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Investors Lose Patience with Davy Jones Delays

McMoRan Exploration Co., which has kept investors dangling with promises that its Davy Jones natural gas discovery in the shallow waters of the Gulf of Mexico (GOM) would be flowing 50 MMcf/d by now, saw its shares plunge last week after the company admitted that it still is struggling to bring the prospective well online.

The New Orleans-based explorer fell by 2.2.5% on Monday and suffered another double-digit loss Tuesday. At midday Friday McMoRan (MMR) was trading up slightly at $8.99/share. The sell-off followed an announcement by the company that engineers were working to clean out perforations at the Davy Jones No. 1 well, which is on South Marsh Island Block 230. The discovery well, which many consider to be one of the largest discoveries ever on the Outer Continental Shelf (OCS), was completed in early 2010 in South Marsh Island Block 230 in 20 feet of water to a record measured depth of 28,263 feet (see NGI, Jan. 18, 2010).

McMoRan Co-Chairman Jim Bob Moffett said at the time that the structure, which encompassed four OCS lease blocks, might contain an estimated 2-4 Tcf of recoverable reserves. McMoRan, which has drilled some of the deepest offshore wells in the world, operates Davy Jones with a 63.4% working interest and 50.2% net revenue stake, with partners Energy XXI (15.8%), JX Nippon Oil Exploration (Gulf) Ltd. (12%) and Moncrief Offshore LLC (8.8%). Plains Exploration & Production Co. (PXP) reported in October that it still owned 51 million shares of McMoRan, representing a stake of about 31.5%, which it acquired two years ago (see NGI, Sept. 27, 2010).

In July Moffett, a legendary wildcatter, said commercial production from Davy Jones was to be in motion by the end of that month (see NGI, July 23). That start-up date passed, and in October the company said it had replaced heavy drilling mud in the No. 1 well with clear completion fluid, which was required to suppress flow in the well, while the final steps were completed.

McMoRan disclosed in October that it has spent more than $960 million on the No. 1 well, an industry record. The well is so deep that McMoRan has had to engineer new equipment over the past three years to allow downhole pressures and temperatures above 400 degrees. So far, however, all of the money has not led to any commercial production.

"On Nov. 11 the well was opened for test and flowed gas into an unmetered atmospheric tank before being flared," officials said. "To date, McMoRan has recovered completion fluids with weights of approximately nine and 19 pounds per gallon and is initiating operations to inject a barite solvent into the formation in order to clean out the perforations to achieve a measurable flow test. McMoRan will provide updates as flow testing operations progress and a measurable flow test is achieved."

McMoRan already has drilled two successful sub-salt wells in the Davy Jone field. The No. 1 well logged 200 net feet of pay in multiple Wilcox sands, which were "all full to base," it said. The Davy Jones offset appraisal well (Davy Jones No. 2), which is two and a half miles southwest of Davy Jones No. 1, confirmed 120 net feet of pay in multiple Wilcox sands, "indicating continuity across the major structural features of the Davy Jones prospect, and also encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonate sections."

Tudor, Pickering, Holt & Co. analysts last week said PXP's "implications from the Davy Jones saga" had cost the company about $1.00 in net asset value following last Monday's sell-off. "Lower MMR equity value reduces expected deleveraging by $100 million ($1.5-2 billion total)," said analysts, but they added that the value was already reflected in PXP's share price. "Our take on the most recent Davy Jones release is heavy drilling/completion fluid possibly hindering well deliverability...but not enough info at this time to determine whether the issue is mechanical or reservoir-related."

JP Morgan (JPM) analysts were more critical, writing that MMR was "still overvalued" following the early week losses. Using New York Mercantile Exchange futures, "we calculate that MMR has zero equity value. Using our JPM price deck ($5.50/Mcf long-term gas), we value MMR at $2.31/share." According to JPM's net asset value on MMR, "the market already is giving significant credit for success at Davy Jones as well as at other ultra-deep shelf fields.”

However, Gramercy Capital's Joan Lappin was circumspect.

"Of all the calamities that have befallen this particular well completion, there are two in particular that stand out from all the others: The U.S. government was afraid of further embarrassment to itself after the Macondo disaster. It required that as soon as Davy Jones was perforated and a flare came up the hole, the rig had to be backed away from the drilling platform" and in "the three hours it took to move the rig out of the way, the debris fell back to the bottom of the hole and clogged up the perforations. It wouldn't flow after that." That restriction then was removed from the drilling permit, she noted.

"The second glaring item of the many problems that the operator has faced was the failure of the newly designed remote control guns that Schlumberger insisted would successfully perforate the casing." Those guns haven't fired properly since March, she said said. The Davy Jones No. 1 well "is not the future" of McMoRan. "The partners aren't yet ready to give up on solving the last of these problems to bring this well on line. They have every reason to believe, given enough time, that they will conquer this problem of mud that turned to cement...This company is not worth zero."

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