Murphy Oil Corporation (MUR) Earnings Call Transcript & Summary

[Audio Gap] exploration has been repeatedly coming up in all of our conversations so far during the conference. And Murphy is really in the middle of a lot of exploration activity. So Eric Hambly, President and CEO of Murphy Oil. Thank you so much for coming to the conference and doing the fireside. And so Eric, I want to start the conversation sort of rolling back and maybe a bit of historical perspective of where Murphy is and how you think about the future from here. So I look this up. You started Murphy in 2006 when the company was still pretty right on the cusp of the TK development in Malaysia. And I think the company today is in a pretty similar transitional phase where you have Vietnam and also pursuing different exploration opportunities. So how do you think about the opportunity set today that you see today compared to what you have seen in the last 2 decades?

Yes. Thanks, Betty, and thanks for having us here. Happy to be here. I think in some ways, what the company is facing today is very similar to what we had in 2006, but I also think there's some significant differences. So maybe I'll kind of talk through that. I joined the company in September of '06, so almost exactly 20 years ago, my anniversary is coming up. It's been a great ride. It's been a fun company to work for. We've done a lot of things around the world and I think created a lot of value for our shareholders. When I joined the company, it was right at a time when there was significant deepwater Gulf of America success. So a lot of success exploring in an early phase of Miocene and [ Plio-Pleistocene ] activity in the early kind of deepwater exploration in the Gulf and Murphy had a number of fields that they had discovered and had just brought online, or bringing online, Front Runner, Medusa, Thunder Hawk, there are others. And so an early very successful push into deepwater for Murphy, primarily as an operator in the Gulf. And then a big emerging business in Malaysia, Sarawak business was producing its first field in 2006. Teekay had been discovered, was under development. Teekay started producing in 2007 and kind of ramped up when oil price really rose quite high. The Sarawak business in Malaysia was being explored, and we had a lot of success. So I would characterize the company when I joined it as a tremendous offshore explorer with a great track record in deepwater Gulf and a Malaysia business that was probably a generational success, like really, really tremendous, great success. Then if you look at sort of what the rest of the company, there wasn't too much happening. We had a little bit of an onshore Canada business which was primarily a heavy oil business, Syncrude ownership and also heavy oil assets. And those were -- okay, they were just kind of okay. If then you look at what we did in the decade following 2006. So for my first 10 years with the company, we executed and developed basically everything we found in Malaysia, tremendous success, built a big business and ended up selling that ultimately later on. But in that decade, what we also did was build a significant onshore business, primarily organically and primarily the Montney and the Eagle Ford. So we got into the Montney in 2006 and we got into the Eagle Ford 2009, '10, mostly through leasing, a few small acquisitions, but really built in through leasing. So we went from a tremendous success exploring offshore. In the next decade, we had what I would characterize as less than ideal success offshore. We had tremendous ongoing success in Malaysia. But basically everywhere outside of Malaysia, we weren't that successful. We were disappointing ourselves in our pace of our success exploring. In the Gulf of America, we made almost no discoveries. I think 2 discoveries in the decade that followed. In West Africa, we drilled a lot of dry holes. We had what I would characterize as a less than perfectly focused exploration program, which was driven more by access to opportunities where we had large well commitments. When you get into blocks that you haven't yet shot or reprocess seismic and you have well commitments, you end up drilling a lot of dry holes. And that's what we had going on. But while we had no success exploring outside of Malaysia, we had a lot of success building an onshore business. So that's what makes us a little bit different now is that we have significantly more optionality in our portfolio. So we've had recent success exploring and then developing in Vietnam with our first field to come online in the fourth quarter this year, Lac Da Vang (Golden Camel). Recent success exploring in Cote d'Ivoire. And those are things that are happening in a company with a significantly more flexible portfolio, which I think helps us. We have a strong balance sheet. We had a very strong balance sheet when Malaysia was ramping up. We're back to that after a period of time where it wasn't as strong and very well positioned to capitalize on success with an emerging Vietnam business and what we think from Cote d'Ivoire early on looks very promising.

Great. And that leads to you'll have a high-class problem to solve when there are so many opportunities in the portfolio or that -- whether that's onshore or developing Vietnam and exploration across multiple basins. So how do you think about pursuing these opportunities, and this is a capital allocation question while balancing other the priorities that company have been talking about, which is cash return or preserving the balance sheet.

