Overview

Murphy Oil Corporation is a worldwide oil and gas exploration and production company with refining and marketing operations in the United States and United Kingdom. A more detailed description of the Company's significant assets can be found in Item 1 of this Form 10-K report.

Murphy generates revenue primarily by selling oil and natural gas production and refined petroleum products to customers at hundreds of locations in the United States, Canada, the United Kingdom, Malaysia and other countries. The Company's revenue is highly affected by the prices of oil, natural gas and refined petroleum products that it sells. Also, because crude oil is purchased by the Company for refinery feedstocks, natural gas is purchased for fuel at its refineries and oil fields, and gasoline is purchased to supply its retail gasoline stations in the U.S. that are primarily located at Walmart Supercenters, the purchase prices for these commodities also have a significant effect on the Company's costs. In order to make a profit and generate cash in its exploration and production business, revenue generated from the sales of oil and natural gas produced must exceed the combined costs of producing these products, amortization of capital expenditures and expenses related to exploration and administration. Profits and generation of cash in the Company's refining and marketing operations are dependent upon achieving adequate margins, which are determined by the sales prices for refined petroleum products less the costs of purchased refinery feedstocks and gasoline and expenses associated with manufacturing, transporting and marketing these products. Murphy also incurs certain costs for general company administration and for capital borrowed from lending institutions.

Worldwide oil and North American natural gas prices were significantly higher in 2008 than in 2007. The average price for a barrel of West Texas Intermediate crude oil in 2008 was $98.90, an increase of 37% compared to 2007. The NYMEX natural gas price in 2008 averaged $8.89 per million British Thermal Units (MMBTU), up 25% from 2007. Crude oil and natural gas prices generally rose during the first half of 2008 with oil prices reaching their high in July. Both crude oil and North American natural gas prices have fallen precipitously near the end of 2008 and remain soft in early 2009. Changes in the price of crude oil and natural gas have a significant impact on the profitability of the Company, especially the price of crude oil as oil represented approximately 93% of the total hydrocarbons produced on an energy equivalent basis by the Company in 2008. In 2009, the percentage of hydrocarbon production represented by oil is expected to decline to about 78% due to new natural gas fields at Kikeh and Block SK 309 in Malaysia and Tupper in British Columbia. If the prices for crude oil and natural gas remain weak in 2009 or beyond, the Company would expect this to have an unfavorable impact on operating profits for its exploration and production business. Such lower oil and gas prices could, but may not, have a favorable impact on the Company's refining and marketing operating profits.

Results of Operations

The Company had net income in 2008 of $1.74 billion, $9.06 per diluted share, compared to net income in 2007 of $766.5 million, $4.01 per diluted share. In 2006 the Company's net income was $644.7 million, $3.41 per diluted share. The significant increase in 2008 net income compared to 2007 was caused by higher earnings in the exploration and production operations, primarily due to higher sales prices for the Company's oil and natural gas production, higher crude oil production volumes and gains on disposal of two assets in Canada. The earnings for the Company's refining and marketing operations were an annual record in 2008 and improved from 2007, primarily in the U.K. and mostly caused by the December 2007 purchase of 70% of the Milford Haven, Wales refinery. The net cost of corporate activities not allocated to the operating segments was higher in 2008 than in 2007. The net income improvement in 2007 compared to 2006 primarily related to higher earnings generated by both the exploration and production and refining and marketing businesses, but partially offset by higher net costs for corporate activities. Further explanations of each of these variances are found in the following sections.

