McMoRan Exploration Co. Q2 2009 Earnings Call Transcript

| About: McMoRan Exploration (MMR)

McMoRan Exploration Co. (NYSE:MMR)

Q2 2009 Earnings Call

July 16, 2009 10:00 am ET


Kathleen Quirk – Senior Vice President, Treasurer

Richard Adkerson – Co-Chairman

James Moffatt – Co-Chairman


Nicholas Pope – Dahlman Rose

[Ann Cameron – J.P. Morgan]

Eric Anderson – Hartford Financial

Noel Parks – Ladenburg Thalmann

[Edwin Ochine – Bathco Capital]

Richard Tullis – Capital One South Co.

Biju Perincheril – Jefferies

Gregg Brody – J.P. Morgan


Welcome to the McMoRan Exploration second quarter conference call. (Operator Instructions) I would now like to turn the conference over to Miss Kathleen Quirk, Senior Vice President and Treasurer.

Kathleen Quirk

Good morning everyone. Welcome to the McMoRan Exploration's second quarter 2009 conference call. Our results were released earlier this morning and a copy of the press release is available on our website at

Our conference call today is being broadcast live on the internet and anyone may listen to the call by accessing our web site home page and clicking on the webcast link for the conference call. We also have several slides to supplement our comments this morning, and the slides are also accessible using the webcast link at In addition to analysts and investors, the financial press has also been invited to listen to today's call, and a replay of the webcast will be available on our web site later today.

Before we begin today's comments, we'd like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements. Please refer to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings.

On the call today are McMoRan's Co-Chairman Jim Bob Moffatt and Richard Adkerson. I'll start by briefly summarizing our financial results, and then turn the call over to Richard who will be referring to the slide material on our web site. As usual, we'll open up the call for Q&A at the end of our comments.

McMoRan reported a net loss applicable to common stock of $100.6 million, $1.40 per share in the second quarter 2009 compared with net income applicable to common stock of $49.7 million or $0.06 per fully diluted share for the second quarter of 2008. Our results in the 2009 quarter continuing operations incurred a loss of $94.7 million which included $38 million in charges to exploration expense for non-productive exploration charges related to the Cordage and Ammazzo exploration which were determined to be non-commercial in the second quarter., $14.6 million in impairment charges related to certain fields to reduce their net carrying value to fair value and $3.8 million of charges associated with additional hurricane damage to certain of our properties and a net loss of $3 million for mark to market accounting adjustments associated with our derivative contracts.

Our second quarter production averaged 187 million cubic feet of natural gas equivalents per day net to McMoRan. That was above our prior estimates of 180 million a day. Our revenues totaled $94.1 million. That compared to $372 million in the second quarter of 2008.

The realized gas prices in the second quarter which do not take into account the gains and loss on derivative contracts, averaged $3.92 per MCF. That was substantially lower than last year's average of $12.11 per MCF and a realized price for oil and condensate averaged $458.24 per barrel in the second quarter of 2009 which was lower than last year's average of $123.00 per barrel.

We financially settled the swap positions of 2.8 bcf of natural and 126,000 barrels of oil at average prices of $8.92 per mcf and $72.00 per barrel respectively. We received $18.6 million in cash for those transactions and we've got some details on our web site and in the press release of what the outstanding derivative positions are.

Our earnings before interest, tax, depreciation, amortization and exploration expenses totaled $59 million in the second quarter of 2009, bringing the year to date EBIDAX to $227 million. Our operating cash flows totaled $19.7 million for the second quarter and $53.5 million for the six month period ended June 30.

Our capital expenditures for the quarter totaled $55 million bringing the six months period to $84.3 million. As we reported during June, we completed $176 million in equity financing to the issuance of 15.5 million shares of common stock at a price of $5.75 per share and $86 million of 8% convertible perpetual preferred stock.

We ended the quarter with unrestricted cash of $225 million and had no borrowings under our bank credit facility.

I'd now like to turn the call over to Richard who will be using the slide materials on our web site.

Richard Adkerson

Good morning everyone. I'm going to give an overview of our operations and the Jim Bob will be talking about some of our drilling opportunities and progress.

Slides 3 and 4 cover the material that Kathleen just reviewed. In Slide 5 we have the slide we present every quarter which shows our producing rates during the second quarter for all of our properties and that's there for your information. There's major properties where we still curtail for the hurricane downstream issues are in Eugena Island 318 and 346.

Our production continues to be impacted by the timing of repairs to these downstream facilities. Our actual production of 187 during the second quarter reflected the fact that we still have off line 30 million a day of production that we're working to restore.

Our third quarter estimate production is 220 million a day which also reflects the Flatrock wells coming back on stream after some field maintenance and recompletion activities that occurred in the second quarter. Some of that will carry over into the second half of the year.

Production estimates of course are depending on when we get these down stream facilities completed. The timing of the planned recompletions at Flatrock and the performance of the wells as they come on stream and of our existing wells.

We are continuing to pursue as it relates to the hurricane, insurance recovery. We received $20 million of proceeds during the first half of the year. We estimate that as we incur costs over time and this will go over multiple periods of a couple of years, we'd expect to receive an additional gross amount of roughly $80 million.

