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McMoRan Exploratio (MMR)

Q4 2010 Earnings Call

January 18, 2011 10:00 am ET

Executives

Kathleen Quirk - Senior Vice President and Treasurer

James Moffett - Co-Chairman, Chief Executive Officer and President

Richard Adkerson - Co-Chairman

Analysts

Joan Lappin - Gramercy Capital

Eric Anderson - Analyst

Joseph Bachmann - Howard Weil Incorporated

Joseph Allman - JP Morgan Chase & Co

Duane Grubert - Susquehanna Financial Group, LLLP

Richard Tullis - Capital One Southcoast, Inc.

Adam Duarte - Omega

Noel Parks - Ladenburg Thalmann & Co. Inc.

Nicholas Pope - Dahlman Rose & Company, LLC

Leon Cooperman - Omega Advisors, Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McMoRan Exploration Fourth Quarter Conference Call. [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. Good morning, and welcome to the McMoRan Exploration Fourth Quarter 2010 Conference Call. Our results were released earlier this morning, and a copy of the press release is available on our website at mcmoran.com. Our call today is being broadcast live on the Internet, and anyone may listen to the conference call by accessing our website Home page and clicking on the webcast link for the conference call.

As usual, we have several slides to supplement our comments this morning, and we'll be referring to the slides during the call. They are also 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 website 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. We'd like to remind everyone to 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 review our recent performance and outlook, and Jim Bob will review our exploration results. As usual, after our remarks we'll open up the call for questions.

Today, McMoRan reported a net loss applicable to common stock of $77 million or $0.75 per share for the fourth quarter 2010, which compared with a net loss of $9.5 million or $0.11 per share for the fourth quarter of 2009. The fourth quarter 2010 results included a number of special items of a $52 million noncash charge was required associated with our December 2010 closing of the convertible perpetual preferred stock offering; accounting rules required us to record a special charge for the difference between the conversion price of $15 per share, which was negotiated in September, and the closing of the transaction when the price was $17.18 per share.

We had $25 million charge in the quarter and impairments to reduce certain of our field's net carrying value to fair value based on a period-end forward pricing and estimated remaining reserves. We had one-time charge associated with the Plains transaction, transaction cost, and those were partially offset by $24 million in gains associated with insurance claims associated with losses related to the September 2008 hurricanes at the Gulf of Mexico.

Our production in the fourth quarter averaged 144 million a day net to McMoRan. Oil and gas revenues during the fourth quarter totaled $95 million. That compared to $128 million in the fourth quarter of 2009. Realized gas prices in the fourth quarter of 2010 were $4.05 per Mcf, and realized prices for oil and condensate averaged $83 per barrel in the fourth quarter 2010.

Our earnings before interest, taxes, depreciation, amortization and exploration expense or EBITDAX totaled $51.3 million in the fourth quarter of 2010 and $237 million for the year ended December 31, 2010. Operating cash flows net of $44 million in abandonment expenditures and just under $25 million in working capital requirements for a use of $21.5 million during the quarter. For the year, our operating cash flows totaled $98 million.

Capital expenditures during the fourth quarter totaled $57 million and year-to-date for the year 2010 were $217 million. Total debt at the end of December was $560 million, and that includes $260 million in convertible securities, and we ended the year with just under $906 million in cash.

During the fourth quarter, our 6 3/4% mandatory convertible preferred stock converted into 10.7 million shares of common stock. And on December 30, we were pleased to complete the previously announced acquisition of Plains Exploration & Production Company's shallow water Gulf of Mexico shelf assets and $900 million in related financing. In completing the transaction with Plains, we issued 51 million shares of common stock, and the cash consideration was $75 million. After taking into account the share issuance to Plains, our basic shares at the end of the year approximated 157 million. And then if you include the remaining outstanding convertible securities and the newly issued convertible securities, we would have approximately 221 million shares outstanding on a fully converted basis.

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

Richard Adkerson

Good morning, everyone. I'm starting on Page 3 of the slides. The year 2010, very significant year for our company. It's characterized by the significant discovery that we saw at Davy Jones. We're now drilling an appraisal well at Davy Jones that Jim Bob will be talking with you about. We've seen some very interesting recent drilling results at our Blackbeard East well, which is 10 miles to the east of the original Blackbeard well that we deepened following the acquisition of that property three and a half years ago.

The information that we gained with our Blackbeard drilling and now with Davy Jones has encouraged us with respect to our ultra-deep program, and we have a whole series of prospects based on leases that we put together to test this concept. We're drilling a well called Lafitte at the present time, which we spudded in October, and it's drilling ahead. But following that, we have a whole series of prospects to test this interesting new geologic concept that we have, and Jim Bob will be talking about all that.

We're continuing with our deep gas exploration program. That's the drilling we started now almost 10 years ago of drilling between 15,000 and 25,000 feet. We have three wells that we're currently having operations engaged on, including the second well in St. Mary Parish in Louisiana where we're drilling our second well at our Laphroaig prospect. The first well was a significant producer and in drilling this well, we've seen some interesting sands with our LWD 2 and we are now sidetracking that well to test deeper projects. So we are continuing with our industry-leading deep gas drilling on the Shelf with Gulf of Mexico, both with our ultra-deep play and with our deep gas play.

Kathleen mentioned we were pleased by year end to complete the acquisition of the Plains' Gulf of Mexico Shelf assets, which basically allowed us to double our interest in Flatrock, which was our major discovery in our deep gas program. We've currently produced half of what we currently see as the ultimate recovery from that well. The field has produced about 200 Bs a day and has about 200 Bs of remaining crude reserves associated with it. In connection with the Plains transaction, we completed the private placement of $900 million in convertible securities, including $200 million of convertible debt and $700 million of convertible preferred securities.

We ended the year with cash of $900 million, and that gives us the financing to go forward. The Plains deal was approved by shareholders on September 30, and that transaction, we issued -- December 30, that transaction we issued 51 million shares, paid Plains $75 million of cash as part of the initial negotiated transactions and then $50 million of purchase price adjustments for cash between the effective and closing dates.

It increases our scale in the Gulf of Mexico. As I said, it added proved reserves as well as a significantly greater interest in the ultra-deep plays that we have, consolidate our ownership in our key areas, increased our reserves production, and as I said, we, conjunction with that, had $900 million of new financing. That is shown on the capital structure on Page 15 where you can see how the new convertible debt notes that end with our existing senior notes and then with the new $700 million of equity capital in the form of convertible perpetual preferred.

Our reserve data as presented on Page 6, I want to emphasize that this does not include any reserves for Davy Jones, either of the Blackbeard wells or the positive drilling results we seen at Laphroaig. But our preliminary reserves we're reporting here is 276 Bcf equivalent. That gives us a PV-10 for those reserves of roughly $650 million, which under SEC rules is based on prices for the 12-month historical period, and that's $4.38 per Mcf per for gas and $79.43 for oil discounted at 10% rate.

Page 7 shows our reserves. Roughly a quarter of our reserves are proved developed producing reserves. About half are proved developed behind pipe non-producing reserves, and that's consistent with where our properties are developed at Flatrock and for the other properties that we have in the Gulf. Roughly 2/3 gas and 1/3 oil was our proved reserves.

Read the rest of this transcript for free on seekingalpha.com