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Executives

Claiborne Deming - President and CEO

Dory Stiles - Manager of IR

Kevin Fitzgerald - SVP and CFO

Mindy West - VP and Treasurer

Analysts

Ryan Todd - Deutsche Bank

Kate Lucas - JPMorgan

Erik Mielke - Merrill Lynch

Gene Gillespie - Gillespie Consulting Group

Paul Cheng - Lehman Brothers

Mark Gilman - The Benchmark Company

Murphy Oil Corporation (MUR) Q3 2008 Earnings Call October 30, 2008 11:00 AM ET

Operator

Good morning ladies and gentleman, and welcome to Murphy Oil Corporation third quarter earnings conference call. During today’s presentation all parties will be in a listen only mode, following the presentation the conference will be opened for questions. If you have a question please press * followed by the 1 on your touchtone phone. If you would like to withdraw your question please press the * followed by the 2. If you are using speaker equipment please lift your handset before making your selection. This conference is being recorded today, Thursday, October 30, 2008. I would now like to turn the conference over to Claiborne Deming, President and Chief Executive Officer. Please go ahead sit.

Claiborne Deming

Thank you and good afternoon. I am joined today by Kevin Fitzgerald, Senior VP and Chief Financial Officer, John Eckard, VP and Controller, Mindy West, VO and Treasurer, and Dory Stiles, Manager of Investor Relations.

I will turn it over to Dory at this time.

Dory Stiles

Thanks Claiborne, and welcome everyone and thank you for joining us today. Our call will follow our usual format today with Kevin beginning by providing a review of third quarter 2008 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 as Murphy’s January 1997 form 8-K filed with the SEC. I will now turn the call over to Kevin for his remarks.

Kevin Fitzgerald

Thanks Dory.

Net income for the third quarter of ’08 was $584.4 million or $3.04 per diluted share, and that compares to third quarter of ’07, where we had net income of $199.5 million, or $1.04 per diluted share.

For nine months of ’08, net income was just over $1.6 billion, or 8.39 per share, and that compares to net income for nine months of ’07 of $560.4 million, or 2.94 per diluted share.

2008 nine month period includes after tax gains from the sales of Canadian assets, our interest in Berkana Energy, and Lloydminster heavy oil properties that both occurred this earlier this year, about 108.3 million or $0.57 a share. The 2007 nine month period includes after tax cost of 24 million or about $0.13 a share, and this was related to the closure of 55 retail gasoline stations in the US and Canada.

Looking at income by segment, first the EMP for third quarter of ’08, income was 529.9 million, and that compares to 150.8 million of net income third quarter of ’07. Higher earnings for the ’08 quarter were primarily attributable to higher crude oil price realizations and higher oil sale volumes.

Crude oil and gas liquids production for the current quarter was a little over 118 thousand barrels per day, as compared to 88 thousand barrels per day in the corresponding 2007 quarter. Increase was primarily attributable to production in Kikeh, offshore Malaysia, which started up in the third quarter of ’07, but this was partially offset by lower volumes in the US as a result of field shut-ins due to the Hurricanes Gustav and Ike.

Also, lower volumes of Canadian heavy oil due to the sale of the Lloydminster properties in the second quarter of this year, and lower buy-ins from Terra Nova field offshore Eastern Canada.

Natural gas sales volumes were 46 million cubic feet per day in the third quarter of ’08, compared to 56 million feet per day in third quarter of last year. This decrease was primarily due to field shut-ins in the Gulf for the hurricanes, and the sale of Berkana Energy in Canada early this year.

The R&M segment third quarter of ’08, net income was 85.8 million, compared to 73.2 million of net income third quarter of last year. The earnings increase was all in the US and primarily due to better marketing margins, while results in the UK were slightly below break even due to weaker refining margins.

The corporate segment third quarter of ’08, we had net charges of 31.3 million, compared to net charges of 24.5 million in third quarter of last year. This cost increase was attributable to a combination of higher net interest expense due to lower amounts being capitalized to development projects and higher foreign exchange losses.

As of September 20, 2008, Murphy’s loan term debt was a bit less than 1.1 billion, or about14.1% of total capital employed.

And with that I’ll turn it over to Claiborne.

Claiborne Deming

Thanks Kevin. Before going into the operational update, I thought I would spend a minute addressing where Murphy’ stands in the economic and capital market environment that has emerged since we spoke last quarter.

As Kevin touched on, our company is financially quite strong with low leverage. A 14% debt to total cap ratio, over $1.4 billion of cash and short term marketable securities on hand, continued access to capital funds.

We will continue to concentrate on the things that are within our control and go about managing our business as usual, while being keenly aware and ready to act on opportunities that arise. We are currently working on next year’s capital budget, and while not ready to discuss in detail, I will say that we will optimize expenditures to ensure that we maintain our financial flexibility.

Now, I will update you on the current activities within our E&P business, and then move to downstream. First exploration for the first oil wells have now been drilled in the Eastern Gulf of Mexico. Two of these were natural gas discoveries, diamond, and oil rich 370 in Dalmation in De Soto Canyon 48. Both will be developed as subsidy tie-backs.