With respect to Flatrock on Slide 7, in May, the operator of the field completed a planned facility expansion at the Tiger Shoal production facility. The second quarter averaged 200 million a day, 38 to us. Two of the wells commenced production in July and in June and the field is currently producing at a gross rate of 300 million a day and as we complete the further work to be done there, recompletion activities during the second half of the year, we expect that gross rate to step up in the range of 350 million a day.

On Page 8 we review our exploration activities, previously announced the non-productive wells drilled at Cordage and Ammazzo. We've also announced positive drilling results at the Blueberry Hill Sidetrack well on State lease 340 in the Mountain Tiger Shoal area where we had re-entered a well that had been drilled in the 2004-2005 time frame.

We re-entered the well at the end of March and we have seen positive drilling results which indicate a potentially significant discovery and it established what we had talked to you about earlier as a concept of drilling this Sidetrack of looking for thickening of sands off the flank of this very large structure.

We are commencing by-pass operations now at 18,600 feet to drill around the blockage that we had in the well, looking for a total depth of 24,000 feet which allows us to test further targets at depth.

We're also drilling an exploration well High Island Block 133, the Sherwood well. That's the first of the month. It's currently at 5,700 feet with a planned depth of just over 16,000 feet. We're looking at developing plans to re-enter a well drilled also in the same large area where Blueberry Sidetrack, but to the west of that. We had previously drilled a well on South Marsh Island block 217 called the Hurricane Deep. We're reviewing side track operations to test the southern flank of the Flatrock structure targeting gyro sands which were encountered in the well, with the objective of finding production in the big sands that we've seen there.

With respect to our Ultra-Deep program, we've re-entered an existing well bore to drill the Davy Jones Ultra-Deep prospect which we'll talk about more. It's an exciting prospect to drill down below the salt well to test the Ultra-Deep prospect there. We are continuing to evaluate data with the Blackbeard West well and we'll gain additional information from drilling Davy Jones which will give us more data to evaluate our next steps at Blackbeard West and there are a number of other potential Ultra-Deep opportunities Jim Bob will be talking with you about.

The Blueberry Hill well is very, very positive development for us and an exciting opportunity. As I mentioned, the drilling results to date confirm the thickening of the sands as they move off the flank of the structure. Our LWD 2 indicated a resistive zone approximating 150 gross feet, at just under 22,000 feet of depth in the well.

We will be evaluation these zones with logs and we'll deepen the well as I indicated to a targeted depth of 24,000 feet and we have targets deeper than this zone that we've identified to date. Our drilling has indicated a very large structure which we believe will lead to significant amounts of additional exploration exploitation and development opportunities off this large structure.

Page 10 spots the location of this property. It is another area that's in the Mount Point Tiger Shoal area that we've been working since 2002 located in 10 feet of water. It's in State waters. This lease area goes from State waters into the Federal offshore. We have 43% working interest and just under a 30% net revenue interest in this well. The growth and risk potential going into it we saw was 500 B's, but with this size structure, there's lots of opportunities to expand that.

The location of the Sherwood Deep prospect is shown on Page 11. This is located in the High Island area, block 133. We have a 23.5% net revenue interest in drilling to the lower Miocene. It's got significant unrisk potential of 200 bcf.

Then the Hurricane Deep prospect that I've mentioned earlier is south of our Flatrock field. It's in South Marsh Island block 217 and this is a well that was drilled previously to the Hurricane Deep well and in drilling that well we saw incredibly thick 900 foot sand that was wet except for 40 feet of hydro-carbon bearing at the top of the sand and we believe by drilling up the depth of this well, we have the potential to find a thicker hydro-carbon column, a very substantial amount of potential in this well as we go forward.

In the location of the Davy Jones well, this is part of our Ultra-Deep program located in very shallow water, in 20 feet of water. We have participated in an earlier well that had been drilled there to roughly 20,000 feet. We have the rig on location and we are re-entering that well which will allow us to test prospects down to an expected 28,000 feet drilling. We believe into targeted Miocene Wilcox and potentially older formations, but very exciting opportunity to test; a very large structure essentially the kinds of structures that are being tested in deep water in the Federal offshore but drilling it in 20 feet of water which has the benefits of allowing for the development of a discovery much more quickly and with much less cost.

Looking at our summary for the year, as Kathleen mentioned, we're expecting annual production to average 210 million a day today, reflecting the step up of production from where we've been in the first half as we restore production for the Hurricanes and return the Flatrock field to full production levels.

Our current estimate for capital expenditures is $180 million. As always, that's subject to change based on situations and opportunities as we go forward. But we are going to be working to manage our capital spending within our cash resources and taking into account the currently low natural gas prices.

We expect to have $80 million of G&A expenditures plus $15 million for escrow payments that we are required to make as part of our Newfield deal of 2007.

Looking at the current forward pricing for oil and gas, and our outlook for production volumes and cost, we would expect that forward pricing our EBITDAX number to be $270 million and we show variations from that on the slide on Page 15.

