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Murphy Oil Corporation (NYSE:MUR)

Q4 2007 Earnings Call

January 28, 2008 1:00 pm ET

Executives

Dory J. Styles - Manager of IR

Claiborne P. Deming - President, CEO

Kevin Fitzgerald - VP, CFO

Mindy K. West - VP, Treasurer

Analysts

Ben Dell - Sanford Bernstein

Nicole Decker - Bear Stearns

Paul Cheng - Lehman Brothers

Arjun Murti - Goldman Sachs

Paul Sankey - Deutsche Bank Securities

Mark Gilman - The Benchmark Company

Gene Gillespie - Howard Weil Inc.

Ted Izatt - Bear Stearns

Louis Roth - Barrow Hanley

Sonia Franklin - Bloomberg News

Operator

Good morning, ladies and gentlemen, and thank you for standing by. 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 call over to Claiborne Deming, President and Chief Executive Officer of Murphy Oil. Please go ahead, sir.

Claiborne P. Deming - President, CEO

Thank you, and 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 Stilers, Manager of Investor Relations.

I'll turn it over to Dory at this time.

Dory J. Styles - Manager of IR

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 19, 2007 Form 8-K filed with the SEC.

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

Kevin Fitzgerald - VP, CFO

Thanks, Dory. 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 the fourth quarter of '06, net income was $88.4 million or $0.47 per share.

The full year 2007 net income was 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 per share. The largest of these was a $59.5 million non-cash after-tax charge to reduce the carrying value of increase in crude oil and product inventories associated with the December 1 of the remaining 70% of the Milford Haven, Wales Refinery.

Our 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 data, which was December 1, 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 a 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.

Breaking earnings by segment, the E&P segment in the fourth quarter of '07 earned $268.2 million compared to $91.1 million in the fourth quarter of '06. The higher earnings in the 2007 quarter were primarily attributable to higher oil and natural gas prices - oil was up almost $30 a barrel and 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 on stream in August, and the natural gas increase was due to buy-ins from the Northwest Mondo field in the Gulf of Mexico, which started up in July.

The E&P segment also benefited from the previously mentioned Canadian income tax rate reduction. Crude oil and gas liquids 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 71 million 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 was 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 were significantly improved over '06, and this was attributable to higher margins and an increase in volumes.

In the Corporate segment, fourth quarter of '07, we showed a charge of $34.7 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. The higher interest number related to both higher average debt outstanding and also lower levels of capitalized interest on development projects.

The 2006 quarter included the costs related to the El Dorado Promise program referred to earlier.

Capex for 2007, including the acquisitions of the Tupper leases in Canada to real estate underlying 500 of our existing retail stations located at the Wal-Mart Supercenters and a 70% of the Milford Haven Refinery total $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 are 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, build out a Phase I of the Sarawak gas project ahead of first production, which is 2009, Azurite field development in Congo, Thunder Hawk 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 at now the 100% owned Milford Haven, as well as continued build out of our retail system in the U.S., both onsite at Wal-Mart Supercenters and our new offering, the Murphy Express stations, in carefully selected high-traffic areas.

At year end 2007 Murphy's long-term debt amounted to $1.5 billion, with 23% of total capital employed.

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

Claiborne P. Deming - President, CEO

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 worldwide upstream operating unit under the leadership of David Wood, while at the same time placing worldwide downstream operations with Harvey Doerr, both of them 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've made.

The key focus for '07 in the E&P division was bringing the Kikeh field on stream. In fact, they achieved that milestone one month ahead of schedule - it may be a record time for deep water development - and the field is currently ramping up with seven wells on stream 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 modelled, and will be an important legacy asset underpinning our extraordinary production growth over the next few years.

The other task of the E&P group was to obtain new opportunities for Murphy in order to set the stage for growth beyond Kikeh. We were successful at 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 - Surinam and Australia. Block 37 in Surinam was picked up in June and covers over 2 million acres. This year we will be acquiring 3-D seismic in 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 ACP 36 in Australia is attractive because it affords an entry into a known hydrocarbon province 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 UCS 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 complement nicely our existing deepwater acreage in Green Canyon.