The (inaudible 1:03) confidence rig has now moved to Finger Hawk for development work. In the first quarter of 2009, we will start a non-operated wild cat called Samurai in Grand Canyon 432-476, in which we hold a one-third interest. This prospect is on acreage that we picked up on early this year, the central sale 2006.

Offshore Malaysia, the Ocean Rover rig, will move over to Block P to drill an oil prospect called Chengal, 60% working interest, late this year following completion of the current phase of development work at Kikeh.

Exploration offshore sale rack, 60% working interest, continues following a recent dry hole at Sabahtan. Two more holes will be drilled in the coming months.

In Australia, in this quarter, we planned to sprout our first well at Abalone Deep, where we have a 40% working interest. The multi TCF liquids rich natural gas prospect, Brows Basin Block ACT36.

Turning to production, the US Gulf of Mexico continues to recover from hurricanes Gustav and Ike. The platforms sustained only minor damage, but ongoing third party pipeline repairs have resulted in curtailed production during the months of September and October.

The third quarter impact to production is approximately 6000 barrel equivalents a day. The impact on the fourth quarter is estimated to be up to 7000 barrel equivalents a day, with all production on stream by the end of the quarter.

Elsewhere, the ramp up at Kikeh and Block K offshore Sabah, Malaysia continues according to plan with current production at 95,000 barrels per day. We will reach the plateau production rate of 120,000 barrels per day by the end of 2008, when three new producers are added.

Natural gas production will commence from Kikeh during the fourth quarter, with production volumes reaching 120 million cubic feet per day, once fully ramped up.

Over the next few months, four addition projects currently under development will becoming on stream first production from Phase one of Tupper, our tight sands gas resource play in British Columbia is scheduled to begin producing it in the next month, at an initial rate of 40 million cubic feet per day. We anticipate exiting the year at 65 million per day.

We now hold a total of 128 sections at Tupper. We have drilled five vertical wells in Tupper West, to better delineate the monotony in that large acreage block. So far, average thickness of monotony in this area is substantially improved over the current Tupper development area. In addition, three of these wells have been encountered a nicely developed dorg section, with pay, that is going to maturely enhance productions and returns in this area.

In Sarawak, Malaysia, work continues on phase one of our natural gas project, as it readies for first gas, now scheduled for the second quarter.

In the Gulf of Mexico, Thunder Hawk development is moving ahead. The fully submersible hull has arrived in the United Sates. During the loading process in Singapore, the hull sustained damage and is currently dry-docked while necessary repairs are made.

First production remains on track for 2Q ’09 as originally planned. Meanwhile, in Azurite, where we have a 50% working interest, offshore the Republic of Congo, the first phase of sub-sea installation work is complete and the FDPSO is nearing completion. Initial production is scheduled for the end of the second quarter of 2009.

These projects will propel us to new successive production records in 2009, and 2010, and serve as nice complements to our existing base led by Kikeh.

Moving downstream, having a diversified US and international asset base once again proved important during the third quarter. While the UK segment was the to performer during the first half of the year, US retail led the way in the third quarter and has continued to do so in the fourth quarter. As crude oil prices have retreated, wholesale gasoline prices flowed, thus improving the margin environment for retail stations. Our high volume, low-cost model is ideally suited to trap profit in declining markets.

We currently have 1004 stations in operation, of which 984 are MurphyUSA sites, and 18 are the large Murphy Express convenience stores. They remain strong in our stations as year over year fuel and non-fuel sales are up.

In the US, we’re finding margins are repressed at Meraux, due to extraordinarily weak gasoline crack spreads, while Superior’s margins are quite good. In addition, the planned 40 bay hydrocracker complex turnaround at Meraux was completed earlier this week and feed is currently being introduced back into the unit. Meraux was shut down for about 10 days during the third quarter for Hurricane Gustav.

UK refining margins have improved as of late following a weak third quarter. In UK retail, we have taken several steps to expand our footprint. In the third quarter we gained initial access into Scotland by purchasing two stations and leasing five others. This will allow us to gauge the marketplace for our products there. Just yesterday, we placed a deal covering sixty-three stations in England and Wales, 58 of which will be leased and five that will be purchased.

To wrap up, through the first three quarters of 2008, our results have been influenced by high commodity prices that have aided in setting net income records. Of course with fourth quarter, the oil markets have changed quite substantially as crude prices have dropped unusually fast. Except for the gut wrenching drop in the equity value of our company, this is a market we both understand and perversely like. Lower oil and natural gas prices are wonderful for our customers, and we were beginning to price ourselves out of the market, and handy for companies with ample liquidity that are underleveraged. As you know, we fit into that category.

As you also know, this is my last earnings conference call. On balance, I have enjoyed my relationship with the investment community during the 14-plus years I have been CEO of Murphy. You perform an extremely important role in disseminating information to our owners and potential owners, and as a result our style has been to tell it like it is, that will continue under my successor, David Wood.

Lastly, the energy markets that we are going through are actually more of the norm than of the exception. In my 30 years in this business, I suspect that around 25 of them have been involved with dealing with difficult markets. Ironically, we typically invest our shareholders money better during these periods because competition is more realistic, and pricing is better.

Our company is built to anticipate and prosper in these types of markets, and I expect this to continue as well.

