Aug 4, 2008
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
Operator
Welcome to the Murphy Oil Corporation's second quarter Earnings Call. (Operator Instructions).
At this time, I would like to turn the presentation over to the President and Chief Executive Officer, Claiborne Deming. Please go ahead, sir.
Claiborne Deming
Thank you. Good afternoon.
I am joined today by Kevin Fitzgerald, Senior VP and Chief Financial Officer; John Eckart, VP and Controller; Mindy West, VP and Treasurer and Dory Stiles, Manager of Investor Relations. I'll turn it over to Dory at this time.
Dory Stiles
Thanks Claiborne. Welcome everyone, and thank you for joining us.
Today's call will follow our usual format. Kevin will begin by providing a review of second quarter 2008 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 obtained. A variety of factors exist that may cause actual results to differ.
Many of these have been identified in Murphy's January 1997 Form 8-K filed with the SEC. I'll now turn the call over to Kevin for his remarks.
Kevin Fitzgerald
Thanks Dory. Net income for the second quarter of '08 was $627 million, or $3.27 per diluted share, as compared to the net income in the second quarter of '07 of $250.3 million or $1.32 per share.
For the six months of '08, net income was $1.36 billion, $5.40 per diluted share compared to the net income for the six months of '07 of $360.9 million or $1.90 per diluted share. Net income in the second quarter of '08, included the $67.9 million after-tax gain of $0.35 a share on the sale of our Lloydminster heavy oil properties in Western Canada.
Net income in the second quarter, and for the six months of 2007 included after-tax cost of $24 million, or $0.13 a share related to the closure of 55 retail gasoline stations in the US and Canada. The 2008, six-month period included after-tax gains from the sales of Canadian assets, including the just mentioned Lloydminster sale of a 108.3 million or $0.57 per diluted share.
Looking at the income by statement, first we'll look at E&P. Income in the second quarter of '08 was $585 million compared to a $149.3 million in the second quarter of last year.
The 2008 quarter included the previously mentioned gain from the sale of the Lloydminster properties. Higher E&P earnings for the 2008 quarter were otherwise attributable to both higher crude oil and natural gas price realizations and higher oil sales volumes.
Natural gas production volumes fell slightly. Crude oil and gas liquids production for the current quarter was over 111,000 barrels per day, as compared to approximately 80,000 barrels per day last year.
The increase was primarily attributable to production from Kikeh Offshore, Malaysia; we started up in the third quarter of '07 that was partially offset by lower volumes of the East Coast of Canada. Natural gas sales volumes were 55 million cubic feet per day in the second quarter of '08 compared to 57 million cubic feet per day in the second quarter of last year.
The decrease was attributable to the sale of Berkana Energy in Canada earlier this year, offset by volumes in the Northwest Mondo field in the Gulf of Mexico, which came on stream last July. The down turn of the independent hub during in the second quarter reduced our production from Mondo by approximately 9 million cubic feet a day.
Had the platform been fully operational of second quarter of 2008, natural gas volumes would have increased over the last year. Looking at R&M, downstream segments second quarter of '08, net income was $77.3 million compared to a $124.2 million in second quarter of last year.
The earnings decline in the '08 quarter was primarily in U.S, where refining and marketing margins were much weaker than last year. The 2007 quarter was burdened with the previously mentioned $24 million of after-tax cost related to the retail gasoline station closings.
However, in the UK, income from the downstream business improved in the '08 quarter relative to '07, due to stronger refining margins, and to the larger UK refining system following the acquisition of the additional 70% interest in the Milford Haven, Wales refinery that was closed in December of last year. In the corporate segment, second quarter of '08, we had a net charge of $35.3 million compared to a $23.2 million charge last year.
This cost increase is attributable to a combination of higher administrative expenses and higher net interest expense, as we experienced increased borrowing levels and lower amounts capitalized to development projects. For the June 30th, 2008, Murphy's long-term debt amount to approximately 1.5 billion, which is 20.2% of total capital employed.