Another significant addition during '07 was the Tupper leases, located in Northeastern B.C. This tight natural gas sands play is part of the Triassic age Montney Formation and provides a favorable entry point for Murphy into an onshore North American natural gas play. Yet the economics are robust, and there is much growth potential here.

Importantly, it also lowers our overall risk profile, adds natural gas in a meaningful way to our mix, and makes us more geographically diverse. Currently, we're 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 and 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. The farm in also includes an exploration 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 complimentary natural gas discovery at [Verus], 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 deepwater Block K Malaysia called [Buntle], which is a four-way dip closure located in 7400 feet of water. The well will be drilled into the same K sections found in the Kikeh 7 deep and also deep in to test a new carbonate play.

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. A well might also be drilled in our northern block in Congo later in the year.

As mentioned, our recently acquired acreage in the Gulf of Mexico should merit two or three wells this year targeting natural gas.

And then last thing, in Australia look for us to drill our first exploration well there.

So in '08, we will get back to the business of exploratory drilling. We'll be carefully risking our growing 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 cost of holding high working interests in 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, Wales 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, our focus at our two U.S.-based refineries remains on reliability and operational performance. Refining margins are lower in the first quarter, as is normal for this time of year as gasoline correct spreads have contracted due to adequate inventories and softer demand. We have curtailed runs for economic reasons at the Superior plant and have planned maintenance work underway at both Milford Haven and [Morrow] during the quarter, all of which will lead to reduced throughputs in the fourth quarter.

Murphy USA Retail Network continued its torrent pace of same-site volume growth and strong non-fuel sales. In fact, Murphy USA has grown both fuel and non-fuel 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. At the end of the year, we're 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 [Kcap] field in Malaysia, which was sanctioned in December. We have not yet booked reserves from Tupper. This would work out to a finding and development cost excluding acquisitions in the mid-20s.

As I mentioned before, due to stringent SEC rules, the Kikeh reserves will not be bookable as one lump sum, but rather programmatically over the next several years. Again to remind you, the field was sanctioned on 440 million barrels, of which our net should be around 230 million barrels. At year end '05, 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 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 [inaudible] 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 Surinam 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 Columbia.

We opportunistically strengthened and diversified our downstream business with a Wal-Mart land acquisition and the U.K. refinery purchase.

In summary, we are on much firmer ground on both sides of our business and from that stable base, poised to grow further through continued focused discipline and execution.

I'm now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ben Dell with Bernstein. Please go ahead.

Ben Dell - Sanford Bernstein

Hi, Claiborne.

Claiborne P. Deming - President, CEO

Hey, Ben. How you doing?

Ben Dell - Sanford Bernstein

Good I just had a couple of quick questions. With respect to Sarawak gas, obviously Asian LNG 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 LNG prices or will it be a flat fee at the LNG site?

Claiborne P. Deming - President, CEO

Ben, it's linked to the realization of LNG 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 LNG so as a result we are and will experience the benefit of this increased price.

Ben Dell - Sanford Bernstein

Okay. Great. And on your Australian acres that you've picked up, obviously the Australian gas market is very localized. Is your ambition to compete in the gas market against the domestic players like Apache or is it a plan to find enough gas to get it into one of the LNG schemes being developed there?

Claiborne P. Deming - President, CEO

The key really for us is to go into a base 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 LNG facility of sorts. Don't have a timetable for it, but you have to enter now and this is a particularly attractive block to us because it's got, oh, three or four structures and they've got size and they work in nearby leases, and so it's an opportunity to capture a pretty large resource now.

Ben Dell - Sanford Bernstein

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 costs and total taxes you expect on a per barrel basis when it's at [inaudible]?

Claiborne P. Deming - President, CEO

Ben, I've got some people looking. We're about $10 now - $7. Say $7 plus or minus is a good ongoing number.

Ben Dell - Sanford Bernstein

That's including taxes?

Claiborne P. Deming - President, CEO

No, that doesn't include - it's amortized in the lease on the FPSO.

Ben Dell - Sanford Bernstein

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

Operator

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

Nicole Decker - Bear Stearns

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

Dory J. Styles - Manager of IR

Sure, Nicky. I'd be glad to. This is Dory.

Our production as previously mentioned is based 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, they have a loss of approximately $25 million included.

Nicole Decker - Bear Stearns

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

Dory J. Styles - Manager of IR

Yes, primarily at Kikeh.

