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McMoRan Exploration's (NYSE: MMR ) fourth-quarter earnings have truly come as a pleasant surprise. Fool analyst Seth Jayson has given a snapshot of the results. However, digging deeper, I found that the Gulf of Mexico operator could be better-placed than it comes across at first glance. In fact, this company might even generate some solid returns for years to come.
The fourth-quarter earnings got a major boost when the company received $39 million in insurance settlements due to losses incurred in the September 2008 hurricanes. However, if we were to discount this, core operations posted a profit of $4.1 million. This is interesting since the company hadn't posted an operating profit in the past seven quarters.
Digging deeper, fourth-quarter production stood at 170 million cubic feet equivalent per day, while the full year averaged 187 Mmcfe/d -- a jump of 18% and 16%, respectively, over last year. The biggest contribution -- at 147 Mmcfe/d -- came from the declining Flatrock field, where McMoRan had increased its stake. In hindsight, it was a smart move by management. By increasing its working interest in a tested and producing field, the company made sure it had exposure to zero-risk wells.
Nonetheless, I'm not too concerned about the declining factor. The reason is simple. McMoRan's primary interests lie elsewhere: in its future prospects. They lie in the sub-salt ultra-deep cretaceous play, some 30,000 feet below the Gulf of Mexico seabed. In fact, this year could define where McMoRan will be headed in the next few years. As of now, things look pretty reassuring. Here's why…
This is what I'm looking to
The Davy Jones well No.1 in the Wilcox cretaceous play is expected to undergo flow tests this month. A successful test means that production should start almost immediately. Well No. 2 is expected to undergo flow tests in the second half of this year. The combined reserves net to McMoRan from these two wells is a massive 3.2 trillion cubic feet equivalent. Of course, everything hinges on the initial flow tests. The production facility has an initial capacity to produce 150 Mmcfe/d, which can be ramped up to produce 275 Mmcfe/d.
The Lafitte project, another ultra-deep prospect, has already encountered hydrocarbons and is currently in the process of completing the wireline logs. Though production isn't expected anytime soon, the potential to add reserves looks very likely. Same goes for the Blackbeard prospect, where the company is drilling two wells.
If the Davy Jones well turns out to be successful, the entire Miocene, Wilcox, and Cretaceous geological formations look very enticing. A production hike right now solely depends on this success -- success that looks highly probable.
However, the point is this: The results should be out in a few weeks, and I don't think the possible success is currently factored into the stock price. The stock has fallen more than 9% in the last 12 months, and it looks like a perfect opportunity to accumulate. Additionally, the potential sizes of these new reserves aren't factored in. The stock is trading at just a little over twice the total book value of assets.
Foolish bottom line
I'm keeping my fingers crossed in connection with the results of the first ultra-deep test. To stay up to speed on the top news and analysis on McMoRan Exploration, you can start here by adding the company to your watchlist.
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