We will take your questions now.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will begin the question and answer session. As a reminder, if you have a question please press the * followed by the 1 on your touchtone phone. If you’d like to withdraw your question please press the * followed by the 2, and if you are using speaker equipment you will need to lift your handset before making your selection.

Our first question comes from the line of Tom Gardener with Simmons & Company. Please go ahead.

Tom Gardener – Simmons & Company

Good afternoon gentleman, Claiborne, first of all I think that the shareholders appreciate your tenure, but I wanted to focus on Murphy’s balance sheet, just given your financial flexibility, do you see this current environment as an attractive time for upstream acquisitions?

Claiborne Deming

I think so, the only caveat that I would add is that when we’ve been successful in the past doing it, it’s typically after this thing settles in a bit, and it's not always at the beginning that pricing is appropriate. Now having said that, something could pop up and we could act and we’re certainly looking, and we’re looking both domestically and we’re looking internationally.

Tom Gardener – Simmons & Company

Would your focus then be more conventional, or unconventional in that regard, I imagine both domestically and internationally, but it’s more of a domestic focused question.

Claiborne Deming

We’re an oily company, and we’re an oily international company, and so to better balance our portfolio with natural gas in North America will be a great fit for us.

In that, because there’ so much of it on the market, and so much more coming onto the market, I suspect there’s going to some retract in pricing because there’s going to a whole new price deck that people are dealing with. And so I think the prices will reflect that.

Tom Gardener – Simmons & Company

Excellent, thank you. Moving over to Australia and Brows Basin, I just wanted to get your feel for the long term outlook for natural gas prices in that region.

Claiborne Deming

Well, they’re tied to oil, typically, it’s an L&G focused commodity over there. And oil price is at $70 which translates into pretty attractive natural gas prices for that type of development. Oil prices go up, I suspect it’s a list of time, that just given the resource and 5 the world and the world’s growth, I suspect oil prices go up from here, to the extent L&G is tied to it, which I think I think that tie will likely last, I think you’ll see pretty good pricing. This is clearly, the prospect is big. There’s two or three bumps, but the first one we’re looking for is certainly a couple of TCF, it’s got a lot of liquids, and this would be designed, ultimately, for a project like this.

Tom Gardener – Simmons & Company

One last housekeeping question, I’m jumping over to the Motany are you still looking for play metrics in the 4.3 BCF range for about $5.1 million or has that changed?

Claiborne Deming

No, that’s roughly right, that’s both reserves and price per well are certainly in the ball park.

Tom Gardener – Simmons & Company

Thank you very much.

Operator

Thank you, and our next question comes from the line of Arjun Murti with Goldman Sachs. Please go ahead.

Arjun Murti – Goldman Sachs

Thank you, and Claiborne congratulations on retiring as CEO. I hope we’ll still get to see you once a year at the analyst meeting, you wont totally forget us.

Claiborne Deming

Oh no, I’m on my way out, it’s David’s shop, but I’m certainly living in El Dorado, Arkansas.

Arjun Murti – Goldman Sachs

Absolutely, a question to follow up on the strong financial position, can you just remind us in terms of Malaysian cash flows, if there’s any issues in terms of repatriating that or using that outside of the country, either in terms of magnitude of cash you can take out of the country or if there’s an additional tax burden to doing that.

Kevin Fitzgerald

Arjun, this is Kevin, we’ve had no problems so far, still, the way we’re structured internationally we’re just bringing back money that we have in essence loaned over there to develop Kikeh, and in fact we were looking at it today, we’ve brought about $750 million back this year. Now, with prices dropping I suspect that’s going to slow down some, but no we haven’t encountered any issues, and the way we’re structured internationally we should be able to move that money around.

Arjun Murti – Goldman Sachs

That’s terrific, I appreciate that. And I might have missed it, did you give an update on Congo drilling, you were looking at a couple of wells around year end, early next year?

Claiborne Deming

Yes, it’s probably going to be the middle of the year, and we haven’t selected the prospect yet, we’re still looking at them. But we have a carry, and we have a rig, so first oil we’ll log, and identify the particular prospect.

Arjun Murti – Goldman Sachs

That’s terrific, thank you.

Operator

Thank you, your next question comes from the line of Ryan Todd with Deutsche Bank. Please go ahead.

Ryan Todd – Deutsche Bank

Hi Claiborne, a couple of quick questions on the cash flow, I know you have, even at low oil prices you have quite a strong cash flow going forward, and I know you haven’t finalized the ’09 cap-ex budget, but, as you’re looking forward, have you tried to balance capital spending and potential acquisitions, assuming some become available down the line, will you try to balance in terms of limiting yourselves to stay in line with cash flow or, how ill you manage you cash going forward?

Claiborne Deming

Absent acquisition, just looking at our capital budget, we will certainly try to stay within cash flow, likely will unless something unusual comes up. At $70 a barrel we’ll likely cash flow somewhere $2.5 billion next year, something like that. And our capital budget will be a bit less than that, and we’ll manage it as we go through the year. We have a lot of developments still left to do in all the projects that I mentioned and so the lever is going to be expiration expense, more likely than not, we can manage that.

Ryan Todd – Deutsche Bank

Great, thank you, and if you look at the Gulf of Mexico, and maybe this is a question for David as well, that you’re four wells into the program that you kicked off earlier this year. For what you’ve seen so far in terms of these slightly missed results. What have you learned and what do you see going forward?