You're aware of course that we completed equity financings in June, selling 15.5 million shares of common stock and just over $86 million of an 8% convertible preferred stock. We raised $176 million netting $168 million and this transaction gave us strength in our balance sheet and gives us the kind of financial profile that we need to have to go forward to pursue the opportunities.

And with that, Jim Bob I'll turn the presentation over to you to talk about our prospects.

James Moffatt

Richard has covered some of the points that I'll give you some more details on. On Slide 20 you notice that we show the Flatrock, Hurricane, JB Mountain, Blueberry Hill, JB Mountain Point. This is to remind you that this vast area that we've been working for the last eight, nine years is now really starting to give us the opportunity to pinpoint the areas that have the possibilities for the thick sands that we encountered in Flatrock and now appear to be encountering in Blueberry Hill.

I'll talk about Flatrock for just a minute. The well that's to the south that Richard mentioned is strengthened even more by the fact that when we ran into Blueberry Hill to the east, we were able to pull the two million and take on the completion equipment which we can reuse, re-drill that well down to 22,000 feet for $21 million.

We encountered this potential. Unfortunately we had a gas gig get away from us but we were fortunate enough to have the drill pipes. That's why we're having to go around the big sand over at River Hill and the gyro gives us confidence over eight miles to the west. We may be able to get higher in the water level in the 226 well and pull that out of the water. It's so thick it has some substantial reserves.

This next slide on 22 just re-emphasized what I just said. This one has a nice color. The red is the existing production at the time we took over this block from Chevron. At the time it was Texaco. And the cross hatch with the stars in it, are locations of successful wells that we drilled proving that the red area which was all production above 12,500 feet had not seen the deeper potential. So with the Flatrock and JB Mountain being successful, now we can see how big we can cut the Blueberry Hill.

We already had the Mound Point production Operc production, for about nine years. We think that the pink areas that we have left in there that is sort of a geometric shape are the JB Mountain Deep and we have the potential of really seeing the Blueberry Hill expansion through the existing production by going down deep and finding sands that are on top of Blueberry Hill.

The two circles on that Page 22 are the Ultra-Deep prospects. So the answer is the red is the shallow production that's existed for years of getting back into the 1940's and 1950's. The crosshatch is the successes that we've already had and the pink area is opportunities that we see in the deeper pool which is above the salt well basically above 20,000 to 25,000 feet. Everything below that is below the salt well.

We just acquired the acreage for Davy Jones north which is a big structure. It sits right underneath Flatrock field, so what we're trying to show here is opportunities stacked on top of each other and the deeper pool concept just keeps going deeper from the deep to the Ultra-Deep.

Blueberry Hill, we've already mentioned it enough. This map on Page 23 is to show you that it is a very big expanse that we had originally estimated that has a potential of 500 B's. Big as the sand we've penetrated is, we had to comment on how it compares to what we expected, we would probably revise to the upside.

It has all the earmarks of the start of the sand pile. You see that on a cross section. We don't want to count our chickens before they hatch, but we want you to understand having encountered this 150 feet of what appears to be thick, coarse sand not only because of redistributing the sand by because of the fact that the dad gum thing flows even with seventeen nine mud in the hole.

If you look at the cross section on Page 24, we hope this will give you some idea of two or three things. Starting at the left edge of the map on Page 24, is the Flatrock field. What you'll see there is we go from Hurricane Deep back to Flatrock. Hurricane Deep was drilled in 2007. We didn't drill the Discovery at Flatrock until later in the year.

We realized then that the Hurricane well had seen some productions sands but we missed the Rob-L sands. In other words you had to move to the north back toward the big blue fault. You see that nest of production that's shown by the gas symbols and as we go south, hopefully as we say, we're going to try to get that Hurricane Deep well and pull it out of water into Gyro.

We already drilled Gyro down to sands in the JB Mountain discovery which has now been producing now for about eight years. And then of course this is really important. We drilled Mound Pt. South well which is shown on the right side. You'll notice that the well was drilled in '09. That was to give us more control in the distribution of the sands because we drilled Blueberry Hill which is to the far right in 2005, and the information from the well which had a targeted gyro in velocity turned out to be a big wet sand along with some other sands above and below it, and that gave us more confidence than ever that down in this area which we'll call the trapdoor wedge, just like the wedge we had at Flatrock on the far left side that we discussed.

You see that the Flatrock expansion by kicking the well to the north and going toward the big fault, we've seen sands that weren't even in the Blueberry Hill well which are probably above the original target that we had to show that. So I hope you see why we keep saying that some of these wells are dry like the Tom Sauk well gives us information so that we can get the pieces of this puzzle to fall in place.

Once you drill these things and look at these formations, everything looks so simple. That's what we're trying to do now, is get the signature so we can drill these sand piles and not have to go back and sidetrack to get the high position. If you look at the next blow up on Page 25, it gives you an even better figure of what we drilled in '09.

On the left side it shows that the sands were unknown on this area which we called the big green fault. It sits on top of old blue that we've been talking about. You can see how from the initial well the sands have started to develop. We actually think that some of the sands that we're seeing may be above the initial shelves in the first well.

