Note B – Property, Plant and Equipment

Exploratory Wells

Under Financial Accounting Standards Board (FASB) guidance exploratory well costs should continue to be capitalized when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.

At June 30, 2017, the Company had total capitalized exploratory well costs pending the determination of proved reserves of $175.5 million. The following table reflects the net changes in capitalized exploratory well costs during the six-month periods ended June 30, 2017 and 2016.



(Thousands of dollars)	2017		2016
Beginning balance at January 1	$	148,500	130,514
Additions pending the determination of proved reserves		48,764	800
Reclassifications to proved properties based on the determination of proved reserves		(13,370)	–
Capitalized exploratory well costs charged to expense		(8,360)	–
Other adjustments		–	(3,205)
Balance at June 30	$	175,534	128,109

Note B – Property, Plant and Equipment (Contd.)

The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed for each individual well and the number of projects for which exploratory well costs have been capitalized. The projects are aged based on the last well drilled in the project.



		June 30,
	2017				2016
(Thousands of dollars)	Amount		No. of Wells	No. of Projects	Amount		No. of Wells	No. of Projects
Aging of capitalized well costs:
Zero to one year	$	57,900	3	3	$	63,617	5	5
One to two years		53,023	3	3		–	–	–
Two to three years		–	–	–		31,627	2	–
Three years or more		64,611	6	–		32,865	4	–
	$	175,534	12	6	$	128,109	11	5

Of the $117.6 million of exploratory well costs capitalized more than one year at June 30, 2017, $70.4 million is in Brunei, $43.2 million is in Vietnam and $4.0 million is in Malaysia. In all geographical areas, either further appraisal or development drilling is planned and/or development studies/plans are in various stages of completion. The capitalized well costs charged to expense during the first six months of 2017 included one well in Block H, offshore Malaysia in which development of the well could not be justified due to noncommercial hydrocarbon quantities found and change in development plan due to low commodity prices.

Divestments

In January 2017, a Canadian subsidiary of the Company completed its disposition of the Seal field in Western Canada. Total cash consideration to Murphy upon closing of the transaction was approximately $49.0 million. Additionally, the buyer assumed the asset retirement obligation of approximately $85.9 million. A $132.4 million pretax gain was reported in the first quarter of 2017 related to the sale. Also, in January 2017, a U.S. subsidiary of the Company completed its disposition of several non-core properties in the North Tilden area of Eagle Ford Shale. Total cash consideration to Murphy upon closing of the transaction was approximately $14.8 million. There was no gain or loss recorded related to this sale.

During the second quarter 2016, a Canadian subsidiary of the Company completed the sale of its five percent, non-operated working interest in Syncrude Canada Ltd. (“Syncrude”) asset to Suncor Energy Inc. (“Suncor”). The Company received net cash proceeds of $739.1 million and recorded an after-tax gain of $71.7 million in the second quarter of 2016 associated with the Syncrude divestiture.

During the second quarter 2016, a Canadian subsidiary of the Company completed a divestiture of natural gas processing and sales pipeline assets that support Murphy’s Montney natural gas fields in the Tupper area of northeastern British Columbia. A gain on sale of approximately $187.0 million was deferred and is being recognized over the next 19 years in the Canadian operating segment. The Company amortized approximately $3.4 million of the deferred gain during the six-month period ended June 30, 2017. The remaining deferred gain of $179.8 million was included as a component of deferred credits and other liabilities in the Company’s Consolidated Balance Sheets.

Acquisitions

During the second quarter 2016, a Canadian subsidiary acquired a 70 percent operated working interest (WI) of Athabasca Oil Corporation’s (Athabasca) production, acreage, infrastructure and facilities in the Kaybob Duvernay lands, and a 30 percent non-operated WI of Athabasca’s production, acreage, infrastructure and facilities in the liquids rich Placid Montney lands in Alberta, the majority of which was unproved. Under the terms of the joint venture, the total consideration amounts to approximately $375.0 million of which Murphy paid $206.7 million in cash at closing, subject to normal closing adjustments, and an additional $168.0 million in the form of a carried interest on the Kaybob Duvernay property. $24.7 million of the carried interest had been paid at June 30, 2017. The carry is to be paid over a period of up to five years from 2016.

Note B – Property, Plant and Equipment (Contd.)

Impairments

During the first quarter of 2016, declines in future oil and gas prices led to impairments in certain of the Company’s producing properties and the Company recorded pretax noncash impairment charges of $95.1 million to reduce the carrying values to their estimated fair values for the Terra Nova field offshore Canada and the Western Canada onshore heavy oil producing properties at Seal. The fair values were determined by internal discounted cash flow models using estimates of future production, prices from futures exchanges, costs, and a discount rate believed to be consistent with those used by principal market participants in the applicable region.

Other

The Company has an interest in the Kakap field in Block K Malaysia. The Kakap field is operated by another company and was jointly developed with the Gumusut field owned by others. As required by the agreements governing the field, a redetermination (unitization) review was required in 2016. In the fourth quarter 2016, the Company recorded $39.1 million in redetermination (unitization) expense related to an expected reduction in the Company’s working interest covering the period from inception through year-end 2016 at Kakap. In February 2017, PETRONAS officially approved the redetermination that reduces the Company’s working interest, from 8.6% to approximately 6.7%, effective April 1, 2017. The Company partially settled $21.8 million of the redetermination expense in cash in the second quarter of 2017. The Company currently expects to settle the remainder in the third quarter of 2017. It is possible that the final adjustment amount could be different than the current estimate. Due to the change in working interest, the future payments under a capital lease of a floating, production and storage facility in the Kakap field are lower and the Company has reduced the total debt recorded on the Consolidated Balance Sheet by approximately $56.7 million, with a similar reduction to Property, plant and equipment.