Claiborne Deming - President and CEO

You know, I’m disappointed. I had pretty high expectations for it, good prospects, good amplitudes, new area, new 3D, all the attributes of success. And I think we had a pretty high expectation for it so two discoveries that are okay out of four disappointed me. I suspect, we’re going back to school a bit probably seal issues is what got us more than anything else but we’re going to spend time on that, the confidence is at thunderhawk, real world development develops there, if we develop a model that we feel comfortable with that we see off some issues, we’ll go back to growing there cause we’ve got two or three other great looking prospects. And if we don’t we won’t.

Ryan Todd – Deutsche Bank

Okay. Great. So that will be a little ways off before we see some more explorations going there?

Claiborne Deming - President and CEO

I would think in the next year, we’ll be drilling at Thunderhaul for the next three or four months.

Ryan Todd – Deutsche Bank

Great. Thanks. And then, finally on Keykay gas you said it’s supposed to start up of this quarter, what sort of and I know you mentioned a peak rate, what sort of ramp up should we expect to see on Keykay is there an X-ray on this quarter?

Claiborne Deming - President and CEO

No, it’s a little bit up in the air for us but this is my best look at it. We’re thinking we’ll start up in the second week of November, and we’re ready to go there’s some issues on the other side of the line which are giving me a bit of pause but our current photos will produce around 34 million cubic feet in November. Seventy five in December, then it will ramp up in the first quarter to 120.

Unidentified analyst

Thanks, great, we’ll see you at the annual meeting.

Claiborne Deming - President and CEO

Of course, thank you.

Operator

Thank you. Our next question comes on the line from Paul Cheng with Barkley’s Capital. Please go ahead.

Paul Cheng – Barkley’s Capital

How are you doing?

Claiborne Deming - President and CEO

Very good.

Paul Cheng – Barkley’s Capital

Great. And congratulation and best wishes, so you now have free time now and what are you going to do?

Claiborne Deming - President and CEO

I have my own time. First time in thirty years, and I won’t have an office. And look around for opportunities and probably spend a bit more time traveling, not working, but I’m certainly not going to retire per say, I’m going to get out and do some stuff.

Paul Cheng – Barkley’s Capital

Right. Claiborne, can I ask several quick questions? One, on TK when is, your best guess now, yes, going to reach the next appraisal < indiscernible 2.44>?

Claiborne Deming - President and CEO

Somewhere in the first quarter Paul. We’re currently a 70% entitlement, and we’ll go down to a bit over 60% when that happens. Sometime, first quarter, maybe orally, I don’t know, naturally it depends on oil prices. That would solve a curve here, but I think that’s roughly right.

Paul Cheng – Barkley’s Capital

How much are you recovered their technical costs?

Mindy West - VP and Treasurer

Cost later that still last to be recovered. About $400 million.

Paul Cheng – Barkley’s Capital

Thank you Mindy. With the on market that is slowing down, everyone it seems like, tightening their budget, have you guys seen any easing or signs of easing on the reg market and also with the oil surfaces?

Claiborne Deming - President and CEO

Not materially, Paul. I think it’s early. I think the floaters are all kind of for a while but you’ll start seeing some companies try to find a home for them next year. I think we’re starting to see the leading edge of death but it looks for now the day rates are the same or, because these companies, they go so excited, paid a fair amount just for their leases – their short-term leases, there’s a real drop but I still think you need equipment out there so see the impact you won’t see it tomorrow you might see on the frame edges you’re seeing a bit of it but I don’t think anything material yet.

Paul Cheng – Barkley’s Capital

I see.

Claiborne Deming - President and CEO

In shock, if you didn’t see it by the middle of next year maybe the first quarter.

Paul Cheng – Barkley’s Capital

Okay. When you talk about the Australian expiration bloc, how much of a gas resource do you need to fund in order to be economically viable for development?

Claiborne Deming - President and CEO

Paul, in what we’ve modeled, at least initially, we think there is a range anywhere of up F2CF up to potentially 102CF up on the bloc.

Paul Cheng – Barkley’s Capital

And what is the minimum you need?

Claiborne Deming - President and CEO

Drives us and we’re in the range of three, four, we’re calling back as in economics I’ve seen a while we’re back and that seems like a reasonable shot.

There’s a nearby development that’s going to go on called Iktheas and we’re close enough there that we can tie into that and if we do pursue that path if we’re not five or six or seven TCF, two TCF likely works if you tie in some show you like that.. It gives you a ballpark range.

Paul Cheng – Barkley’s Capital

That’s great. I’m wondering, in the past that you gave some number about 2009- 2010 production target. Is there any update to those two years?

Claiborne Deming - President and CEO

I was just looking in our budget 2009 and it now seems now like somewhere between 190 and 195 a bare equivalent of somewhere around there. Going into 2010 somewhere over 200 maybe 210, 215 something around there.

Paul Cheng – Barkley’s Capital

Talking about the cash flow, you guys know that does have a very strong bond statement and everything. But from the cash flow management standpoint, next year, a different occurring market condition than the current market, do you want to run a cash flow neutral model or that you don’t mind if the opportunity is there that you’re going to cut the mile or try to raise that, how should we look at that?