2008 vs. 2007 - Net income in 2008 was $1.74 billion, $9.06 per diluted share, compared to $766.5 million, $4.01 per diluted share, in 2007. The consolidated net income improvement of $973.5 million in 2008 was attributable to higher earnings in both exploration and production (E&P) and refining and marketing (R&M) operations. The net cost of corporate activities in 2008 was higher than in 2007, partially offsetting the improved results in E&P and R&M. Earnings in the E&P business were markedly improved in 2008, increasing by $942.8 million compared to 2007, as this business benefited from both higher sales prices for oil and natural gas, higher sales volumes for crude oil and gains from asset dispositions. E&P earnings were unfavorably affected in 2008 compared to 2007 by lower sales volumes for natural gas and higher expenses for exploration, production, depreciation, depletion and administration. The R&M business generated record profits in 2008, increasing $108.1 million compared to 2007. The improvement was primarily due to refining profits generated in the U.K. in the current year following the acquisition of the remaining 70% of the Milford Haven, Wales, refinery in December 2007. R&M earnings in 2007 included an unfavorable impact from noncash inventory revaluations. Following the Milford Haven acquisition, the Company's U.K. operations recorded an after-tax noncash last-in, first-out accounting charge of $59.5 million in 2007 to reduce the carrying value of crude oil and refined products inventory to beginning of year prices, which were significantly lower than at the end of the year. The net costs of corporate activities increased by $77.4 million in 2008 compared to 2007, with the cost increase mostly attributable to higher losses on transactions denominated in foreign currencies and higher net expenses for interest and administration. The foreign currency losses occurred because the U.S. dollar generally strengthened against other significant foreign currencies used in the Company's business in 2008, especially compared to the British pound sterling. The higher net interest expense was mostly caused by lower interest capitalized to E&P development projects. The 2008 period included higher corporate administrative costs mostly due to higher expense for employee compensation and community and other support activities.

Sales and other operating revenues were $9.0 billion higher in 2008 than in 2007 mostly due to higher sales prices and sales volumes for gasoline and other refined products, higher sales prices and sales volumes for crude oil produced by the Company, and higher revenues from merchandise sales at retail gasoline stations. Sales prices for natural gas were higher in 2008 than 2007, but the favorable price variance was somewhat offset by lower natural gas sales volumes in the current year. Gain/(loss) on sales of assets in 2008 was $134.1 million higher than in 2007 and these realized pretax gains were primarily associated with the sales of its interests in Berkana Energy and the Lloydminster area heavy oil properties in Canada. Interest and other income was lower by $77.7 million in 2008 due primarily to greater losses on foreign currency exchange, which in the current year was mostly attributable to a generally stronger U.S. dollar compared to the British pound sterling. Crude oil and product purchases expense increased by $6.8 billion in 2008 compared to 2007 due to a combination of higher purchase prices and throughput volumes of crude oil and other feedstocks at the Company's refineries, higher prices and volumes of refined petroleum products purchased for sale at retail gasoline stations, and higher levels of merchandise purchased for sale at the gasoline stations. The higher crude oil purchase volumes in 2008 were caused by a full year of operations at the Milford Haven, Wales refinery in 2008 following the December 2007 purchase of the remaining 70% interest. Operating expenses increased by $376.5 million in 2008 compared to 2007 and included higher refinery and retail station costs, and higher costs for oil field operations in Malaysia and synthetic oil operations at Syncrude. Refining costs increased due to both higher natural gas and other fuel costs and the full year of operations at Milford Haven following the 2007 acquisition. Exploration expenses were $141.3 million higher in 2008 than in 2007 and were primarily associated with higher leasehold amortization expenses at the Tupper area in British Columbia, more dry hole expense in Malaysia and Australia, and higher geophysical expenses in Suriname. Additionally, 2007 included costs for settlement of two work commitments on leases formerly held on the Scotian Shelf offshore eastern Canada. Selling and general expenses were $0.5 million higher in 2008 than in 2007. Depreciation, depletion and amortization expense was $223.2 million higher in 2008 compared to 2007 due mostly to higher crude oil production volumes, but also due to higher barrel-equivalent unit rates for depreciation for virtually all E&P segments and higher depreciation for the Milford Haven, Wales refinery acquired in December 2007. Impairment of long-lived assets of $40.7 million in 2007 primarily related to closing 55 underperforming gasoline stations in the U.S. and Canada. Accretion of asset retirement obligations increased by $8.2 million in 2008 due to additional abandonment obligations incurred as additional Kikeh development wells were drilled during the year and higher estimated costs of future abandonment obligations at Syncrude. Net costs associated with hurricanes of $3.0 million in 2007 was due to a downward adjustment of anticipated insurance recoveries at the Meraux refinery following Hurricane Katrina based on updated loss limits communicated in 2007 by the Company's primary property insurer. Interest expense incurred in 2008 was $0.4 million less than in 2007 due to lower average debt levels during 2008 compared to the prior year. The amount of interest costs capitalized to property, plant and equipment decreased by $18.4 million in 2008 due to lower levels of interest allocable to worldwide E&P development projects. Minority interest was insignificant and was associated with the operations of Berkana Energy in Canada that was sold in January 2008. Income tax expense was $607.9 million higher in 2008 than in 2007 and was mainly attributable to a higher level of pretax earnings. The effective income tax rate for consolidated earnings increased from 38.0% in 2007 to 38.3% in 2008. The tax rate in both years was higher than the U.S. federal statutory tax rate of 35.0% due to a combination of U.S. state income taxes, certain foreign tax rates that exceed the U.S. federal tax rate, and certain exploration and other expenses in foreign taxing jurisdictions for which no income tax benefit is currently being recognized because of the uncertain ability of the Company to obtain tax benefits for these costs in future years.

