McMoRan Exploration Reports 1Q Earnings
McMoRan Exploration reported a net loss applicable to common stock of $66.2 million, $0.74 per share, for the first quarter of 2010 compared with a net loss applicable to common stock of $63.2 million, $0.90 per share, for the first quarter of 2009. Results include impairment charges totaling $57.0 million in the first quarter of 2010 and $39.0 million in the first quarter of 2009, principally reflecting lower natural gas prices.
- Exploratory Activities:
- Positive drilling results from the Davy Jones ultra-deep exploratory well on South Marsh Island Block 230 indicate a major discovery in shallow water on the Shelf of the Gulf of Mexico.
- Offset appraisal well at Davy Jones commenced on April 7, 2010. The well is currently drilling below 4,000 feet towards a proposed total depth of 29,950 feet.
- Blackbeard East ultra-deep exploratory well commenced on March 8, 2010 and is currently drilling below 11,000 feet towards a proposed total depth of 29,950 feet.
- Lafitte ultra-deep exploratory well expected to commence drilling in 2010.
- Deep gas exploratory drilling in 2010 expected to include sidetracking operations at Blueberry Hill, re-drilling of Hurricane Deep and the Boudin and Platte prospects.
- First-quarter 2010 production averaged 190 Million cubic feet of natural gas equivalents per day (MMcfe/d) net to McMoRan, compared with 198 MMcfe/d in the first quarter of 2009.
- Average daily production for 2010 is expected to approximate 170 MMcfe/d net to McMoRan, including 170 MMcfe/d in second quarter 2010.
- Operating cash flows totaled $80.3 million for the first quarter of 2010, including working capital sources of $31.2 million.
- Capital expenditures totaled $40.8 million in the first quarter of 2010 and are expected to approximate $240 million for the year. Capital spending will continue to be driven by opportunities and managed based on market conditions.
- Apparent high bidder on 17 of 19 blocks on the Shelf at Central Gulf of Mexico Lease Sale 213 in March 2010.
- Cash at March 31, 2010 totaled $268 million.
James R. Moffett and Richard Adkerson, McMoRan's Co-Chairmen, said, "The first quarter of 2010 was one of the most exciting periods of our company's history. The initial results from our Davy Jones well are promising and extend the geologic basin from the deepwater, opening up multiple high-potential exploration prospects on the Shelf of the Gulf of Mexico. We congratulate our entire team for their execution of our strategy to unlock the values we believe exist at depth in the shallow waters of the Gulf of Mexico. We look forward to an active period in 2010 and beyond as we define the potential of this new exploration frontier."
PRODUCTION AND DEVELOPMENT ACTIVITIES
First-quarter 2010 production averaged 190 MMcfe/d net to McMoRan, compared with 198 MMcfe/d in the first quarter of 2009. Production in the first quarter of 2010 was in line with revised estimates provided in March 2010 but below publicly reported estimates of 200 MMcfe/d in January 2010 because of unplanned downtime at certain fields and performance related issues. Production is expected to average approximately 170 MMcfe/d in the second quarter of 2010 and 170 MMcfe/d for the year, lower than the previous estimate of 180 MMcfe/d. McMoRan’s estimated production rates are dependent on the timing of planned recompletions, production performance and other factors.
Following the Flatrock discovery in OCS 310 on South Marsh Island Block 212 in July 2007, McMoRan has drilled five additional successful wells in the field. Production from these six wells in the Flatrock field averaged a gross rate of approximately 262 MMcfe/d (49 MMcfe/d net to McMoRan) in the first quarter of 2010. Current production rates have declined to approximately 190 MMcfe/d (35 MMcfe/d net to McMoRan) as a result of mechanical and production performance issues. These issues are not expected to impact the ultimate recovery from the field. McMoRan has a 25.0 percent working interest in Flatrock and Plains Exploration & Production Company (NYSE: PXP - News) holds a 30.0 percent working interest.
McMoRan's exploration strategy is focused on the "deep gas play," drilling to depths of between 15,000 to 25,000 feet in the shallow waters of the Gulf of Mexico and Gulf Coast area and on the "ultra-deep gas play" of depths below 25,000 feet. Deep gas prospects target large structures above the salt weld (i.e. listric fault) in the Deep Miocene. Ultra-deep prospects target objectives below the salt weld in the Miocene and older age sections that have been correlated to those productive sections seen in deepwater discoveries by other industry participants.