But we're seeing the sands developed already and we've still got 2,000 feet to go before we get down to the green fault. We think the sands will thicken as you can see as we approach that green fault. As I said, we don't want to count our chickens before they hatch, but we've got 150 feet to go and the start of a big sand pile. Stay tuned on that. We'll get the fish in the hole in the next couple of weeks hopefully we'll be back down and see how thick this sand is, and of course we'll keep you updated as we get some more information.

The reason why we keep being impressed by the results of some of these wedge models, I'll just take a minute on Page 26. You remember I talked to you ad infinitum about work we did back 10 years ago looking at these trap door type structures in Texas. The reason we did that was because everything over there happens above 15,000 feet because the basin is so much smaller than the basin at the mouth of the Mississippi River.

This slide is to give you a point of just what these wedge like sands can do. This is a field that has one sand. You can see how the wedge concept is there because the sand to the left as it goes into the big fault. You can see how it goes to the south, and that's a one sand field. It's got about a 600 foot gas column. It covers 1700 acres and it's already produced 1.2 bcm.

So these models that we have in the shallower basins to the west are what we used if you remember to project why we thought the deeper pool concept would be so good in Louisiana because the depth of the embankment at the mouth of the Mississippi River is so much deeper. And the sands, instead of having one sand you're going to have multiple sands as we shown on the diagram.

That's why you have to stay on your toes, because these areas extend 1,000 to 2,000 acres and contain so much gas with these big sands. So I hope that gets the point across as to what we've been trying to talk about in the deeper pool.

Just quickly, let's review the Ultra-Deep because with the Davy Jones prospect being an Ultra-Deep. Remember Davy Jones was so important to us. We drilled in the Lafitte Complex shown in the red circle on Page 27, and that gave us an opportunity to try the deep water Miocene Trend and the Eocene Trend that continues to proliferate in the deep water.

But after we got that tie, the more we tied our seismic together, lo and behold we find that the Blackbeard Complex goes all the way up into what we call Lafitte which is sort of intermediate to Blackbeard but then goes all the way back up under the Flatrock area where we have the Davy Jones prospect and the North Davy Jones Prospect.

The reason that's so important is those wells as you know, Blackbeard in 70 feet of water which is considered standard platform. The wells back to the north are not only in shallow water, 10 to 20 feet to complete, but as we go up the Gulf of Mexico shelf, everything we see at Blackbeard from 25,000 to 35,000 we can see from 20,000 to 30,000 feet up in the shallow water.

Simply put, if we can create the Wilcox Trend in the deep water in 4,000 to 10,000 feet of water up to 10 to 20 feet of water the drilling and completion process will be 5% of what they are out in the deep water and be right on top of the infrastructure, and the structure's we're seeing are just brothers and sisters to this deep water feature.

I'll run quickly as to why we think they're brothers and sisters. Remember we said the current shelf edge defines the shelf today in the Gulf of Mexico is the present day shelf. The shelf at the time of the Miocene was as you can see all the way back on shore and so the shelf edge diffused to divide the districts known as the deep water district and the shelf district today because of the difference in engineering of drilling and completing in deep water versus the shelf, has nothing to do with geology.

If you get my point, the Miocene basin is all one piece and the Miocene that we're drilling in the shallow water is in the same basin and basically the yellow area with the red contours underneath the red circles shows you the areas of the extent that we think the drilling has done. And what should really impact you is, look at all of the discoveries south of the current day shelf. If you realize that that shelf is gone at Miocene time, all of the structures that we're seeing are going to be brothers and sisters to the ones to the south and there's not a big structure out there that doesn't have production in either the Miocene or the Wilcox.

The Wilcox surface area is identical to the one that we just looked at but it covers the same area, about twice as much area as included in the Wilcox area because of the drilling that's been done. So once again, the Mississippi River has been dumping sand. We're going from the top down because the Miocene sits on top of the Eocene/Wilcox, and you can see that the same situation applies here.

The current day shelf has nothing to do with the definition of the Wilcox embankment, so if we can create the Wilcox trend that has been discussed in the Shenandoah wells to the north where we're drilling in 10 to 20 feet of water. Just imagine having that Wilcox trend duplicated where we can have the completions and the drilling costs of these big savings because we're not having to use the deep water engineering technology.

Of course last, but not least, again going deeper on top of this is the Miocene and then the Wilcox, in the shallower water, because we're so much shallower in the sub-surface as well as going up in the shallow water on the current day shelf, we see the opportunity to prove what we think may be the solution, which was the big trend that you see shown on the map in Central Louisiana north of Baton Rouge.

We compare it to the Wilcox and Miocene. There have been no cretaceous wells in the area to the south. That basin is going to be we believe much more concentrated around the coastal area that we just discussed. As you keep moving that shelf 90 miles to the north, that moves your deep water trend proportionally to it.