2007 vs. 2006 - Net income in 2007 was $766.5 million, $4.01 per diluted share, compared to $644.7 million, $3.41 per diluted share, in 2006. The improvement in consolidated net income in 2007 of $121.8 million compared to 2006 was primarily related to higher earnings in both major businesses - E&P and R&M. The net costs of corporate activities were higher in 2007 and partially offset the improved results in E&P and R&M. Earnings in the E&P business improved by $40.3 million in 2007 as this business benefited from higher oil sales prices, lower exploration expenses and lower income taxes in 2007 compared to 2006. E&P earnings were adversely affected in 2007 by lower sales volumes for oil and natural gas and slightly lower realized natural gas sales prices as well as higher expenses for production, depreciation, depletion and administration. The R&M business generated strong profits in 2007, increasing $95.1 million compared to 2006. The improvement was primarily due to higher U.S. refining margins in 2007 compared to 2006, a fully operational refinery at Meraux, Louisiana, during 2007, and lower hurricane repair expenses in 2007, but R&M earnings in 2007 included an unfavorable impact from noncash inventory revaluations in the U.K. The Meraux refinery was shut-down for repairs for the first five months of 2006 following significant damage caused by Hurricane Katrina in late August 2005. The Company incurred significant repair costs in 2006 at Meraux following Hurricane Katrina, certain of which were not recoverable through insurance policies. In the U.K., the Company acquired the remaining 70% interest in the Milford Haven, Wales, refinery in late 2007. Under the Company's last-in, first-out accounting policy for inventory, an after-tax noncash charge of $59.5 million was recorded in the year of acquisition to reduce the carrying value of crude oil and refined products inventory to beginning of year prices, which were significantly lower than at the end of the year. The net costs of corporate activities increased by $13.6 million in 2007 compared to 2006, with the cost increase mostly attributable to higher net interest expense and higher losses on transactions denominated in foreign currencies. The higher net interest expense was caused by higher average borrowing levels, partially offset by a higher level of interest costs capitalized to E&P development projects. The U.S. dollar generally weakened against other significant foreign currencies used in the Company's business in 2007, especially compared to the Canadian dollar. The 2007 period included lower corporate administrative costs mostly due to higher expense in 2006 for an educational assistance contribution commitment.

