Murphy Oil Corp (MUR) 2007 Q4 法說會逐字稿

Welcome to the Murphy Oil Corporation, fourth quarter earnings release. (OPERATOR INSTRUCTIONS) This conference is being recorded Thursday, January 31, 2008. I would now like to turn the conference over to Claiborne Deming, President and Chief Executive Officer of Murphy Oil. Please go ahead.

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

Thanks, Claiborne. Welcome, everyone, and thanks for joining us. Today's call will follow our usual format. Kevin will begin by providing a review of the fourth quarter 2007 results. Claiborne will then follow with an operational update, after which questions will be taken. 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 these results to differ. Many of these have been identified in Murphy's January, 1997, form AK filed with the SEC. I will now turn the call over to Kevin for his comments.

Thanks, Dory and welcome everybody to the call. Net income for the fourth quarter of '07 was $206.1 million, or $1.07 per diluted share compared to fourth quarter of '06, a net income of $88.4 million or $0.47 per share. For full year 2007, net income was $766.5 million, or $4.01 per share compared to the 2006 net income of $644.7 million, or $3.41 per diluted share. The fourth quarter of '07 included several unusual items, which together reduced reported net income by a little over $40 million, or $0.21 cents per share. The largest of these are the $59.5 million noncash asset tax charge to reduce the carrying value of increase in crude oil and product inventories associated with the December 1 purchase of the remaining 70% of the Milford Haven Wells Refinery.

A LIFO accounting policy utilizes the first purchase price during a year to value incremental barrels acquired during any given year. In the fourth quarter of '07, we reduced the carrying value of these incremental barrels from the fair value paid at acquisition date, which was December 1st to the beginning of the year price, which as everyone knows was at a much lower level. This resulted in a $59.5 million after-tax charge. We also incurred a $14.5 million after-tax charge to settle work commitments on two properties offshore eastern Canada and we booked a $33.9 million income tax benefit in Canada related to our federal tax rate reduction.

The '06 fourth quarter included a charge for an educational assistance contribution commitment, otherwise known as the El Dorado promise. That was largely offset by the settlement of prior years tax matters and a favorable court ruling in Canada. Looking at earnings by segment, EMP segment in fourth quarter of '07 earned $268.2 million compared to $91.1 million in the fourth quarter of '06. Higher earnings in the 2007 quarter were primarily attributable to higher oil and natural gas prices. Oil was up almost $30 a barrel. North American natural gas prices were up approximately $0.50 per mcf. And higher sales volumes.

Oil sales volumes were up primarily due to Kikeh which came onstream in August and a natural gas increase was do to volumes from the northwest Mondo field in the Fulg ov Mexico which started up in July. E&P segment also benefited from the previously mentioned Canadian income tax rate reduction. Crude oil and (inaudible) production averaged over 113,000 barrels per day in the '07 quarter compared to 83,100 barrels per day in '06, again, primarily as a result of Kikeh. Natural gas volumes were 71million cubic feet a day in the '07 quarter compared to 56 million cubic feet a day in '06. The downstream segment, fourth quarter of '07 with a reported loss of $27.4 million as opposed to net income in the fourth quarter of '06 of 29.3. Excluding the previously mentioned after-tax LIFO charge, earnings in the '07 quarter would have slightly surpassed those in '06. Marketing results in the 2007 quarter was significantly improved over '06 and this was attributable to both higher margins and an increase in volumes.

In the corporate segment, fourth quarter of '07 we showed a charge of $37.4 million compared to a charge of $32 million in the '06 quarter. 2007 we experienced higher foreign exchange losses due to the continued weakening of the U.S. dollar and higher net interest expense. Higher interest number related to both higher average debt outstanding and also lower levels of capitalized interest for development projects. 2006 quarter included the costs related to the El Dorado promise program referred to earlier. CapEx for 2007 including the acquisitions of the tougher releases in Canada, the real estate underlying 500 of our existing retail stations located at the Wal-Mart Supercenters, and the 70% of the Milford Haven Refinery, totaled $2.4 billion. Plans for 2008 are also ambitious but will be underpinned by cash flow from our growing production and by a better position downstream business. Total 2008 CapEx is expected to be $2.8 billion with an approximate 75/25 split between upstream and downstream.

On the upstream side, development expenditures estimated to be about $1.6 billion and includes major projects, which will enable us to double our production from average 2007 levels, such as remaining well drilling and completion at Kikeh. Buildout of Phase I of Sarawak S project, ahead of first production which is in 2009 as a Wright Field development in Congo, Thunderhawk Field development in the Gulf, both of these should begin producing in 2009, and the commencement of our Tupper project which we should start seeing volumes by the end of this year. These five projects take up a little over 80% of our development capital in 2008. That still leaves a healthy balance of almost $500 million for exploration, including about $300 million for exploration drilling needed to provide growth projects contributing beyond 2010. Downstream CapEx includes expenditures, now the 100% owned Milford Haven, as well as continued buildout of our retail system in the U.S., both onsite at Wal-Mart Supercenters and our new offering of Murphy express stations in carefully selected high traffic areas. Year end 2007 Murphy's long-term debt amounted to $1.5 billion, or 23% of total capital employed. With that, I'll turn it over to Claiborne.