So imagine having the Miocene, Wilcox and cretaceous opportunities on the shelf that are basically unexplored. And when I say unexplored, you've got 40 rigs out there in the deep water defining the deep water and we have the one well at Blackbeard that we deepened as a point of control and the wells that we have in the Flatrock area and now hopefully the Davy Jones are the only data points on the northern portion of the Miocene Wilcox and then the possibility of establishing a new trend south of the Fort Hudson trend.

Anyway, I hope that gets my point across. Just quickly to review with you, the Ammazzo well which is a dry hole did give us very important information because it has sand in the bottom of it below 24,000 which got 20+% porosity. We're going to see in Davy Jones to the west, the same elevation underneath the salt well, and if we can have those good porosities in the Ammazzo, we've likely seen 22,000 feet at Blueberry Hill, we are encouraged that even though we're below the salt well, the same depth level of the geothermal gradient and the pressure gradient would give us the opportunity to have sands in the Miocene and the Wilcox.

As you can see the Davy Jones is going to be probably one of the most watched wells with the Blackbeard well because of what it will do to the extension of the trend. Just to emphasize one more time, if you take Davy Jones and Blackbeard on Page 32, on the left side is a cross section of Davy Jones. It's a salt well, just like the Blackbeard.

As you can see if you realize there's a gap between the two diagrams because you're in 10 to 20 feet of water to the north. 10 feet of water is about a 30 mile gap. We have all the data to tie in between.

What we're emphasizing here is everything that you saw below 30,000 feet in Blackbeard, you can see above 30,000 feet in Davy Jones, at least if our correlations are correct. That's why it's so significant for us to get the data point and hopefully find these big, big sands talked about in the Wilcox deep water, and of course establish this new tech solution.

And of course you've got to understand these are big flows. You can see the circle on Page 33 which encompassed 4,000 to 5,000 acre blocks. We've got all that acreage tied up so here's a 20,000 acre closure and you can come up with a lot of numbers of what the bcf's might be, talking in terms of bcf's.

Just to further emphasize, if you look at Page 34, as you can see is a little bit different shape. It's more elongated but it covers more than two 5,000 acre blocks. We've seen the sands. We think below that may be the Wilcox and the Blackbeard location shown on the very far right of the Blackbeard structure would be to try to prove if we get the same kind of thing we just talked about at Blackbeard as they've seen in the offshore, it would be another where the sands we have in the Blackbeard well or as big potentially on the east flank.

I hope that outlines for you the geologic dynamics of what's going on. Once again, we're drilling shelf and we having to generate almost all the information ourselves because there's nobody else actively pursing this in spite of the success we have. The Flatrock and what appears to be Blueberry Hill and of course what we think is the preliminary success at Blackbeard.

So stay tuned. We'll keep you up to date on Blueberry Hill and we'll keep you up to date on the Davy Jones prospect and how it impacts the Ultra-Deep area where we control about 12 prospects that are part of this Ultra-Deep play.

I'll stop there. I hope we generated more answers than questions, but if there's come questions, about my presentation or Richard's, we'll take the questions at this time.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Nicholas Pope – Dahlman Rose.

Nicholas Pope – Dahlman Rose

In regards to Davy Jones, you comment in the press release that you had partners signed up with the Plains and Energy 21 and I was wondering, how firmed up is that contract for Davy Jones and what is your anticipated final interest in Davy Jones when everything is settled with the partners?

James Moffatt

The reason why the partnership numbers aren’t stated is because we have one in the group that has 5,000 acres of the 20,000. 15,000 acres came in and took an override and decided to farm out to us on that basis. So 5,000 acres is controlled by Nippon and they've indicated that they would like to participate in the well which would give them about a 12% working interest. But they have some other partners that they're trying to get approval on. Nippon has given us a commitment that it will participate. I think they've got one other partner out of the five or six or eight that they had. They anticipate that will come in the next week or so.

That's why the interests aren't stated. But the commitment between three partners are working the Plains, Energy 21 and ourselves. The proportional split will be about the same and that will give us about a third, give the Plains about a third and give Energy 21 20% or less because of the dilution of the possible participation of the Nippon

So that's why the working interests are shown specifically, because it's still a work in progress and we'll nail that down as soon as we can and the next time we talk to you, what the exact percentages are. But the McMoRan Plain Energy 21 portion of the thing is a done deal and really the Nippon portion is a done deal. We're just waiting to see if they're last partner signs up so they can give us a firm commitment sometime here in the next couple of weeks.

Nicholas Pope – Dahlman Rose

With respect to the well, what is the progress? What's the status of drilling or activity on Davy Jones right now. Where exactly are you at?

James Moffat

We tied the old well back to the surface, put the new drilling rig on it. We're at approximately 11,000 feet and we're cleaning out the existing casing which was set to 17,500 feet. We have to tie back from 11,000 feet to the surface with the existing strength. Then we'll drop right down to 17,500 where there's another plug.

We'll drill that from 17,500 to 28,000 feet. So hopefully here in a week or so, we'll have the well down to 17,500 which gives us the advantage of not having to drill the 17,500 feet of hole and take advantage of the casing that was left in the hole and give us an opportunity to cut the cost of this well substantially and get this important data below 20,000 feel and below the salt.