Deep Gas Exploration Activities
The Blueberry Hill offset appraisal well on Louisiana State Lease 340 commenced drilling on November 8, 2009 and was drilled to a total vertical depth of 23,585 feet in March 2010. The well did not confirm the continuity of the pay sands seen in the sidetrack #1, by-pass and sidetrack #2 wells drilled in 2009. The information obtained from the well has been incorporated into McMoRan’s 3-D seismic interpretations of the area and McMoRan intends to sidetrack the well to a location southwest of the pay sands seen in 2009. The Blueberry Hill #9 STK1 is expected to commence drilling imminently and has a proposed total depth of 24,000 feet. McMoRan's first quarter results included $4.6 million in exploration expenses associated with the drilling costs incurred through March 31, 2010 below 19,000 feet, where future sidetracking operations are expected to commence.
McMoRan's first quarter results also include $40.0 million in charges to reduce the carrying value of its investment in Blueberry Hill, reflecting completion of an impairment assessment following the decline in forward prices of natural gas during the first quarter. McMoRan's total investment in Blueberry Hill approximated $16.7 million at March 31, 2010, including $9.8 million for the offset appraisal well, compared with a total investment of $53.5 million at December 31, 2009.
The Hurricane Deep sidetrack well on South Marsh Island Block 217 commenced drilling on November 17, 2009 and had a proposed total depth of 21,750 feet. As previously reported, the operator encountered an underground flow in the well at approximately 18,450 feet in February 2010. McMoRan plans to re-drill the well during 2010 and its share of costs to re-drill to 18,450 feet will be covered under its insurance program. McMoRan's investment in Hurricane Deep totaled $21.0 million at March 31, 2010, including $8.1 million on operations since November 2009.
McMoRan's deep gas exploratory drilling plans in 2010 also include the Boudin and Platte prospects. 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. Platte, which is located in Vermillion Parish, Louisiana, has a proposed total depth of 18,700 feet.
Ultra-deep Exploration Activities
The data received to date from ultra-deep drilling on the Shelf confirm McMoRan’s original geologic modeling, which correlates objective sections on the Shelf below the salt weld (i.e. listric fault) in the Miocene and older age sections to those productive sections seen in deepwater discoveries by other industry participants. In addition to Davy Jones and Blackbeard West, McMoRan has identified 15 ultra-deep prospects in shallow water near existing infrastructure. The lead times for development of wells on the Shelf are not expected to be as long or expensive as development would be in the deepwater Gulf of Mexico. McMoRan’s ultra-deep drilling plans in 2010 include the Blackbeard East and Lafitte exploratory wells and delineation drilling at Davy Jones. Future plans also include the John Paul Jones prospect located north of Davy Jones.
In February 2010, the Davy Jones discovery well 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 until necessary equipment for the completion is available. Flow testing will be required to confirm the ultimate hydrocarbon flow rates from the well. McMoRan, working with a team of experts, has initiated studies on the design for the completion of the well and various fast track alternatives to flow test the well are being evaluated. The timing of the flow test is uncertain and subject to a number of factors, but is expected within 12 to 18 months.
On April 7, 2010, McMoRan commenced drilling the Davy Jones offset appraisal well on South Marsh Island Block 234, two and a half miles southwest of the discovery well. The well is currently drilling below 4,000 feet towards a proposed total depth of 29,950 feet. The offset appraisal well (Davy Jones #2) is expected to test similar sections up-dip to the discovery well.
Davy Jones involves a large ultra-deep structure encompassing four OCS lease blocks (20,000 acres). McMoRan is funding 25.7 percent of the drilling costs and holds a 32.7 percent working interest and 25.9 percent net revenue interest. Other working interest owners in Davy Jones include: PXP (27.7%), Energy XXI (15.8%), Nippon Oil Exploration USA Limited (12%), W.A. "Tex" Moncrief, Jr. (8.8%) and a private investor (3%). McMoRan’s investment in Davy Jones totaled $31.6 million at March 31, 2010.