Thanks Kevin. '07 was a year of repositioning and achievement for Murphy and I'm quite confident about what lies ahead for us. As you recall, we realigned our organization by creating a single world-wide upstream operating unit under the leadership of David Wood. While at the same time placing a worldwide downstream operations with Harvey [Doer]. Both have been quite busy, making the necessary decisions to improve our position for both the short and the long-term and I'm pleased with the progress they have made.

The key focus for '07 in the EMP division was bringing the Kincaid field on stream. In fact, they achieved that milestone one month ahead of schedule and it may be a record time for deep water development and the field is currently ramping up the seven wells onstream, producing around 70,000 barrels a day. We anticipate exiting '08 at the plateau rate of 120,000 barrels a day. The field is performing extremely well and as modeled, will be an important legacy asset under pending our extraordinary production growth over the next few years. The other task of the EMP group was to obtain new opportunities for Murphy in order to set the stage for growth beyond Kikeh.

We were successful in adding several new acreage positions and our portfolio now has substantially greater depth and balance than a year ago. Exploration acreage was acquired in two new countries, Suriname and Australia. Block 37 in Suriname was picked up in June and covers over 2 million acres. This year, we will be acquiring three (inaudible) making preparation for drilling our first prospect there in '09.

In November, we announced the acquisition of acreage in the Browse Basin, offshore northwestern Australia, where we plan to drill a well later in '08, looking for multi TCF natural gas prospects. The opportunity on block ACT 36 in Australia is attractive because it affords an entry into a known hydrocarbon provenance remaining large field potential, which is exactly the credentials we prefer. The Australian addition builds nicely on our Southeast Asia position, anchored, of course, by Malaysia. We hope to further expand our presence in the region, so don't be surprised to see us layer in further opportunities beyond this one.

Strong Gulf of Mexico presence remains important to us and in the OCS October lease sale, we obtained 26 blocks in the DeSoto Canyon and Lloyd Ridge areas. These blocks become a focal point in future Gulf of Mexico exploration plans and will compliment nicely our existing deep water acreage in Grand Canyon. Another significant addition during '07 was the Tupper leases located in northeastern DC. This tight natural gas sands play is part of the [Tryasic Age Motne] formation and provides a favorable entry point for Murphy into an onshore North American natural gas play. The economics are robust and there's much growth potential here. Importantly, it also lowers our overall risk profile and its natural gas in a meaningful way to our mix and makes us more geographically diverse. Currently we are moving ahead with a drilling and development program, which commenced in November of last year.

First gas production is anticipated in the fourth quarter of this year. In the Congo, we brought in a partner to MPS in the Azurite development with the intent to recalibrate our risk. Murphy remains operator of the project, but now holds a 50% working interest in the field, which is planned to be on stream in 2009. [Farman] also includes an expiration carry for the MPS block for two wells which are planned for this year. Looking ahead, we will be much more active on the exploration front after taking a break for 18 months to regroup and reposition.

Following up on our success at Rotan in early 2007, we now have a complementary natural gas discovery at [Veris], also on block H in Malaysia. This discovery adds to the resource base in that area and moves us closer to a critical commercial development. In the second quarter we will be drilling an exploration well in deep water Block K Malaysia, called [Buntal], which is a four-way dip closure located in 7400 feet of water. The well will be drilled into the same pay sections found in the Kikeh 7 D and also deep at the test in new carbonate (inaudible) Our program offshore Sarawak, will also be active, as we will likely drill two or three additional oil and natural gas exploratory wells. Offshore Republic of Congo two wells are planned for '08 on our MPS Block to test prospects, which held up well under our CSEM survey last year. Well might also be drilled in our Northern Block in Congo later in the year. As mentioned, our recently acquired in the Gulf of Mexico should merit two or three wells this year, targeting natural gas. Lastly in Australia, look for us to drill our first exploration well there. So in '08, we will get back in the business of exploratory drilling. We'll be carefully risking our drilling dollars and bringing in partners in many cases, but still focusing on key impact wells for the company. One of the distinct competitive advantages of our company is that we are large enough to absorb the costs of holding high working interest and exploration and development projects, but small enough that the impact of our success can be quite meaningful.