Yes, it's a great question. I think when we look at our business, the onshore business has an ability to basically be relatively stable, relatively flat. Spending similar capital program that we have over the last, say, 5 to 7 years. The Vietnam business, we've been investing in it to get our first field online and exploring and appraising and pretty soon when our production starts to ramp in Hai Su Vang. We think our Vietnam business will effectively self-fund. So future development of Hai Su Vang likely happens within or similar to the cash flows that we generate within Vietnam. So it won't be an additional heavy call on capital. The big obvious thing we have happening in the near term is understanding how large the Bubale discovery is. We're at a point where we believe we've made a commercial discovery, but we need to appraise it to confirm that and also to find out just how big is it and how do we optimally develop it. And that's going to be the biggest call on our near-term capital. So sort of priorities for us are maintaining the scale of our cash flow generating assets by reinvesting in them. That would be our producing assets. Next kind of priority for us would be likely our dividend. After that, we'd be looking at share repurchase. And all of those things we'd be doing in the context of trying to protect our balance sheet. So we want to be very disciplined about where we're spending money, how much money are we spending. We've got our balance sheet in a great spot, which positions us well to invest in finding out what Bubale looks like, finding out what the other prospects on the block look like before we commit to what would likely be even larger development, which would be development CapEx. We have a portfolio that allows us to think about how we monetize the development if we get to that point. We have a possibility of bringing in a partner, farming down some of our ownership. We have ability of using our strong balance sheet and liquidity we have a possibility of selling pieces of our onshore assets or other. And we'll be thinking about those things as we learn more as our understanding of Côte d’Ivoire opposition evolves over the next 18 to 24 months, we'll be thinking about how do we create the most value for our shareholders. Right now, we don't really know how that will happen. We want to find that what we have first, what the requirement of capital will be, and then we'll come up with an optimized plan to create value for shareholders. We do have a long history of investing at high ownership, like our Malaysia business, where we had really great success. We developed those fields at 80% and 85% working interest. We're at 90% and 85% in Côte d’Ivoire now in Vietnam, we're at 40%. So we already kind of have built-in partners. So I think we have a pretty exciting opportunity set in front of us with a lot of optionality. It's not like we have the one thing to do and it either happens or doesn't happen. Our core business has been generating strong cash flows, delivering great returns. We've made a dividend since 1961. We have a really great position to be pursuing the optionality in front of us. And I think it's an exciting time to be an owner of Murphy.

And I want to get into some of the assets before we get there. Sort of talk about how, given exploration is really in focus now and how you think about the appraisal process for communication of the resource potential and how -- what you see internally and how that gets communicated to the Street, along sort of coming on the back of the HSV appraisal update, does that process change how you think about evaluating the future appraisal opportunities that's ongoing in the company.

Yes, thanks. That's a fair question. I think we go over to Vietnam first and then maybe come around to Côte d’Ivoire. In Vietnam, we announced a discovery about 1.5 years ago and it's pretty exciting. We found pay and we did not find the limits of the field. And then we followed that up with an appraisal well, which encountered more pay and also demonstrate a deeper oil level in the field. At the time, we knew we had only tested sort of this middle kind of core of the field, and it was a large structure, and we've talked about how we had 2 roughly 8-inch holes in the structure of the size of Manhattan. And so we knew we needed to learn more and how did the reservoir properties vary across the larger structure. We haven't identified the limits of the field. And so we communicated that we needed to do 2 more appraisal wells almost certainly, 3x and 4x, which tested the Northeast and Southwest extensions of the field. We expected that we would learn things when we did that. That's why we did them. We were trying to get to a point where we understand the limits of the reservoir, the variability of the reservoir properties across the structure and then importantly, how do we optimally develop that. And so we designed that program to do that. The 3X tested what we thought would be a thinner primary reservoir, which will be encountered. The 4X was testing what we thought would be an expanded primary reservoir which had a potentially deeper oil level than we had previously demonstrated. What we found in the 3X was largely in line with what we expected. In the 4X, we were somewhat surprised in that we found non-reservoir quality sands. We found the same sand package we had predicted, but we found it at such low quality that it wasn't storing oil effectively or oil that would flow. And that was somewhat of a surprise to us in that we thought the limits of the field were driven more by how much of the structure will be filled and now our view is a combination of how much of the structure is filled in terms of depth and also the variability of the reservoir properties across the structure, which is why we appraised it. I think what we communicated at the time we had the results from the 2X well was encouraging because we were quite encouraged and we felt it was material enough that we should communicate it. It felt like the right thing to do to say we still don't know how big it is, but it has potential to be toward the higher end of our prior range or even beyond. I think some people interpreted that as maybe we were being ultra conservative and that they were not our communicated views, but other people we were hearing communicate extremely large numbers for Hai Su Vang and commonly, when we met of people we said, we don't think it's that big. It could be, but we don't think it is. And so I think what we've said was consistent with what was appropriate and fair as we learned. And I think you'll see us do that going forward. If you think about where we are in the Bubale, which is sort of following just a couple of years later following in the same path, we discovered oil pay in 2 reservoirs,the Turonian and the Cenomanian. We drilled the discovery well where the Turonian, Cenomanian crossed. So we were able to test the one place where the 2 features cross. We are fortunate to find oil in both. We still have a lot of uncertainty about how much of those features are filled. We don't know for sure what's down dip or up dip. The Bubale West-1x Well that we're drilling now the first appraisal well is testing down dip Turonian and we chose that location because we think it's the location that allows us the best chance of quickly understanding if we have a very high confidence of a developable scale field. We think we do from the first well, but there's uncertainty. And so we're drilling that. It's 8 miles west of the discovery well, which is a significant step out and down structure. And we're interested to see what we find, obviously. If we find oil to base, then we'll probably drill another appraisal well further down dip, if we find a wet well that it would likely infer that the column height is somewhere between the 2 wells. If we find a water contact, then we'll know where it is. That's helpful. Those -- that well and an analysis that will follow will help us determine what's the in-place volume, what -- how connected are the reservoirs that has implications for how much we recover. And we will be a little while from knowing what to communicate in terms of a resource range. We will still have a broad range of resources. So after the next well result, depending on what we find, of course, but we're likely not to have a definitive view of the field because we still haven't tested updip Turonian or updip or downdip Cenomanian. So I think what you'll see from us is communicate will be found kind of factually in the well the implications that has for the future with probably not a quantitative reset, but probably an indication of is it good or bad. And then next year, as we conduct our appraisal program, we'll learn more information about the field and when we have more confidence that we have a commercial development, we'll probably communicate that and maybe be able to guide a size of resource range. It depends on what we find. We're not going to be overly cautious or overly optimistic. We're going to just methodically step through, let the wells tell us what we know about the field and when we gain a high confidence, then we'll try to communicate that.

