McMoran Exploration (NYSE:MMR) represents one of the most aggressive ultra-deep water drilling plays in the Gulf of Mexico [GOM]. Additionally, MMR has an embedded upside if its Main Pass Energy Hub (a re-gasification facility located on the old sulfur and salt dunes some eighteen miles offshore) gains final approval from the Coast Guard.
Here is my thesis on why now is the time to go long this company:
a. MMR’s focus is on the ultra-deep gas plays where less than 5% of all wells have been drilled. MMR currently has rights to over 400,000 gross acres in the GOM. According to management, MMR has at least 23 high potential drilling targets which hold about 1.8 Tcfe of net un-risked reserves.
b. While most GOM E&P companies have made smaller and smaller finds in the GOM, MMR in the past 2 years have hit very large discoveries (e.g. JB Mountain). Mitigating these discoveries is that MMR enjoys a success rate of 50% in the ultra deep water.
c. Production metrics are driving upward at a rate not found in many E&P companies. The following table shows how aggressive the drilling and production has been:
- Q1 2006 MMR production share 46Mmmcfe
- Q2 2006 MMR production share 55M mmcfe/d
Current MMR production share at 80M mmcfe/d
- Q3 2006 100M mmcfe/d
Seven additional wells are expected to commence production in 2H 2006.
d. MMR has raised its capital budget dramatically to $240m from $175m in 2006. This will provide for the drilling of about 15 wells.
e. For almost two years, MMR has sought approval to build a re-gasification plant (LNG Import Terminal) with a capacity of 1.6 Bcf of natural gas per day and 28Bcf in total storage capacity. Main Pass is near existing shipping lanes and has the advantage of being offshore.
f. A Final Environmental Impact report was done and concluded that only minor long-term adverse impacts existed. The one source of contention was the effect of an open rack vaporizer as against a closed loop system. MMR amended its application on May 31, 2006 to propose a closed loop system (at greater operating costs to MMR). It would seem that a final decision could be due any time before the end of August 2006.
g. What is Main Pass worth to MMR? JPM Morgan analyst Phillips Johnston estimated: “an approval of Main Pass together with secure tolling capacity contracts, and receive attractive financing terms for construction costs – three events that admittedly cannot be considered a given” – could be worth $6-12 NPV. (see JP Morgan report 20 April 2006 titled “Q1 Mixed but Q2 Guidance Strong” by Phillips Johnston).
a. As drilling and production becomes more aggressive, cash flow measures have worsened. MMR has been fast drawing down cash over the past three quarters and has tapped a $100m line.
b. Hard to value – negative operating cash flow for the past 3 years and little proven reserves but significant unproven reserves makes MMR hard to compare using the standard metrics used to value E&P companies.
Disclosure: I, David Segelov, have a significant long position in MMR.
Company data (all in US $):
Year End: Dec
Shares O/S: 27m
Market Cap: 460m
Net Debt: 150m
MMR 1-yr chart: