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McMoRan Exploration Co. (MMR)

Q3 2010 Earnings Call Transcript

October 18, 2010 10:00 am ET

Executives

Kathleen Quirk – SVP and Treasurer

Richard Adkerson – Co-Chairman; President and CEO, Freeport-McMoRan Copper & Gold Inc.

Jim Moffett – Co-Chairman and CEO; Chairman, Freeport-McMoRan Copper & Gold Inc.

Analysts

Neal Dingmann – Wunderlich Securities

Duane Grubert – Susquehanna

Eric Anderson – Hartford Financial

T. Boone Pickens – BP

Noel Parks – Ladenburg Thalmann

Joe Allman – JPMorgan

John Levin – Levin Capital

Richard Tullis – Capital One Southcoast

Patrick Wigarmer [ph] – Iberia Capital Partners

Joan Lappin – Gramercy Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McMoRan Exploration’s third quarter conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

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

Good morning and welcome to the McMoRan Exploration’s third quarter 2010 conference call. Our results were released earlier this morning, and a copy of the press release is available on our Web site at mcmoran.com.

Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our Web site homepage and clicking on the Webcast link for the conference call. We also have several slides to supplement our comments this morning, and they’ll also be accessible using the webcast link on mcmoran.com.

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 Web site later today.

Before we begin today’s comments, we’d like to remind everyone that today’s press release and certain of our comments on this call include forward-looking statements.

I’d like to refer everyone 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 reviewing our presentation materials. As usual after our remarks we’ll open up the call for questions.

Today, McMoRan reported a net loss applicable to common stock of $25.3 million or $0.26 per share for the third quarter of 2010 compared with a net loss of $51.9 million or $0.60 per share for the year ago third quarter.

Our third quarter 2010 results included $11.3 million in impairment charges recorded to DD&A to reduce the carrying value of certain fields reflecting period end pricing and $5.6 million in gains from insurance proceeds associated with insurance recovery related to the 2008 hurricane events in the Gulf of Mexico.

Our production in the third quarter of 2010 averaged 146 million cubic feet of equivalents per day net to McMoRan, and our third quarter revenues totaled $90.8 million.

Our realized gas prices in the third quarter were $4.61 per Mcf, and our realized prices for oil and condensate averaged $75.78 per barrel in the third quarter 2010.

Our earnings before interest, taxes, depreciation and amortization, and exploration expense totaled $40.4 million in the third quarter, and operating cash flow which were net of $29 million in abandonment expenditures, totaled $28 million for the third quarter of 2010 and $119.7 million for the nine months ended September 30, 2010.

Our capital expenditures totaled $58.8 million during the third quarter and $160.3 million for the nine months ended September 30th. We ended the third quarter period with total debt of $375 million which includes $75 million in convertible senior notes that have a conversion price of $16.575 per share. We also ended the quarter with $180 million in cash.

Our shares outstanding currently approximate 95.5 million and assuming conversion of our existing 8% Convertible Perpetual Preferred Stock, the 5.25% Convertible Debt, and Mandatory Convertible Preferred Stock McMoRan would have approximately 114 million shares outstanding.

I’ll now turn the call over to Richard, who will be providing additional details on our operations and the status of our Plains transaction.

Richard Adkerson

Good morning, everyone and thanks for joining us this morning. I will give a brief summary of where we stand right now and then Jim Bobs will be available to make comments and answer questions.

As we announced on September 20, we have completed agreements to acquire Plains, shallow water, Gulf of Mexico, shelf assets and we also announced financing transactions to issue $900 million in equity linked securities.

In our deep gas exploration program, our traditional play of drilling in the 15,000 to 25,000 foot depths, we announced on August 3rd that we had logged 105 feet of high quality play sand at our Blueberry Hill sidetrack well we’re now working to get this completed and we expect initial production early in 2011.

In our ultra-deep exploration program below salt we have now got three wells in progress, the Davy Jones offset appraisal well which is drilling ahead, the Blackbeard East well where we’ve had positive drilling data and information below salt. Then on October we spud the third well the Laffite prospect.

At the Davy Jones discovery well we are procuring equipment, we’ve got a team working on completion activities and we expect to begin the physical completion in the third quarter of 2011.

The Plains deal, we acquired their shelf production and rights under our jointly operated properties, McMoRan would issue 51 million shares of stock and pay $75 million in cash for these assets.

As I indicated, we concurrently reached agreement on $900 million of new financing. We have gotten early termination granted under Hart-Scott-Rodino, we’ve got other approvals that we’re pursuing and we’re in the process of scheduling the vote for the shareholders once we’re cleared by the SEC, we will schedule the shareholders’ meeting to vote we expect that to happen and close the transaction before the end of 2010.

This transaction will significantly of course will increase our scale in our existing activities, it consolidates our ownership rights and gives our shareholders greater exposure to our really highly attractive exploration development projects and it thereby increases our leverage, adds to our reserves and production and with this financing, it gives us the capital required to pursue our strategy of going after these high potential growth projects.

We also benefit from this very positive partnership that we’ve had with Plains because they will continue as a significant shareholder in our company and that partnership has been important to us and will continue to be.

Page 7 shows the additions to our proved reserves, our 2P reserves, we would end up with on a mid-year basis of 300 Bcf equivalents of proved reserves and roughly 400 of 2P reserves and it add significantly to our potential with our exploration prospects.

With our financing, they are summarized on page 8. They include $200 million of convertible notes with a seven year maturity. It was a 4% coupon, the conversion price of $16, their provisionally callable after five years these are standard convert notes with no security.

Then in addition, we issued $700 million or have agreed to issue $700 million of perpetual preferred stock that carries a stated dividend rate of 5.75%, a similar $16 conversion price and these would be provisionally callable after three years. These offerings were placed with a group of private investors and also with $500 million of the perpetual preferred by Freeport-McMoRan Copper & Gold Inc.

On page 9, we show how the ownership of the company would be on a fully diluted basis. Our existing shares outstanding are 95.5 million on a fully diluted basis for these new converts, and our existing converts, the fully diluted shares would be 221 million. The existing McMoRan shareholders, would own 52% of the company; Plains, 23%; FCX 14%; and the new private investors, 11%. That’s on a fully diluted basis.

Slide 10 shows the Blueberry Hill discovery that I mentioned earlier. This is located in 10 feet of water. State Lease 340, part of the original large acreage track that we acquire from Texaco Chevron, which we had the success at Flatrock and our other prospects. The well was drilled over to 24,000 feet.

As I mentioned, we have a significant sand section with exceptional porosity and we are now working on completion activities; expect first production in the first quarter of this year.

Near term, on slide 11, with our deep gas prospect, we have a development type well, Laphroaig in St. Mary Parish. The Hurricane Deep well, we anticipate beginning drilling before the end of the year, that’s the South Marsh Island 217, where we had participated in a well being drilled by Chevron that had an underground flow. That well was abandoned. We’re now re-drilling it, and we will operate the well, significant portion of the cost will be covered by insurance proceeds.

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