the guidance? And in the guidance, the range, $0.75 to $1, can you give me an idea of what percent of that is attributed to the R&M segment?

The R&M side, we're showing margins, we're seeing weaker margins -- margins go, if you go back to June, the margins were really strong and they've just steadily declined since. Today at Meraux, we're negative. Superior is going to be kind of-- last month of October is the last month of the asphalt season, so we'll see some declines there and the retail side is having trouble keeping up with raising prices fast enough to really attract a lot of margin. So, on the downstream side, that estimate includes anywhere from just a couple million dollars maybe to the $12, $15 million range. It is pretty light. But that includes that charge for Milford Haven as I mentioned a minute ago.

Ok. And just, with respect to Robusto, is that prospect near any infrastructure and is it -- could it be considered a tie-in candidate?

I think it is a tie back candidate for Kikeh. It is a tie back.

It is. Thanks, Kevin. That's all I had.

You're welcome.

Thank you, sir. The next question comes from the line of Paul Cheng with Lehman Brothers. Please go ahead with your question, sir.

Thank you. Hey, Kevin, how are you doing?

Good, Paul and you?

Very good. On the gasoline sales, you guys are doing real well. Can you share with us, the same store sales yield the year for those stores that have been open for more than 12 months?

I think we're up in the neighborhood of 4%- 5% in volume.

Kevin, do you know whether you guys are capturing market share or that is in the marketing area that you guys are doing is actually going at that pace?

You know, Paul, it is hard to say but with high prices, in the times of high prices with the Wal-Mart, the tie-in with the Wal-Mart and the low pricing strategy, I would say we tend to get market share from others, because of that situation. You know, the overall macro numbers in the area, I don't know -- gasoline demand is still increasing at some rate. I think our rate is faster than what you're seeing just from a pure demand standpoint.

And that I think we all witness that the Shop Rite and right prices, we saw the retail margin being squeezed. As of this point, is your retail operation profitable?

Yes.

Yes?

Yes.

You say Meraux, the refining is actually negative for you guys at this point?

Yes, it is. What we've seen is in the -- not only the rise in the crude prices but a lot of crude we buy, the differentials, you know, based off of WTI and the differentials between the crudes we're buying WTI have been narrowing. It has caused us to really good squeezed from the refining side.

Two more questions. One in heavy oil, Canadian heavy oil, I think at one point it was in the 14,000, 15,000 barrel per day. I think your latest guidance is for the fourth quarter, around again in the 12,000 barrel per day. Is the 14-15, given the weak Canadian heavy oil prices that is no longer the target or just still the target, you guys going to do it? And then final one, are you going to do more on the exploration and do you have a number of wells you're going to drill in 2008 versus 2007 by region?

On the heavy oil question, you know, part of the slowdown, drop in the production, if it goes back to late last year when we slowed down the drilling program. And as you know, the prices up there have suffered. This year, we've had a lot of weather issues up there. Also, for the 50% interest properties, the operator hasn't been drilling wells. So, it is just a combination of those sorts of things that results in that lower volume. As far as the total number of wells --

Kevin, I understand what causing the production not to be at the 14,000, 15,000 at this point. I guess the question is, you're looking out for the next one to two years, the 14,000, 15,000 barrel per day is still the target or we should assume the pricing is not improving that you're going to be more stuck with maintaining just on the 12,000 barrel per day?

I would look at it as kind of maintaining the current levels.

Okay.

As far as the wells last year, Paul, it is a little bit too early in the overall budgeting process, especially when you get down to looking at how many wells in the different areas but you know, we're going to do a bit more drilling. It will be a measured pace with the price of wells and the like, we'll be looking for help and looking for some partners. But it will be a big faster clip than what we've done in the last year or so.

Kevin, do you have a rough number of what is the total exploration Cap Ex for next year?

Not yet. Again, we're in the middle of the process. It would be too early at this point.

Sure. Ok. Very good. Thank you.

You're welcome.

Thank you, sir. Our next question comes from the line of Ted Izatt with Bear Stearns. Please go ahead with your question, sir.