Turning to downstream, two significant transactions occurred during '07. First, we acquired the real estate underlying most of our existing Murphy USA retail stations. Owning the property, as opposed to leasing it, enhances the longevity of this best in class retail offering. Secondly, effective December 1 for an attractive price, we became the sole owner of the Milford Haven Wells Refinery, in which we previously had a 30% stake. Integration of this 108,000 barrel a day facility into our asset mix adds important diversity to our downstream business. Meanwhile, the focus at our two U.S.-based refineries remains (inaudible) liability and operational performance. Refining margins are lower in the first quarter, as is normal for this time of year.

Gasoline crux spreads are contracted due to adequate inventories and softer demand. We have curtailed runs for economic reasons at the Superior plant and have planned maintenance work under way at both Milford Haven and Morrow during the quarter, all of which will lead to reduced through puts in the first quarter. Murphy USA retail network continued its torrent pace of same-site volume growth and strong nonfuel sales. In fact, Murphy USA has grown both fuel and nonfuel sales on a per station average each year of the chain's existence with the system currently averaging fuel sales of almost 300,000 gallons per month per site. The end of the year with just under 1,000 stations. Reserve numbers are still being worked but preliminarily we expect to replace production by booking additions primarily from Kikeh and Sarawak gas, and some initial bookings at the [Kakke] field in Malaysia, which was sanctioned in December. We have not yet booked reserves from Tupper. This would work out to finding and development costs excluding acquisition in the mid-20s. As I mentioned before, due to stringent SEC rules, the Kikeh reserve will not be bookable as one lump sum, but rather programmatically over the next several years. Again, to remind you, the fuel sanction 440 million barrels, of which our net should be around 230 million barrels. At year end '06 we booked only 47.5 million barrels.

In closing, I believe the future of this company will be quite strong. In hindsight, we got preoccupied and distracted by Hurricane Katrina, but emerged from that with a new-- renewed focus and commitment to quality assets and careful risking of capital. We executed last year on the one milestone that was absolutely critical, Kikeh first production. Furthermore, we shepherded along successfully our other development projects, which are still in progress. We bolstered and diversified our exploration portfolio with entries into Australia and Suriname and expanded our presence in the eastern Gulf of Mexico. Secured an entry into what we believe will be a very substantial lower risk resource play through acreage acquisitions in British Colombia. We opportunistically strengthened and diversified our downstream business with the Wal-Mart land acquisition and UK refinery purchase. In summary, we are all on much firmer ground on both sides of our business and from that stable base, poised to grow further through continued focus, discipline and execution. I'm now ready to take your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from [Ben Dell] with Bernstein. Please go ahead.

Hi, Claiborne.

Hi, Ben. How are you doing?

Good. I just had a couple of quick questions. With respect to Sarawak gas obviously Asian L&G prices are extremely strong right now. Do you have an idea of what sort of sales price you'll be getting for that? Will it be linked to L&G prices or will it be a flat fee at the L&G site?

Ben, it's linked to the realization of L&G landed, and it's a percent of that and due to contractual reasons, we've always declined and can't disclose what that percent is, and it's a combination of both spot as well as contract prices for L&G, so as a result, we are and will experience the benefit of this increased price.

Okay, great. And, on the Australian acreable that you picked up, obviously Australian gas market is very localized is your ambition to compete in that gas market against the domestic players, like Apache, or is it a plan to find enough gas to get it into one of the L &G schemes that are being developed there?

The key really for us is to go into a basin and see if we can develop some mass on some large reserves and capture resource and then use that over time to get into an L&G facility of sorts. Don't have a timetable for it, but you have to enter now, and this is particularly attractive block to us because it's got, oh, three or four structures and they have got size and they work in nearby leases and so it's-- it's an opportunity to capture pretty large resource now.

Okay, and just lastly, going back to Malaysia, you mentioned obviously during the ramp-up operating costs at Kikeh are above where you expect them to be in the future. Do you have an indication of what sort of operating cast and total taxes you expect on a per-barrel basis when it's at plateau?

Ben, I've got some people looking. We're about $10 now.

Yes, we get down to $7.

$7, say $7 plus or minus is a good ongoing number.

That's including taxes?

No, that doesn't include taxes. It includes amortizing the lease on the FPSO.

Okay. All right. That's all for me. Thank you.

Thank you.

Our next question comes from Nikki Decker with Bear Stearns. Please go ahead.

Good afternoon. Would you walk through your assumptions behind your first quarter earnings guidance, please?

Sure, Nikki, would be glad to. This is Dory. Our production, as previously mentioned, is placed on 125,000 barrels of oil equivalent per day. Sales volumes of 142,000. Our realized worldwide oil price based on a range between 75 and $80 a barrel. Realized gas price, around $8. We have 70 to $80 million built in for exploration expense, and for the -- that's also including downstream income in the neighborhood of 15 to $25 million. Corporate, we have a loss of approximately $25 million included.

So it sounds like you-- you created an underlift position in the fourth quarter, which will be balanced out in the first. Is that right?

