McMoRan Reports Q2 Results
McMoRan Exploration Co. on Thursday reported net income of $14.1 million, $0.32 per share, for the second quarter of 2006 compared with a net loss of $16.2 million, $0.66 per share, for the second quarter of 2005. McMoRan's net income from its continuing operations for the second quarter of 2006 totaled $16.1 million, which includes $2.9 million of start-up costs associated with MPEH(TM) and $6.8 million of exploration expense. During the second quarter of 2005, net loss from continuing operations totaled $14.9 million, including $2.6 million of MPEH(TM) start-up costs and $28.5 million of exploration expense.
“The continued success of our exploration and development program resulted in increased oil and gas production of 46 percent compared to the first quarter of 2006,” stated James R. Moffett and Richard C. Adkerson, co-chairmen of McMoRan. “We had three additional discoveries in the quarter and are enthusiastic about our opportunities to discover additional reserves and increase our production through our deep gas exploration activities onshore South Louisiana and in the shallow waters of the Gulf of Mexico. We are also working diligently to establish a major new offshore LNG terminal and look forward to obtaining our permit and proceeding with completion of the commercial arrangements and construction of the facilities to bring the MPEH(TM) LNG facility into operation.”
McMoRan announced three successful exploratory wells during the second quarter: Liberty Canal, Pecos and Point Chevreuil. Successful production tests were conducted on these wells and the King of the Hill No. 2 well (first-quarter 2006 discovery) during the second quarter. Since inception in 2004 of the multi-year exploration venture, McMoRan and its private partner have participated in 12 discoveries on the 23 prospects that have been drilled and evaluated. Five additional prospects are either in progress or not fully evaluated.
The Liberty Canal well was drilled to a total depth of 16,594 feet and evaluated with log-while-drilling tools and confirmed with wireline logs, which indicated two intervals totaling 199 gross feet with 125 net feet of hydrocarbon bearing sands. A successful production test was conducted on the well in June 2006, indicating a gross flow rate of approximately 26 million cubic feet of natural gas (MMcf/d) and 1,700 barrels per day (bbls/d) of condensate (approximately 36 MMcfe/d gross, 10 MMcfe/d net to McMoRan) with flowing tubing pressure of approximately 6,100 pounds per square inch (psi) on a 38/64th choke. The well is expected to commence production in the third quarter of 2006. The Liberty Canal discovery is located onshore Vermilion Parish, La., on a significant north-south ridge where McMoRan controls 13,000 acres and has several additional exploration prospects. McMoRan incorporated the results from this well with its 3-D seismic data and developed the Zigler Canal exploratory prospect, where drilling is currently in progress, located two miles northwest of the Liberty Canal discovery. McMoRan is continuing its mapping in this area to identify additional prospects. McMoRan and its private partner each have a 37.5 percent working interest and a 27.7 percent net revenue interest in the Liberty Canal prospect.
The Pecos exploratory well commenced drilling on January 5, 2006, and was drilled to a true vertical depth of 18,795 feet (19,625 feet measured depth). Uphole pay sands were evaluated with log-while-drilling tools and wireline logs, indicating two intervals of hydrocarbons. The deeper zone encountered 31 net feet of hydrocarbon bearing sands over a 172 foot gross interval; the upper zone encountered 12 net feet of hydrocarbon bearing sands over a 14 foot gross interval. In May 2006, a drill-stem test over the deeper zone resulted in a gross test rate of approximately 15.5 MMcf/d and 600 bbls/d of condensate (approximately 19.1 MMcfe/d gross, 7 MMcfe/d net to McMoRan) and no water with a flowing tubing pressure of 2,700 pounds psi on a 31/64ths choke. The well is expected to commence production in the third quarter of 2006 utilizing nearby infrastructure. McMoRan and its private partner each own a 50 percent working interest and a 36.0 percent net revenue interest in the discovery. McMoRan has rights to approximately 3,500 acres comprising the Pecos and Platte deep gas exploration prospects at West Pecan Island located onshore in Vermilion Parish, La. The Pecos prospect was drilled as a directional well from an offshore location in less than 10 feet of water to a bottom hole location onshore.