Hi. Good afternoon, everybody. Congratulations on your quarter. I was wondering in previous calls, you've talked a little bit about maybe doing a major acquisition, given your balance sheet and everything like this. Where does this stand and what kind of parameters would you look at if you were to do something?

Well, we've never really talked about major acquisitions. We've always referred to more of the bolt-on acquisitions, of which we've done three this year. The Tupper acquisition in western Canada, which complements our activity already up there, then the two downstream acquisitions, purchased in the land under Wal-Mart which makes a lot of sense for us and then purchasing the 70% interest in Milford Haven. You know, additional -- you never say never, but that's the types of things that, you know, is more the kind of thing we can do.

Ok. So, it is fair to conclude or assume you probably wouldn't be doing a major acquisition, more bolt-ons? I may have misunderstood the previous call. I understand.

It has always been the bolt-on sort.

What about the capitalization of the company, how high would you be willing to take the debt levels from current levels?

Well, we said this year that we would be in the upper 20s -- upper 20% type percent. Murphy's history in the past, if we had a good reason to bring it up, for instance back in the '70s, early '80s, with the [many] infield, we brought it up over 50% but then we had this big asset with a lot of production coming on that would -- that was going to help pay that debt down. And so you know, we don't particularly saddle ourselves with -- it depends on the opportunity that presents itself and you know, how soon will it produce cash flows and the like that you could pay down any debt that you would bring on.

Ok. Ok. Thank you.

Thank you, sir. The next question comes from the line of Nikki Decker with Bear Stearns. Please go ahead with your question.

Hi. Sorry, that Bear Stearns is dominating here. My question's on Block H. The drilling, I assume is around the Rotan discovery?

Yes. It is not far away.

Is this all, though, sort of in the interest of gathering sort of enough discovered reserves to develop as a group?

Yes, I think in that overall area, to justify a pipeline and a leg in, and you've got other gas discoveries by other folks in the area, you probably need amalgamation, 5 to 7 TTF sort of thing. Now [Timane] has some oil, possibilities too, it's not just a totally gas prospect. Berous is more gas. But you could build up the gas. We would love to find some oil there.

I guess what I'm getting at is, is the construction of this pipeline incumbent upon Murphy finding additional gas or what needs to happen before the development of the gas prospects in that region starts?

It is not totally incumbent just on us. Just finding gas in that overall area. But you know, exactly what would make it a go, I don't know.

Who's building the pipeline? Would you participate in that?

No. We wouldn't.

Who is building it? Is it Petronoff?

Petronoff's would build it.

I was under the impression that the construction was going to start sometime this year.

I haven't heard that.

Ok.

We'll check on it and see but I don't know that.

Ok. Great. Let me just ask one more. The prospect that you picked up in the latest lease around the Gulf of Mexico, the Lloyd Ridge 370, can you just talk about that? That was one of the higher-priced prospects. Could you just talk about the schedule and what you saw there that was attractive to you?

All of these prospects are -- they're supported by -- in that area, was supported by the three B, the good Miocene type of prospects. What I would like to do there is be able to find enough. The prospects that we've gathered out of the whole lease sale, different prospects, you love to be able to -- someone would be tie back candidates but you would love to be able to put another hub in there for something. The actual geology for that particular prospect, I don't have an answer for you.

Have you -- have you developed any schedule for drilling on that block yet?

We're looking at drilling several wells next year. The order of the wells and exactly which prospects hasn't been determined yet.

I see.

That has to be part of the budgeting process, too, Nikki, that will become a lot more clearer over the next few months.

Thank you.

You're welcome.

Thank you. The next question comes from the line of Kate Lucas with J.P. Morgan. Please go ahead with your question.

Hi, good afternoon. I have a quick question. A couple of quick questions on Kikeh. One is -- I believe that you were able to book more reserves as of year end 2007 after starting some of the enhanced recovery methods upon first production. Is that right?