No, that makes sense. And that's really helpful context because Bubale is such a -- it could be a really meaningful discovery, but also has multiple steps and appraisals, which could be a pretty meaningful capital commitment as well. I think you've laid out previously like a 3 to 5 well appraisal program and depending on what you see, you can decide how much to advance that. Like what do you need to see? And you talked about every single while help you understand the reservoir a bit better. But I guess if you can range bound what do you need to see to feel confident enough to advance and what will be an upper or low-end range of how you think about that appraisal program?

Yes. So when you develop a deepwater oilfield, you do not know everything about the field when you sanction the project. You typically have a handful of well penetrations and you make a model of what happens, everywhere you do not have well data, you make a model of what's happening in the reservoir. You use seismic data, you use other information. And so the appraisal program is doing several things, like I said, it's testing to see how much of the structures are filled with oil, how connected are they? Thus that has implications on production rates and recovery. So those are really critical things to understand. But as we step through our appraisal program, we'll gain more confidence, more confidence. At some point, we'll probably determine that we have enough confidence to commit large scale capital to do a development while also continuing to have some uncertainty about aspects of the field. We may have an untested segment of the field, a reservoir or we may not test updip in one of the reservoirs, but we have a high confidence that there's a core development area that justifies the development and also importantly, that we do not plan a development scenario, the facilities, the well count, whatever that won't work economically. We don't want to overcapitalized, and we don't want to dramatically undercapitalize. If we want to have some confidence that what FPSO or FPS and FSO, we build will be suitable for the fuel development. We will likely, as we have in almost all of our historical deepwater developments, we will likely have kind of a core development and then additional phases and additional understanding as we learn more. When you drill more wells, you learn more and you kind of have additional phases of development. That's very common for us. So we're not going to appraise the point where there's no uncertainty. We're going to appraise to the point where we have a high confidence that a large investment will make a lot of money. These deepwater developments they're $10 to $20 a barrel CapEx to develop. And the resource size could be significant here as we've talked about historically. That's a very large range for a company of our scale. When we've been deploying $1.2 billion, $1.3 billion of capital in recent years, this year, a little more, obviously, with the success we've had, how we pace that investment, how we understand that it will be important for us. I think just to point out, we're fortunate to be the operator in Vietnam and Côte d’Ivoire. So we control the pace of our appraisal investment and our development investment if we get to that point. It's a nice position to be in because we're not going to be partnered with someone that's much more capitalized than we are, and we lose control, which I think is important from creating value for shareholders.

That makes sense. Now it's interesting, like you -- the decision that you have to make without perfect information, the maybe with the very high interest you currently have in Bubale, how -- like at what point would you consider farming out some of the interest? Like is it -- is it like where, within where you feel there is enough to go forward with a full development?

Yes. I think when we have a full understanding or a reasonable understanding of Bubale's potential we will then have more confidence that we know sort of the value that, that would be to us and to someone else if they were to come in, but we also have significant undrilled prospectivity on our blocks. And we may consider understanding the value of that prospectivity before thinking about bringing in a partner. So typically, when you have someone farm into your block. It's the whole block and not one field. It's the entire block that they come into. We have not tested many significant prospects on the blocks where we're likely to have a Bubale all development of the 2 blocks. And so at some point, we'll get comfortable that we either really need the external funding to make that happen and it's the right thing to do for shareholders or that we don't want to do that, and we're going to keep our existing interest and develop it. I wouldn't be surprised if we do not ever bring a partner in. We have a partner that's built in that already has an option of increasing their ownership. That's something that it's not public what their ownership could be, but it is a significant ability to -- with our existing partner, which is a national oil company to increase their ownership. So we're likely to already have a kind of a built-in funding partner if we have a successful development. But I'll be cautious about giving away ownership in something that hasn't been fully evaluated. And there's a lot of prospectivity still to think about on the blocks. So it's a key thing. As I was trying to indicate before, it's going to take us a little while to figure it out. So we're probably looking at an 18- to 24-month process before we have kind of that sort of confidence of knowing that we know enough to make a decision about the right steps to create the most value for our shareholders relative to ownership in Bubale or any of our other assets that we call upon to help fund the development.