A successful production test was conducted on the King of the Hill No. 2 discovery well at High Island Block 131 in June 2006. The well tested at a gross rate of 11.5 MMcf/d and 60 bbls/d of condensate (approximately 12 MMcfe/d gross, 2.3 MMcfe/d net to McMoRan) on a 14/64th choke. The well is expected to commence production in the third quarter of 2006. McMoRan and its private partner each own a 25.0 percent working interest and a 19.6 percent net revenue interest in the King of the Hill prospect.
The Point Chevreuil exploratory well commenced drilling on November 18, 2005, and was drilled to a true vertical depth of 17,011 feet (17,274 feet measured depth). The well was evaluated with log-while-drilling tools and wireline logs, which indicated 96 net feet of hydrocarbon bearing sands over a 112 foot gross interval. A successful production test was conducted in June 2006, indicating a gross rate of 9 MMcf/d and 470 bbls/d of condensate (approximately 12 MMcfe/d gross, 2 MMcfe/d net to McMoRan) on a 15/64th choke with flowing tubing pressure of 9,100 psi. The well is expected to commence production by year-end 2006. McMoRan has a 25 percent working interest and a 17.5 percent net revenue interest in the Point Chevreuil prospect which is located in less than 10 feet of water in the South Belle Isle Field offshore St. Mary Parish, La. In May 2006, McMoRan and its partners acquired approximately 2,500 gross acres surrounding the discovery at a state lease sale.
The JB Mountain Deep exploration well commenced drilling on July 14, 2005 and was drilled to a measured depth of 24,600 feet (true vertical depth of 24,557 feet). Interpretation of wireline logs indicated a gross interval of 115 feet at a depth of approximately 21,900 feet that will require further evaluation, as previously reported. Wireline logs also indicated an additional deeper interval of 115 feet of gross thickness at a depth of approximately 24,250 feet. The log indicated 115 feet of resistivity with the top 30 gross feet of the lower interval indicating the best porosity. A protective liner has been set and the well was temporarily abandoned. Information obtained from the testing of the Blueberry Hill well at Louisiana State Lease 340 will be incorporated in our future plans for this well. As previously reported, the Blueberry Hill well, which is located five miles east of JB Mountain Deep, encountered four potential productive hydrocarbon bearing sands below 22,200 feet. Both areas (JB Mountain Deep and Blueberry Hill) demonstrate similar geologic settings and are targeting deep Miocene sands that are equivalent in age. The Blueberry Hill well is expected to be tested in the third quarter of 2006, pending receipt of special tubulars and casing for this anticipated high pressure well. McMoRan's investment in JB Mountain Deep and Blueberry Hill totaled $29.6 million and $11.4 million, respectively, at June 30, 2006.
The Laphroaig exploratory well in St. Mary Parish, La., commenced drilling on April 8, 2006, and is currently drilling below 15,600 feet with a planned total depth of 19,000 feet. McMoRan has a 37.5 percent working interest and a 27.8 percent net revenue interest in the Laphroaig prospect. McMoRan's investment in Laphroaig totaled $11.1 million at June 30, 2006.
The Long Point Deep exploratory well at Louisiana State Lease 18091 in Vermilion Parish commenced drilling on April 27, 2006 and is currently drilling below 15,500 feet. The well has a planned total depth of 23,000 feet. The well, which is 7,000 feet southwest of the Long Point No. 1 discovery well, will test additional horizons in a separate fault block than the discovery well and the successful No. 2 offset well. McMoRan has a 37.5 percent working interest and a 26.8 percent net revenue interest in Long Point Deep, which is located in inland waters. McMoRan's investment in Long Point Deep totaled $4.5 million at June 30, 2006.
