McMoRan's Deepwater Gulf Expedition Looks Very Uncertain

McMoRan Exploration (NYSE: MMR  ) has its sights set firmly on the Gulf of Mexico. When others are actually trying to move operations away from this region following the disastrous Macondo blowout last year, McMoRan is continuing the search for elusive oil some 25,000 feet below the sea bed.

So deep is its conviction that McMoRan acquired shallow water assets on the Gulf's shelf from Plains Exploration & Production (NYSE: PXP  ) for almost $1 billion!

McMoRan is not alone in its quest to find natural gas from the deeper (and older) rock formations under the Gulf. But the real question is: Why?

The advantage
The company, along with its public partner Energy XXI (Nasdaq: EXXI  ) , has been stubbornly maintaining that these reservoirs are capable of altering prevailing market conditions for natural gas. A successful drilling campaign in this region could drastically bring down the cost of production. Given the currently lousy market conditions for natural gas, which now trades at $4.36/MCF, successful production could actually lower prices significantly below that value.

Currently, Ultra Petroleum (NYSE: UPL  ) and Southwestern Energy (NYSE: SWN  ) have mastered the art of producing natural gas on the cheap -- doing so at $2.61/MCFE and $3.85/MCFE, respectively. However, successful production from the Davy Jones wells No. 1 and No. 2 could see an even bigger drop in costs.

Not a smooth ride
Thanks to last year's Deepwater Horizon disaster, government regulations have become stricter. Higher costs, more ardous compliance, and greater attention to safety will undoubtedly be a part of new efforts in the region. This will not rest lightly on management's shoulders.

From an operational standpoint, the Davy Jones well No. 1 is expected to undergo a flow test at the end of this year. Well No. 2 is expected to undergo the flow test in the second quarter of 2012. As a potential investor, I recognize that that's a long way off.

Things do not look too rosy at the moment from a financial standpoint, though. Another loss in the second quarter is only going to make investors jittery. Capital expenditures for 2011 are expected to be in the range of $300 million to $500 million. This makes each well that's being drilled cost upwards of $250 million. Hitting a dry hole is definitely not an option here.

Foolish bottom line
Overall, management seems to be going ahead with a lot of conviction. However, it is too early and risky to come up with a specific conclusion on the growth prospects of this company.

Think otherwise? Leave your comments below.

Fool contributor Isac Simon does not own shares of any of the stocks mentioned in this article. The Motley Fool owns shares of Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2011, at 2:31 PM, EmmyKaye wrote:

    Thanks for driving it down. I'm looking to add to my position around $15.00

  • Report this Comment On July 28, 2011, at 11:49 PM, duckduffer wrote:

    Why would you mention Macondo when referring to shallow water wells? Is this a hit article or are you serious? This article doesn't mention the potential 100TCF of gas MMR is after. That size discovery would mean a 3-4 bagger. And the gas is there. Will they get it to flow is the only pending question. With over $800 million in cash and a legendary geologist leading this company, seems like a pretty good risk to me.

  • Report this Comment On July 29, 2011, at 11:31 AM, JustMee01 wrote:

    Jim Bob, McMoRan's CEO seems driven less by the prospect of Davy Jones than on proving the Ultradeep play in more general terms. A large part of their focus is on establishing that older rock is not as deep as geologists once believed. That part has been largely confirmed.

    MMR and Energy XXI, its partner in these deeper projects will continue to expand those efforts to other properties. Davy Jones is far from the only serving on this plate. For those who might be interested in speculating on this exploration with less risk, Energy XXI may be worth a look. EXXI has substantial new procduction coming on line after a very large recent acquisition from Exxon- Mobil. These fields are older production assets with potential workoever potential upside and additional targets on blocks currently held by production. These targets- in contrast to the the MMR story- are shalloow water and also not deep formations. These are easy drilling targets using cheap rigs, and it's work that EXXI is well acquainted with. Buying established fields and squeezing some more life out of them is their business model. There is some geographical risk from a hurricane persepctive, as EXXI's fields are very concentrated at the mouth of the Mississippi delta. That's intentional, since it makes operations more efficient with a smaller number of employees, and also because the region is oilier. A large percentage of EXXI's production is oil and not gas. In short, EXXI is a very different play than MMR, with substantial cash flow from existing (and expanding) production in addition to a percentage piece of MMR's Ultradeep gas play.

  • Report this Comment On July 29, 2011, at 1:25 PM, qwoofbark wrote:

    Why do these FOOLS keep writing such utter rubbish about companies they know nothing about?

    MMR is NOT involved in ANY deep water projects.

    Isac Simon, you are an IDIOT

  • Report this Comment On July 30, 2011, at 11:03 AM, jlc816 wrote:

    I agree with all the above comments. I Simon you obviously know little about MMR.

    They are in and ONLY in SHALLOW water U Deep. They is a HUGE difference.

    I wonder if anyone @ The M Fool reads these comments and EVER comes back to Correct themselves.

    Another example of is a recent "article" on SINA.

    The title of the article was

    "Is Sina Hiding Something" or like that. However the actual article was about whether SINA could pass a couple of financial strength tests on Intangible and Tangible assets. They PASSED both with Flying Colors. Yet the title inferred the possibility that SINA was "hiding" something. In the wake of the Sino-Forrest fiasco, something like this is only fear mongering. The author knew what the article was about and the results. So why not title it SINA passes Financial Tests Easy. Instead of some misleading one.

    Would really love an answer. HA.. As if..

    John

  • Report this Comment On August 01, 2011, at 7:04 PM, frak4318 wrote:

    This article is missleading and ill informed. The name of the game is risk/ reward. Risking $17 dollars to possibly being rewarded 5 to 10 times that, seems like a good idea. Once the Davy Jones flow test is successful, that is a game changer, proving they can extract hydrocarbons from 6 miles into the earth. 200 feet of pay is a huge deal when drilling a well, 50 feet of is a big deal. MMR has several wells with over 100 feet of pay. The article title is misleading, no one can say if it's likely or not. By the end of the year we will know.

  • Report this Comment On August 02, 2011, at 4:09 AM, isacsimon wrote:

    @gwoofbark

    <<MMR is NOT involved in ANY deep water projects>>

    It's no where mentioned in the article that MMR is involved in deepwater projects. In fact it's mentioned that "McMoRan is continuing the search for elusive oil some 25,000 feet below the sea bed".

    It would be better to comment after reading the article, which I doubt you did.

    -Isac

  • Report this Comment On August 02, 2011, at 9:10 AM, jlawrence14 wrote:

    Isac Simon, Have you bothered to listen to ANY of the webcasts or conference calls? You are very il-informed!

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