Sales and other operating revenues were $4.1 billion higher in 2007 than in 2006 mostly due to higher sales volumes and sales prices for gasoline and other refined products, higher sales prices for crude oil produced by the Company, and higher sales volumes for merchandise at retail gasoline stations. Sales volumes for oil and natural gas were lower in 2007 than in 2006. Gain/(loss) on sales of assets in 2007 was $9.8 million unfavorable to 2006 as the Company had no major asset sales in 2007. Interest and other income was lower by $3.0 million in 2007

due mostly to higher losses on foreign currency exchange attributable to a weakening of the U.S. dollar against the primary foreign currencies affecting the Company's operations, which mainly include the Canadian dollar and the British pound sterling. Crude oil and product purchases expense increased by $3.7 billion in 2007 compared to 2006 due to a combination of higher purchase prices and throughput volumes of crude oil and other feedstocks at the Company's refineries, higher prices and volumes of refined petroleum products purchased for sale at retail gasoline stations, and higher levels of merchandise purchased for sale at the gasoline stations. The higher crude oil purchase volumes in 2007 were caused by the Meraux refinery being operational throughout 2007 following about five months of downtime for hurricane-related repairs in 2006. Operating expenses increased by $218.8 million in 2007 compared to 2006 and included higher refinery and retail station costs, higher workover and repair costs for Gulf of Mexico oil and gas fields, and higher costs for oil field operations in Malaysia, the U.K. and Ecuador and for Canadian synthetic oil operations at Syncrude. Exploration expenses were $16.2 million lower in 2007 than in 2006 primarily associated with less dry hole and geophysical expenses in Malaysia, but partially offset by higher costs in Canada for dry holes, geophysical, lease amortization and settlement of two work commitments on leases formerly held in the Scotian Shelf. Selling and general expenses were $0.8 million higher in 2007 than in 2006 as higher compensation, insurance and Berkana Energy administrative costs in 2007 were almost offset by lower costs associated with an educational assistance program called the El Dorado Promise. The Company acquired 80% of Berkana Energy in December 2006, and subsequently sold this investment in January 2008. Depreciation, depletion and amortization expense was $105.8 million higher in 2007 compared to 2006 due mostly to higher barrel-equivalent unit rates for depreciation for virtually all E&P segments and higher depreciation for the Meraux refinery and retail gasoline stations. Impairment of long-lived assets of $40.7 million in 2007 primarily related to closing 55 underperforming gasoline stations in the U.S. and Canada. Accretion of asset retirement obligations increased by $5.3 million in 2007 mostly due to additional abandonment obligations incurred as Kikeh development wells were drilled during the year, and higher anticipated future abandonment costs on existing wells in the U.S. Net costs associated with hurricanes was lower in 2007 by $106.2 million mostly due to uninsured repair costs incurred in 2006 at the Meraux refinery following Hurricane Katrina in 2005. The $3.0 million of hurricane expense recorded in 2007 related to a downward adjustment of anticipated insurance recoveries at the Meraux refinery based on updated projected loss limits announced by the Company's primary property insurer. Interest expense increased by $22.9 million in 2007 mostly associated with higher average debt levels during the year compared to 2006. The amount of interest costs capitalized to property, plant and equipment increased by $6.8 million in 2007 due to higher spending on E&P development projects in Malaysia, the U.S. and the Republic of the Congo. Minority interest in operations of Berkana Energy in Canada was favorable $0.6 million in 2007 compared to 2006. Income tax expense was $77.0 million higher in 2007 than in 2006 and was mainly attributable to higher pretax income levels. The effective income tax rate for consolidated earnings rose from 37.9% in 2006 to 38.0% in 2007. The tax rate in both years was higher than the U.S. federal statutory tax rate of 35.0% due to a combination of U.S. state income taxes, certain foreign tax rates that exceed the U.S. federal tax rate, and certain exploration and other expenses in foreign taxing jurisdictions for which no income tax benefit is currently being recognized because the ability to obtain tax benefits for these costs in future years is uncertain. The tax rates in both years benefitted, however, from overall favorable effects of tax rate changes in foreign countries.