Yes. That's correct. Primarily at Kikeh.

Okay. Production in the fourth quarter was stronger than we had expected. Is Kikeh running on schedule or ahead of schedule, or where was the strength, maybe at Mondo?

No, the strength is Kikeh. It's performing, ramping up faster. I mean it's-- it's performing better.

Great, and one more. Can we interpret your CapEx plan for the downstream as -- is it appropriate to assume that you've made a decision to hang on to those assets?

Nikki, this budget certainly reflects that, yes. What it does, it reflects finishing up this year the purchase of the land under the Wal-Mart sites and then adding new sites pretty aggressively, both with Wal-Mart and then outside of Wal-Mart through this new format we have Murphy Express, then spending money at Morrow, a lot for new tankage that was damaged by Katrina and then a couple of projects--

So, Claiborne is the review process is complete for the downstream?

What I've told the market, Nikki, is that one of our options going forward is to spend the upstream in the downstream. And I don't rule either in or out either option, and we'll look at it this year in the course of the year.

Great, okay. Thank you.

Our next question comes from Paul [Chong] with Lehman Brothers. Please go ahead.

Hey, guys.

Hi, how are you doing?

Very good. (inaudible) for this year, should we look at that as a high water mark and coming down over the next several years or that we have the new projects, you continue to do is going to maintain the coast at that level?

Paul, the way that our plan reflects is that this is close to a high water market, starts coming down, comes down pretty substantially. As of course Kikeh, this is the last year of heavy lifting there. It's the last year of real heavy lifting on Sarawak gas. Azurite, all those. So, that's the bulk of where the capital is. Our projects tend to be large and real chunky, so it tends to -- it will trend down pretty dramatically. Now, naturally, I hope, that we have some success either -- well, in some of our programs and you'll see some more development dollars out there.

sure.

The one that goes on, by the way, is Tupper we're going to spend $300 million plus this year and the spend there pretty aggressive as you go forward. The first year's burden by gas plants and some pipelines and you get the benefit of that later on, more drilling, but nonetheless, it stays at a pretty high level for a pretty long -- for a long time in fact, because (inaudible) to get.

Can we narrow down (inaudible) the number. Of course, (inaudible) hopefully you guys will fund a new project, but just based on your existing project back log, should we assume that without adding new new project, the CapEx for the next several years would drop it down to the maybe 1.7- 1.8 billion (inaudible) range?

Paul, this is Kevin. You know, when we show in our budget is going down like the 2009, you would be going down approximately $600 million. Most of that's going to be development project getting done. And barring new projects, I think -- I don't think it next year it would drop that much, but you could see several hundred million dollars. You go out a few years and you probably get to the 1.5 range.

Okay.

But you've got to assume that you're going to have some success along the way and that number won't--

Sure, I understand. I understand. (inaudible) you talk about the first quarter production guidance and. is there a number that you guys can share for the next two years, 2008, 2009 as a full-year basis?

I can tell you what '08 is roughly. It's barrel of oils equivalent 100 -- mid 130s, somewhere around there, Paul.

In 2008?

Yes, the average for, the average for '08.

That seems low. Is that given the Kikeh is going to ramp up pretty rapidly? What's the--- within that 135 or so for the year, what is your expectation from KIkeh inside there?

We're looking right now, Paul.

We have it. There's about, just on the, the oil piece, Paul --

Kikeh is going to exit around 70 or net, but you also have to realize we're planning to sell some properties as well. We just unloaded the [Recanna] properties, which are 2500 barrels a day. We're also planning to sell some further properties in Canada, which is another 3,000 barrels a day of production. Still have declines in Gulf of Mexico. Ecuador, we're minimizing capital there, so you'll see declines there. So while it is a strong contribution from Kikeh, we have some other things playing into the numbers as well.

Mindy, what's the total process sales reduction going to be than in your plan for 135--

Based on what we know now, probably 55 to 6,000.

For the year average?

Right.

Okay. And, Kevin, on the broad edge, how much gas do you need in terms of total recoverable in order for that to be able to (inaudible) in a commercial development project and I presume that it is sufficient gas, is that going to go to the route of the(inaudible) or similar to what we have seen in Block K associated get piped to the onshore maybe for the (inaudible) or the other use for the domestic market?

Paul, it's early, but there's been a project, joint venture company formed and a project announced near Beeris that's going to be developed, anchored by [Kepabogen] so there's going to be development and infrastructure in the area near Beeris. [Rowtan] needs additional drilling. It's further removed. And what we'll do is we'll drill the east half of Rowtan, which appears to us to be about the same size and then we've got two or three other satellites around that to bring that up. And what likely happens there is you pipe that gas, assuming success, onshore and then likely to the L&G facility.

Okay.

But it's early. It's early.

