McMoRan Exploration Co. (NYSE:MMR) — Action in the Gas Patch, Good and Bad

New Orleans-based McMoRan Exploration Co. (NYSE:MMR) is an on- and offshore exploration, development, and production company for oil and natural gas in the Gulf of Mexico and on the Gulf Coast. The company’s latest game changer is an $818 million purchase from Plains Exploration & Production Co. that includes several shallow-water leases.

To look at the opportunities and pitfalls in the transaction we turn to Byron W. King, Agora Financial’s editor of Energy & Scarcity Investor, who discusses this matter in one of his recent reader updates:

“Closer to home, but still offshore, this week came news that Plains Exploration & Production Co. is selling its shallow water Gulf of Mexico (GOM) assets to McMoRan Exploration Co. (NYSE: MMR). This is a cash-and-stock deal valued at $818 million in which McMoRan will pay Plains $75 million in cash upfront and 51 million McMoRan shares in exchange for the assets.

“The transaction covers an array of plays in the GOM, specifically leases called Flatrock, Hurricane Deep, Blueberry Hill, Blackbeard West and Davy Jones. All of these areas are shallow, meaning in less than 500 feet of water.

“The properties have proven hydrocarbon potential. They currently produce about 45 million cubic feet of natural gas equivalents per day net. The estimated proved reserves are about 63.9 billion cubic feet of natural gas equivalents.

“It’s always good to acquire production and reserves, but I don’t think that’s the entire idea behind the Plains deal. More important, McMoRan is focusing its efforts on drilling deep — indeed, ultra deep — but in shallow waters. This business strategy avoids the costliest aspects of deep-water drilling, with the massive drilling ships, riser systems, blowout preventers and all the rest.

“Instead of drilling in deep waters, McMoRan is taking heavy-duty jackup rigs and drilling for deep targets in shallow water. Rig costs are lower. There’s better well control, and an overall lower risk profile.

“McMoRan’s drilling targets are within the prolific Wilcox Trend that extends from onshore, under the GOM and far out into the deepest waters, up to 200 miles offshore. McMoRan is pioneering development of this deep trend, but doing it in shallow water. Here’s a cross section to illustrate the idea.

“McMoRan’s drilling targets are within the prolific Wilcox Trend that extends from onshore, under the GOM and far out into the deepest waters, up to 200 miles offshore. McMoRan is pioneering development of this deep trend, but doing it in shallow water. Here’s a cross section to illustrate the idea.

“Of course, there’s still geological and technical risk involved in drilling these kind of deep wells. The pressures and temperatures down hole are astonishingly high, to the point that McMoRan has had to develop technology just to test the hydrocarbon zones, let alone to achieve future production. Still, it’s good to know that the resource is down there. And if the resource is there, then McMoRan can eventually lift it out.

“There’s a problem, however…

“The biggest immediate problem with offshore development is industrywide. The federal “moratorium” on offshore development in the GOM is, basically, strangling drilling activity.

“Specifically, the federal government has issued all of five (count ’em, five) drilling permits in the shallow-water GOM in the past three months. Ordinarily, you’d see 40 or so permits per month. People on the deck plates of the rigs have told me that the federal government is dragging its heels on offshore development. One disturbing statistic is that about one-third (15 of 45) of the available jackup rigs in the GOM are idle for lack of work.

“Supposedly, the drilling moratorium applies only to deep-water development, meaning over 500 feet of water depth. And also, supposedly, this moratorium will go away on Nov. 30.”

King is very skeptical of the federal government’s willingness to let the moratorium expire given the political environment and its current stinginess with drilling permits. It’s a complex time to invest in the hydrocarbon energy business’ offshore development. For help navigating these waters you should visit the Agora Financial reports page, found here, where you can learn more about, and sign up for, Energy & Scarcity Investor.

Best,

Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]