When this well was TD about five years ago, we really didn't understand what the salt meant. Only after tying the data back, as we've discussed and getting this sub salt or below the salt well play understood including the drilling of the Blackbeard well and our deepening to give you the exact ties to what geography existed and that's what gave us the ability to tie back and predict that we may have the Wilcox and possible the Cretaceous above 30,000 feet. But that's the current status of using the existing well board as opposed to drilling a new well.

Nicholas Pope – Dahlman Rose

Production or kind of initial rates for that fixed well at Flatrock. I was hoping you could shed a little light on that.

James Moffatt

The fixed well is flowing just under 50 million a day as expected in the sixth well. The fifth well that they went in and incorporated, the sand that the perforated was one of the lower sands below the big sands that we have at 15,000 feet.

They perforated that one reservoir. Frankly it's been somewhat disappointing. It was only about 33 but it was in the process of coming up the hole and what will probably happen is, we'll probably plug that off fairly quickly and come on up because you've got those big sands sitting up there that have the potential of 50 million to 100 million a day. And that's why the field at 300 million a day as opposed to 350 million.

So the completion in the 232 well which is the number five well and the thinner, deeper Rob L sands, it was something you had to do mechanically, but it doesn't look like it's going to be one that we're going to be satisfied with. We've got these 100's of feet of sand up the hole at 15,000 feet that we know can flow anywhere from 50 million to 100 million a day.

That's kind of the status of it. The rest of the wells are performing about as predicted. That's why we're at 300+ million a day right now.


Your next question comes from [Ann Cameron – J.P. Morgan]

[Ann Cameron – J.P. Morgan]

Do you know for sure that the sand that you found at the sidetrack at Blueberry Hill are gyro sands or is there operc?

James Moffatt

We frankly are not sure. That's why I tried to say that our original diagram which we just put on, that we may have to adjust it some, but just the look of the sands from the log, we can't really tell whether they're operc or gyro or not. We know they're at least operc. The gyro marker, when you have this much sand is something that's hard to find. When the bugs decided to do their thing, they got deposited in the shale as opposed to be deposited in sand as much just because of the environment at that position.

We get some bugs in the sand but the real market, a gyro marker which is how you pick up the difference between operc and gyro is somewhat elusive in the Mound Point area. We've had some wells that pick the top and some wells that don't pick the top. But to be honest, it could be lower operc which means the gyro is still below us in this 2,000 feet of hole we have left to drill, but the operc sands are so well developed, that's why we feel, and they're not even in the update that we saw in the first original Blueberry Hill.

That's why we believe our wedge concept is really starting to work. And since we've got 2,000 feet left to drill, let's just say the rest of it could all be shale, and we could drill out of the sand in the next 10 feet. We don't want to count our chickens before they hatch, but it doesn't look like that's the case because we're so shallow in the section, that as you say, it may even be the basic part of the operc.

We think the next 2,000 feet of hole is going to be that sand pile, continue that sand pile. And then of course we've got to prove that the sand's [inaudible] how much column it has because of the size of the structure. This could have 600 to 1,000 feet of column without any issue because of the vertical exaggeration of Blueberry Hill.

[Ann Cameron – J.P. Morgan]

Would a success at Blueberry Hill mean that you would move up drilling at JB Mountain Deep or at Mound Point up in your queue?

James Moffatt

You got it. That's the whole point of the pieces of the puzzle. Tom Sauk was a dry hole and shooting for a target and unfortunately it turned out to be a big wet sand, but it gave us that control point to go down and go in the middle of the Blueberry Hill well and the Tom Sauk well using the geophysics to pinpoint this fault wedge and so all that does is give us a signature to get in there and try to find the Flatrock, now Blueberry Hill hopefully trap door fault wedges.

If we get a signature on it, then we can use the existing well data that's there that's been drilled. The other fault trap, trap door like you said, JB Mountain, Mound Point where we show these other pink areas. And then of course remember the circular areas in that same acreage are the deep plays of Davy Jones and Davy Jones North.

We just acquired that Davy Jones North lease sale last week for $1 million. We were successful in that bid. So the pieces of the puzzle continue to fall together here.

[Ann Cameron – J.P. Morgan]

The 30 million a day offline for hurricane repairs, what is your best estimate when that would come back online?

James Moffatt

I hate to keep giving you estimates. I'm told July or August, one of the pipelines are actually in deep water now. The problem is as you know, you've heard it till you're sick of it as I am, the damage to the pipelines, the people quit working on them because the weather got so ugly in the fall and they went back out and they're now getting the lines laid and the de-watering process of these new lines to keep from overwhelming their shore facilities, they put this gas through the various gas plants to knock out the liquids is a process you just have to do step one, step two, step three.

But hopefully in the July/August, maybe a few in September all this stuff will get ramped back up and we'll be back up to the 50 million that we said. We've got 20 million, 30 more to go.


Your next question comes from Eric Anderson – Hartford Financial.

Eric Anderson – Hartford Financial

I wonder if you could just briefly go back to the information that's on Page 22 where you've laid out in the light pink circles, the Davy Jones North and then the bigger one which is the south. Could you explain a little bit as to why would Davy Jones North be appearing in block 213 or is that just that it's everywhere but you've got, it's way down deep? What I don't understand is why would the north and south be expressed there and maybe not in block 216 as well.