Understand, fully understand. Kevin, maybe I missed it when you talking about where you are going to fund additional reserve from Kikeh and all that, did you talk about what is the total amount of the reserve addition that you're going to have for this year? And also did you talk about that, what is the PSC impact, if there is any in terms of the reserve reduction?

No. What I said was preliminarily, and I'll emphasize that, we're going to replace production and we gave just a preliminary F &D number. But we haven't finalized it. We're still rolling it up and looking at it. And don't have any particular PSC impacts to pass on.

I see. Okay. Very good. Thank you.

Well, I don't think we addressed your question. I apologize, on '09 production, but our budget right now is calling for average production levels right around 200,000 barrels of oil equivalent a day.

Thank you, Mindy.

Our next question comes from Arjun Murti with Goldman Sachs. Please go ahead.

Thanks. Claiborne, I don't recall your previously following up on the number seven deep sands, and I think [Buntill] will be the first experience with that. Is that just because in the vicinity of Kikeh, your facilities are full so it didn't make sense to further explore it at the time, or some other development occurred that made you want to go back and drill those deep sands now with Buntill.

Primarily the facilities are full, and the resource opportunity at Buntill is one that -- if it works, is significant, and so we want to see-- , want to take a crack at that

Kikeh type significant, or-- You know, yes, yes. It's -- put it this way. It's a large structure and it's a deeper horizon and it's only been tested at Kikeh seven deep and we encountered hydrocarbons and so it's the risk to that extent, but as you recall when (inaudible) of Kikeh we had raddier sand development, but it was in the same age sand as the Kikeh producing horizons. This is deeper and so as a result, there's a different depositional and sand story, but that's the risk likely, is sand quality. But it's got real good seismic reflectivity and it's quite large and we know there's hydrocarbons in that system at that age. So from an exploration standpoint, you get really -- you look forward to drilling.

I got you. So when you first went outboard, you drilled kind of the Kikeh horizons at [Finungan] and I forgot all the other names. Those were the thin bed reservoirs. This is in that vicinity, but this will test the deeper sands.

And it's a different structural type. It's a basin floor fan rather than the structure that Kikeh and the others were. And so it's different structurally. It's got-- it's got a good seismic anomaly. It's got movable hydrocarbons and a nearby well, and it's got a lot of size. And so it's got a lot of come-on.

Is there any-- do you expect to follow up on any thin bed reservoirs this year of any note?

Unlikely. What we're doing is we're going to get a well into [Creecy], I think, but we have to wait for the platform or the FPSO to have room and it won't for a while, but our plan is to get an early well there and flow it and just see how it holds up. And the issue is water support for those things, because the reservoirs at Kikeh are so big and blocky, you can put water in and get pressure maintenance and you get good recoveries, but it's more difficult there. Plenty of oil in all those particular structures, but it's just hard to get more than primary recovery out of them, so your economics start looking thin.

Got ya. On the blockage gas discoveries, are you thinking L&G down the road, or is that domestic market gas?

It's likely -- telling Paul, it's early, but I think the preliminary fault is you pipe it onshore, you get it over to (inaudible).

Then just lastly, a numbers question, your Malaysia realized gas price I think was notably above what we were expecting net of the expected payment you make above the threshold price. Was there some reason you didn't have that payment this quarter, or have the thresholds gone up, or was I just missing something there contractually?

You mean oil?

Oil, yes the Malaysia realized oil price.

The difference is the mix at Kikeh because we're maximizing cost recovery there. It's only profit barrels that are subject to the supplemental payment, so it's a very low fraction of the Kikeh barrels that go into the equation right now.

That's it.

That's why it was lower than what you've seen it before when it was just wet pass.

That makes sense. I apologize. One final one. Do you have a cost for the total acreage purchase cross around the Tupper prospects?

We do. We spent around 225 in December at the sale and we had previously acquired the interest, we call Tupper One on the Bear Ridge acquisition for 150 million and then we went to a sale or two in between origin, but I don't recall how much we spent, but significantly less than that. I think all in all, we've got about 400 million in it.

400 million. That is great. Thank you very much.

Okay.

Our next question comes from Paul [Fenkey] with Deutsche Bank. Please go ahead.

Hi, good afternoon, gentlemen, ladies. Claiborne, can you just remind us of your cash priorities in terms of how you would use excess cash that could easily be implied from the coming years? Obviously I'm thinking about dividend, buyback and if you could move on then to talk about the fact that you said acquisitions were a potential outcome, if you could talk a little bit about that as well. Thanks.

Sure. Well, historically we've been dividend payors and certainly don't see that decreasing in the fact I see that in the more robust way over time, and so you can kind of fit that into your mix. Historically, that is in the last 15 years, 10 years, have shied away from buybacks because we saw greater opportunities and you could buy oil and gas reserves in the mid-90s exploring in the post 2000. And I see that continue. Now, the world always changes and so say that it's two years from now and that we have tremendous excess cash flow. I think we would look at it then and say, gee, what's the best place for us to make money for shareholders, realizing that we're all big shareholders around here. And that's very important for us to make sure shareholders are treated extremely well.