Nicole Decker - Bear Stearns

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?

Claiborne P. Deming - President, CEO

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

Nicole Decker - Bear Stearns

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 onto those assets?

Claiborne P. Deming - President, CEO

Nicky, this budget certainly reflects that, yeah. I mean, 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 WalMart through this new format we have, Murphy Express. And then spending money at Morrow, a lot for new tankage that was damaged by Katrina. And then a couple of projects this period.

Nicole Decker - Bear Stearns

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

Claiborne P. Deming - President, CEO

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

Nicole Decker - Bear Stearns

Great. Okay, thank you.

Operator

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

Paul Cheng - Lehman Brothers

Hey, guys.

Claiborne P. Deming - President, CEO

How you doing?

Paul Cheng - Lehman Brothers

Very good. Hey, Kevin, $2.8 billion for this year - should we look at the year as a high-water mark and just coming down over the next several years, or that with the new projects you continue do, you're just going to maintain - coast at that level?

Claiborne P. Deming - President, CEO

Well, the way that our plan reflects is that this is a close to a high water mark, and it starts coming down. It 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'll trend down pretty dramatically.

Now, naturally I hope that we have some success either - well, in some of our programs - and so you'll see some more development dollars out there. One that goes on, by the way, is Tupper. We're going to spend $300 million plus this year there, and the spend there is pretty aggressive there as you go forward. Now the first year's burdened by gas plants and some pipelines and you get the benefit of that later on. It's more drilling. But nonetheless, it stays at a pretty high level for a long time, in fact, because it's a large resource, a lot to get.

Paul Cheng - Lehman Brothers

[inaudible] can we narrow down a [inaudible] number? Of course, I mean, hopefully that you guys will find a new project, but just based on your existing project backlog, should we assume that without adding any new project, the Capex for the next several years that - which dropped back down to the $1.7, maybe $1.8 billion range?

Kevin Fitzgerald - VP, CFO

Paul, this is Kevin. You know, we show in our budget is going down, like for 2009, you'd be going down approximately $600 million. Most of that's because these development projects get done. And barring new projects, I don't think 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.

Paul Cheng - Lehman Brothers

Okay.

Kevin Fitzgerald - VP, CFO

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

Paul Cheng - Lehman Brothers

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?

Claiborne P. Deming - President, CEO

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

Paul Cheng - Lehman Brothers

In 2008?

Claiborne P. Deming - President, CEO

Yeah.

Paul Cheng - Lehman Brothers

Mid-130?

Claiborne P. Deming - President, CEO

The average for '08.

Paul Cheng - Lehman Brothers

That seems low. Is it given that Kikeh is going to ramp up pretty rapidly? Within that 135 or so for the year, what is your expectation from Kikeh inside there?

Claiborne P. Deming - President, CEO

We're looking right now, Paul.

Kevin Fitzgerald - VP, CFO

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

Mindy K. West - VP, Treasurer

Kikeh should exist around 70 or net. But you also have to realize that we're planning some properties as well. We just unloaded the [Brikana] property, which was 2,500 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 decline there.

So while it is a strong contribution from Kikeh, we have some other things playing into the number as well.

Paul Cheng - Lehman Brothers

Mindy, what's the total asset sales reduction going to be in your plan for $135.

Mindy K. West - VP, Treasurer

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

Paul Cheng - Lehman Brothers

For the year - average?

Mindy K. West - VP, Treasurer

Right.

Paul Cheng - Lehman Brothers

Okay. And [inaudible] on [inaudible], 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 is that similar to what we've seen in [inaudible] get piped to the onshore maybe for the methanol plant or the other use for the domestic market?

Claiborne P. Deming - President, CEO

Paul, it's early, but there's been a project - a joint venture company and a project announced - near Verus that's going to be developed, I think there by [Kepobogan], so there's going to be development in infrastructure in the area near Verus. Rotan needs additional drilling. It's further removed, and what we'll do is we'll drill the east half of Rotan, 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 LNG facility.

Paul Cheng - Lehman Brothers

Okay.

Claiborne P. Deming - President, CEO

It's early. It's early.

Paul Cheng - Lehman Brothers

I understand. I fully understand. Claiborne, maybe I missed it, when you were talking about where you're going to fund additional reserve from [inaudible] 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 PFC impact if there's any in terms of the reserve reduction?

Claiborne P. Deming - President, CEO

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 PFC impacts to pass on.

Paul Cheng - Lehman Brothers

I see. Okay. Very good. Thank you.

Mindy K. West - VP, Treasurer

Paul, 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.

Paul Cheng - Lehman Brothers

Thank you, Mindy.

Operator

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

Arjun Murti - Goldman Sachs

Thanks. Claiborne, I don't recall your previously following up on the number 7 deep sands, and I think Buntle 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 at the time or has some other development occurred that made you want to go back and drill those deep sands again now with Buntle?

Claiborne P. Deming - President, CEO

Primarily, facilities are full. And the resource opportunity at Buntle is one that, you know, if it works, is significant. And so we want to see - want to take a crack at that one.

Arjun Murti - Goldman Sachs

Kikeh-type significant or -

Claiborne P. Deming - President, CEO

You know, yeah. Yeah. Put it this way. It's a large structure, and it's a deeper horizon that's only been tested at Kikeh 7 deep and we encountered hydrocarbons, and so it's de-risked to that extent. But as you recall, when we went outboard of Kikeh, we had rattier 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, you know, from an exploration standpoint, you get really - you look forward to drilling it.

Arjun Murti - Goldman Sachs

I got you. So when you first went out for it, you drilled kind of the Kikeh horizons at [Tsonoga] and then I - and I forget all the other names. Those were the thin-bed reservoirs. This is in that vicinity, but this will test the deeper sands.

Claiborne P. Deming - President, CEO

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 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.

Arjun Murti - Goldman Sachs

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

Claiborne P. Deming - President, CEO

Unlikely. What we're doing is we're going to get a well into [Karesi], I think, but we have to wait for the FPSO to have room, and it won't for awhile. 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 are 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.

Arjun Murti - Goldman Sachs

On the Block H gas discoveries, are you thinking LNG down the road there or is that domestic market gas?

Claiborne P. Deming - President, CEO

It's likely - I was telling Paul, it's early but I think the preliminary thought is you pipe it onshore, you get it over to [inaudible].

Arjun Murti - Goldman Sachs

Got you. 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?

Mindy K. West - VP, Treasurer

Do you mean oil?

Arjun Murti - Goldman Sachs

The oil, yeah. The Malaysia realized oil price.

Mindy K. West - VP, Treasurer

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.

Arjun Murti - Goldman Sachs

That's it.

Mindy K. West - VP, Treasurer

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

Arjun Murti - Goldman Sachs

That makes sense. And I apologize, one final one. Do you have a cost for the total acreage purchase cost around the Tupper prospect?

Kevin Fitzgerald - VP, CFO

We do. We spent around $225 in December at the sale, and we had previously acquired the interest - we call it Tupper 1 from - on the Bay Ridge acquisition, for $150 million. And then we went to a sale or two in between, Arjun, 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.

Arjun Murti - Goldman Sachs

That is great. Thank you very much.

Operator

Our next question comes from Paul Sankey with Deutsche Bank. Please go ahead.

Paul Sankey - Deutsche Bank Securities

Thank you. 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'd said acquisitions were a potential outcome, if you could talk a little bit about that as well? Thanks.

Claiborne P. Deming - President, CEO

Sure. Well, historically we've been dividend payers, and I certainly don't see that decreasing, and in fact, I see that in more robust way over time. And so you can kind of fit that into your mix.

But historically - that is in the last 10 years - I've shied away from buybacks because we saw greater opportunities in either buying oil and gas reserves in the mid90s, exploring in post-2000. And I see that continuing.

Now, the world always changes, and so, say that it's two years from now and that we have tremendous excess cash flow, then I think we'd 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 so that's very important for us to make sure that shareholders are treated extremely well.

Paul Sankey - Deutsche Bank Securities

Would you characterize yourself as anti-special dividends?

Claiborne P. Deming - President, CEO

We haven't done one, and so I would leave it at that. I don't think I really have a stance of pro or anti, quite frankly. You know, again, we'll look at our cash flow, we'll see gee, is there a great development to do? I mean, that's the highest returning dollar you can place almost in the world today depending upon where you invest it, of course, and that would be always the preferred way for us to invest our dollars and grow our company.

But to the extent that we have excess dollars, we'll say how can we reward our shareholders?

Paul Sankey - Deutsche Bank Securities

Okay. Then you'd raised the possibility of acquisitions. I know that's always difficult to talk about, but is there anything to add on that?

Claiborne P. Deming - President, CEO

No, and what we've said, you know, the term is used so much now it's become trite to me, this [inaudible] baloney, but it kind of fits certainly what we do.

I historically have said that we've shied away from [inaudible] company acquisitions because gee, if you're wrong, you know, what happens? So I would think that you'd 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 dollars, 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 2010, 2011, which is what Tupper does, then I think we'd look at it pretty closely. It is a reasonable price, I mean, if you have a great asset and open pay, then, you know, so what? You made money.

So I think you have to have all those things happen, and we certainly look.

Paul Sankey - Deutsche Bank Securities

Sure. A very specific one on the downstream. Firstly, you mentioned that the buying of the land underneath the retail stations, the word you used is good for the longevity. I thought it a slightly change choice of word. Could you just expound on -

Claiborne P. Deming - President, CEO

Yeah. Well, they were leased.

Paul Sankey - Deutsche Bank Securities

Right.

Claiborne P. Deming - President, CEO

So what happens with a 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.

Paul Sankey - Deutsche Bank Securities

So you're prepared to put more money into it, I guess?

Claiborne P. Deming - President, CEO

Well, we were putting money into it when we had a lease, so that really hasn't changed. It just give us more confidence over the sweep of time that we'll have something which is, in 10 years, will still be with us and still be quite valuable that can capture the economic wind ourselves.

Paul Sankey - Deutsche Bank Securities

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

Claiborne P. Deming - President, CEO

No, 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 kind of diversity of assets. After Katrina we realized that we were - so we bought Milford Haven, and that gives us a little bit more strength there. Because we leased the land under the retail sites and they've ended up being quite profitable for us, we wanted to buy them. And so I think they're just normal business decisions that a rational person makes to make their business stronger.

Paul Sankey - Deutsche Bank Securities

Finally from 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?

Claiborne P. Deming - President, CEO

You know, I've never been specific in not wanting to be pinned down. All I said is in the course of the year, we'll look at that. And naturally we're asked about that side of our business 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.

Paul Sankey - Deutsche Bank Securities

Thanks a lot.

Claiborne P. Deming - President, CEO

You're welcome.

Operator

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

Mark Gilman - The Benchmark Company

Claiborne, Kevin, folks, good afternoon.

Claiborne P. Deming - President, CEO

Hey, Mark.

Mark Gilman - The Benchmark Company

A couple things. Claiborne, what didn't work on [Robusto] and what implications might that have for any of the other Eastern Gulf gas prospects?

Claiborne P. Deming - President, CEO

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  it wasn't salt core, it didn't have an underlying structure beneath the structure that we drilled.

Now, it hurt that it didn't work because it had 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've 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 that we've picked up, I have to say. And I don't want to damn the ones I got by overpricing them, but they all have big - pretty much 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 the Independents 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 Bcf plus size and then there's three or four that are 150 Bcf size. So I think we're very confident that they're different than Robusto in that we've got others that are more analogous closer or as - closer to the ones we're going to drill.

Mark Gilman - The Benchmark Company

Okay. With respect to Buntle, what fraction of the potential that you see is carbonate as opposed to sandstone?

Claiborne P. Deming - President, CEO

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.

Mark Gilman - The Benchmark Company

So the prospect speaks for itself just on the 7 deep sand?

Claiborne P. Deming - President, CEO

Oh, yeah. On the [plastics], yeah. Yeah, for sure. You can map each. Yeah.

Mark Gilman - The Benchmark Company

Okay, with respect to the Montney, is both the upper and lower reasonable objectives and believed to exist in much of the acreage?

Claiborne P. Deming - President, CEO

The answer's 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 that 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 Tupper 1 and the Bear Ridge, but it gets thicker. The net around where we were in the Bear Ridge acquisition, somewhere net between 70, maybe 110 meters, and then you get up to net Montney of 150 meters, actually, up in the new stuff, and it's in all three zones.

But again, up there it's more the upper Montney. But I wouldn't discount the lower - I mean, the middle and the lower. We'll get reserves out of them.

Mark Gilman - The Benchmark Company

Okay. Anything new with respect to [Pertang Kinarong]?

Claiborne P. Deming - President, CEO

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, you know, we muck around with it, and I suspect something will happen.

Mark Gilman - The Benchmark Company

Okay, I was a little 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 unitization with [Tibbobogan]. And that would be a potentially distinct or different opportunity than, you know, what Rotan and any satellites thereto might be.

Could you clarify that for me, if you would?

Claiborne P. Deming - President, CEO

Yeah. And it's early, Mark. There's no unitization with Tibbobogan. What we found at [inaudible] is - I'm going to guess a little bit, but I'd say it's 20 kilometres away. What you do is you piggyback on that development, if and when you can make a deal. I mean, 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'd want to think about it.

Rotan is further enough away that it's a bit more standalone-ish, and we've always said you need two or three TCF, and we think we have a TCF at Rotan. And it's mainly just about pipeline to shore then over to [Vintulu]. And we've got more work to do there, but we've got structures and amplitudes that look like it, so we'll get to it.

Mark Gilman - The Benchmark Company

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

Claiborne P. Deming - President, CEO

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

Mindy K. West - VP, Treasurer

About $2.50.

Claiborne P. Deming - President, CEO

About $2.50 of it's that.

Mark Gilman - The Benchmark Company

And it's an all in cash operating cost, so $4.50 would be the balance?

Claiborne P. Deming - President, CEO

That's correct.

Mark Gilman - The Benchmark Company

Okay, folks. Thanks very much.

Operator

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

Gene Gillespie - Howard Weil Inc.

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

Kevin Fitzgerald - VP, CFO

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

Gene Gillespie - Howard Weil Inc.

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

Kevin Fitzgerald - VP, CFO

Oh, Gene, it bounces in and around Tapis. It's been a premium with Tapis for the first couple of months, then I've seen it go below. But Tapis plus, you know, $0.50, $1 has historically been where we've been.

Gene Gillespie - Howard Weil Inc.

Okay.

Kevin Fitzgerald - VP, CFO

Let me find it and see if we can answer the other question for you. Yeah, 91.

Gene Gillespie - Howard Weil Inc.

91?

Kevin Fitzgerald - VP, CFO

Yeah.

Gene Gillespie - Howard Weil Inc.

Okay. All right. And you have a lease -

Kevin Fitzgerald - VP, CFO

[inaudible]

Gene Gillespie - Howard Weil Inc.

I'm sorry?

Kevin Fitzgerald - VP, CFO

91 was the average of all of '07 that this has been producing.

Gene Gillespie - Howard Weil Inc.

Okay.

Kevin Fitzgerald - VP, CFO

But we only sold in the fourth quarter, so it's a fourth quarter average.

Gene Gillespie - Howard Weil Inc.

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

Claiborne P. Deming - President, CEO

June.

Gene Gillespie - Howard Weil Inc.

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

Claiborne P. Deming - President, CEO

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

Gene Gillespie - Howard Weil Inc.

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

Claiborne P. Deming - President, CEO

Yes, we have.

Gene Gillespie - Howard Weil Inc.

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

Claiborne P. Deming - President, CEO

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

Gene Gillespie - Howard Weil Inc.

All right.

Claiborne P. Deming - President, CEO

So we'll just play it out.

Gene Gillespie - Howard Weil Inc.

Would you be looking at something similar - maintaining a similar interest as you did on the MPS?

Claiborne P. Deming - President, CEO

Yeah. Yeah. I don't want to be pinned down there, but roughly. They're more expensive wells. There's an Albion above salt, super salt play then there's a deeper play which is Jurassic, which is expensive, but good, good-sized structures, and they work on shore. So there's risk, but there's nice analogs and you've got size. And you've got good obvious, obvious structure.

Gene Gillespie - Howard Weil Inc.

And you definitely want to retain operatorship?

Claiborne P. Deming - President, CEO

Yeah.

Gene Gillespie - Howard Weil Inc.

Okay, great. Great. Thanks for your time.

Operator

Your next question comes from Ted Izatt with Bear Stearns. Please go ahead.

