McMoRan reported a net loss applicable to common stock of $50.2 million, $0.32 per share, for the second quarter of 2011 compared with a net loss of $21.7 million, $0.23 per share, for the second quarter of 2010.
James R. Moffett and Richard Adkerson, McMoRan's Co-Chairmen, said, "The data gained to date from our ultra-deep drilling program in the shallow waters of the Gulf of Mexico add to our enthusiasm for the resource potential of this important new geologic trend. Through our drilling activities, we have confirmed the potential for large hydrocarbon bearing structures below salt in the Miocene, Wilcox, Frio, Tuscaloosa and Cretaceous Carbonate formations. Our ongoing exploration drilling and flow testing of the Davy Jones wells in the coming months have the potential to enhance our reserve and production profile meaningfully."
PRODUCTION AND DEVELOPMENT ACTIVITIES
Second-quarter 2011 production averaged 197 MMcfe/d net to McMoRan, compared with 165 MMcfe/d in the second quarter of 2010. Production in the second quarter of 2011 was higher than McMoRan's previously reported estimates of 190 MMcfe/d in April 2011 because of favorable production performance. Production is expected to average approximately 180 MMcfe/d in the third quarter of 2011 and 185 MMcfe/d for the year, higher than the previous 2011 annual estimate of 175 MMcfe/d. McMoRan's estimated production rates are dependent on the timing of planned recompletions, production performance, weather and other factors.
Production from the Flatrock field averaged a gross rate of approximately 172 MMcfe/d (70 MMcfe/d net to McMoRan) in the second 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 successfully commenced production from the Laphroaig No. 2 well in St. Mary Parish, Louisiana in late April 2011. Production from the Laphroaig No. 2 well averaged a gross rate of approximately 50 MMcfe/d (15 MMcfe/d net to McMoRan) in May and June 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 (NASDAQ:EXXI - News) holds an 18.8 percent working interest.
As previously reported, the Brazos A-23 development well commenced drilling on February 13, 2011, and was drilled to a total depth of 15,946 feet. This traditional Shelf well targeted proved undeveloped reserves updip from logged pay zones. Log evaluation indicated that the well encountered 30 net feet of hydrocarbon bearing sands and a protective liner has been set. The well has been temporarily abandoned while future plans are developed. McMoRan owns a 100.0 percent working interest and an 81.25 percent net revenue interest in the well. McMoRan recorded a $23.8 million impairment charge in the second quarter to reduce the carrying value of the Brazos A-23 well to $17.4 million.
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."
Shallow Water, Ultra-Deep Exploration Update
Since 2008, McMoRan has actively pursued large ultra-deep targets located in the shallow waters of the GOM below the salt weld (i.e. listric fault) at depths generally below 25,000 feet. The data gained to date from four wells confirm McMoRan's geologic model and the highly prospective nature of this emerging geologic trend. Prior to McMoRan's involvement in the ultra-deep, there had been only two wells drilled on the Shelf targeting these objectives; one did not reach its targeted depth and the other was outside McMoRan's focus area. McMoRan's results to date have indicated the potential for large accumulations of hydrocarbons at these deeper depths in the shallow waters of the GOM.
McMoRan's activities to date have confirmed that drilling below the salt weld on the Shelf of the GOM can be achieved safely. In addition, the data indicate the presence below the salt weld of geologic formations including Middle/Lower Miocene, Wilcox, Frio, Tuscaloosa and Cretaceous carbonate. These formations have been prolific onshore, in the deepwater GOM and in international locations. McMoRan is encouraged by the results which indicate the potential for prospects with high quality reservoirs on large structures with multi-Tcfe of gross unrisked potential. McMoRan intends to conduct further drilling and flow testing to determine the ultimate potential of this emerging geologic trend.
The Davy Jones offset appraisal well (Davy Jones No. 2), located on South Marsh Island Block 234 two and a half miles southwest of the Davy Jones No. 1 discovery well, was drilled to a total depth of 30,546 feet. Log results above 27,300 feet confirmed 120 net feet of hydrocarbon bearing Wilcox sands, indicating continuity across the major structural features of the Davy Jones prospect.
In June 2011, results from wireline logs of the Cretaceous section below 27,300 feet indicated that the Davy Jones No. 2 well encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonate sections. Flow testing will be required to confirm the potential hydrocarbons and flow rates. A 6 5/8 inch production liner has been set to 30,511 feet and the well has been temporarily abandoned. McMoRan is evaluating development options and expects to commence completion of the No. 2 well for flow testing in the second quarter of 2012. McMoRan is also considering updip locations in a subsequent well to the north to evaluate the Tuscaloosa sands and Lower Cretaceous carbonates higher on the Davy Jones structure.
The Tuscaloosa sands are correlative with the prolific Tuscaloosa trend onshore South Louisiana and the carbonate section may be analogous to productive fields located offshore and onshore Mexico in the southern GOM. These potential hydrocarbon bearing zones are the first Cretaceous sandstones and limestones encountered offshore Central Louisiana on the GOM Shelf. McMoRan believes the combination of productive Wilcox and Cretaceous intervals on the same structure could enhance the value of Davy Jones and the prospectivity of McMoRan's other ultra-deep prospects on its acreage position within the Davy Jones trend.