Would you characterize yourself as NT special dividends?

We haven't done one, and so I would leave it at that. I don't think I'm -- I really have a stance pro or anti quite frankly, but, again, we'll look at our cash flow. We'll see, gee, is there great development to do? That's the highest return dollar you can place, almost, in the world today, depending on where you invest, of course and that would be always the preferred way for us to invest our dollars and grow our company. But to the extent we have excess dollars, we'll say how can we reward our shareholders.

Okay, and then you would raise the possibility of acquisitions, I know it's always difficult to talk about this, but is there anything to add on that?

No, and what we've said, the term is used so much now, it's become trite to me, this bolt-on baloney, but it kind of fits certainly what we do. Historically have said that we have shied away from bet the company acquisitions because, gee, if you're wrong, you know what happens. So I would-- I would think that you would see more of the same type of acquisitions. We'll do it opportunistically. We have nothing budgeted there, but like Tupper where we ended up spending $400 million. I would view that as an acquisition.

If we saw something that fit a piece of our portfolio that built it out, that filled a gap, that grew us beyond 210, 211, which is what it Tupper does, then I think we would look at it pretty closely. And it was a reasonable price. If you have a great asset and open pay, then so what. It made money. I think you have to have all those things happen and we certainly look.

Sure. The very specific one on the downstream firstly, you mentioned that the buying of the land and the retail stations -- the words you used were good for longevity. I thought it was slightly strange choice of words. Can you just expand on--

Well, yes, they were leased.

Right.

And so what happens with the lease, it's got a term, and so when you own it, you don't have a term. So I'll leave it at that.

So you're prepared -- basically you're saying you're prepared to put more money into it, I guess.

Well, we were putting money into it when we had a lease, so that really hasn't changed, just gives us more confident over the sweep of time that we'll have something which is in 10 years will be with us and will still be quite valuable and we'll-- can catch the economic (inaudible) ourselves.

I guess the follow-on to that, it makes the spinout easier, would you say, if you were to do that, downstream spinout?

I wouldn't, I wouldn't jump to that. I wouldn't jump to that. We want to make our downstream company stronger. We want to make it stronger. It needs greater, greater kind of diversity of assets.

After Katrina, we realized that we were -- so we bought Milford Haven and that gives us a little more strength there and we leased the land -- and the retail sites and they have ended up being quite profitable for us. We wanted to buy them. And so I think they are just normal business decisions that a rational person makes to make their business stronger.

Finally for me, further to that, is your review process that you kind of said you were doing on the downstream, is that a formal process that will lead to a set conclusion at the end of the year, or how should we look at that? Is it just a vague maybe we'll do something?

You know, I've never been specific and not wanting to be pinned down. All I've said is in the course of the year we'll look at that and naturally we're asked about our-- that side of our business and every year, and so all I'm saying to amplify that a bit is that given the valuations that we see in both ends of the market, upstream and downstream, it's something that we as a company ought to look at.

Thanks a lot.

You're welcome.

Our next question comes from Mark Gilman with Benchmark. Please go ahead.

Claibourne, Kevin, folks, good afternoon.

Hi, Mark.

Couple things. Claiborne, what didn't work on Robusto and what implications might that have for any of the other eastern Gulf gas prospects?

Mark, it was reservoir development and it might have been a busted trap. But the amplitude didn't conform quite to structure, and it didn't have an underlying--- wasn't soft core-- didn't have an underlying structure beneath the structure that we drilled. Now it hurt that it didn't work (inaudible) good amplitude. Don't get me wrong. And if you look at the lease sale, some of the partners spent a lot of money on adjacent leases in the event that if it worked, they could capture that, which they since released and didn't pay the whole full amount for.

So it was a shared view that it was a pretty good prospect, but it's not nearly as good as the ones we picked up, I have to say, and I don't want to damn the ones I got by over praising them, but they all have pretty good features underneath that pop them up in the structure itself, good amplitudes conforming to structure, and, of course, they look very similar to what else worked in the eastern Gulf, which is what independence Hub and Mondo is, which is all closer to what we bought. And they have size and that's important in today's world in the Gulf it's hard to find it and these especially one or two, one in particular has got 400 million BCS plus size and then there's three or four that are 150 BCF plus size. So I think we're very confident that they are different than Robusto and that we've got others that are more analogous closer, or closer to the ones we're going to drill.

Okay. With respect to Buntill, what fraction of the potential that you see is carbonate as opposed to sand stone?

We're not putting anything on the carbonate, Mark. It's pretty -- I won't say speculative but there's no production to my knowledge in that part of the basin from a carbonate reservoir?

