Ann: Sugarloaf Operations Update , page-25

Murphy Oil Corp. (MUR)

Q4 2009 Earnings Call

January 28, 2010 1:00 pm ET

Executives

David Wood - President & Chief Executive Officer

Kevin Fitzgerald - Senior Vice President & Chief Financial Officer

John Eckart - Vice President & Controller

Mindy West - Vice President & Treasurer

Craig Bonsall - Supervisor of Investor Relations

Analysts

Mark Gilman - Benchmark Company

Paul Cheng - Barclays Capital

Blake Fernandez - Howard Weil

Ray Deacon - Pritchard Capital

Anthony Guegel - Upstream Newspaper

Gene Gillespie - Gillespie Consulting Group

Kate Lucas - Collins Stewart

Mark Gilman - Benchmark Company

Paul Cheng - Barclays Capital


Capital expenditures for 2009 totaled approximately $2.2 billion. Approximately 82% or some $1.8 billion was spent in the E&P segment, $426 million in exploration, and remainder for development projects with Tupper, Kikeh, Sarawak gas, Thunder Hawk and Azurite projects accounting for the bulk of the expenditures.

2010, our budgeted capital expenditures, which were approved by our Board in early December totaled $2.4 billion with approximately 83% or $2 billion for the E&P segment. Of that, approximately $1.5 billion is for development projects, the remainder approximately $500 million is to be spent on exploration activities.

In 2009, we?re very active in acquiring leases especially in the Eagle Ford Shale, but for 2010 will be much more tilted toward exploration drilling activity. Our budget assumed WTI pricing of $65 per barrel and Henry Hub pricing of $5 per Mcf. At year end 2009, Murphy?s long term debt amounted to approximately $1.35 billion or 15.7% of total capital employed, cash, cash equivalents, and short term investments and marketable securities totaled approximately $1.1 billion.

With that I?ll turn it over to Dave.

David Wood

Thanks, Kevin. This quarter closes out my first year as Chief Executive Officer of Murphy Oil and it?s hard to believe an entire year has passed so quickly. 2009 was an uncertain and challenging year, but one for which I assure you that Murphy was ready. Financial flexibility, reserve cash balances and ample credit capacity that we can continue on track with our plan as well as look for buying opportunities.

Historically, we tend to capture quality opportunities, when conditions are at their poorest. This go round we used the low point in North American natural gas prices to expand our footprint at Tupper in British Columbia and aggressively a new trend at Eagle Ford Shale in South Texas.

Our aim is simple, to assimilate an impactful, long term position in high quality, lower cost onshore natural gas to complement our main oil based portfolio. We also stepped into the buyer fuels business and purchased an ethanol plant to balance part of our U.S. retail plant.

Looking back, the three fields promised to come on in 2009 did, Azurite, Thunder Hawk and Sarawak gas. All performed as or above expectations below ground, which is always the key for me. Above ground, slower ramp up at Sarawak gas was vexing, but all three are making important cash flow contribution at the levels we expect.

Continued expansion of our North American natural gas position was targeted for 2009 and to that end we added 42,000 net acres to the Montney, British Columbia position. We sanctioned the Tupper West into the Eagle Ford Shale play in March and by the end of the year are moving on towards 200,000 leased acres having just drilled our first promising well.

Exploration activity was below the level we like due to pairing of the overall budget to live within cash flows as oil prices collapsed. We did have encouraging results with four out of five exploration wells finding potentially develop our projects, of these three will see a close in 2010.

On balance, and given the external circumstances I am pleased with how we performed in 2009, but 2010 gets a fresh opportunity to take our business further upward. For 2010, our capital expenditure budget is $2.4 billion, of which $400 million is allocated to downstream and $2 billion to upstream.

Downstream expenditures include approximately $200 million to build 80 additional retail sites at our program. This is up from the 26 built in 2009. Of the upstream capital, $1.5 billion will be spent on development, major projects including Tupper main, Tupper West, Sarawak gas, Kikeh, Azurite around Eagle Ford, with the remainder, approximately $500 million, as Kevin mentioned to be spent on exploration with 10 meaningful wells across our acreage positions.

Production guidance for the full year 2010 remains just north of 200,000 barrels equivalent a day, which would represent a 23% increase over 2009 volumes, on the back of a full year of production from Azurite, Thunder Hawk and Sarawak gas, as well as startup volumes from the Eagle Ford.

On the development side, work continues at Tupper where we are currently producing nearly 80 million cubic feet a day and at Tupper west where we will add 180 cubic feet a day at natural gas volumes in second quarter of 2011. We are off to a great start with our Eagle Ford Shale program in south Texas. We recently announced the discovery at our first well, the George Miles number one drilled in McMullen County.

Initial rate of flow from the well was approximately 7.5 million cubic feet a day. This was increased to 11.7 million cubic feet a day once tubing was run. That well is hooked up and making sales at approximately 4 million cubic feet a day and still has a lot of water to come out of the well before we get the improved rate.

We have reached TD on our program?s second well, this one in Karnes County. Frac operations should start within a couple of weeks. That rig is now rigging up to spud Oasis Mineral Company MOH well in LaSalle County. We have added a second rig that should be active for us in mid February. This is being brought forth from our original plans. We will continue to assess the results and evaluate adding additional rigs to this program through the year.

In our downstream business, we?re always undergoing a 30 day turnaround, which should conclude early next month and to a 60 day turnaround at the end of February. Margins in the refining part of the business of course remain challenged. Focus this year is on reliability, optimization and cost control.



As we entered 2010 it was appropriate to reset our score card with new goals and I would like to share those with you. First goal is that we look to at 10 trillion cubic feet of natural gas in North America to our portfolio and I believe we are two thirds of the way there with our combined acreage position of Tupper and Eagle Ford, as results so far in both areas have been very encouraging. I am pleased to go the rest of the way by expanding our positions in those existing plays or potentially adding a third to our portfolio.

The second item I have on our score card is our U.S. retail offering has been the strongest contributor to our iron business, averaged over the last five years. So for 2010, we will help you understand, why we?d like this piece of business and its value contribution and the third item on the score card and most importantly is that we include meaningful exposure to reserve additions through the drill bit.

With impact exploration wells across our major acreage positions began with a strong emphasis on oil targets. Getting back to exploration at higher levels for us is the key. In closing let me say I?m proud of the way Murphy weathered, unpredictable and challenging conditions of last year and of the quality assets we were able to add to our portfolio.

Throughout the year we maintained our financial discipline while moving quickly to secure the Eagle Ford acreage and achieved a cost effective entry into the mandated ethanol business. This year we aim to move the needle further through exploration and I think we have a portfolio we seemed to do it. In downstream it will be a tough year, but as I mentioned we will be adding 80 locations to our U.S. retail offering.

That concludes my prepared remarks and I am now happy to take your question.