I love following companies with great stories. You know what I'm talking about, the kind of stories that promise massive rewards for shareholders. McMoRan (MMR) has long been a company like that as it searches for massive rewards drilling ultra-deep wells into huge prospects in the Gulf of Mexico.
This week McMoRan ceased to be a great story as an independent company as it was acquired in a controversial (I'll explain why later) deal with Freeport-McMoRan (FCX).
Meanwhile, McMoRan believes that is has identified a major new geologic trend that spans 200 miles of the shallow water Gulf of Mexico and onshore into the Gulf Coast area.
Onshore McMoRan believes it has 30 trillion cubic feet of unrisked potential.
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Offshore, the prize is even larger. McMoRan believes it has over 100 trillion cubic feet of unrisked potential.
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That is a combined 130 trillion cubic feet of potential for a company with a market capitalization that has fluctuated between one and two billion recently. Clearly the potential upside is very large for a company the size of McMoRan.
But potential often turns out to be nothing more than potential, and that doesn't pay the bills..
For much of this year McMoRan has struggled to get a measurable flow rate out of its Davy Jones #1 prospect. On November 26 McMoRan provided an operational update that investors did not like, sending the stock price tumbling down over 30%. The update from McMoRan indicated more mechanical problems and not progress:
McMoRan today provided an update on the Davy Jones No. 1 production test currently in progress on South Marsh Island Block 230. As previously reported in October 2012, McMoRan replaced heavy drilling mud in the hole with clear completion fluid, which was required to suppress flow in the well while the final steps were completed. On November 11, 2012, the well was opened for test and flowed gas into an unmetered atmospheric tank before being flared. To date, MMR has recovered completion fluids with weights of approximately 9 and 19 pounds per gallon and is initiating operations to inject a barite solvent into the formation in order to clean out the perforations to achieve a measurable flow test. McMoRan will provide updates as flow testing operations progress and a measurable flow test is achieved.
Prior to this share price collapse, I knew the McMoRan story fairly well but hadn't had a close look at the company and its financial position in a while. I decided to take a look and see if the big selloff was overdone and whether I should be buying some shares to take advantage of an overreaction from Mr. Market.
As I read through the company third quarter earnings release it wasn't hard to see what investors were growing concerned about. The company appeared on the verge of a fairly serious liquidity issue.
At September 30, 2012 the balance sheet looked like this:
September 30, | December 31, | ||||||
2012 | 2011 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 191,934 | $ | 568,763 | |||
Accounts receivable | 56,044 | 72,085 | |||||
Inventories | 35,551 | 36,274 | |||||
Prepaid expenses | 16,636 | 9,103 | |||||
Current assets from discontinued operations, including restricted cash | |||||||
of $473 | 797 | 682 | |||||
Total current assets | 300,962 | 686,907 | |||||
Property, plant and equipment, net | 2,378,285 | 2,181,926 | |||||
Restricted cash and other | 62,575 | 61,617 | |||||
Deferred costs | 9,023 | 8,325 | |||||
Long-term assets from discontinued operations | 439 | 439 | |||||
Total assets | $ | 2,751,284 | $ | 2,939,214 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 89,635 | $ | 115,832 | |||
Accrued liabilities | 145,779 | 160,822 | |||||
Accrued interest and dividends payable | 20,704 | 14,448 | |||||
Current portion of accrued oil and gas reclamation costs | 64,571 | 58,810 | |||||
5¼% convertible senior notes due October 2012 | 345 | 66,223 | |||||
Other current liabilities | 6,480 | - | |||||
Current liabilities from discontinued operations, including sulphur reclamation costs | 2,717 | 5,264 | |||||
Total current liabilities | 330,231 | 421,399 | |||||
5¼% convertible senior notes due October 2013 | 67,832 | - | |||||
11.875% senior notes | 300,000 | 300,000 | |||||
4% convertible senior notes | 188,943 | 187,363 | |||||
Accrued oil and gas reclamation costs | 227,279 | 267,584 | |||||
Other long-term liabilities | 19,896 | 20,886 | |||||
Other long-term liabilities from discontinued operations, including sulphur reclamation costs | 18,624 | 19,018 | |||||
Total liabilities | 1,152,805 | 1,216,250 | |||||
Stockholders' equity | 1,598,479 | 1,722,964 | |||||
Total liabilities and stockholders' equity | $ | 2,751,284 | $ | 2,939,214 | |||
That by itself doesn't look too concerning since there is $191 million of cash on hand. But when you factor in that McMoRan's quarterly cash inflow from operations last quarter was $70 million and that the company capital expenditure guidance for Q4 was for $135 million and you can start to see where liquidity is starting to get pretty tight for a company working on extremely expensive ultra deep drilling projects.
So I took a pass on McMoRan as an investment because of what I thought was going to become a strained financial position and possible dilutive financing being required.
When I first saw the blockbuster news of Freeport-McMoRan Copper and Gold (FCX) acquiring McMoRan at premium of almost 100% to the prior day share price I knew there was going to be some controversy. And it seems that I was on the mark given the way Freeport-McMoRan shareholders have been voting with their sell fingers:
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The truth is that this transaction looks an awful lot like a bailout of McMoran. It looks like that because the co-Chairman of Freeport-McMoran just also happens to be the CEO and Chairman of McMoRan Jim Bob Moffett. Jim Bob is the single largest individual shareholder of McMoRan, and Mr. Moffett is just one of many individuals with interests in both companies:
Name | Serves as... | And as... |
James R. Moffett | CEO, President, Co-chairman, McMoRan | Co-chairman, Freeport board |
Richard C. Adkerson | CEO, President, Co-chairman, Freeport | Co-chairman, McMoRan board |
B.M. Rankin, Jr. | Vice chairman, Freeport board | Vice chairman, McMoRan board |
Robert Addison Day | Director and chair of audit committee, Freeport board | Director and chair of audit committee, McMoRan board |
H. Devon Graham, Jr. | Director, Freeport board | Director, McMoRan board |
Gerald J. Ford | Director, Freeport board | Director, McMoRan board |
J. Taylor Wharton | Advisory director, Freeport board | Advisory director, McMoRan board |
James C. Flores | CEO, President, Chairman, Plains | Director, McMoRan board |
John F. Wombwell | EVP, Secretary, General Counsel, Plains | Director, McMoRan board |
Nancy D. Parmelee | CFO, Secretary, McMoRan | Controller of Operations, Freeport |
C. Donald Whitmire, Jr. | Principal Accounting Officer, Freeport | Principal Accounting Officer, McMoRan |
Dean T. Falgoust | Chief Compliance Officer, Freeport | VP, McMoRan |
This transaction doesn't look right and likely isn't right. Shareholders who invested their hard earned money in Freeport-McMoRan did so because they wanted to invest in a world class mining company with a defined strategy. They didn't invest in Freeport-McMoRan because they expected the company to radically change its strategy to help out a small oil and gas explorer that had bitten off more than it could chew.
I wish I'd bought some McMoRan so that I could enjoy this premium, but you can bet I won't be investing in Freeport-McMoRan given this less than idea transaction taken on by management. I just don't understand how the Board of Freeport-McMoRan would not understand how bad it looks that they make this transaction when Jim Bob's oil and gas company is having a rough go.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