So the prospect speaks for itself, just on the Seven deep sand?

Oh, yes, (inaudible) yes, yes, for sure. You can map each. Yes.

Okay. With respect to the, the [Netmont Knee], is both the upper and lower reasonable objectives and believed to exist in much of the acreage?

The answer is yes and no. The upper is the more prolific and more productive. As you go south, the middle and lower start looking a bit more attractive. We tested the middle in particular and we got a pretty good flow rate out of it, but most of our reserves, we think we have are in the upper and also as you go to the northwest where we bought the new acreage, we're on strike there with what we call it Tupper One and the Bear Ridge, but it gets thicker.

The net around where we were and the Bear Ridge acquisition, somewhere net between 70, maybe 110 meters, and then you get up to Netmont Knee of 150 meters actually up in the new stuff. And so it's in all three (inaudible) but again, up there, it's more the upper Mont. But I wouldn't discount the mid and the lower. We'll get reserves out of them.

Okay. Anything new with respect to [Furtang Kiterong].

No, there is not. We have a field development plan that's been filed. I'm sorry, area development plan that's been filed and what's always fouled it up is gas price and we're -- we muck around with it and I suspect something will happen.

Okay. I was a little bit confused about the threshold issue with respect to Block H and I think you suggested something in response to a prior question regarding what sounded like a unitzation with [Kepabogan] and that that would be a potentially distinct or different development opportunity than, what, you know, what Rotan and any satellites thereto might be. Could you clarify that for me, if you could?

Yes, and it's early, Mark. There's no unitization with Kepabogan what we found there is I'm going to guess a little bit, but I would say it's 20-kilometers away, but what you do, you piggy back on that development, if and when you can make a deal. There's all sorts of ifs and whens here, but that certainly would be where you would start thinking about going if there's a nearby development, then certainly you would want to think about it. Rowtan is further enough away that it's a bit more stand-alone-ish and we've always said you need a two or three TCF and we think we have a TCF in Rotan. It's mainly just about pipeline to shore then over to [Bentulu] And we've got more work to do there, but we've got structures with amplitudes that look like it, so we'll get to it.

Okay, and if you would, just clarify that. I think the cost, the -- what I thought you were saying was the cash op cost for Kikeh, $7, and what is included in that $7 number?

That's $7, and the FPSO lease amortization is included in that. I don't have the breakout.

About $2.50 of it's that.

And it's an all-in cash operating cost, so 450 would be the balance?

That's correct.

Okay, folks. Thanks very much.

Our next question comes from Gene Gillespie with Howard Weil, please go ahead.

Three or four little things here. One, Kevin, cash position at year end, do you have that available?

Yes, I do. Let me get it real quick here. It's 673, $674 million.

How is the, the Kikeh price tracking Tapus? Is it in line with your expectations, and do you have a realized price that you can share for the fourth quarter?

Gene it, bounces in and around Tapus. It has been a premium for Tapus for the first couple of months and I've seen it go below. But Tapus plus, you know, $0.50 a Buck has historically been where we've been.

Okay.

See if we can answer the other question for you.

Yes, it was 91.

91?

Yes.

Okay, all right. And you have a lease--

91 is was the average.

I'm sorry?

91 was the average (inaudible) '07 been produced, but we only sold in the fourth quarter, so it's a fourth quarter average.

Okay. All right. Very good. You have a lease relinquishment coming up on Block H. I believe in April, is that correct?

Yes.

And so you're basically done in preparation for that, doesn't sound like there's anything else going to happen on Block H between now and then.

You know, Gene, I wouldn't make any assumptions on the renewals or any assumptions on additional work there either way.

Okay. Okay. And lastly, have you began the formal process for farm out on MPN?

Yes, we have.

Okay. So you're pretty confident or reasonably confident that you'll have a partner and perhaps a well by year end?

Well, that's certainly our goal, and there's been a fair amount of interest, and there should be.

All right.

So we'll just play it out.

Would you be looking at something similar, maintaining a similar interest as you did on EMPS?

Yes. I wouldn't -- I don't want to be pinned down there, but roughly -- they are more expensive wells. There's an albion above salt, (inaudible) spray salt play and then there's a deeper play, which is Jurassic, which is expensive, but good, good size structures, and they work onshore. So there's risk, but there's nice analogs and you've got size and you've got good obvious, obvious structure.

And you definitely want to retain operatorship.

Yes.

Okay, great. Great. Thanks for your time.

Our next question comes from Ted [Izatt] with Bear Stearns. Please go ahead.

Hi, good afternoon. Thanks for the call. I wanted to ask you about your M&A policies, but I think you covered that fairly well, so thank you. And my next question was more just on your leverage and where you see it headed, what would be the, in an acquisition situation, or maybe even just through the capital spending and so forth, how high of a debt to capital would you be willing to go to?

