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McMoRan energizes jumpy investors Company has reserves in shallow Gulf of Mexico waters, but daily production and profits produce another negative year Ray Tyson Petroleum News Houston Correspondent
McMoRan Exploration, which has carved out a name for itself as a deep-gas explorer in the relatively shallow waters of the Gulf of Mexico’s continental shelf, is sitting on a pile of reserves but keeps coming up short on daily production and profits, much to the chagrin of investors.
During the past year, shares of the New Orleans-based independent rocketed nearly 60 percent, from $12.28 to as high as $19.40, despite the company posting loses in each of the last four quarters, including a negative $16.7 million or 70 cents per share in the final quarter of 2004.
McMoRan is among a handful of exploration and production independents that can’t seem to profit in today’s strong commodity price environment.
Following a Jan. 20 conference call to discuss 2004 fourth-quarter earning results and company plans to increase production, McMoRan’s share price plummeted 10 percent to $16.31 but then rose to $17.20 the next day, indicating investors’ willingness to stick with McMoRan, despite the red ink. Company not providing first quarter production estimates Still, the company would not provide analysts with any firm overall production estimates for the 2005 first quarter. Thompson-First Call survey of analysts has McMoRan losing another 52 cents per share in this year’s first quarter.
“We are very anxious, as you are, to see some production from all these wells,” McMoRan co-Chairman James “Jim Bob” Moffett said. “Just as soon as we get a better feel for this, you’ll get our update.”
Through several joint ventures, McMoRan has been party to significant natural gas discoveries below 15,000 feet on the continental shelf, including finds in the much-heralded JB Mountain-Mound Point area on the shelf.
In 2004 alone, McMoRan participated in 11 exploratory wells that resulted in four discoveries: Deep Tern at Eugene Island block 193, Minuteman at Eugene Island block 213, Dawson Deep at Garden Banks block 625, and Hurricane Upthrown at South Marsh Island block 217. Three of the 11 wells are currently drilling. Production has begun at Deep Tern C-2 McMoRan said production was launched Dec. 30 from its Deep Tern C-2 well and is now yielding about 18 million cubic feet of gas equivalent per day, with 8 million per day going to McMoRan. The company said it also plans to drill an offset well to delineate and develop the multiple gas sands encountered in the C-2 discovery.
Hurricane Upthrown was drilled to a total depth of 19,664 feet and logged about 205 feet of hydrocarbons in two Rob-L pay zones, McMoRan said, adding that completion activities are under way with initial production expected in the second quarter of 2005 from the lower Rob-L interval. Production estimates were not provided. McMoRan operates the well with a 27.5 percent working interest.
Production from the Minuteman discovery is expected to begin in the first quarter of 2005 using McMoRan’s facilities at Eugene Island block 215, located about seven miles west of the well, the company said. However, while the well is said to have confirmed 60 feet of pay, McMoRan did not provide production estimates. The company’s net revenue interest is 29.8 percent.
Meanwhile, estimated timing of first production from Dawson Deep is pending the final development plan, with sanctioning of the Kerr-McGee-operated deepwater project anticipated in the first quarter of 2005, McMoRan said. McMoRan owns a 30 percent working interest and a 24.0 percent net revenue interest in the Dawson Deep prospect.
“2004 was a year in which we achieved some significant steps in pursuing our strategy of drilling for deep reserves of significant potential on the shelf,” McMoRan co-Chairman Richard Adkerson said. “We are still in the evaluation stage with respect to these properties that we have had discoveries on.” Hurricane Ivan, which caused extensive damage to many offshore facilities in the U.S. Gulf, also caused the shutdown of third-party pipelines that serve McMoRan’s oil production facility at Main Pass block 299. McMoRan said it plans to barge oil ashore.
“I don’t know now many years before all these pipeline issues are resolved,” Moffett said. Some (pipelines) were totally washed away by mud flows.” At least 12 exploration wells planned this year The company said it expects to participate in at least 12 exploration wells in 2005, targeting Deep Miocene objectives in the U.S. Gulf and Gulf Coast area, with at least four exploratory wells expected to commence drilling during the first quarter of 2005. They are: Korn at South Timbalier block 98, King Kong at Vermilion blocks 16 and 17, Viceroy in St. Mary’s Parish onshore Louisiana and Delmonico offshore Louisiana. To advance projects, McMoRan has raised $231 million through a stock offering and bank loans.
McMoRan believes its offshore portfolio holds a gross 9 trillion cubic feet of potential gas reserves, 1.5 tcf of which would be net to McMoRan. That’s a tidy position for a relatively small company with just 50 billion cubic feet of booked reserves at year-end 2004 and average daily production of roughly 9 million cubic feet of gas equivalent during the fourth quarter.
Moffett said that strict rules governed by the U.S. Security and Exchange Commission are preventing McMoRan from moving probable and possible reserves into the proved reserve category, the only designation recognized by the SEC. That generally takes additional drilling and production history.
“The good news is that we have the discovery,” he said. “What we can’t get is the full reserves to report to you because we can’t book anything.”
Nevertheless, with a huge amount of possible untapped reserves at stake, it’s no wonder investors are willing to gamble on McMoRan’s future.
“We feel our company is very well positioned, both operationally and financially, to pursue the strategy we had set forth five years ago in looking for exploration on the shelf,” Adkerson said.
Additionally, investors are hanging their hat on another interesting McMoRan project — the proposed Main Pass Energy Hub —that would serve both as an offshore liquefied natural gas port and gas storage and delivery system. McMoRan’s plan differs from other LNG proposals in the U.S. Gulf in that much of the infrastructure already exists in the way of two platforms and pipelines. It also would be near ocean shipping lanes. Huge sub-sea salt caverns, which are situated close to the platforms, are being designed to store an initial 28 billion cubic feet of natural gas, the company said, adding that when the project is completed 2.5 bcf of gas could be delivered daily via pipeline to the Gulf Coast.
However, the company’s application for a federal permit necessary to launch construction on the $450-million hub project has stalled as the National Oceanic and Atmospheric Administration and U.S. Coast Guard attempt to quantify the project’s potential affect on marine life.
“NOAA … has raised questions about the cumulative impact of these facilities,” Adkerson said. “So the Coast Guard stopped the clock running. They’ve asked for additional information and we’ve supplied that. We expect that we would be back in the process early in 2005.”
Moffett added: “We have no reason to believe that there are any issues with our facility that would hold us up from getting our permit.”
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