James Moffatt

We maybe should have named that Flatrock Deep or something. The Davy Jones complex that you see shown, we talk about the Davy Jones complex and the Lafitte complex and the Blackbeard, was intended to talk about the shallow water, 10 to 20 feet of water. So when we found Davy Jones, we knew that underneath Flatrock there was a structure that appeared to be building up, but until we got this new processing and extended our Blackbeard and found Davy Jones, we didn't have the prospect as well defined as we now have it.

Frankly what it is, is just another fold of clay that's not quite as big as Davy Jones, but still over 5,000 acres big and if Davy Jones is good and it proves that we have the Wilcox, some Miocene in Wilcox, or cretaceous, we'll just move right on over to that thing because that's in 10 feet of water.

Of course having the irony of the thing as you can see, the red circle at Target shoals had 3.2 TCF produced from it. Now the Flatrock, which we hope is going to be somewhere in the Trinity lines and then underneath the Sauk well, here's the Davy Jones north prospect. It just shows that the tectonic of these things when these big structures existed, these multi TCF in the shallows, it was really years ago. We're just in the right place to go for the deeper targets. So we're just stacking these things on top of each other.

Eric Anderson – Hartford Financial

The trick though is you've got to drill into the part of the structure where you can produce it rather than big sands that happen to be wet.

James Moffatt

That's correct. We've got to prove it. Remember we've got to prove two things. As you heard talk ad infinitum, below the Sauk well you have these big folds. Above the Sauk well you have these trap door faults. It's two different kind of tectonic and these big folds are look a-likes to the deep water which without that control, we would be just projecting from onshore.

But it's a no brainer frankly to project the cretaceous a step forward because as I said, Central Louisiana was one of the biggest discoveries in the late 70's, 80's. And the reason why I say it was important is, it was sitting there for years in Central Louisiana in Tuscaloosa Trend wasn't even thought about.

As it got deeper seismic on the onshore, underneath that shallow and the production they've drilled those giant features up there that went on for about 15 years. Some of them are still producing. That deep water trend that's been like to deep water Miocene is today, would be located right along the coast here.

So that's why we're so anxious to get a sub salt well drilled in what we're calling the Davy Jones complex which is just a moniker for the shallow water part of this Ultra-Deep line.

Eric Anderson – Hartford Financial

Various trade presses have reported that you've got the new Rowan Kaufman under contract for some time early next year. But at the same time you've got an out on the contract if exercised by year end. Are we to assume that that's there, that you would go forward with that additional rig if the Davy Jones is successful?

James Moffatt

That's exactly why we're trying to position ourselves. The key word is work load and these big rigs and the jack up rigs, with these deep wells we have to be able to run some intermediate pipe that would have a hook load of over two million pounds. We have to do that to get the big hole so you don't run out of hole.

These two rigs would be the only two rigs that have hook loads of two million pounds or more so that's why we have it. And we wanted to keep ourselves an option. That's how we negotiated the contract on the reduction of the rig rate at the Mississippi from 220 down to 180. We got this option at 180 and in six months or more, they've got some other rigs that may come out of the shipyard and may fill out pistol, but we didn't want to be in a situation where we didn't have the ability to take two rigs and go to work.

We've got pieces that are in their primary term that are extended SOS's. Like Blackbeard, and as we said repeatedly, these structures that we're mapping like Davy Jones and Davy Jones North, Blackbeard, Lafitte, all the one's we're referring to, are all look a-likes, deep water trend. If one of them proves up and either the Miocene, Wilcox and/or the cretaceous, it's going to light up the rest of the pinball machine and all hell's going to break loose on this shelf once people realize including ourselves exactly what the stratographic section is.

The structures are nailed. The geophysics are just as good as any geophysics in the deep water, and you're not trying to define traps in the 1,000 to 2,000 which of course are very lucrative. Above the Sauk well, we're just seeing some examples and we're trying to reproduce it at Flatrock and Blueberry Hill.

So you're sitting up in one kind of tectonics right above the Sauk well. These Ultra-Deep play, what's so overwhelming about them is you have these big structures like Rocky Mountain Fold and they've got a lot of vertical relief that cover a broad area. I know you understand reservoir volumes, but that's why we're predicting as people have said in deep water, that these reserves can be bigger than anything we found in the Sauk well.

We're talking two to 10 CCF on some of these things. So all we can do is try to portray it for you as best we can and then we all stay tuned to see if we can light up the rest of this pinball machine.

Eric Anderson – Hartford Financial

I think spending $18 million on an option is a smart way to do it.

James Moffatt

We try to keep all the flexibility we can because who knows what the rig situation is going to be six months from now.

Eric Anderson – Hartford Financial

You can't use just any old rig.

James Moffatt

You can't use just any old rig because the jack up may look like a jack up but in these deep wells you've got to make sure you've got the kind of fire power you need to get these deep wells drilled.