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. McMoRan is preparing to complete and flow test the No. 1 well in late 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: Energy XXI (15.8%), JX Nippon Oil Exploration (U.S.A.) Limited (12%), Moncrief Offshore LLC (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 $619.4 million at June 30, 2011.
In July 2011, McMoRan commenced operations to drill a by-pass of the Blackbeard East ultra-deep exploration well at approximately 30,700 feet to evaluate targets in the Eocene. The well is permitted to 34,000 feet. Based on interpretations of drilling data obtained in the first quarter of 2011 prior to the mechanical issue, McMoRan believes the well encountered Sparta sands in the Eocene, which are younger than the Wilcox. Sparta sands are productive onshore in South Louisiana. Wireline logs will be required to evaluate this interval.
As reported in January 2011, wireline logs indicated that Blackbeard East 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 above 25,000 feet announced in December 2010 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 at these depths could utilize conventional equipment and technologies.
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%), Moncrief Offshore LLC (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 $216.1 million at June 30, 2011.
The Lafitte ultra-deep exploration well commenced drilling on October 3, 2010 and is currently drilling below 24,200 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 Moncrief Offshore LLC (10.0%). McMoRan's total investment in Lafitte, which includes allocated costs associated with the PXP property acquisition, totaled $100.2 million at June 30, 2011.
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 has also identified a new location within the Blackbeard West unit on Ship Shoal Block 188 to evaluate the Miocene age sands seen in Blackbeard East above 25,000 feet. McMoRan is developing plans to commence drilling this ultra-deep well, which has a proposed total depth of 26,000 feet, in the second half of 2011. The Ship Shoal Block 188 location is approximately 4 miles west of the Blackbeard West #1 well on South Timbalier Block 168. McMoRan holds a 67.3 percent working interest and 51.5 percent net revenue interest in the Blackbeard West well on Ship Shoal Block 188. McMoRan's total investment in Blackbeard West, which includes allocated costs associated with the PXP property acquisition, totaled $58.9 million at June 30, 2011.
Shallow Water, Deep Gas Exploration Update
In addition to the ultra-deep play on the Shelf of the GOM, McMoRan's exploration strategy is also focused on the "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.
The Boudin deep gas exploration well commenced drilling on February 27, 2011 and is drilling below 19,350 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 53.5 percent working interest and a 42.4 percent net revenue interest in Boudin. EXXI holds a 20.6 percent working interest. McMoRan's total investment in Boudin, which includes allocated costs associated with the PXP property acquisition, totaled $49.1 million at June 30, 2011.
The Hurricane Deep well, which is located in 12 feet of water on South Marsh Island Block 217, was drilled to a true vertical depth of 21,378 feet in July 2011. Log results indicated the presence of Operc and Gyro sands that McMoRan determined could be pursued in an updip location. The well is being temporarily abandoned to preserve the wellbore and McMoRan is evaluating opportunities to sidetrack or deepen. McMoRan's total investment in Hurricane Deep, which includes allocated costs associated with the PXP property acquisition, totaled $54.5 million at June 30, 2011. McMoRan's investment is expected to be reduced by approximately $11 million for reimbursable costs associated with its insurance programs.
Second-quarter 2011 exploration expense includes $36.8 million in costs for the previously reported noncommercial well at Blueberry Hill.
McMoRan's second-quarter 2011 oil and gas revenues totaled $155.5 million, compared to $104.1 million during the second quarter of 2010. During the second quarter of 2011, McMoRan's sales volumes totaled 11.6 Bcf of gas, 778,400 barrels of oil and condensate and 1.6 Bcfe of plant products, compared to 9.8 Bcf of gas, 626,400 barrels of oil and condensate and 1.4 Bcfe of plant products in the second quarter of 2010. McMoRan's second-quarter comparable average realizations for gas were $4.71 per thousand cubic feet (Mcf) in 2011 and $4.66 per Mcf in 2010; for oil and condensate McMoRan received an average of $109.08 per barrel in second-quarter 2011 compared to $76.20 per barrel in second-quarter 2010.
CASH, LIQUIDITY AND CAPITAL EXPENDITURES
At June 30, 2011, McMoRan had $765.3 million in cash. Total debt was $561.0 million at June 30, 2011, including $74.7 million in Convertible Senior Notes due in October 2011 with a conversion price of $16.575 per share and $186.3 million in Convertible Senior Notes due in December 2017 with a conversion price of $16.00 per share. On June 30, 2011, McMoRan entered into a new five-year, $150 million senior secured revolving credit facility, which replaced the revolving credit facility that was scheduled to mature in August 2012. McMoRan had no borrowings and $100 million of letters of credit issued under its revolving credit facility resulting in total availability of $50 million at June 30, 2011.
Capital expenditures totaled $162.4 million for the second quarter of 2011 and $258.9 million for the six-months ended June 30, 2011. McMoRan expects 2011 capital expenditures to approximate $500 million, including $300 million for exploration and $200 million for development. Capital spending will continue to be driven by opportunities, drilling results and follow-on development activities.
Net abandonment expenditures, which include scheduled conventional and hurricane-related work, totaled $20.0 million for the second quarter of 2011 and $42.2 million for the six-months ended June 30, 2011. Abandonment expenditures are expected to approximate $160 million in 2011.
In the second quarter of 2011, McMoRan recorded $12.9 million in gains for reimbursable costs associated with its insurance programs. Since 2009, McMoRan has recorded $92.9 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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