Claiborne Deming - President and CEO

I’m not really sure I’m following you.

Paul Cheng – Barkley’s Capital

When we’re looking at, I guess that question is that for the next year when you are planning your capital spending, as well as the plans of the acquisitions or anything, do you want to live within the means just using your cash flow operations or if you think that opportunity is there you don’t mind tapping into your credit line as well maybe trying to raise debts? How should we look at your approach of cash management?

Claiborne Deming - President and CEO

You know, for the right assets, certainly we would, yes, that’s why it’s there and that’s why likely that’s going to be the best opportunities for us over the next eighteen months I suspect is looking for properties that we can facilitate the development of. This would help our credit lacks, for sure.

Paul Cheng – Barkley’s Capital

Okay.

Claiborne Deming - President and CEO

Well, 14%, that’s the total cap going into a weak period, that’s just the ….

Paul Cheng – Barkley’s Capital

How about if we’re excluding the acquisition activities, just looking at your organic capital spending program, should we look at it as you’re trying to live within your means and cash flow to be neutral or that you think you’d be willing to go a little bit above the cash flow.

Claiborne Deming - President and CEO

Paul, I think absent acquisition I think you’d see us living within or below our cash flow. Big spending Keykays, the big spending like gas is about to be behind us and the big spenders is behind us, as a right, Thunderhawk, course being behind us. So the big development dollars are done. So now we’re going to get the cash flow from those and so I suspect the next couple of years, absence of extraordinary opportunity which I kind of expect to see, I think we should generate free cash flow.

Paul Cheng – Barkley’s Capital

A final question, maybe. This is for Mindy or Kevin. For UK Alan there is a loss in the third quarter, market condition non-excluded in the US but I think, that not seems to indicate by the benchmark indicator saying that you won’t break even, is there any special happening in the quarter?

Claiborne Deming - President and CEO

Paul, I can handle it. The way we run our business there, because short-haul crude, we don’t hedge any of our crude positions, and so as a result you buy crude, the market is just hurdling down, by the time you get the crude in your shop, you run the products, you typically lose some money and are really really abruptly falling with the market. Likewise on the way up, which just went up in the second quarter, hard to reverse that.

Paul Cheng – Barkley’s Capital

Oh yeah, but inventory loss

Claiborne Deming - President and CEO

Yes, exactly, but if you just stripped all that away you would probably would have made somewhere between $15 to $20 million bucks in a quarter.

Paul Cheng – Barkley’s Capital

Perfect. Thank you.

Claiborne Deming - President and CEO

I was not particularly happy with it but it’s worked for us in the past because you buy you run it. But within ten days the market changes abruptly.

Paul Cheng – Barkley’s Capital

Actually, I don’t think that you want to hedge. This is trying to just understand you don’t know.

Claiborne Deming - President and CEO

Yes, that’s what happened.

Paul Cheng – Barkley’s Capital

Thank you.

Operator

Thank you. Our next question comes from the line from Erik Mielke from Merrill Lynch.

Please go ahead.

Erik Mielke -Merrill Lynch

Good afternoon, gentlemen. My first question is to the very first question on the call is on acquisition opportunities but perhaps more focused on the downside. Back in May you mentioned that you would consider doing some acquisitions as part of building up the business, sometimes it would be big enough to be a standalone business. But also that you thought the valuations were still too high at that time. Can you comment on the current valuations and whether you think that's an area you'll be putting money to use as well? You mentioned you bought some retail assets in the UK.

Claiborne Deming - President and CEO

Well, likely we'd concentrate on retail assets even thought our organic program in the US is so strong - there' no need there, unless there's something to fill in. On the refining side of course values have plummeted - I'm not even sure there's a market there now. Something was unusual that filled in for us I think we'd look at it - I think that's unlikely. I will never say never there. A current suite of assets given 100% of Milfordhaven and retail - it's pretty good shape right now. Much better shape than we would have been a year or so ago. So, I'm well on the same path, but the opportunistic is something just kind of falls into a play.

Erik Mielke -Merrill Lynch

And your attitude to keeping the business combined at?

Claiborne Deming - President and CEO

Well, anything as you've noted other companies have thought about slimming out their downstream assets - we put them on the shelf because credit markets are what they are, and capital markets are what they are. And so, we're certainly not immune to those forces.

Erik Mielke -Merrill Lynch

Very good. Thanks for your answers.

Operator

Thank you our next question comes from the mine Gene Gillespie with Gillespie Consulting Group. Please go ahead.

Gene Gillespie - Gillespie Consulting Group

Claiborne I'm going to miss you.

Claiborne Deming - President and CEO

You Gene I might start Bidding Consulting Group.

Gene Gillespie - Gillespie Consulting Group

I'll call it.

Claiborne Deming - President and CEO

That's a creative name.

Claiborne Deming - President and CEO

No I would never do that. I can assure you of that. I missed you too, Gene.

Gene Gillespie - Gillespie Consulting Group

Well, listen I just want to do a follow up more on this cash flow thing and living within your means. Can you share with us how well you can go with your 2009 upstream Cap X without impacting current projects or delaying a production from things that are already in works - assuming the current service calls, labor steal, construction materials etcetera have continued where they are today.

Claiborne Deming - President and CEO

Gene, we're going to find out. Dave is bringing the group together tomorrow and look at it. Just a first, quick glance at the development projects is about $4 billion we would reach maybe $5 billion, and most of those are sacrosanct. Just looking at the list I don't see anything there that we're not going to want to do. And then, exploration for us, except for commitments is, you can shut the whole darn thing down. So, I might - a $1.5 billion is too low, but somewhere between $1.5 billion and a $1.7 billion I would suspect on the upstream side.

On the downstream side we have an expansion at Milford haven we're going to look at because it's extraordinarily efficient to do it. It will take a $100,000,000 to take the plan up to a 135,000 a day. That probably needs to stay in there, and also likely continuing the) retail outlets here in the US. It has been a good business for us - that'll likely stay - maintenance. That's not a lot so, all in all somewhere between $1.75 and $2 billion I would think, is where we could end up. But I doing a little bit of finger painting, but that's what - you know, that's an educating guess.

Gene Gillespie - Gillespie Consulting Group

You're spending this year will come in around $3 (? Not sure what amount)

Claiborne Deming - President and CEO

No, - it's going to be less than that. I suspect - I don't know yet $2.4 (Not sure what amount). It's a good stab at it.

Gene Gillespie - Gillespie Consulting Group

Excluding exploration with 2A.

Claiborne Deming - President and CEO

But things have slowed, we're just having a hard time getting (unintelligible)

Gene Gillespie - Gillespie Consulting Group

(That excludes exploration expense.

Claiborne Deming - President and CEO

No, that's everything.

Gene Gillespie - Gillespie Consulting Group

That's everything. Okay.

Claiborne Deming - President and CEO

Probably $2.4 (Not sure what amount). Maybe less than that - I don't think it'll be more.

Gene Gillespie - Gillespie Consulting Group

That's good. All right, thank you.

Operator

The next question comes from the mine of Mark Gillman with the Benchmark Company. Please go ahead.

Mark Gilman - The Benchmark Company

Claiborne I'm going to miss you too, but believe me I don't…

Claiborne Deming - President and CEO

What?

Mark Gilman - The Benchmark Company

I said I'm going to miss you also, but I don't expect you to reciprocate.

(Soundbite of laughter)

Claiborne Deming - President and CEO

I’m definitely going to miss your questions.

Mark Gilman - The Benchmark Company

On a more serious note, a couple of clarifying things. The 70% Kikei entitlement, is that on your working interest or on a 100% basis?

Claiborne Deming - President and CEO:

Wait, I’m sorry, what did you say again?

Mark Gilman - The Benchmark Company:

You quoted a 70% entitlement on Kikei. Is that on your working interest or on a gross basis?

Mindy West - VP and Treasurer:

That’s our net, for our 80% working interest, which then declines to just a little under 60 once we flow to our cost recovery layer.

Claiborne Deming - President and CEO:

That’s a gross number.

Mark Gilman - The Benchmark Company:

I’m still not sure –

Claiborne Deming - President and CEO:

It’s 70% of 100% -

Mindy West - VP and Treasurer:

It’s 70% for our 80% working this.

Claiborne Deming - President and CEO:

Corrected.

Mark Gilman - The Benchmark Company: 

OK. And with respect to Mindy, does the $400 million to be recovered – is that your working interest?

Mindy West - VP and Treasurer:

That was a gross number.

Mark Gilman - The Benchmark Company:

OK. Who’s the off-taker on the KK Gas if you could remind me?

Claiborne Deming - President and CEO:

It’s a methanol plant that’s been built on Guam Island I think.

Mark Gilman - The Benchmark Company:

And back to the UK refining for a second. You’re not on a fifing-canning basis are you?

Claiborne Deming - President and CEO:

For products we are.

Kevin Fitzgerald - SVP and CFO:

For crude we’re Lifo but for products we’re Fifo.

Mark Gilman - The Benchmark Company:

That’s kind of an interesting mix, Kevin.

Kevin Fitzgerald - SVP and CFO:

It just, it goes way back. Way, way back.

Mark Gilman - The Benchmark Company:

OK, and is that what creates the distortion that you were speaking of previously?

Kevin Fitzgerald - SVP and CFO:

A combination of the two, yeah.

Mark Gilman - The Benchmark Company:

Yeah? And Claiborne, just one final one. Just remind us of some of the features of Shengal, in terms of type of prospect, closure, positional environment, things like that.

Kevin Fitzgerald - SVP and CFO:

It’s outbored in P, Mark. It’s a four-way dip.

Claiborne Deming - President and CEO:

Probably 150 million barrels per inaudible], the size. It’s got flat spots, but we had one that had flat spots that was a dry hole. I don’t take it. But it’s nice to see, good amplitude. It’s near Uba, which looks like it’s going to be a discovery, but another company is drilling. It’s not bad, I mean we haven’t had success there so I think you have to put some risk on it. But it’s a good four-way dip, amplitude supported, flat spot, prospect, and oil country.

Mark Gilman - The Benchmark Company:

The 150 is unrisked, Claiborne?

Claiborne Deming - President and CEO:

Yeah.

Mark Gilman - The Benchmark Company:

OK. Thanks again, and I hope not to lose touch.