The Zigler Canal well onshore Vermilion Parish, La., commenced drilling on June 17, 2006. The well is currently drilling below 11,700 feet and has a proposed total depth of 13,500 feet. McMoRan and its private partner each have a 37.5 percent working interest and a 26.8 percent net revenue interest in the Zigler Canal prospect. McMoRan's investment in Zigler Canal totaled $1.5 million at June 30, 2006.
McMoRan expects to commence drilling additional exploratory prospects during the second half of 2006, including Vermilion Block 54, Hurricane Deep at South Marsh Island Block 217 and North West Kaplan Canal. McMoRan currently has rights to over 350,000 gross acres and is also actively pursuing opportunities through its exploration venture to acquire additional acreage and prospects through farm-in or other arrangements.
PRODUCTION AND DEVELOPMENT ACTIVITIES
Second-quarter 2006 production averaged 67 MMcfe/d net to McMoRan, including oil production of approximately 2,350 bbls/d (14 MMcfe/d) from Main Pass Block 299, 46 percent higher than the average rates in first quarter of 2006 reflecting new production from five wells, including Hurricane No. 2, two wells at Long Point, King Kong No. 3, and Cane Ridge.
The Hurricane No. 3 development well commenced drilling on June 14, 2006. The well is currently drilling below 12,000 feet toward a proposed total depth of 16,000 feet. In May 2006, initial production commenced at the Hurricane No. 2 development well at South Marsh Island Block 217 and the Long Point No. 1 and No. 2 wells located at Louisiana State Lease 18090. Recent production rates from the Hurricane field approximate 92 MMcfe/d (18 MMcfe/d net to McMoRan). McMoRan and its private partner each own a 27.5 percent working interest and a 19.4 percent net revenue interest in the Hurricane field. Recent production rates from the Long Point field approximate 60 MMcfe/d (16 MMcfe/d net to McMoRan). In July 2006, the Long Point No. 2 well was recompleted to the same interval where the No. 1 well is producing. McMoRan and its private partner each own a 37.5 percent working interest and a 26.8 percent net revenue interest in the Long Point field.
The Dawson Deep discovery at Garden Banks Block 625 commenced production in July 2006. Initial production from the well approximates a gross rate of approximately 1,600 bbls/d and 2.5 MMcfd/d (2.9 MMcfe/d net to McMoRan) on a 25/64th choke with flowing tubing pressure of 5,400 psi. The well is expected to ramp up to higher rates following completion of start-up activities. McMoRan owns a 30.0 percent working interest and a 24.0 percent net revenue interest in the Dawson Deep discovery which is located on a 5,760 acre block, approximately 150 miles offshore Texas.
McMoRan's share of third quarter 2006 production is expected to average 80-85 MMcfe/d. The increase from second quarter rates reflects new production from five additional wells expected to commence production during the third quarter of 2006, including Dawson Deep, West Cameron Block 43 No. 3, Pecos, Liberty Canal, and King of the Hill No. 2. Following start-up of these well, McMoRan expects its share of total production to reach 100 MMcfe/d. The discovery well at Point Chevreuil in St. Mary's Parish, Louisiana is expected to commence production by year-end 2006.
JB MOUNTAIN/MOUND POINT AREA ACTIVITIES
McMoRan is a participant in a program that began in 2002 and includes the JB Mountain and Mound Point Offset discoveries in the OCS 310 and Louisiana State Lease 340 areas, respectively. The program currently holds a 55 percent working interest and a 38.8 percent net revenue interest in the JB Mountain prospect and a 30.4 percent working interest and a 21.6 percent net revenue interest in the Mound Point Offset prospect. Under terms of the program, the third party will own all of the program's interests until the program's aggregate production totals 100 Bcfe attributable to the program's net revenue interest, at which point 50 percent of the program's interests would revert to McMoRan. All exploration and development costs associated with the program's interest in any future wells is to be funded by the third party partner during the period prior to when McMoRan's potential reversion occurs.