The Blackbeard East ultra-deep exploration well commenced drilling on March 8, 2010 and is currently drilling below 11,000 feet. The well, which is located in 80 feet of water on South Timbalier Block 144, has a proposed total depth of 29,950 feet and will target Middle and Deep Miocene objectives seen below 30,000 feet in Blackbeard West, nine miles away. McMoRan is funding 32.0 percent of the exploratory costs and holds a 38.5 percent working interest and 30.7 percent net revenue interest. Other working interest owners in Blackbeard East include: PXP (31.5%), EXXI (18.0%), W.A. "Tex" Moncrief, Jr. (10.0%) and a private investor (1.6%). McMoRan’s investment in Blackbeard East totaled $5.2 million at March 31, 2010.
The Lafitte ultra-deep exploration well is expected to commence drilling in 2010. Like Blackbeard East, Lafitte will target Middle and Deep Miocene objectives. Lafitte is located on Eugene Island Block 223 in 140 feet of water.
The information gained from the Blackbeard East and Lafitte wells will enable McMoRan to consider the priorities 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. In May 2009, the Minerals Management Service granted McMoRan's request for a geophysical Suspension of Operations (SOO) to extend its Blackbeard West leases in the Blackbeard area. The SOO is allowing McMoRan to evaluate whether to drill deeper at Blackbeard West, drill an offset location or complete the well to test the existing zones. McMoRan’s investment in the Blackbeard West well totaled $31.3 million at March 31, 2010.
Central Gulf of Mexico Lease Sale 213
On March 17, 2010, the Minerals Management Service (MMS) conducted Central Gulf of Mexico Lease Sale 213 in New Orleans, Louisiana. McMoRan participated in the sale and submitted apparent high bids on 17 of 19 blocks on the Shelf totaling $9.4 million. Apparent high bids are subject to a review process by the MMS before they can be awarded. If granted, the lease acquisitions would add approximately 75,000 gross acres to McMoRan's leasehold inventory, which currently approximates one million gross acres, including 150,000 gross acres associated with the ultra-deep gas play.
McMoRan’s first-quarter 2010 oil and gas revenues totaled $128.8 million, compared to $95.1 million during the first quarter of 2009. During the first quarter of 2010, McMoRan’s sales volumes totaled 11.2 Bcf of gas, 691,500 barrels of oil and condensate and 1.7 Bcfe of plant products, compared to 12.2 Bcf of gas, 749,200 barrels of oil and condensate and 1.1 Bcfe of plant products in the first quarter of 2009. McMoRan’s first-quarter comparable average realizations for gas (before hedging) were $5.53 per thousand cubic feet (Mcf) in 2010 and $4.88 per Mcf in 2009; for oil and condensate McMoRan received an average of $76.34 per barrel in first-quarter 2010 compared to $40.91 per barrel in first-quarter 2009.
CASH, LIQUIDITY AND CAPITAL EXPENDITURES
At March 31, 2010, McMoRan had $268 million in cash, compared with $241 million on December 31, 2009. Total debt was $375 million at March 31, 2010, including $75 million in 5 1/4% convertible senior notes due in 2011 with a conversion price of $16.575 per share. McMoRan currently has no amounts borrowed under its $175 million revolving credit facility and $75 million in availability after considering $100 million in outstanding letters of credit. McMoRan’s bank group is currently completing its semi-annual redetermination of its borrowing base. The review is expected to be completed in the second quarter of 2010. McMoRan does not expect the redetermination to impact its future plans or operations.
Capital expenditures totaled $40.8 million for the first quarter of 2010 and are expected to approximate $240 million in 2010, including $170 million in exploration and $70 million in development spending. Capital spending will continue to be driven by opportunities and managed based on market conditions and participation by partners.
Net abandonment expenditures, which include scheduled conventional and hurricane-related work, totaled $17.5 million for the first quarter of 2010 and are expected to approximate $100 million in 2010. McMoRan is entitled to receive reimbursement of certain hurricane-related abandonment costs under its insurance programs associated with the 2008 hurricane events in the Gulf of Mexico.
- McMoRan Touts 'Sizable Reserves' at Sub-Salt, Ultra-Deep Trend (Feb 20)
- McMoRan Preps Davy Jones Well for Fracking Ops (Jan 31)
- McMoRan's Latest Efforts at Davy Jones Site Meet 'Limited Success' (Dec 28)