McMoRan Exploration reported its fourth quarter/twelve-month 2010 results.
James R. Moffett and Richard Adkerson, McMoRan's Co-Chairmen, said, "We look forward to a very active year of exploration and development as we continue to define the potential of our prospects on the GOM Shelf. We are currently drilling high potential exploration wells and progressing efforts to establish initial production from our Davy Jones ultra-deep discovery. The financing completed during 2010 will enable us to build on our success as we work to deliver significant value for shareholders."
McMoRan Exploration reported a net loss applicable to common stock of $77.0 million, $0.75 per share, for the fourth quarter of 2010 compared with a net loss applicable to common stock of $9.5 million, $0.11 per share, for the fourth quarter of 2009. Under applicable accounting rules, McMoRan recorded a $51.6 million noncash charge for the difference between the $16 per share conversion price negotiated in September 2010 and the $17.18 per common share price on the December 30, 2010 closing date associated with the convertible perpetual preferred stock offering in the fourth quarter.
For the twelve months ended December 31, 2010, McMoRan reported a net loss applicable to common stock of $190.1 million, $2.00 per share, compared with a net loss applicable to common stock of $225.3 million, $2.87 per share, in the 2009 period.
ACQUISITION OF PXP's SHALLOW WATER GOM ASSETS & RELATED FINANCINGS
On December 30, 2010, McMoRan completed its acquisition of PXP's shallow water GOM Shelf assets and related financings. Under the terms of the transaction, McMoRan issued 51 million shares of McMoRan common stock and paid $75 million in cash to PXP for all of PXP's interests and exploration rights in the shallow waters of the shelf of the GOM. In addition, the purchase price includes $51 million associated with estimated revenues, expenses and capital expenditures attributable to the properties from the August 1, 2010 effective date through the December 30, 2010 closing date. McMoRan's common stock price on the closing date was $17.18 per share.
The properties acquired include PXP's 27.7 percent interest in the significant ultra-deep discovery at Davy Jones, PXP's 35 percent interest in Blackbeard West and all of PXP's interests in deep gas and ultra-deep exploration prospects on the shelf of the GOM, including Blackbeard East and Lafitte which are currently being drilled; PXP's 30.0 percent working interest in the multi-well Flatrock field, 47.9 percent interest in Blueberry Hill and 30.0 percent working interest in Hurricane Deep. Independent reserve estimates for the proved reserves acquired, excluding the significant reserve potential from Davy Jones and Blackbeard East, approximated 53 Bcfe as of December 31, 2010 and fourth-quarter 2010 production rates averaged 43 MMcfe/d.
In accordance with the purchase method of accounting, the $1.0 billion purchase price for McMoRan's acquisition of the PXP properties is allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the closing date. Based on preliminary estimates, approximately 18 percent of the purchase price is expected to be allocated to producing properties and 82 percent to in-progress wells and unproved properties, the majority of which is expected to be allocated to Davy Jones and Blackbeard. The preliminary allocation of the purchase price (valued on the closing date) is subject to change as McMoRan completes its analyses of the values of the acquired assets.
Results from subsequent evaluation of the acquired exploration prospects, future exploration and development activities, declines in natural gas or oil prices and other factors differing from the assumptions used to estimate the fair values of the acquired assets could result in impairment of the carrying amounts assigned to the acquired properties.
On December 30, 2010, McMoRan also completed the financings announced on September 20, 2010 consisting of $900 million in equity-linked securities, including $200 million of 4% Convertible Senior Notes due 2017 and $700 million of 5 3/4% Convertible Perpetual Preferred Stock. The financings included $400 million in investments from institutional investors and a $500 million investment in convertible preferred stock by Freeport-McMoRan Copper & Gold.
McMoRan has approximately 157 million basic shares of common stock outstanding. Assuming conversion of McMoRan's remaining outstanding 8% Convertible Perpetual Preferred Stock, 5.25% Convertible Debt due October 2011 and including the newly issued 4% Convertible Senior Notes and 5 3/4% Convertible Perpetual Preferred Stock, McMoRan would have approximately 221 million common shares outstanding on a fully converted basis.
PRODUCTION AND DEVELOPMENT ACTIVITIES
Fourth-quarter 2010 production averaged 144 MMcfe/d net to McMoRan, compared with 209 MMcfe/d in the fourth quarter of 2009. Full-year 2010 production averaged 161 MMcfe/d net to McMoRan, compared with 202 MMcfe/d for 2009. Production is expected to average approximately 175 MMcfe/d in the first quarter of 2011 and 160 MMcfe/d for the year. There is a potential to increase production rates from successful exploration and development activities. McMoRan's estimated production rates are dependent on the timing of planned recompletions, production performance and other factors.
Production from the Flatrock field averaged a gross rate of approximately 165 MMcfe/d (31 MMcfe/d net to McMoRan) in the fourth quarter of 2010. The operator successfully recompleted the #229 well and production is expected to recommence in the first quarter of 2011. As a result of the PXP transaction, McMoRan owns a 55.0 percent working interest and a 41.3 percent net revenue interest in the Flatrock field.
McMoRan's exploration strategy is focused in the shallow waters (i.e. less than 150 feet of water) of the GOM and Gulf Coast area on the "deep gas play" and on the "ultra-deep gas play." Deep gas prospects target large Miocene age deposits above the salt weld (i.e. listric fault) at depths typically between 15,000 to 25,000 feet. Ultra-deep prospects target objectives typically at depths below 25,000 feet beneath the salt weld in the Miocene and older age sections that have been correlated to those sections that have been productive onshore and in deepwater drilling by other industry participants.
Shallow Water, Ultra-Deep Exploration Activities
In February 2010, the Davy Jones discovery well (Davy Jones No. 1) on South Marsh Island Block 230 was drilled to a total depth of 29,000 feet. As reported in January 2010, McMoRan logged 200 net feet of pay in multiple Eocene/Paleocene (Wilcox) sands in the well. In March 2010, a production liner was set and the well was temporarily abandoned to prepare for completion. McMoRan has ordered long-lead time and specialty items, including a 25,000 PSI production tree, safety valve and blowout preventer, and expects to receive the equipment to complete and flow test the well by year-end 2011.
On April 7, 2010, McMoRan commenced drilling the Davy Jones offset appraisal well (Davy Jones #2) on South Marsh Island Block 234, two and a half miles southwest of the Davy Jones No. 1 discovery well. The well is currently drilling below 27,100 feet towards a proposed total depth of 29,950 feet. The offset appraisal well is targeting similar sections up-dip to the Davy Jones No. 1 discovery well, as well as deeper objectives, including potential additional Wilcox and possibly Cretaceous (Tuscaloosa) sections.
Davy Jones involves a large ultra-deep structure encompassing four OCS lease blocks (20,000 acres). McMoRan holds a 60.4 percent working interest and 47.9 percent net revenue interest in Davy Jones. Other working interest owners in Davy Jones include: Energy XXI (15.8%), Nippon Oil Exploration USA Limited (12%), W.A. "Tex" Moncrief, Jr. (8.8%) and a private investor (3%). McMoRan's costs incurred in Davy Jones totaled $82.6 million at December 31, 2010, including $38.3 million in costs associated with the Davy Jones No. 2 offset appraisal well in progress (these amounts exclude allocated values associated with the PXP property acquisition).
The Blackbeard East ultra-deep exploration well commenced drilling on March 8, 2010 and is currently drilling below 31,400 feet. McMoRan has been granted a permit by Bureau of Ocean Energy Management (BOEM) to deepen the well to 34,000 feet. Recent wireline logs have indicated that Blackbeard East has encountered hydrocarbon bearing sands in the Oligocene (Frio) with good porosity below 30,000 feet. This is the first hydrocarbon bearing Frio sand encountered either on the GOM Shelf or in the deepwater offshore Louisiana. Blackbeard East is located high on the structure and seismic data on the prospect indicates the potential for significantly thicker sands on the flanks of the structure as has been confirmed in major deepwater discoveries by other industry participants, including the K2 field in the deepwater. McMoRan is considering down dip drilling opportunities on the flanks of the structure to further evaluate this section. This Frio sand section is geologically older (i.e. below) than the drilled section at Blackbeard West (33,000 feet) approximately 10 miles away. The Frio trend is prolific onshore in South Louisiana and extends south along the Texas coast.
The Frio sand section below 30,000 feet is in addition to the 178 net feet of hydrocarbons in the Miocene previously announced above 25,000 feet at Blackbeard East. The pressure and temperature data below the salt weld between 19,500 feet and 24,600 feet indicate that a completion could utilize conventional equipment and technologies. Analysis of wireline log and paleo data from Blackbeard East indicates that certain Miocene sands seen in the Blackbeard East well correlate to Miocene sands at Blackbeard West. In 2011, McMoRan plans to drill a 25,000 foot offset appraisal well to further evaluate and delineate these zones in the Upper and Middle Miocene. McMoRan believes the Miocene structural features in Blackbeard East are similar to the structures identified in the Auger and Cardomon discoveries drilled in the GOM flex trend by other industry participants.
Blackbeard East is located in 80 feet of water on South Timbalier Block 144. McMoRan holds a 70.0 percent working interest and 56.2 percent net revenue interest in the well. Other working interest owners in Blackbeard East include: EXXI (18.0%), W.A. "Tex" Moncrief, Jr. (10.0%) and a private investor (2.0%). McMoRan's costs incurred in the Blackbeard East well totaled $47.6 million at December 31, 2010, excluding allocated values associated with the PXP property acquisition.
The Lafitte ultra-deep exploration well commenced drilling on October 3, 2010 and is currently drilling below 16,100 feet towards a proposed total depth of 29,950 feet. Lafitte is located on Eugene Island Block 223 in 140 feet of water. The well is targeting Middle and Deep Miocene objectives and possibly Oligocene (Frio) sections below the salt weld. McMoRan holds a 72.0 percent working interest and 58.3 percent net revenue interest in Lafitte. Other working interest owners in Lafitte include: EXXI (18.0%), and W.A. "Tex" Moncrief, Jr. (10.0%). McMoRan's costs incurred in the Lafitte well totaled $15.2 million at December 31, 2010, excluding allocated values associated with the PXP property acquisition.
The information gained from the Blackbeard East and Lafitte wells is expected to assist McMoRan in developing plans for future operations at Blackbeard West. As previously reported, the Blackbeard West ultra-deep exploratory well on South Timbalier Block 168 was drilled to 32,997 feet in 2008. Logs indicated four potential hydrocarbon bearing zones that require further evaluation and the well was temporarily abandoned. McMoRan is evaluating whether to drill deeper at Blackbeard West, drill an offset location or complete the well to test the existing zones. McMoRan expects to be granted a new Suspension of Operations from the BOEM at Blackbeard West to provide additional time to complete its assessment and rig arrangements. McMoRan holds a 67.3 percent working interest and 54.8 percent net revenue interest in the well. McMoRan's costs incurred in the Blackbeard West well totaled $31.3 million at December 31, 2010, excluding allocated values associated with the PXP property acquisition.
Shallow Water, Deep Gas Exploration Activities
The Laphroaig No. 2 deep gas well in St. Mary Parish, Louisiana commenced drilling on September 24, 2010 and has been drilled to 18,366 feet. Gamma ray and resistivity information obtained from LWD tools indicate multiple possible hydrocarbon bearing zones measuring 140 net feet in aggregate, including the field's current producing sand and several additional new zones. Wireline logs will be required to assess the potential zones. Because of a recent mechanical issue, the well will be by-passed at approximately 17,350 feet and drilled to a proposed total depth of 20,000 feet to evaluate deeper exploration potential. The Laphroaig No. 1 discovery well commenced production in 2007 from a 56 foot interval. McMoRan has a 37.3 percent working interest and a 28.5 percent net revenue interest in the Laphroaig prospect. EXXI holds an 18.6 percent working interest. McMoRan's costs incurred in the Laphroaig No. 2 well totaled $7.5 million at December 31, 2010.
The Platte deep gas exploration well in Vermilion Parish, Louisiana commenced drilling on November 19, 2010 and is currently drilling below 16,300 feet. The well has a proposed total depth of 17,000 feet and is targeting lower Miocene age sands. McMoRan and EXXI each hold a 50.0 percent working interest in Platte. McMoRan's costs incurred in the Platte exploration well totaled $7.3 million at December 31, 2010.
McMoRan's 2011 deep gas exploratory drilling plans include the Hurricane Deep and Boudin prospects. Hurricane Deep is located on the southern flank of the Flatrock structure in 12 feet of water on South Marsh Island Block 217. McMoRan has been granted a permit by BOEM to drill Hurricane Deep and operations have commenced. The well has a proposed total depth of 20,000 feet and is targeting the thick Gyro sand encountered in the Hurricane Deep well (No. 226) in 2007. The location also offers the opportunity to evaluate deeper potential Gyro zones. McMoRan holds a 55 percent working interest in Hurricane Deep. McMoRan's costs incurred in the Hurricane Deep field totaled $12.1 million at December 31, 2010, excluding allocated values associated with the PXP property acquisition. Certain of McMoRan's costs to re-drill the well to 18,450 feet are expected to be recovered from insurance programs. Boudin is located in 20 feet of water on Eugene Island Block 26. The well has a proposed total depth of 23,050 feet and will test Miocene objectives. McMoRan holds a 74.2 percent working interest in Boudin.