And with that I'll turn it over to Claiborne
Claiborne Deming
I will start by updating you on the current activities within our E&P business, and then move to downstream. An active exploration program kicked off last month, and today we have finished three Gulf of Mexico wells and drilling continues at Buntal, in Malaysia.
In the Gulf, the first prospect drills are carried well at Sapphire and Lloyd Ridge 268, where non-commercial quantities of natural gas were encountered and the well was plugged and abandoned. Secondly, at Diamond, in Lloyd Ridge 370, natural gas play was found sufficient for subsea tieback.
The rig will move to the Manhattan prospect, Lloyd Ridge 511, where we have a 100% interest. There is both the shallow and deep component to this prospect, and at this time we will only be testing the shallow section.
Depending upon results at Manhattan, we'll either drill an appraisal well of one of several other exploratory prospects in the Eastern Gulf. Offshore Malaysia in Block K, drilling continues at Buntal, and we anticipate reaching target depth soon.
For the second half of 2008, the exploration calendar will be active outside of the Gulf with multiple wells coming up. Offshore Sabah Malaysia, additional well is planed either in Block H area around our Rotan discovery or [Shingal] of Block P prospect.
Also in Malaysia, two or three exploration wells are scheduled for offshore Sarawak in the fourth quarter, as we pick up another jack up to complement the rig drilling development wells in the Sarawak gas project. Offshore Australia in the Browse Basin, a well will be drilled in the fourth quarter on acreage we operate with a 40% working interest targeting a multi-TCF size prospect.
Offshore, the Republic of Congo, the two wells previously planned for 2008 will slip to mid-2009 due to a different rig being contracted. Turning to current production, the ramp up at Kikeh located in Block K offshore Sabah, Malaysia, is continuing with ten wells now on stream producing 85,000 barrels per day.
We remain on schedule to reach the plateau production rate of 120,000 barrels per day by the end of 2008, and continue to be pleased with the field performance. In the fourth quarter of this year, natural gas production will commence from Kikeh.
Production volumes there will achieve levels of 120 million cubic feet per day, when fully ramped up. Production from operating areas elsewhere remains good.
In the UK, plant maintenance at Schiehallion and Mungo/Monan during the third quarter will reduce volumes there. Gulf of Mexico production was unaffected by Hurricane Dolly last week.
Development work continues on the next tranche of production, Tupper our Montney tight sands gas resource play in British Columbia is on track to begin producing in the fourth quarter. 25 wells have been drilled so far on our holdings, which totaled a 125 sections.
We recently tested a horizontal well at 9.5 million cubic feet per day. This will be the first phase of development for our project that will be a source of meaningful growth for many years to come.
As evidenced by recent transactions, this area has attracted an extraordinary amount of attention, and we're certainly glad to be a stake holder. In Sarawak Malaysia, phase I of our natural gas project continues to push towards startup in the first quarter of 2009.
In the Gulf of Mexico, the Thunder Hawk development is on track for first production towards the end of the second quarter of 2009. The hull is scheduled to sail away shortly from the shipyard and work continues on the topsides.
Development work at Azurite offshore Republic of Congo has also remained on schedule for second quarter of 2009 production startup. Moving to downstream, our enhanced UK refining position has generated early financial returns.
The UK segment provide a quite strong earnings at the time when it's U.S. counterparts lagged due to distressed margins caused by steadily escalating crude prices and decreased product demand.
UK margins, especially distillate, were markedly better. UK refinery continues to perform well even though margins have retreated somewhat from second quarter levels.
The plant is currently running 102,000 barrels per day. In US, refining margins have improved over the last couple of weeks.
However, Superior, where asphalt prices have lagged run-up of crude is running at a reduced rate of 26,000 barrels per day following a full plant turnaround in May. Meraux is operating profitably to 112,000 barrels per day, and has a mid-September planned 38 day maintenance turnaround of one of its units at which time crude runs should average around 93,000 barrels a day.
In retail, we continue to see increases in year-over-year fuel volumes, and merchandise sales. Gasoline demand for our sites in US, started to slow in the second week of June, although we continue to have quite strong year-over-year gains.
Capturing margin in the steadily rising wholesale pricing environment can be challenging, as we have seen for most of the first half of the year. However, a reverse is also true.