Well, we'll certainly take a look at that but you have to show that the -- be able to do a direct correlation between -- we've been pumping in water -- water injection from day one, and you have got to show direct correlation to that before you can book the additional reserves. It is certainly a possibility. But they'll have to work through that and work the numbers and the pressures and that sort of thing to see but it is certainly an area that, because of the early start in the production, earlier than anticipated, that it is a possibility.

All right. I know that your outlook for booking the remainder of the reserves at Kikeh was based on -- you've given outlook based on a prior crude price assumption. If crude were to stay relatively in line with where it is now or say around $80 at year end, how would that change your I guess outlook for what you're able to book?

Kate, this is Mindy. Crude prices don't have that much of an impact, not nearly as much as what you might think on what the overall bookings are. Certainly, our expectation is that Murphy's net for the field which was sanctioned at 440 million barrels will be somewhere above 200 million barrels, somewhere between 200 and 250.

Ok, great. Could you just repeat the year end exit rate you mentioned earlier for Kikeh?

Between 55,000 and 60,000 gross.

Great. Ok. Thanks very much.

You're welcome.

Thank you, ma'am. The next question comes from the line of Ben Dell. Please go ahead with your question, sir.

Hi, guys. Yes, I just wanted to pull off on another Malaysia question, on Saranak, and on the gas contract. Can you give us some indication, obviously Asian LNG prices are pretty strong at the moment. How do your contracts work in terms of your realized price on those gas sales?

Ben, all we've ever said is that the gas price is related to the LNG delivered price. And we'll end up with a mid to upper teens type of rate of return on that project, and that hasn't changed.

Ok. Can I just confirm when you expect first gas and going back the gas reserve booking question, do you believe you'll be able to book any those reserves at year end this year?

It is a possibility with phase two of some plans yet approved. First production -- you know, you are looking toward the first quarter of '09.

Just lastly, in Canada, obviously people are still waiting to see what the royalty change is. Do you have a view on how that would change your outlook for Canadian activity if the royalties that were proposed actually went through?

Well, you have to imagine that it would hurt activity. You've had several other companies announce that they would slash their capital budgets by huge amounts. You got to assume that would have an effect across the industry like that. I know a lot of the smaller gas players were fussing too. You have got to assume it would have a negative impact.

Ok. And just lastly on a financial question, as your free cash flow generation ramps up over the coming years, as your production picks up, would you expect buybacks to be more on the table as you go forward?

Oh, it is something to consider. You know, a situation, an issue that we've dealt with a lot over the years, it's ameliorated now some since we've had our two splits. We just never had that many shares out there. Now we're up to the $180 to $190 million. We see a lot of prospects on the board. Got a lot of things; our debt will be inching up. We have a lot of places to put the cash flow, from what we are seeing now. But the Board looks at that, they consider that. It is one of the options to use that cash. I wouldn't build anything in.

Ok, great. Thank you.

You're welcome.

Thank you, sir. (Operator INSTRUCTIONS) The next question comes from the line of I. Tom Bernstein with Friedman, Billings and Ramsey.

Quick question. Could you put some color around your fourth quarter guidance in terms of assumptions?

Yes. Hey, Tom, this is Dory. I'll be glad to help you with that. Built into the $0.75 to $1 range, that's based on production of the 118,000 Boe's per day, sales will be in an overlift position about 120,000 Boe's per day. We base that on a worldwide realized oil price in the neighborhood of $67.75 worldwide, realized gas price about $7.20. Kevin mentioned the downstream case would be a contributor in the amount of approximately $2 million up to maybe $12 million. Exploration expense will be up to $100 million. We have three potential dry hole wells in there. Robusto, Timane and Berous, that would play into factor there. Corporate side, we're -- form the fourth quarter, estimating loss of $30 million.

Ok. Great. Thank you.

Thank you, sir. Gentlemen, at this time, there are no further questions. Please go ahead.

We appreciate everybody's participation in the call. We'll see you next quarter.

Ladies and gentlemen, this does conclude the conference call. We thank you very much for using ACT . Have a great day.