McMoRan Exploration reported a net loss applicable to common stock of $27.6 million, $0.17 per share, for the first quarter of 2011 compared with a net loss applicable to common stock of $66.2 million, $0.74 per share, for the first quarter of 2010.
James R. Moffett and Richard Adkerson, McMoRan's Co-Chairmen, said, "The theme of McMoRan's 2010 annual report, 'Buried Treasures on the Shelf,' characterizes our deep drilling activities in the shallow waters of the Gulf of Mexico and highlights the significance of this developing trend. Results to date in our program indicate the potential for large structures, similar to large discoveries onshore South Louisiana and in the deepwater of the Gulf of Mexico. We have six wells currently drilling and an extensive prospect inventory, which provide opportunities for significant future production and reserve additions."
PRODUCTION AND DEVELOPMENT ACTIVITIES
First-quarter 2011 production averaged 195 MMcfe/d net to McMoRan, compared with 190 MMcfe/d in the first quarter of 2010. Production in the first quarter of 2011 was above McMoRan's previously reported estimates of 175 MMcfe/d in January 2011 and 190 MMcfe/d in March 2011 because of improved performance at certain fields and lower than expected downtime for maintenance. Production is expected to average approximately 190 MMcfe/d in the second quarter of 2011 and 175 MMcfe/d for the year, higher than the previous 2011 annual estimate of 160 MMcfe/d, reflecting favorable production performance and projected start up at Laphroaig. McMoRan's estimated production rates are dependent on the timing of planned recompletions and start ups, production performance and other factors.
Production from the Flatrock field averaged a gross rate of approximately 183 MMcfe/d (75 MMcfe/d net to McMoRan) in the first quarter of 2011. The operator successfully recompleted the No. 229 well and production recommenced in the first quarter of 2011. McMoRan owns a 55.0 percent working interest and a 41.3 percent net revenue interest in the Flatrock field.
As previously reported, McMoRan performed a successful production test on the Laphroaig No. 2 well in St. Mary Parish, Louisiana. The production test indicated a gross rate of approximately 54 MMcf/d (approximately 16 MMcf/d net to McMoRan) and zero barrels of water on a 30/64th choke with flowing tubing pressure of 9,989 pounds per square inch (PSI). McMoRan will use the results of the production test to determine the optimal flow rate for the well. The well is expected to commence production in the second quarter of 2011. McMoRan owns a 38.4 percent working interest and a 29.5 percent net revenue interest in the Laphroaig No. 2 well. Energy XXI holds an 18.6 percent working interest. McMoRan's investment in the Laphroaig No. 2 well totaled $16.5 million at March 31, 2011.
The Brazos A-23 development well commenced drilling on February 13, 2011, and is currently drilling below 14,100 feet with a planned total depth of 16,120 feet. This traditional shelf well is targeting proved undeveloped reserves updip from logged pay zones. McMoRan owns a 100.0 percent working interest and an 81.25 percent net revenue interest in the well. McMoRan's investment in Brazos A-23 totaled $18.3 million at March 31, 2011.
McMoRan's exploration strategy is focused in the shallow waters of the Gulf of Mexico (GOM) and Gulf Coast area on the "ultra-deep gas play" and on the "deep gas play." 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. 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.
Shallow Water, Ultra-Deep Exploration Activities
The Davy Jones offset appraisal well (Davy Jones No. 2) has been drilled to a total depth of 30,546 feet and McMoRan is preparing to evaluate the exploration objectives in the Cretaceous section below the identified Wilcox pay sands. Based on interpretations of drilling data, McMoRan believes the well has encountered the Cretaceous section. If confirmed, McMoRan believes the combination of productive Wilcox and Cretaceous sections on the same structure could enhance the prospectivity of Davy Jones and the value of McMoRan's other ultra-deep prospects on its acreage position within the Davy Jones trend.
In February 2011, McMoRan announced preliminary data from wireline logs over the interval from 25,400 feet to 27,300 feet in the Davy Jones No. 2 well. The logs, which continue to be evaluated, indicated over 200 gross feet of sand and approximately 100 net feet of sand, based on intermittent porosity data available, in multiple Wilcox zones that appear to be hydrocarbon bearing. Additional data will be required to complete the evaluation. Paleo and log data indicate the offset well to be approximately 1,300 feet structurally high (up dip) to the Davy Jones discovery well (Davy Jones No. 1) and confirm the major structural features of the Davy Jones prospect. All but one of the sands in the discovery well appear to be present in the offset well, which would confirm sand continuity on the Davy Jones feature. This information also suggests that the Wilcox sands at Davy Jones could be sheet sands (not channel sands) and could be present at other McMoRan prospects on its acreage position within the Davy Jones trend. These results support the wedge effect seen on other large sub-salt structures in the GOM, where sands generally thicken on the flanks of the structure.
The Davy Jones No. 2 well is located two and a half miles southwest of the Davy Jones No. 1 well. Based on analogs with a number of other large sub-surface structures in the GOM, McMoRan believes there is potential for thicker sands on the northern part of the structure, which is closer to the depositional source.
As previously reported, in January 2010 McMoRan logged 200 net feet of pay in multiple Wilcox sands in the Davy Jones No. 1 well on South Marsh Island Block 230. In March 2010, a production liner was set and the well was temporarily abandoned to prepare for completion. Long-lead time equipment has been ordered and completion and flow testing of Davy Jones No. 1 is expected by year-end 2011.
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 a 47.9 percent net revenue interest in Davy Jones. Other working interest owners in Davy Jones include: EXXI (15.8%), Nippon Oil Exploration USA Limited (12%), W.A. "Tex" Moncrief, Jr. (8.8%) and a private investor (3%). McMoRan's total investment in Davy Jones, a substantial majority of which is associated with allocated costs associated with the PXP property acquisition, totaled $562.4 million at March 31, 2011.
The Blackbeard East ultra-deep exploration well commenced drilling on March 8, 2010 and has been drilled to a TVD of 32,559 feet. McMoRan is continuing to address a mechanical issue that was encountered in drilling the well during the first quarter of 2011. Pending resolution of the mechanical issue, McMoRan plans to deepen the well to a proposed total depth of 34,000 feet. Based on interpretations of drilling data, McMoRan believes the well has encountered Sparta sands in the Eocene, which are younger than the Wilcox and have been found to be productive in certain onshore fields in South Louisiana. Wireline logs will be required to evaluate this interval.
As reported in January 2011, wireline logs have indicated that Blackbeard East has encountered hydrocarbon bearing sands in the Oligocene (Frio) with good porosity below 30,000 feet. McMoRan is considering down dip drilling opportunities on the flanks of the structure to evaluate this section further. This is the first hydrocarbon bearing Frio sand encountered either on the GOM Shelf or in the deepwater offshore Louisiana. The Frio sand section below 30,000 feet is in addition to the 178 net feet of hydrocarbons in the Miocene sands announced in December 2010 above 25,000 feet at Blackbeard East. Pressure and temperature data below the salt weld between 19,500 feet and 24,600 feet at Blackbeard East indicate that a completion could utilize conventional equipment and technologies. In 2011, McMoRan plans to drill a 25,000 foot offset appraisal well to further evaluate and delineate these Miocene zones.
Blackbeard East is located in 80 feet of water on South Timbalier Block 144. McMoRan holds a 70.0 percent working interest and a 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 total investment in Blackbeard East, which includes allocated costs associated with the PXP property acquisition, totaled $192.0 million at March 31, 2011.
The Lafitte ultra-deep exploration well commenced drilling on October 3, 2010 and is currently drilling below 20,950 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 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 total investment in Lafitte, which includes allocated costs associated with the PXP property acquisition, totaled $78.9 million at March 31, 2011.
Shallow Water, Deep Gas Exploration Activities
The Hurricane Deep well, which is located on the southern flank of the Flatrock structure in 12 feet of water on South Marsh Island Block 217, commenced drilling on January 20, 2011 and is drilling below 17,300 feet. The well has a proposed total depth of 21,700 feet and is targeting the thick Gyro sand encountered in the Hurricane Deep No. 226 well in 2007 and potential deeper Gyro zones. McMoRan holds a 55.0 percent working interest and a 38.8 percent net revenue interest in Hurricane Deep. Certain of McMoRan's costs to re-drill the well to 18,450 feet are expected to be recovered from insurance programs. McMoRan's total investment in Hurricane Deep, which includes allocated costs associated with the PXP property acquisition, totaled $45.2 million at March 31, 2011.
The Boudin deep gas exploration well commenced drilling on February 27, 2011 and is drilling below 10,800 feet. Boudin, which is located in 20 feet of water on Eugene Island Block 26, has a proposed total depth of 23,100 feet and will test Miocene objectives. McMoRan holds a 74.1 percent working interest and a 58.8 percent net revenue interest in Boudin. McMoRan's total investment in Boudin, which includes allocated costs associated with the PXP property acquisition, totaled $28.3 million at March 31, 2011.
McMoRan is planning to perform additional production testing and evaluation of the Blueberry Hill No. 9 STK1 well in the second quarter of 2011. As previously reported, wireline logs indicated that the well encountered 105 net feet of hydrocarbon bearing sands with exceptional porosity in the Miocene. The well was completed and then shut in after results from the production test indicated a range of rates and pressures. 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 investment in the Blueberry Hill No. 9 STK1 well totaled $32.5 million at March 31, 2011.
McMoRan's first-quarter 2011 oil and gas revenues totaled $133.7 million, compared to $128.8 million during the first quarter of 2010. During the first quarter of 2011, McMoRan's sales volumes totaled 11.7 Bcf of gas, 686,700 barrels of oil and condensate and 1.7 Bcfe of plant products, compared to 11.2 Bcf of gas, 691,500 barrels of oil and condensate and 1.7 Bcfe of plant products in the first quarter of 2010. McMoRan's first-quarter comparable average realizations for gas were $4.54 per thousand cubic feet (Mcf) in 2011 and $5.53 per Mcf in 2010; for oil and condensate McMoRan received an average of $96.76 per barrel in first-quarter 2011 compared to $76.34 per barrel in first-quarter 2010.
CASH, LIQUIDITY AND CAPITAL EXPENDITURES
At March 31, 2011, McMoRan had $836.7 million in cash. Total debt was $560.5 million at March 31, 2011, including $74.7 million in Convertible Senior Notes due in October 2011 with a conversion price of $16.575 per share and $185.8 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 $96.5 million for the first quarter of 2011. Depending on drilling results and follow on development opportunities, McMoRan expects 2011 capital expenditures to approximate $400 million to $500 million. The low end of the range includes approximately $250 million in exploration and $150 million in development spending. Capital spending will continue to be driven by opportunities and may be increased with additional exploration success.
Net abandonment expenditures, which include scheduled conventional and hurricane-related work, totaled $22.2 million in the first quarter of 2011. Abandonment expenditures are expected to approximate $135 million in 2011. In the first quarter of 2011, McMoRan recorded $16.4 million in gains for reimbursable costs associated with its insurance programs. Since 2009, McMoRan has recorded $80.0 million in gains associated with the 2008 hurricane events in the GOM and continues to pursue reimbursement of certain hurricane-related abandonment costs under its insurance programs.
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