Over the last several weeks fuel margins have improved nicely as wholesale gasoline prices retreated. We currently have 986 stations in operations, including eight of the standalone Murphy Expresses, which by the way have been nice earners.
To wrap up, we've had good year so far. Operationally, I'm pleased expect for delay in gas production startup from Kikeh, production is a growing strength and we reaffirm our guidance of 130,000 barrels a day for the year.
In key oil and gas field developments are all on track. UK refinery was able to pick up the slack for the US R&M group in the second quarter, and as crude has weakened over the last several weeks, we have picked up barrel profits in our U.S.
retail segment, where we sell around 250,000 barrels a day. The discovery of Diamond, albeit modest is a start.
As noted, we have a number of high potential wildcats on tap, balanced by unusual production growth including two large long life gas assets, Sarawak in Malaysia and Tupper in British Columbia. In addition, our balance sheet is extremely strong and as crisis cycle down, I suspect opportunities and more attractive valuations will become available.
I am now ready to take your questions.
Operator
Ryan Todd - Deutsche Bank
Great. Good afternoon, gentlemen.
A quick question on production volumes, again, in terms of the moving pieces for 3Q of '07 a little bit of hard time getting close to the 128, is it just a delay in getting the wells on line in Kikeh or are there any other pieces that we should be aware?
Dory Stiles
Ryan let me, this is Dory. Let me walk you through, what we have built in there and that might answer your question for you.
Specifically in the – some of the oil field in the US, we have 11,000 barrels per day, the United Kingdom 3000 barrels per day, Canadian heavy 8,000 barrels per day, offshore Eastern Canada 16,000, Syncrude 12,000, Ecuador 7,000 and Malaysia 63,000, natural gas in the US 41 million cubic feet per day, in the UK 4 million, and Canada 1 million.
Ryan Todd - Deutsche Bank
Okay. That’s very helpful, thanks.
If I could just ask one more then on refining, or actually on Diamond and Sapphire, can you give any sort of estimates in terms of gross resource or is it too early to say on that?
Claiborne Deming
Well, sapphire is dry hole.
Ryan Todd - Deutsche Bank
Sapphire was dry, right, but on Diamond?
Claiborne Deming
No, no, it's a tieback size, somewhere 45, 50 Bcf in that range.
Ryan Todd - Deutsche Bank
35 Bcf to 50 Bcf?
Claiborne Deming
Yeah, I would reckon that.
Ryan Todd - Deutsche Bank
Okay, great gentleman, Thank you, I appreciate it.
Operator
Thank you. Our next question comes from the line of Kate Lucas with JPMorgan.
Please go ahead.
Kate Lucas - JPMorgan
Hi, good afternoon.
Claiborne Deming
Kate, how are doing?
Kate Lucas - JPMorgan
Hi, just fine, thanks. Just a quick question on Kikeh, and just the rate at which you've been able to recover your cost there?
How far long are you in recovering cost out of the cost recovery pool, and then how big is the overall pool or how much further do you have to go?
Mindy West
Hey, this is Mindy. I'll take that question.
Currently the cost recovery pool on gross basis is just a little over $900 million, but it's important to understand that that number is fluid. It decreases as we make listings from Kikeh, but it is also increases as we continue to spend money not just in the Kikeh field, but in the Kakah field as well.
So as we've mentioned before, as far our production numbers, for next year we modeled more of a mid-year type payback. That’s probably going to occur as oil prices continue to hold towards the first part of '09, which would decrease our production forecast by roughly 6,000 barrels a day.
Kate Lucas - JPMorgan
Starting in mid-year, next year?
Mindy West
We originally modeled mid-year, but if you look that up to beginning of '09, we would need to take an additional 6,000 barrels a day out of our forecast.
Kate Lucas - JPMorgan
Okay. And then, when do you expect to start paying, if you have 900 million left to recover, including or not including any additional cost you might bring, and then when do you expect to start incurring or accounting for the supplemental payment?