Claiborne Deming - President and CEO:

Mark, don’t worry, good luck to yourself.

Kevin Fitzgerald - SVP and CFO:

Mark, it’s Kevin. I was just corrected on the products. We’re Fifo for retail.

Mark Gilman - The Benchmark Company:

OK, but Fifo for wholesale?

Kevin Fitzgerald - SVP and CFO:

Right, in the UK.

Mark Gilman - The Benchmark Company:

OK, thanks Kevin.

Mindy West - VP and Treasurer:

Mark, just to go back to your question regarding Murphy’s net at Kikei, we have an 80% working interest. We met 70% of the production. I think we’re all talking about the same thing but we met 70% of the production.

Claiborne Deming - President and CEO:

Of the 100%.

Mindy West - VP and Treasurer:

That’s right.

Claiborne Deming - President and CEO:

Did you get that, Mark?

Mark Gilman - The Benchmark Company:

Yeah, yeah. I thought I did until Mindy said something. Now I’m confused again.

Claiborne Deming - President and CEO:

No, it’s 70 of the 100, never more than 60 of the 100.

Mark Gilman - The Benchmark Company:

OK, got it.

Claiborne Deming - President and CEO:

That’s what I thought it was.

Mindy West - VP and Treasurer:

So our networking interest right now.

Mark Gilman - The Benchmark Company:

OK, thanks. Sorry about that. I’m a little slow.

Operator

Thank you, ladies and gentlemen. If there are any additional questions at this time please press the star followed by the 1, and if you are using speaker equipment you will need to lift your handset before making your selection. Your next question comes from the line of Louis Robb with Barrow Hanley. Please go ahead.

Louis Robb – Barrow Hanley:

Hey Claiborne.

Claiborne Deming - President and CEO::

Hey Louis!

Louis Robb – Barrow Hanley:

We’re gonna miss you too, man.

Claiborne Deming - President and CEO::

Thank you. I’ll see you.

Louis Robb – Barrow Hanley:

But I had to get this in before you left. You know, I just noticed that the yield on the S&P 500 is higher than your yield and you’re gonna reserve a little of that cash flow next year to increase the dividend too I hope.

Claiborne Deming - President and CEO::

Well, Dub always said, back when oil was $20 a barrel, dividends are pretty sacrosanct around here. We certainly like what we have and given the opportunity we’ll certainly increase it.

Louis Robb – Barrow Hanley:

I just wanted to give you one last hard time about that.

Claiborne Deming - President and CEO::

Absolutely.

Louis Robb – Barrow Hanley:

Really, I have another question.

There have been some rumblings and now that the valuation seems to be coming down to more reasonable levels are you guys taking a look a little closer to home now?

I think the play, from what I know of it is that it’s quite a strong play and if there was something available at the appropriate place then I think we can certainly take a look at it. It’s got all the attributes, I suspect, you that are looking for. (.30) so the upfront cost is a bit more to drill wells and the cost for paying for the well, and the acreage was so high, it really took quite a high gas price by our calculations to make it fly. But if you get it right, I think you’ve got something that’s pretty powerful for you. We wouldn’t turn our back on it.

Alright, thanks for that caller and best of luck to you.

Thanks and same to you.

Operator

The next question comes from the line of William Fuhr with W.H. Reaves. Please go ahead.

William Fuhr – W.H. Reaves

Good afternoon ladies and gentlemen. Staying on the acquisition or the cash flow interest, you have been willing to step into Canada for example. Could you just elaborate a bit more on what criteria you might be looking for and perhaps include what your budgeted or minimum price expectations might be for projects going forward without addressing whether today’s prices are the perfect price. Thanks very much, and by the way, all the best.

Claiborne Deming - President and CEO::

Thank you. We got lucky with the botany because there was a low in drilling last year when prices plummeted and so we bought the initial position and then we added acreage before it ran up and then it really ran up, and then another company bought a near-by company and it really ran the botany, so we were just fortunate there because our call structure is going to be super, super competitive. Even in this price environment, we’ll do quite nicely. It’s going to be hard for us to replicate that. If it just falls into place, then we can add to it and make it material to our company. As was mentioned in passing, we don’t know what it is yet, but it’s going to be helpful. It could be material, additional production from that particular area, especially the first two or three years. We’ll look for something like that. I think it’s hard, hard to find something like that at reasonable prices but we got people turning over rocks looking. I think it would be wise to use prices around here without giving away too much.

William Fuhr – W.H. Reaves

The oil side and the gas side?

Claiborne Deming - President and CEO::

Sorry?

William Fuhr – W.H. Reaves

65 and around 6.50 roughly?

Claiborne Deming - President and CEO::

Well, I would be more…from the gas side. There’s just so much of it out there. These plays are enormous, their prolific; the technology has improved, therefore the… Have to stay here in the States. There’s a lot of money that’s been invested, so you’re not going to let it go foul. I’d be surprised if you didn’t see a lot of pressure on gas prices for a while. And companies saving a lot of rigs and they will some but a lot of them they won’t to meet marginal costs. Just because you pay a ton of money for a 3 year lease, that’s your principle asset of the company, you’re not going to let it lapse. You’ll grow it and produce it. Even if you don’t make much money, so I say pressural supply. It’s just a way to look at it that’s realistic.