Ted, we don't have a particular black line that says you go above it or below it. Historically, we kept it low. We're long-term owners and long-term players in the oil and gas business and realize that if you get too levered over time, then bad things happen to you. Right when you're in the rough, is when conditions get bad. So, I suspect that our 23% will float up a bit here this year, but then over time trends down. No, when we develop an Indian field, I'm going back to the 1970s , we went up to about

Right.

But it was a great field. We never even approached that with Kikeh and we were prepared to, because prices increased and we sold some assets to finance it. So that's, the upper limit that we historically have reached. I don't see that happening here because unless something, truly, truly unusual, never say never, but just look at our history.

Right. Okay. Thank you. And then I guess actually on the M&A side, I have one real last question, if you can give a comment. More broadly speaking, how do you see the market for property these days given the high price of oil? Is there a big disconnect between the offers and the bids, or is it pretty close?

No, there are places out there. There are some things on the market and things are clearing and people are paying-- paying up. And it depends where you are, depends is it oil, is it gas, all sorts of stuff, what type of political risk you're willing to assume, but putting all that aside, which is always there, there's-- there's activity in the market. Okay. Thank you very much.

Our next question comes from Louis (inaudible) with Barrel Huntly please go ahead.

Hey, good afternoon.

Hey, Louis.

I don't know if Gene was trying to make a point by asking you a question that was, obviously right there in the-- in the release, or if maybe it's just his advanced age he can't see it as well, but I want to reiterate it a little bit. I mean you guys obviously did build cash on the balance sheet in a year when you were pretty aggressive in your spending and the payout ratio is, what, down to about 16% now and the yield is about half of what the S&P yield is. So just as a follow-on, you know, let's talk a little bit more about the dividend and what your plans are, Claiborne.

Louis, we were pretty aggressive last year and the year before, and so I don't see us continuing at that aggressive percent increases, but I do see us over time continuing to increase dividends, assuming our business maintains its current position and we've got shareholders who enjoy dividends, and I'm one of them, so we're all aligned in that particular world and I've been unabashed about that for a long time. So, you never it wouldn't get too far ahead of yourself. So, just be mindful of the fact that we're dividend payors and to the extent we have excess cash and we need to pay our owners the rent, we'll do it.

You don't see yourself more able to do that in this situation? I mean, again, the payout ratio, if I'm calculating it right, is only 16%, and, just seems to me like the opportunity is there to do it and that it's not really a competitive yield, given what the market's paying.

Well, as we go through the year, we always revisit it. But we increased it pretty substantially last year and we increased it pretty substantially the year before, and, our (inaudible) don't get me wrong, but we have a pretty aggressive capital budget and we need to be mindful of that. We need to keep ourselves available for opportunities and so all those things balance, but there's no hidden agenda and there's no reason why we don't pay and wouldn't increase it. It's just a prudent business decision going forward, how much do you pass to your shareholders and how much do you keep in your business and we historically paid up pretty much. And we'll certainly continue to review it.

Okay. Well, congratulations on a great year.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes as a follow-up from Mark Gilman from Benchmark. Please go ahead.

Claiborne, I assume West Pat's in decline at this point and therefore, I was wondering whether or not the facilities there and the availability of them might afford an opportunity to move ahead aggressively, more aggressively with (inaudible).

Mark, I would read that more as we build out Sarawak gas. There will be enough facilities there where there may be some piggy backing going on, but certainly West Patricia is there and in decline and, of course it's more of an oil field and there's both oil and gas (inaudible) But we'll-- we're mindful of the whole infrastructure implications and what we got and what's been a bit stranded and what we need to do over time.

So at least at this point it, doesn't materially advance around [Pat or Randell].

Not next year, but certainly in our long-term plans, that's where we intend to use what we build out at Sarawak gas in particular to provide entry to those. More economically than we could otherwise.

Okay, thanks, Claiborne.

Our next question comes from Sonya Franklin with Bloomberg News. Please go ahead.

Hi, there. I might have missed it earlier, but Mindy, you mentioned average expected production rates for 2009 of around 200,000 barrels of oil a day. Just wanted to see what the goal is for this year and where the increases would be coming from other than the ramp-up in Kikeh.

What we said for the year '08 was in the mid-30s and--

Mid 130s?

Mid 130s Barrels of oil equivalent a day, most of that coming from Kikeh growth with some (inaudible) growth added in in the fourth quarter.

Great. Thank you.

And at this time, I'm showing no further questions in the queue. I would like to turn the call back over to management for their concluding remarks.

Thank you very much. We look forward to communicating with you in the future.

Ladies and gentlemen, this does conclude the Murphy Oil Corporation fourth quarter earnings release. You may now disconnect, and we thank you for using ACT conferencing.