Mindy West
The supplemental payment begins to occur on day one. It's just that you don’t realize, you don’t really notice that now because only roughly 15% of our net barrels are subjected to that right now, as we are fully utilizing our cost recovery allocations.
Once you have payback and all the barrels are drawn into the profit back that number is going to approach a 100% of our net instead of the 15%. It won't ever get close too 100%, because you can always recovery your operating costs.
Kate Lucas - JPMorgan
Right
Mindy West
So, the supplemental payment is there, it's just not noticeable right now.
Kate Lucas - JPMorgan
Okay. Do you think that by the end of the 4Q, you would have recovered the remaining more or less remaining 900 million to have basically close to 100% of the barrels starting to reflect the payment or would that be more?
Mindy West
Based on our projections right now, that should occur early '09, so that will start to become much more noticeable on material at the beginning of next year. But also keep in mind that numbers is fluid so as we spend capital going forward in the block that percentage from quarter-to-quarter will change.
Kate Lucas - JPMorgan
Okay, all right. Thanks very much.
Claiborne Deming
Welcome
Operator
Thank you. We'll move to the next question from the line of Erik Mielke with Merrill Lynch.
Please go ahead.
Erik Mielke - Merrill Lynch
Yeah, hi. My question relates to the exploration that you have in the Eastern Gulf of Mexico and trying to understand what your pre-drilling estimates are now for Diamond, I beg your pardon, for Emerald in Manhattan following the slightly disappointing results from Sapphire and Diamond?
Claiborne Deming
Well, I don’t think, we're going to change what we think might be there. What happened at Sapphire and Diamond is good reflector, in fact fabulous reflector of, but it was a low gas saturated reservoir and so you had hydrocarbons gas that reflect, but just not sufficient quantities in most cases to be economic.
And so, query is that same phenomenon, which is kind of (inaudible) of the seismic events in the Gulf of Mexico does that recur again in Manhattan and again in Emerald? Manhattan which we're going to next is a, it's either upper Miocene or it's a supply of Pleistocene age, different age, a little bit shallower than either of the other two.
It's a little bit different age, rock, and traps roughly the same however. And so we'll go from diamond there and, I mean yes, and then depending upon results in Manhattan, we either go to Emerald or we have a coupe of other options that are coming up now.
Manhattan has got a shallow component, which we are going to reach and there is a deep component, which we like to, it's probably lower Miocene on lapping against salt, and between the two it’s a really large prospect. Between the two shallow and deep sections, somewhere between 500 Bcf and Tcf.
It's really unusually large for the Gulf, at this stage of Gulf, and, I wouldn’t change those on that prospect at this point.
Erik Mielke - Merrill Lynch
That’s very clear. Can I ask one, I know, it's a difficult one to estimate going into the next quarter, but what should we expect in terms of exploration expense that you know would already becoming during the quarter?
We had slightly low exploration in Q2; I guess it has something to do with you had found on Sapphire.
Claiborne Deming
Right, Dory you want to handle that?
Dory Stiles
Erik our range for the quarter, we have 55 million built in there for G&G with amortization, and you add in the dry hole potential of 55 million, and that get you up to the 110 million top end of the exploration expense range, low end being 55 million.
Erik Mielke - Merrill Lynch
That’s great, thanks.
Operator
Thank you. Our next question will come from the line of Gene Gillespie with Gillespie Consulting Group.
Please go ahead.
Gene Gillespie - Gillespie Consulting Group
Good quarter, Claiborne.
Claiborne Deming
Oh, thank you, Gene. Hey I Like that new confident.
Gene Gillespie - Gillespie Consulting Group
You like that? That’s a pretty creative isn't it?
Listen, I don’t want to ask you a question that’s unrelated to quarters. Under the new SEC rules, I'd like for your interpretation, it would appear to me that you're going to have an opportunity to book the approximately 130 million barrels of Syncrude reserve that you have in Canada?
And secondly, correct me if I am wrong. Secondly, is this going to make it a little easier to book reserves in some of these frontiers areas, like Malaysia where you've had a very, it's been a very slow process in terms of adding reserve to the book?
