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Offshore Costs Send McMoRan into the Red

McMoRan Exploration Co., which has made its name through discoveries of big, gassy fields in the shallow waters of the Gulf of Mexico (GOM), said Tuesday soaring costs from an unproductive well and impairment expenses ate into its revenues in the second quarter, sending the company to a loss for the sixth straight quarter.

The company lost $50.2 million (minus 32 cents/share) from April through June, versus a loss of $21.7 million (minus 23 cents) in the year-ago period.

Co-Chairmen Richard Adkerson and Jim Bob Moffett, who also is CEO, helmed a conference call with energy analysts to discuss the company's performance. They acknowledged that the drilling to date hasn't paid off yet -- but delineation results soon should prove positive for some of the big discoveries, including the prospective Davy Jones formation.

"The data gained to date from our ultra-deep drilling program in the shallow waters of the Gulf of Mexico add to our enthusiasm for the resource potential of this important new geologic trend," Adkerson told analysts. "Through our drilling activities, we have confirmed the potential for large hydrocarbon-bearing structures below salt in the Miocene, Wilcox, Frio, Tuscaloosa and Cretaceous Carbonate formations.

"Our ongoing exploration drilling and flow testing of the Davy Jones wells in the coming months have the potential to enhance our reserve and production profile meaningfully." Flow testing on the first Davy Jones well is scheduled to begin by the end of the year; a second well is set for testing in early 2012.

The New Orleans-based company operates some of the deepest wells on the GOM Outer Continental Shelf and discoveries have been encouraging -- but costly. Other prospective discoveries include Blackbeard East, where McMoRan has begun operations to drill a bypass well at around 30,700 feet to evaluate some targets, as well as Lafitte, which the company began drilling last October.

However, in late June the independent warned that it was looking at a $37 million charge after the Blueberry Hill No. 1 STK-1 well in the GOM failed to produce commercially viable results.

The deep well's costs were reflected in the latest quarter's results with McMoRan booking a $36.8 million charge, as well as a $29.2 million impairment hit, compared with a $13.7 million total write-down in the year-ago period.

Total costs in 2Q2011 were up 71%, with exploration expenses, which were up by around 80% year/year, making up most of the costs. Total expenses in the quarter totaled almost $194 million, which wiped out a 46% jump in revenue, which totaled about $158 million. A year earlier total expenses totaled $113 million on revenue of $104 million.

With the latest expenses, McMoRan plunged into the red in 2Q2011 to the tune of $39.86 million. A year ago the company lost $16.45 million.

Second quarter output averaged 197 MMcfe/d net to McMoRan, compared with 165 MMcfe/d in the year-ago period. Average daily production this year is forecast to reach 185 MMcfe/d net, which would include 180 MMcfe/d in the third quarter.

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