Segment Results - In the following table, the Company's results of operations for the three years ended December 31, 2008 are presented by segment. More detailed reviews of operating results for the Company's exploration and production and refining and marketing activities follow the table.

               (Millions of dollars)          2008        2007      2006
               Exploration and production
               United States                $   156.6      98.2     212.4
               Canada                           588.7     370.2     330.6
               United Kingdom                    73.8      47.6      60.7
               Malaysia                         865.3     148.2      (5.9 )
               Ecuador                           (2.9 )    28.5      38.4
               Other                            (81.6 )   (35.6 )   (19.4 )

                                              1,599.9     657.1     616.8

               Refining and marketing
               North America                    227.9     230.4      77.5
               United Kingdom                    85.9     (24.7 )    33.1

                                                313.8     205.7     110.6

               Corporate and other             (173.7 )   (96.3 )   (82.7 )

               Net income                   $ 1,740.0     766.5     644.7

Exploration and Production - Earnings from exploration and production operations were $1.60 billion in 2008, $657.1 million in 2007 and $616.8 million in 2006. E&P earnings improved $942.8 million in 2008 compared to 2007 with the significant increase primarily due to higher average realized sales prices for the Company's oil and natural gas production, higher crude oil production volumes and gains on disposals of Canadian assets. Results in 2007 were favorably impacted by income tax benefits associated with tax rate reductions in Canada. The 2008 results were unfavorably affected compared to 2007 by lower natural gas sales volumes and higher expenses for exploration, production, depreciation, depletion, administration and accretion of discounted abandonment liabilities. Crude oil sales volumes in 2008 were 41% higher than in 2007, compared with a 29% increase in crude oil production in 2008 compared to 2007. Crude oil sales volumes grew more than

production in 2008 due to the timing of sale transactions as the Company had a lower inventory of unsold crude oil at year-end 2008 compared to a year earlier. The significant unsold crude oil inventory at year-end 2007 was mostly at Kikeh where sales volumes lagged production in late 2007 during the start-up phase of this field. During 2008, higher oil sales volumes in Malaysia attributable to higher production volumes at the Kikeh field were partially offset by lower oil sales volumes at most other producing areas. Lower U.S. crude oil sales volumes in 2008 were primarily due to reduced production volumes at several Gulf of Mexico fields following Hurricanes Gustav and Ike. Certain facilities owned by other companies downstream of our producing fields were down for repairs for an extended period of time in the fourth quarter 2008. Lower oil sales volumes in Canada were attributable to field decline at Hibernia, field decline and a higher royalty rate at Terra Nova, sale of the Lloydminster heavy oil property in Western Canada and more downtime at Syncrude. Lower crude oil sales volumes in the U.K., Ecuador and West Patricia, offshore Sarawak Malaysia, were mostly caused by production declines as these fields mature. Natural gas sales volumes were 9% lower in 2008 than 2007 and the reduction was mostly due to sale of Berkana Energy in January 2008. Additionally, several of the Company's Gulf of Mexico fields were either shut in or had curtailed gas production while downstream facilities owned by others were repaired following third quarter hurricanes. The Company's average realized oil sales price was 38% higher in 2008 than 2007, and the average North American natural gas sales price was 33% higher in 2008.