William Fuhr – W.H. Reaves

Thank you.

Operator

Thank you. Once again, ladies and gentlemen, if there are any additional questions at this time please press the * followed by the 1 and if you are using speaker equipment you will need the hand-set before making your selection. We have a follow-up question from the line of Mark Gilman with The Benchmark Company. Please go ahead.

Mark Gilman – The Benchmark Company

If I can spend a minute on your thinking regarding the merit of enhancing your retail footprint in the UK.

Claiborne Deming - President and CEO::

Well, the main reason, Mark, is that we run a real good shop over there. Consistently over time, we’ve made good returns on the capital that we’ve deployed in the acquisition two year ago, that added about 30, 40 stations, it’s turned out really good for us. And not even factoring in appreciation and property values, which most people do in these types of things, we didn’t, and just the cash in cash out margins have been quite nice. So the thought being why don’t we just slowly build on that position, we’re not on motorways, we’re typically neighborhood oriented, it’s a little bit of a quirky business, but it’s consistently been good for us. And then, since we’re off the other 70% of Milford Haven, the more you can cram barrels, gasoline,. Petrol, into the England market, the more money your make because it’s just a more profitable place than selling it at the jetty, so that’s another strategic lease. We’re not going to break a pick on it, but we’re just going to continue to kind of peck away at it.

Mark Gilman – The Benchmark Company

Do you use the same pricing model over there as you’ve used here in the States?

Claiborne Deming

No, we don’t. It’s a whole different business, it’s a lower volume, a more neighborhood oriented offer. And we do pretty well on inside the store there as well.

Mark Gilman – The Benchmark Company

Okay, thanks a lot.

Operator

Your next question comes from the line of Mark Caruso with Millennium Partners. Please go ahead.

Mark Caruso – Millennium Partners

Good afternoon, I just had two quick questions, and I apologize. I got on late. I’m not sure if you guys went over this, but I wanted to see, Claiborne, you were talking about some of the cap-ex for next year, and I was curious, just from a high level, given where commodity prices are, and sort of what you guys drilled in the Gulf of Mexico this year, did we already go after the more high risk wells in the program and now the commodity prices come down, it’s lower risk as far as drilling opportunities or you’re still going after the project that you think offers the best value in the long term?

Claiborne Deming

The latter, just because the time frame of these things is so long that you, to be driven too much by next years price I think would be not particularly wise, so we’ll find the best prospects now, and having said that there’s only one that right now I firmly say that we’re going to drill in the Gulf next year, which is a non-operating route, a prospect call Samurai, which is one of these middle mine single mine sub salt deals. And it’s expensive, it’s sub-salt it’s going to be a hundred odd plus day well, but it’s a good looking prospect, 50 million barrels, plus or minus, and we’ll drill that. and we may drill something else in the Grand Canyon that we operate, but we’re going to get all th rest of our 3-D seismic in January to target it before we make a final decision. So that kind of gives you my philosophy. There’s something great, you drill it.

Mark Caruso – Millennium Partners

Thanks, and then just one last question, as far as we’ve seen the correction in oil prices, is there oil price or gas price, and you expect some more pressure, given the different plays that are out there, but is there an oil price where you guys sort of, you start thinking about whether or not it’s worth kind of pushing things a little bit? I know different people have different price hurdles, but I didn’t know if you guys had 60 or mid 50s where you start thinking about it, I’m just trying to get a sense in general. Do you guys look at the world, where the oil price would have to be before you start rethinking things?

Claiborne Deming

I think that what Dave will do is look at a budget based on $70 a barrel, I think that’s a pretty good place to start. And then, I think we’ll probably have some sensitivities if oil goes to 60, if oil goes to 50, what type of capital do we need to start pulling out, to stay balanced, if they decide that they want to stay balanced, which I I think is pretty reasonable thing to think about in this market, to take advantage of opportunities. Os I wouldn’t say there’s a price where you kind of stop stuff, I’d say look 60 bucks a barrel, what’s your cash flow going to be next year? Then you just start prioritizing and taking stuff out that you can. If you say it’s 50, take it down. That’s kind of how we run the shop, so rather than there be some price where you magically, you just put the price in and start looking at your projects and prioritize them.

Mark Caruso – Millennium Partners

Great, thank you so much.

Operator

And we have a follow up question from the line of Gene Gillespie with Gillespie Consulting Group, please go ahead.

Gene Gillespie - Gillespie Consulting Group

Claiborne, you had indicated that Samurai was one-third interest, what sort of (inaudible 04:49) that you had 50-50 in the lease?

Kevin Fitzgerald

No, it never was, we always went in with Samson and Anadarco.

Gene Gillespie - Gillespie Consulting Group

Okay, thank you.

Operator

Thank you, and at this time there are no further questions in the queue, you may continue.

Claiborne Deming

Well ladies and gentleman, thank you very much, I appreciate your attention and I will undoubtedly see some of ya’ll at

Operator

Ladies and Gentlemen, this concludes the Murphy Oil Corporation third quarter conference call, if you’d like to listen a replay of today’s conference please dial 800-405-2236 with an access code of 11120763#, thank you for your participation, you may now disconnect.

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Source: Murphy Oil Corporation Q3 2008 Earnings Call Transcript
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