McMoRan Exploration Co. (MMR)

Q2 2010 Earnings Call

July 19, 2010 10:00 AM ET


Kathleen Quirk – Senior Vice President and Treasurer

Jim Bob Moffett – Co-Chairman, President and CEO

Richard Adkerson – Co-Chairman


Nicholas Pope – Dahlman Rose

Joe Allman – JPMorgan

Noel Parks – Ladenburg Thalmann

Jason Wangler – Wunderlich Securities

Duane Grubert – Susquehanna Financial Group

Eric Anderson – Hartford Financial

Richard Tullis – Capital One Southcoast

Gregg Brody – JPMorgan



Ladies and gentlemen, thank you for standing by. Welcome to the McMoRan Exploration Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Ms. Kathleen Quirk, Senior Vice President and Treasurer. Please go ahead, ma’am.

Kathleen Quirk

Thank you, and good morning, everyone. Welcome to the McMoRan Exploration second quarter 2010 conference call. Our results released earlier this morning and a copy of the press release is available on our website at

Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. As usual, we also have several slides to supplement our comments this morning and will be referring to the slides during the call. The slides are also accessible using the webcast link at

In addition to analysts and investors, the financial press has been invited to listen to today’s call and a replay of the webcast will be available on our website later today.

Before we begin our comments today, I’d like to remind everyone that today’s press release and certain of our comments on this call include forward-looking statements. Please refer to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings.

On the call today are McMoRan’s Co-Chairmen, Jim Bob Moffett and Richard Adkerson. I’ll start by briefly summarizing our financial results and then turn the call over to Richard who will be referring to the slide materials and will, as usual, open up the call for comments after our formal remarks.

Today, McMoRan reported a net loss applicable to common stock of $21.7 million or $0.23 per share for the second quarter of 2010, compared with a net loss of $100.6 million or $1.40 per share for the second quarter of 2009.

Our second quarter 2010 results included significant items. First was a $13.7 million impairment charge recorded to DD&A to reduce the carrying value of certain fields. We also recorded $9.2 million in gains for insurance proceeds associated with recoveries related to the 2008 hurricane events in the Gulf of Mexico.

Our production in the second quarter of 2010 averaged 165 million cubic feet of equivalent per day net to McMoRan. It was lower than our publicly reported estimates in April 2010 of 170 million a day, primarily because of unscheduled downtime for maintenance on pipelines and other facilities.

Our oil and gas revenues during the second quarter totaled $104 million, that compared to $94 million in the year ago quarter. Realized gas prices in the second quarter of 2010 of $4.66 per Mcf were approximately 20% higher than the year ago quarter of $3.92 per Mcf.

And our realized price for oil and condensate of $76.20 per barrel were approximately 30% higher than the year-ago period’s average of $58.24 per barrel. These realizations do not take into account our gains and losses on derivative contracts.

Earnings before interest, taxes, depreciation and exploration expense totaled $59 million in the second quarter and $143.7 million for the six months ended June 30th. Our operating cash flows, which were net of $24 million in abandonment expenditures during the quarter, totaled $11 million and $91.5 million for the six months ended June 30th.

Our capital expenditures during the quarter totaled $60.6 million and $101 million for the six months ended June 30th. We ended the quarter with total debt of $375 million, which includes $75 million in convertible senior notes. We also had $217 million in cash at the end of June.

Our basic shares outstanding currently approximate $95.5 million and assuming conversion of our remaining 8% preferred stock and outstanding 6.75 mandatory convertible preferred stock, our shares outstanding would average between 109 million and 111 million shares.

Now, I’d like to turn the call over to Richard, who will be referring to the slide materials on our website.

Richard Adkerson

Good morning, everyone. In the second quarter, I’m going to be reviewing this summary starting on page three, so you can follow along on the slides. We are -- we will be providing where we stand with our Blueberry Hill sidetrack well as part of our deep gas exploration program.

We have had drilling in this area. It’s highly prospective with complex geology and now we have seen indications of hydrocarbon-bearing zones that we are now testing and we will continue to drill to evaluate deeper prospective intervals that have been indicated as being highly prospective, based on early drilling that we have done.

In our ultra-deep gas exploration program, we have advanced drilling on two of our wells. The Davy Jones offset appraisal well, which is located in 20 feet of water and 2.5 miles away from our original discovery at Davy Jones is being drilled. And then, at South Timbalier 144, in a well that is drilling now below 18,000 feet, we are drilling the Blackbeard East exploratory well. This is a well that is east, obviously east of our original -- nine miles east of our original Blackbeard well and we will be reporting on where we stand with that drilling.

And then we are doing work to progress the development activities for the discovery well at Davy Jones, we completed the well designed in the second quarter and now we are procuring equipment. Following the Macondo blowout on April 20, we have been working diligently and have completed by June 30, the necessary certifications that’s required by the Bureau of Ocean Energy management to allow us to continue with our activities -- all of which, of course, are in the shallow water and not in the deep water.

The details of the financial data that Kathleen reviewed are included on page four. And then we have the map on page five, which shows the location of our very significant amount of acreage that we have in the Gulf of Mexico. We have rights to over 1 million gross acres including 200,000 in the ultra-deep trend, all -- virtually all located in the shallow waters of the Gulf.

Just as a reminder that our exploration strategy is focused on really two types of plays, the deep gas play which we have been working on for the past 10 years, including drilling wells that are in general terms between 15,000 and 25,000 feet, drilling to Miocene age sands above the salt well. And then beginning with our acquisition of the new field properties in 2007, we have been pursuing ultra-deep gas plays which again in the shallow waters, not in deep waters, but drilling to deep water type exploration targets below the salt well and these wells typically go at depths beyond 25,000 feet.

Our targets are on the shelf, generally in very shallow waters, but within 500 feet. They are very large targets, similar in size to the targets the industry has been drilling in the deep water, but the physical part of our operations are significantly different from the deep water because of the shallow water location where we are drilling from jack-up rigs and barge rigs and don’t have the technical challenges that the industry faces when it is dealing in deep waters.

We also, by drilling in this area, are typically near existing infrastructure that has been used for historical operations. And so that allows us to bring new discoveries online more quickly and also at less cost than deep water development, even though they are similar size of prospects.

We don’t operate in the deep water. And so accordingly, our exploration activities have not been subject to any of the drilling suspension activities that have been imposed by the Department of The Interior. We are dealing and working on the new regulations and enhanced safety certifications that affect all operations in the Gulf but as we work through those, those reflect the historical practices that our companies have been following in terms of the way we have been drilling things.

We completed the certifications, as I mentioned. Some of the permit processing is taking longer, but we are working through that in a reasonable fashion. Page six just gives some details that describe the differences between the drilling operations that we have and the operations that are required to drill in the deep water. We have been working with regulators. Jim Bob and other members of our team have been working with the regulators as this process unfolded to educate them on the important differences between shallow water and deep water.

We have been pointing out that shallow-water drilling on the shelf has been done successfully and safely for over 50 years, involving drilling of 50,000 wells. Well control is an established science in the shallow water primarily managed by the selection of pipe points and control of mud weight during the drilling process.

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