E&P earnings improved $40.3 million in 2007 compared to 2006 primarily due to higher average realized oil sales prices in the latter year for the Company's production. In addition, exploration expenses were lower by $16.1 million in 2007. Both years were favorably affected by income tax benefits associated with tax rate reductions in foreign countries. The 2007 results were unfavorably impacted compared to 2006 by lower oil and natural gas sales volumes, lower realized natural gas sales prices in North America and higher expenses for production, depreciation, depletion, administration and accretion of discounted abandonment liabilities. Crude oil sales volumes in 2007 were 3% lower than in 2006, despite a 4% increase in crude oil production in 2007 compared to 2006. The lower sales volumes were caused by the timing of sale transactions as the Company had a larger inventory of unsold crude oil at year-end 2007 compared to a year earlier. The 2007 increase in unsold crude oil inventory, which was primarily at the Kikeh field in Malaysia, returned to normal levels during 2008. During 2007, lower oil sales volumes in the U.S. and Ecuador were only partially offset by higher oil sales volumes in Malaysia and Canada. The lower sales volumes in the U.S. were due to field declines in the Gulf of Mexico, while lower sales volumes in Ecuador were caused by nonrecurring make-up sales volumes in 2006 that related to a prior year. Higher oil sales volumes in Malaysia were mostly caused by start-up of the significant Kikeh field, offshore Sabah, in August 2007, partially offset by lower production at the West Patricia field, offshore Sarawak. Higher volumes in Canada were attributable to better production volumes at the Terra Nova field in the Jeanne d'Arc basin, offshore Newfoundland, which was shut-in for repairs for about six months in 2006. Natural gas sales volumes were 19% lower in 2007 than 2006 and the reduction was mostly due to field declines for maturing fields in the Gulf of Mexico and onshore south Louisiana as well as lower natural gas production at U.K. North Sea fields. The Company's average realized oil sales price was 20% higher in 2007 than 2006, while North American natural gas sales prices averaged 5% less in 2007 than in 2006.

The results of operations for oil and gas producing activities for each of the last three years are shown by major operating areas on pages F-37 and F-38 of this Form 10-K report. Average daily production and sales rates and weighted average sales prices are shown on page 6 of the 2008 Annual Report.

A summary of oil and gas revenues, including intersegment sales that are eliminated in the consolidated financial statements, is presented in the following table.

           (Millions of dollars)                2008       2007      2006
           United States
           Oil and gas liquids                $   374.0     310.8     440.1
           Natural gas                            162.1     121.7     160.4
           Canada
           Conventional oil and gas liquids       775.8     628.6     476.0
           Natural gas                              5.5      23.0      24.1
           Synthetic oil                          459.6     351.4     270.0
           United Kingdom
           Oil and gas liquids                    189.4     129.5     156.8
           Natural gas                             25.8      16.6      23.3
           Malaysia
           Oil and gas liquids                  1,985.6     436.0     219.6
           Natural gas                              0.1        -         -
           Ecuador - crude oil                     80.2     126.1     122.7

           Total oil and gas revenues         $ 4,058.1   2,143.7   1,893.0

The Company's crude oil, condensate and natural gas liquids production averaged 118,254 barrels per day in 2008, 91,522 barrels per day in 2007 and 87,817 barrels per day in 2006. Production of crude oil, condensate and natural gas liquids in 2008 increased by 26,732 barrels per day, or 29% compared to 2007, primarily due to continued ramp-up of the Kikeh field in Block K, offshore Sabah, Malaysia. This prolific field, which came on production in August 2007 produced 53,000 net barrels of oil per day for the full-year 2008 compared to 11,658 barrels per day

in 2007. Light oil production in Canada declined from 596 barrels per day in 2007 to 46 barrels per day in 2008 due to sale of Berkana Energy in January 2008. Heavy oil production in the Western Canadian Sedimentary Basin (WCSB) fell from 11,524 barrels per day in 2007 to 8,484 barrels per day in 2008, due to sale of the Lloydminster property in 2008 and lower production volumes at the Seal field in Alberta. Oil production at Hibernia, offshore Newfoundland, was 8,542 barrels per day in 2008, up slightly from 8,314 barrels per day in 2007. Oil production decreased at Terra Nova, offshore Newfoundland, from 10,557 barrels per day in 2007 to 8,284 barrels per day in 2008. The 2008 reduction at Terra Nova was attributable to natural field decline plus a higher royalty rate. Syncrude production totaled 12,546 barrels per day in 2008 compared to 12,948 . . .