There are three producing wells and approximately 13,000 gross acres on Louisiana State Lease 340 and OCS 310 that remain subject to the 100 Bcfe arrangement. McMoRan believes there are further exploration and development opportunities on this acreage. The three producing wells averaged an aggregate gross rate of 33 MMcfe/d during the second quarter of 2006.
MAIN PASS ENERGY HUB(TM) UPDATE
On May 31, 2006, McMoRan submitted an amendment to its license application with the U.S. Coast Guard (USCG) and the Maritime Administration (MARAD) to obtain approval of its Main Pass Energy Hub(TM) project using Closed Loop technology. MARAD will establish a timeline for processing the amendment, which will include the publication of revisions to the previously published Environmental Impact Statement followed by public hearings and the record of decision. The significant studies completed to date should enable the revisions to the MPEH(TM) permit application that incorporate Closed Loop technology to be processed expeditiously. A record of decision on the application is expected by year-end 2006.
The MPEH(TM) terminal would be capable of regasifying LNG at a rate of 1 billion cubic feet of natural gas (Bcf) per day. The use of existing facilities provides significant cost advantages, and the proposed project benefits from its offshore location near established shipping lanes. McMoRan is continuing discussions with potential LNG suppliers as well as gas marketers and consumers in the United States to develop commercial arrangements for the facilities.
McMoRan is also considering investments to develop substantial cavern storage for a pipeline header system that would allow deliveries into U.S. gas markets. Current plans for the MPEH(TM) include 28 Bcf of initial cavern storage capacity and aggregate peak deliverability from the proposed terminal, including deliveries from storage of up to 2.5 Bcf per day. As previously announced, McMoRan received approval from the Federal Energy Regulatory Commission to bring gas onshore using its proposed 36-inch pipeline into Coden, Ala.
McMoRan's second-quarter 2006 oil and gas revenues totaled $50.3 million, compared to $30.9 million during the second quarter of 2005. During the second quarter of 2006, McMoRan's sales volumes totaled 3.9 Bcf of gas and 360,600 barrels of oil and condensate, including 203,600 barrels from Main Pass Block 299, compared to 2.8 Bcf of gas and 208,800 barrels of oil and condensate in the second quarter of 2005, including 100,600 barrels from Main Pass Block 299. McMoRan's second-quarter comparable average realizations for gas were $6.90 per thousand cubic feet (Mcf) in 2006 and $7.51 per Mcf in 2005; for oil and condensate, including Main Pass Block 299, McMoRan received an average of $64.96 per barrel in second-quarter 2006 compared to $48.85 per barrel in second-quarter 2005.
CASH AND CASH EQUIVALENTS AND CAPITAL EXPENDITURES
On June 30, 2006, McMoRan had unrestricted cash and cash equivalents of approximately $17 million and no borrowings under its $55 million credit facility. Capital expenditures for the second quarter of 2006 totaled $73.7 million and $142.5 million for the six-months ended June 30, 2006. Capital expenditures in the first half of the year included significant development activities as McMoRan commenced production from several new wells. Capital expenditures are expected to approximate $260 million for the year, including approximately $130 million for exploration expenditures and $130 million for currently identified development costs. Capital spending may change as additional opportunities become available or to fund additional development capital expenditures on successful wells. In addition, McMoRan plans to incur approximately $5 million to advance commercialization of the MPEH(TM) in the remainder of 2006. Additional expenditures for the MPEH(TM) would be required following the receipt of the permit. McMoRan may pursue additional funding sources for its oil and gas and MPEH(TM) activities to supplement cash balances and cash from operations.
McMoRan Exploration Co. is an independent public company engaged in the exploration, development and production of oil and natural gas offshore in the Gulf of Mexico and onshore in the Gulf Coast area. McMoRan is also pursuing plans for the development of the MPEH(TM), which will be used for the receipt and processing of liquefied natural gas and the storage and distribution of natural gas.
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