Claiborne Deming
The answer is, certainly we'll be able to book Syncrude if they continue to, if it holds up what is proposed from the SEC, and I presume it will. I think on the margin Gene, it's going to be easier in Malaysia to book.
I mean, they are allowing you to use more technical parameters, and use, it's the latest techniques that people use. However they're still cautious on basins where there is not analogs and where there is not a lot of production history.
And so I think we'll wrestle that a bit, but I think the good in Malaysia is that we're going have production. And so really under any of the scenarios, I think you will see increased bookings for us and it will always be a bit measured, but we're producing now from most of the main reservoirs, and we're injecting water and getting good pressure responses.
So we pretty have a good sense of where we are, and so I think you will see continued bookings, at least in that particular basin based on that fact if not from the new SEC parameters.
Gene Gillespie - Gillespie Consulting Group
At Kikeh you've got a pretty large number left to go, 250 barrels something like that?
Claiborne Deming
Yeah, its 240 oil it was, is our number for gross recoverable, and we've booked about 65, so the Deltas there 180, something like that. So we'll obviously book fair amount of share.
Gene Gillespie - Gillespie Consulting Group
And then the gas component, if you start production in the fourth quarter, you'll book the gas, or is that….?
Claiborne Deming
Yeah. We book some gas last year from Kikeh
Mindy West
One third.
Claiborne Deming
About one-third of what are recoverable is. Yeah.
So, I am sure we'll book some more gas there as well as we get some production history.
Gene Gillespie - Gillespie Consulting Group
So, the metrics could look pretty tall and good this year?
Claiborne Deming
I hope so, we're spending more money, but we've got a fair amount to book.
Gene Gillespie - Gillespie Consulting Group
Is the CapEx number that you had provided before, is that still a solid number?
Claiborne Deming
We're about 3 billion now in total, I mean that includes…
Gene Gillespie - Gillespie Consulting Group
That’s up a couple of hundred from a…
Claiborne Deming
Yeah, downstream as well, and we're 2.8 before. And it represents mainly buying some leases in the Gulf and then buying some leases in Tupper in the Montney.
Gene Gillespie - Gillespie Consulting Group
Well, thank you
Claiborne Deming
Welcome.
Operator
Thank you. Our next question will come from the line of Paul Cheng with Lehman Brothers.
Please go ahead.
Paul Cheng - Lehman Brothers
Hi, guys.
Claiborne Deming
Hello.
Paul Cheng - Lehman Brothers
Hi, Claiborne you talked about say 3 billion for 2008, any update on 2009?
Claiborne Deming
No, we really don’t Paul. We'll go through our budgeting process here, well October when we will take our first real serious pass at it.
So I really can't update you.
Paul Cheng - Lehman Brothers
Okay. I think that you talk about say 2008 130, previously that you have a number that for 2009 on production, can you remind me what's that number or is there any change to that number?
Claiborne Deming
Paul, we had last year, I mean for 2009, we have 204,000 as our production number. Now that is assuming as Mindy discussed earlier that that was assuming that Kikeh would payout at mid-year '09, so you're going – if that occurs earlier, you will drop some barrels from there.
Paul Cheng - Lehman Brothers
,
Dory Stiles
We're looking at Tupper Paul, averaging around 30 million a day for the quarter. It maybe a bit more that, exiting somewhere around 40, 44 million a day, so we'll ramp up as we bring wells on.
And Kikeh, I don’t have a demand, our plateau is 120 and we ramp up, we start in late September, I think is our latest
Mindy West
65 for the quarter.
Dory Stiles
We'll average 65 for the quarter.
Paul Cheng - Lehman Brothers
So you will ramp up pretty quick in both cases?
Dory Stiles
Yeah, yeah pretty quickly, and then I think you will see Tupper doing quite nicely in the first quarter of '09 too and also Kikeh.
Paul Cheng - Lehman Brothers
e
Claiborne Deming
No Paul, we got into Tupper last year, at mid-year, and then increased our position pretty much steadily all through the back-end of last year. So we got in a real attractive pricing, so now, obviously it's probably double since then.
And we think we've got 2 Tcf after royalty there on that 125 sections. And the recent results that we're getting were extremely pleased with what we're seeing from both the upper and lower Montney, in fact in Tupper 1.
So, I think it’s a whole month, and I think it's going to be significant volume. It's going to be over 300 million a day net to the company from Tupper.
So I wouldn’t back down a bit. Now, a lot of fancy numbers have been thrown about.
People get leasehold positions, Tupper now, but also in (inaudible). I think, when the industry gets really frothy and so it's been so fanatic in the last six months with these very extraordinary prices paid for assets.
I think you got to put your floor on the brake a bit, and let these things cycle down and we're seeing it. And if all the gas is going to get to market, and the people say it's going to the market from this resource place, then I think there is a risk that natural gas prices come under a bit of pressure here as we go forward, because it's gas not always going to stay in the US especially if the economy is worse.
And so, you got folks quite aggressively getting the admittedly very good assets, but even great assets can be over capitalized, and I know that personally quite well from related environment. So, I think you just have to be a bit cautious here.
But, if you see a good one, and it fits within your economic parameters like Tupper did for us, I think you have to act and react fast.
Paul Cheng - Lehman Brothers
So, you said actually that you don’t have a problem in terms of the pay funds that you just think right now the industry maybe is a little bit fanatic thinking about the pricing?
Claiborne Deming
Well, I mean, every one, every company is different, certainly, and I tend try not to put all the eggs in one basket, whether it be resource plays or any particular type of play or type of asset class. And so, having more of these resource plays at the right price, I think would be a very important part of Murphy's future, and I wouldn’t have all from there.
I just wouldn’t and so I think over time, if you have a company which is a bit timeless and you think gee what're you going like in 20 years, I think it's good to have, oil, it's good to have natural gas, it good to be in the U.S. its also very important to be in international exposed company.
And I think, you will see that from Murphy and certainly resource plays in the U.S. will be a part of that and likely a growing part of that.
But over the last six month, buying assets, I think you got to be careful.
Paul Cheng - Lehman Brothers
I know you must be tired of people asking this question. One of your competitor just indicate that they are evaluating whether they want to split the company into two and wondering that have you guys revisited or whether look at that also and then what is your current view, any change from last time you talked?
Claiborne Deming
No, I've been real open with people that we have thought about our downstream business a lot of different ways, and certainly that was an option that we've looked at. Only note of caution, I would say is one, their assets, the company you're referring to are certainly different than ours and secondly that particular market has changed pretty fast over last six months.
And, if you look at the equities of the independent R&N stocks, they are down anywhere from 60% to 80%, and then on top of that credit markets are awfully choppy out there to use a euphemism. And as you probably know, working capital requirements if nothing else for downstream in today's environment are extraordinary high, and then our weakened credit environment, I think you just need to mindful of all those facts just from the way we look at it.
I don’t know if you have seen some of the terms that have been paid for some of these credit facilities but while they are awfully high, so I think you got to be bit cautious here in that particular regards. Even though I have to tell you, our downstream company is substantially better than it was.
Second quarter certainly benefited from the new asset in UK and the third quarter is going to benefit substantially from our retail assets here in the US.
Paul Cheng - Lehman Brothers
Very good, thank you. Keep on, have a good quarter.
Claiborne Deming
Thanks very much.
Operator
Thank you (Operator Instructions). Our next question comes from the line of Mark Gilman with The Benchmark Company.
Please go ahead.
Mark Gilman - The Benchmark Company
Claiborne, good afternoon, how are you?
Claiborne Deming
Fine, Mark.
Mark Gilman - The Benchmark Company
Hey, I saw that --
Claiborne Deming
I am sorry. Go ahead.
Mark Gilman - The Benchmark Company
That Noble drilled the dry hole offshore recently, and I was wondering have you looked at that at all and how it might relate to prospects you would define in the Block you acquired there?
Claiborne Deming
No, best that we know Mark, they didn’t test the same age rock that we have, but we don’t know everything about it yet, but that’s the first pass that we at it. So that’s all I know, and I don’t know much, except I don’t think it's condemned or tainted what we've gotten, because they had a different target there but we still have to shoot some 3D from what we've got.
