Murphy Oil (NYSE:MUR) executives used the final session of the company’s three-part offshore educational webinar series to explain how production sharing contracts (PSCs) work and why the framework is central to valuing Vietnam offshore projects. Management said the session was intended to help investors understand cash flow mechanics, entitlement production, and how Murphy’s hub-and-spoke development strategy could affect the timing of cost recovery and free cash flow in Vietnam.
Webinar focus: PSC mechanics and Vietnam’s fiscal framework
President and CEO Eric Hambly said the third session was designed to “take a closer look” at PSCs, which underpin Vietnam’s offshore contractual structure. He said the company walked through a simplified, fictional PSC model using example numbers to show how cash flows and entitlement production can evolve over a project’s life, including how free cash flow behaves under PSCs versus traditional concession agreements.
Why PSCs exist and how they differ from concessions
In remarks framing the history of PSCs, Murphy described PSCs as an alternative to concession agreements that gained traction starting in the 1960s and became widely adopted across emerging petroleum provinces in the 1970s. According to the presentation, about one-quarter of the world’s producing countries use PSCs today.
Murphy said PSCs were developed to attract foreign investment while allowing host governments to retain more control over timing of development and capture more upside from hydrocarbon resources. Under a PSC structure, the government retains ownership of the hydrocarbons, and risk and reward are more evenly shared versus a concession model, the company said.
Murphy highlighted two foundational PSC mechanisms:
- Cost recovery: Contractors can recover eligible exploration, appraisal, development, and operating costs from early revenue streams, which Murphy characterized as downside protection during capital-intensive phases.
- Profit sharing: After royalty and cost recovery, remaining production (profit oil/gas) is split between contractors and the government, often via progressive sliding scales that increase government take as profitability improves.
Management also addressed investor concerns about “government take,” describing it as a function of risk, reward, and negotiation dynamics. The company said higher government take does not necessarily imply weak economics because cost recovery can protect early returns, while profit-sharing scales with profitability over time.
Typical Vietnam PSC components and cash flow sequencing
Murphy said it could not disclose the specific terms of its Vietnam PSCs due to contract confidentiality, but walked through what it described as the core building blocks of a typical Vietnam PSC. Executives outlined royalty on gross revenue using an incremental sliding scale tied to revenue generated from daily production, cost recovery that is capped annually at a negotiated percentage of gross revenue, and profit oil/gas sharing after royalty and cost recovery.
The company also referenced taxes and levies that can apply under the PSC framework, including crude oil export tax on exported oil and environmental charges, and said corporate income tax rates can vary based on a block’s incentive status.
Executives emphasized that PSCs operate with a defined sequencing:
- Gross revenue is generated once production begins.
- Royalty is paid first.
- Cost recovery is allocated next (subject to an annual ceiling), drawing down accumulated costs in a “cost bank.”
- Remaining revenue is treated as profit oil/gas and split between contractors and government.
- Contractor cash flow reflects cost recovery plus profit share, net of taxes and costs, while government take includes royalties, profit share, and taxes.
Illustrative project model and entitlement production
Using a fictional 12-year project example, Murphy assumed a 5% royalty rate and a 50% annual cost recovery ceiling, along with a 50% contractor profit share and 50% corporate tax rate. The example assumed a flat $75 commodity price, operating expense of $10 per barrel of oil equivalent, and flat production of 15,000 barrels of oil equivalent per day.
In the example, exploration and development costs accumulated in the cost bank before first production, and once production began the project drew against the cost bank up to the annual ceiling. Murphy said year 10 in the example was the first year the project became “cost current,” meaning accumulated costs had been recovered. Management said that once cost current, government share rises and contractor entitlement production and free cash flow decline, noting that the drop in entitlement production is a PSC mechanism rather than reservoir performance.
Murphy also said that beginning in the fourth quarter it will start reporting entitlement production from its Vietnam business unit.
Hub-and-spoke strategy, unitization questions, and disclosure limits
Management connected PSC mechanics to Murphy’s Vietnam development approach, saying PSCs operate on a block-level cost bank, which can allow future tieback spending to be recovered against revenue from existing hubs. Murphy referenced its “Golden Camel” hub in Block 15-1/05 and “Golden Sea Lion” hub in Block 15-2/17 and said that once those hubs are producing, additional tiebacks within the same block could accelerate recoverable costs and cash flow.
During Q&A, Wolfe Research asked about government take, citing past references in the low-70% range. Hambly said he had historically cited 65% to 75% depending on block production rates and that the webinar’s example was intended to be indicative of what a “model field” might look like under Vietnam’s petroleum law rather than a precise estimate for Murphy’s blocks. He added that the Block 15-1/05 PSC was signed in 2007 before Murphy entered the block and was negotiated by a supermajor operator, limiting Murphy’s ability to shape those terms.
On unitization and a hypothetical successful exploration well that could connect resources across blocks, executives said unitization would involve determining participation shares for the portions of a field in each block, and that cost recovery remains block-level. They described the cost recovery approach as “first in” costs being recovered first and indicated that costs associated with the portion of a unitized field in one block could potentially be recovered from that block’s revenues after prior costs are recovered.
Johnson Rice asked whether Murphy’s inability to disclose PSC terms is driven by Vietnam or by company choice. Hambly responded that Murphy is not allowed under its Vietnam agreements to publish PSC terms, and said the company is trying to provide enough information for investors to model PSCs closely without disclosing confidential terms. Asked about Côte d’Ivoire, Hambly said he did not know the legality of disclosing PSC terms there and would need to review it, while stating that the terms in Côte d’Ivoire are “very good” and “almost as good as the United States,” though not quite as favorable.
Barclays asked how Murphy thinks about optimizing production given that some terms are linked to production tiers. Murphy said it focuses on maximizing value at the block level rather than targeting specific tiers, running constrained and unconstrained facility capacity cases to evaluate capital investment and returns. Executives also clarified that production and costs are aggregated at the block level in Vietnam, and said the company does not intentionally constrain production to maximize entitlement, describing development planning as a transparent process involving partners and the host government.
In closing remarks, Hambly said Murphy believes shale oil production will likely peak within the decade while global demand continues to rise, and argued that ongoing exploration will be needed to address a supply gap. He pointed to Murphy’s stated recent exploration success rate of 60% and its claim of developing resources 40% faster than the industry, and said the company sees a “line of sight” to a 30,000 to 50,000 barrel-per-day business in Vietnam in the 2030s.
About Murphy Oil (NYSE:MUR)
Murphy Oil Corporation is an independent upstream oil and gas company engaged in the exploration, development and production of crude oil, natural gas and natural gas liquids. The company’s operations encompass conventional onshore and offshore reservoirs, with an emphasis on liquids-rich properties and deepwater assets. Through a combination of proprietary technologies and strategic joint ventures, Murphy Oil seeks to optimize recovery rates and manage its portfolio to balance long-term resource development with operational flexibility.
Murphy Oil’s exploration and production activities are geographically diversified.