Ted Izatt - Bear Stearns

Hi. Good afternoon, and thanks for the call.

I wanted to ask you about your M&A policies, but I think you've covered that fairly well, so thank you. My next question was more just on your leverage and where you see it headed, what would be the, you know, in an acquisition situation or maybe even just through the capital spending and so forth, how high of a debttocapital would you be willing to go to?

Claiborne P. Deming - President, CEO

Ted, we don't have a particular bright line that says you go above it or below it. Historically we've kept it low. You know, 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 because right when you [inaudible] up is when conditions get bad.

So I suspect that our 23% will, you know, float up a bit here this year, but then over time it trends down.

No, when we developed the [Minean] field - I'm going back to the 1970s, for Christ's sake - we went up to about 50%.

Ted Izatt - Bear Stearns

Right.

Claiborne P. Deming - President, CEO

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. I just don't because unless something, you know, truly, truly unusual - you never say never, but just look at our history.

Ted Izatt - Bear Stearns

Right. Okay, thank you. Then, well I guess actually on the M&A side I have one real last question if you could give a comment. It's just more broadly speaking, how do you see the market for properties these days? Given the high price of oil, is there a big disconnect between the offers and the bids or is it pretty close?

Claiborne P. Deming - President, CEO

No, there's good prices out there. Things are on the market, and things are clearing. And people are paying up. And it depends where you are, it 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 activity in that market.

Ted Izatt - Bear Stearns

Okay. Thank you very much.

Operator

Our next question comes from [Louis Roth] with Barrow Hanley. Please go ahead.

Louis Roth - Barrow Hanley

Hey, good afternoon.

Claiborne P. Deming - President, CEO

Hey, Louis.

Louis Roth - Barrow Hanley

I don't know if Gene was trying to make a point by asking you a question that was, you know, obviously right there 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. So just as a follow on, you know, let's talk a little bit more about the dividend and what your plans are, Claiborne.

Claiborne P. Deming - President, CEO

Well, 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.

You know, you never want to get too far ahead of yourself, and so I'm just being mindful of the fact that we're dividend payers and to the extent we have excess cash and we need to pay our owners [a rent], we'll do it.

Louis Roth - Barrow Hanley

You don't see yourself more able to do that in this situation? I mean, again, the payout ratio's, if I'm calculating it right, is only 16% and, you know, it 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.

Claiborne P. Deming - President, CEO

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 interests are aligned, I mean, don't get me wrong, but we have a pretty aggressive capital budget and we need to mindful of that. We need to keep ourselves available for opportunities.

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 pay out to your shareholders and how much do you keep in your business, and we historically paid out pretty much.

And we'll certainly continue to review it.

Louis Roth - Barrow Hanley

Okay, well congratulations on a great year.

Claiborne P. Deming - President, CEO

Thank you.

Operator

(Operator Instructions) Your next question comes as a follow up from Mark Gilman with Benchmark. Please go ahead.

Mark Gilman - The Benchmark Company

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 more aggressively with [Endower] or [Ronpen].

Claiborne P. Deming - President, CEO

Mark, I would read that more as we build out Sarawak gas. There'll be enough facilities there, where there may be some piggybacking going on, but certainly West Patricia is there and in decline. You know, of course, it's more of an oilfield and there's both oil and gas in Endower and Ronpen.

But 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.

Mark Gilman - The Benchmark Company

Okay, so at least at this point it doesn't materially advance Ronpen or Endower?

Claiborne P. Deming - President, CEO

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 entrée to those more economically then we could otherwise.

Mark Gilman - The Benchmark Company

Okay. Thanks, Claiborne.

Operator

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

Sonia Franklin - Bloomberg News

Hi, there. I might have missed it earlier but Mindy mentioned average expected production rates for 2009 of around 200,000 barrels a day. I 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.

Mindy K. West - VP, Treasurer

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

Sonia Franklin - Bloomberg News

Mid 130s?

Mindy K. West - VP, Treasurer

Mid-130,000 barrels of oil equivalent a day, most of that coming from Kikeh growth with some [Pepper] growth added in in the fourth quarter.

Sonia Franklin - Bloomberg News

Great. Thank you.

Operator

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

Dory J. Styles - Manager of IR

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

Operator

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

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