Mark Gilman - The Benchmark Company
Okay. In the quarter, if I can read numbers correctly Milford Haven runs over 119,000 a day, which I thought is above name plate, are you writing a name plate on that unit?
Claiborne Deming
Mark that includes some intermediates, we've got an oversize cracker there, and so we can import feed stocks, intermediate feed stocks, and I am not looking at the numbers you are, but I would suspect that’s what it is.
Mark Gilman - The Benchmark Company
Oh, I see, okay. Back to the Eastern Gulf for just a sec.
Claiborne, it sounds to me if I interpreted your remarks correctly, that you are primarily using good old fashioned bright spot technologies to find prospects, is that pretty much true?
Claiborne Deming
Mark, in a particular case of the Eastern Gulf, these were really nice prospects in the sense that they had a deep seated structure, and then there was a structure obviously on top of the deep seated structure. There was a bright spot conformable to structure and there were flat spots, and it almost doesn’t get any better than that.
If you do all the statistics typically those things pay our discoveries certainly more than 50% of the time. And so those are just the odds, those are just the statistics as you go through the Gulf of Mexico and you look at those types of structures.
Mark Gilman - The Benchmark Company
Yeah, but how does it integrate with what might have been the deposition pattern?
Claiborne Deming
Well, everyone has got a depositional model that they use, and certainly we have one as well and we have a way that we can sediments there and sediments certainly were there. It was a breach trap in both cases, and so you had low gas saturated water basically that reflects extraordinary well.
And as you all know, this gas, in other way to say to it, has been reason for a number of dry holes and has struck again. I wish I could discount that away with more technology, but so far we haven’t been able to do that.
And its early days, I mean, if I don’t they work they don’t work. I mean, that’s why obviously we, recognizing risks we found out Sapphire, and had no financial exposure and with Diamond, we don’t have hardly any money in the leases themselves because we brought in partners we promoted.
So, we certainly catered to the risk, we are aware of the risk and financially addressed the risk. Now, I would have much preferred to have made a big booming discovery especially, Diamond which had a lot of potential.
But in fact, we managed it which is what we're paid to do.
Mark Gilman - The Benchmark Company
Okay. Just one other one for Kevin, just so he doesn’t feel unloved.
Kevin Fitzgerald
You know, I was feeling unloved until you got on the line.
Mark Gilman - The Benchmark Company
How is that you were feeling unloved.
Kevin Fitzgerald
Yeah, because they were saying anymore calls and suddenly there wasn’t a Mark Gilman, I'm thinking my heavens.
Mark Gilman - The Benchmark Company
No, I was, Kevin I was taking a nap because I'm getting kind of old.
Kevin Fitzgerald
Oh that hurts. Feeling my remarks.
Mark Gilman - The Benchmark Company
Hey, Kevin the deferred tax number, very large in the second quarter. Is that in any way related to the Kikeh ramp up, I know this a hard thing to predict going forward, but is there any thing unusual that was responsible for that.
Kevin Fitzgerald
No, that’s related to Kikeh ramp up. You will some more there as we continue to ramp up the plateau.
Mark Gilman - The Benchmark Company
All right, thanks guys.
Kevin Fitzgerald
Thank you
Claiborne Deming
Thank you.
Mindy West
Thank you.
Operator
Thank you, sir. (Operator Instructions).
And management, at this time we have no additional questions in the queue, and I'll go ahead and turn the conference back to you for any closing remarks.
Claiborne Deming
Well, thank you very much, and we appreciate you being part of the conference call. Good day.
Operator
Thank you, management. Ladies and gentlemen at this time, we will conclude today's teleconference presentation.
We do thank you for your participation on the conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 1-800-405-2236, and using the access code of 11116776 followed by the pound sign.
Once again if you would like to listen to a replay of today's teleconference, you can do by dialing 1-800-405-2236 and using the access code of 11116776 followed by the pound sign. Ladies and gentlemen we will conclude today's teleconference presentation for the Murphy Oil Corporation's second quarter earnings conference call.
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