As previously reported, a production test was performed in November 2010 on the Blueberry Hill #9 STK1 well. Results from the production test indicated a range of rates and pressures. The well flowed at a gross rate as high as approximately 22 million cubic feet of natural gas per day (MMcf/d) and 1,250 barrels of condensate on a 22/64th choke with flowing tubing pressure of 13,090 pounds per square inch (PSI) and the rate at the end of the testing period approximated 16 MMcf/d and 838 barrels of condensate on a 23/64th choke with flowing tubing pressure of 7,750 PSI. The well has been shut in pending plans for additional testing and evaluation of the well.
Blueberry Hill is located on Louisiana State Lease 340 in approximately 10 feet of water. McMoRan owns a 90.8 percent working interest and a 62.8 percent net revenue interest in the well. McMoRan's costs incurred in the Blueberry Hill #9 STK1 well totaled $33.0 million at December 31, 2010.
McMoRan's fourth-quarter 2010 oil and gas revenues totaled $95.1 million, compared to $128.0 million during the fourth quarter of 2009. During the fourth quarter of 2010, McMoRan's sales volumes totaled 8.2 Bcf of gas, 629,000 barrels of oil and condensate and 1.3 Bcfe of plant products, compared to 13.1 Bcf of gas, 731,800 barrels of oil and condensate and 1.8 Bcfe of plant products in the fourth quarter of 2009. McMoRan's fourth-quarter comparable average realizations for gas (before hedging) were $4.05 per thousand cubic feet (Mcf) in 2010 and $4.70 per Mcf in 2009; for oil and condensate McMoRan received an average of $83.23 per barrel in fourth-quarter 2010 compared to $75.15 per barrel in fourth-quarter 2009.
CASH, LIQUIDITY AND CAPITAL EXPENDITURES
At December 31, 2010, McMoRan had $905.7 million in cash. Total debt was $560.0 million at December 31, 2010, including $74.7 million in Convertible Senior Notes due in October 2011 with a conversion price of $16.575 per share and $185.3 million in Convertible Senior Notes due in December 2017 with a conversion price of $16.00 per share. McMoRan currently has no amounts borrowed under its $150 million revolving credit facility and $50 million in availability after considering $100 million in outstanding letters of credit.
Capital expenditures totaled $57.0 million for the fourth quarter of 2010 and $217.3 million for the twelve-months ended December 31, 2010. Depending on drilling results and follow on development opportunities, McMoRan expects 2011 capital expenditures to be at least $300 million and potentially up to $500 million. The low end of the range includes approximately $200 million in exploration and $100 million in development spending. Capital spending will continue to be driven by opportunities.
Net abandonment expenditures, which include scheduled conventional and hurricane-related work, totaled $44.3 million in the fourth quarter of 2010 and $115.1 million for the twelve-months ended December 31, 2010. Abandonment expenditures are expected to approximate $135 million in 2011.
In the fourth quarter of 2010, McMoRan recorded $24.2 million in gains for reimbursable costs associated with its insurance programs. Since 2009, McMoRan has recorded $63.5 million in gains associated with the 2008 hurricane events in the GOM, including $38.9 million in 2010, and continues to pursue reimbursement of certain hurricane-related abandonment costs under its insurance programs.
Independent reservoir engineers' preliminary estimates of McMoRan's proved oil and gas reserves as of December 31, 2010, were 276.1 Bcfe, compared with 271.9 Bcfe at December 31, 2009. Year-end 2010 reserves reflect the acquisition of producing properties from PXP and positive reserve revisions from certain of McMoRan's producing properties, offset by 2010 production. Year-end 2010 reserves exclude results from Davy Jones, Blackbeard East and the recent drilling results at Laphroaig. The recent positive well results at Laphroaig are expected to be incorporated into the final reserve report to be included in McMoRan's 2010 Annual Report and 10-K. McMoRan believes that information gained to date combined with positive future drilling results and successful flow tests at Davy Jones and Blackbeard East could result in significant future reserve additions.
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