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Freeport-McMoRan’s Ultra Deep Dreams

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As part of a big bet on oil and gas, Freeport-McMoRan  (NYSE: FCX  )  picked up some intriguing possibilities for future growth. The most intriguing, however, are its ultra-deep prospects in the shallow waters of the Gulf of Mexico. It has a top position in this emerging trend, as the following slide shows.

Source: Freeport-McMoRan Investor Presentation (link opens a pdf).

Looking ahead to 2014, the company has several projects that investors should keep an eye on, including Davy Jones No. 2, Lineham Creek, and Blackbeard West No. 2. These results could prove to be quite the catalyst for the stock in 2014. However, before investors dream of big returns, we need to drill down a little deeper into Freeport's ultra-deep dreams. 

Before looking at what's to come it's important to take a quick look back at what has transpired in order to temper enthusiasm about the future. ExxonMobil (NYSE: XOM  ) was an early partner at Blackbeard West. But the global oil giant decided to back off on the project years ago, fearing a blowout from an ultra-deep well could cause a repeat of the PR nightmare it endured after the Exxon Valdez spill. The high temperatures and pressures found 30,000 feet below the earth were just not something ExxonMobil wanted to be involved with at the time. We know know just how real those risks are, as the Deepwater Horizon disaster proved. 

These ultra-deep wells have also proved to be very challenging to drill and have pushed scientific boundaries. The temperature and pressure six miles into the earth's crust are so great that oil isn't even the target here. Any oil that formed was likely "cooked" into natural gas by now. However, those natural gas resources are believed to be vast enough to make it worth the effort, especially when natural gas prices do head higher.

Big-time potential
A great example of this potential was demonstrated by Chevron (NYSE: CVX  ) , the operator of the Lineham Creek project in which Freeport-McMoRan is a partner. Earlier this year, the Chevron-led partnership announced that it had found proved, probable, and possible reserves equivalent to 547 billion cubic feet of natural gas at Lineham Creek.

To get a rough idea of how much gas that is, 1 billion cubic feet is enough to meet the needs of roughly 10,000 U.S. homes for a year. So we're talking about enough gas to fuel 5.5 million American homes for one year. While that one find is itself incredible, the partners aren't yet finished drilling; it's possible more discoveries will be made. The current plan is to complete a well there in 2014, so investors should keep an eye on what Chevron and its partners have to say about the prospect.

Investor takeaway
That one well shows that the potential exists for these shallow water ultra-deep wells to really move the needle even for a big company like Freeport-McMoRan. However, there is still a lot of risk involved with these projects. McMoRan Exploration, which Freeport acquired earlier in 2013 to obtain these prospects, spent a lot of money already with little to show for that outlay. For now the best Freeport investors can do is dream about this potential. While 2014 will be a big year for completing some of these wells, natural gas prices still need to move higher before these wells can really fuel returns for Freeport investors.

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