Not clear on where the cabs are, but first choice would be cleanly cut out section of existing rock,replace with new rock shimmed to make up for what you need, tape seam (lightly, prime, then tile.
Would avoid tiling over large span of mud except for durock which is virtually unsandable.

Thanks Jakuvall. Would like not to mess with the drywall. (We've had our share with that --in other parts of the house -- and I had enough!) I think we'll just continue on installing the countertop and deal with the wavy wall when we get to the tiling part. With the tile goes up to upper cabinet height all around, maybe a varying substrate thickness will not be very noticeable.

I would worry about the strength of the drywall mud. It's not a strong material.

If you don't want to do the best fix, which is removing drywall, shimming the studs, then replacing drywall, at least use a strong patching compound for the leveling. Look for something with reinforcing fibers and extra adhesive.

Best would be to repair the drywall, but if it is a half inch stip vertically and you are in a corner, then the tile will only be backing that gap the one half inch minus the thickness of the tile. You are talking about 1/8 to 1/4 inch. For 1/2 inch mosaics, that may still be significant, but it you are doing 4x4, 3x6 or other common size larger tiles, I wouldn't be too concerned about it. That little strip isn't going to bear the load of the tile or have weight on it (like a floor would) to make it crack. The mud will be solid enough to keep the tile from moving and that might be the most important thing for such a small area.