Your next question comes from Noel Parks – Ladenburg Thalmann.

Noel Parks – Ladenburg Thalmann

Back on the income statement, what were the realized gain or loss amounts for the hedges during the quarter? I know in the press release you disclosed the total for realized and unrealized, but do you have the realized number there?

Kathleen Quirk

It was $16.7 million was what we realized in the quarter.

Noel Parks – Ladenburg Thalmann

The expense items for the quarter seemed a good bit higher I think on a unit basis than they had been in the previous quarter and also higher than I expected. Can you give me some insight on what that was related to?

Kathleen Quirk

We had some impairment charges, $14.6 million in impairment. That's reflected in our depreciation. We had $38 million in exploration expenses for the non-productive drillings costs. We also had just under $4 million additional accrual related to hurricane damage.

Noel Parks – Ladenburg Thalmann

Did that appear in LOE?

Kathleen Quirk

You're specifically talking about the LOE?

Noel Parks – Ladenburg Thalmann

That last $4 million you talked, and yes, the LOE I was particularly interested in.

Kathleen Quirk

The LOE ran about 285 per mcf which was similar to what it was in the first quarter. We expect that to come down in the second half as production rates increase.

Noel Parks – Ladenburg Thalmann

Talking about the drilling, the Hurricane deep sidetrack is certainly one of the big topic this quarter that you introduced. In the original drilling that you did there, there's 40 feet of pay you found I think at the top of your target there. I was just wondering, is that 40 feet in and of itself commercial?

James Moffatt

Yes it did produce for some period of time then the water rights came up and we didn't want the water right to go so high as to sand up the tubing which would have made it hard to recover the tubing which is very expensive as we just did at Blueberry Hill. So what this is, the well we're talking about drilling, we first drilled this well, remember if you look at the date on these wells, the Hurricane Deep was one of the first wells we drilled before we found the Flatrock field, and once again had to sharpen our pencil and we were trying to test all the targets.

Now that we know where the water level is, it becomes really a delineation well as to whether or not we can take the ridge which appears to get high to the south and high to the west of the well. So we know what the sand is which is over 800 feet thick, so assuming we don't get some kind of a abrupt shale out, and I only mention that because it would be reverse of what we see at Blueberry Hill can happen easily.

When you move around these things you don't want to take for granted that the sand is going to be the same thickness. But if we go up dip and the sand thins, let's just say it thins from 900 feet to 500 feet, if we can pull it out of water and get 200 feet higher in the well, 200 to 250 to the well, what that will do is take that known water level and stack all the sand that you have above the current water level in the 226 well.

Make it simple, you get 100 feet high, you should have 140 feet of play in the well because you're far enough away from that well that the water level wouldn't move up consistently. When you product a well on the edge of a reservoir like we did at 226, and if you're at 200 feet high, you've got 240 feet of pay. Any higher than that, you can do your own math.

These sands are better than 20% porosity and the things will flow at the same kind of rates that you have in the Flatrock well. So if you can pull this thing out of water, you've got a couple of hundred bcf and possibly more depending on how much thickness you have and you can establish some drainage points, two or more that would flow at rates of 75 million to 100 million a day.

It would add significantly to the reserves at Flatrock. It's the south end of the shoe that we've been talking about.

Noel Parks – Ladenburg Thalmann

In the bigger picture, is it safe to say that you're pretty confident that it's unlikely that you could wind up with a situation where you could find at least similar sands that you found originally in 40 feet? Is that realistically sort of the minimum you'd expect to see from drilling the side track there, hopefully more from what you say, but is it at all possible that you could end up with less productive?

James Moffatt

If you get high and all the sands are the reverse of what we proved at Blueberry Hill, of course that can happen. If the sand was 200 feet thick or 300 feet thick or 400 feet thick, I would think it would be more likely that you could say that the whole sand would dip. The point I was trying to make is it's so big and it has such homogeneity, that if you get a dip to it and you've got whatever sand you've got left, it ought to fill up.

The water levels are constant. If you add to it, you might find that the reservoir had 50 feet of sand and then you have to decide whether you want to complete in 50 feet of water. All we can do is follow our model and the seismic as you would expect it to do, is you go south the structure appears to continue to migrate to the south. That's why we think we can get high to the well to the southwest of the existing location at 226. Follow the model. Try to get all the pieces of the puzzle together.

Noel Parks – Ladenburg Thalmann

Looking at Blueberry Hill, assuming that when you resume drilling, things look good as you continue deeper, should we look forward to 2010 there being a development plan at Blueberry Hill that might look something like late 2007 and into 2008 looked like at Flatrock; a series of wells drilled to just target different points on the structure?

James Moffatt

If the sand thicknesses that we anticipate, again we don't want to count our chickens before they hatch, if the signal we've had that this 150 feet of sand that we believe has got hydrocarbon because of the redistribution of the LWD log and the gas flow that we had, if that continues to thicken and we believe the columns are going to be big because of the vertical exaggeration of this feature, if we have 500 bcf which is our original target, we're not counting our chickens before they hatch, but if you do, you're going to start to drill more than one well.

And if you see that the symmetry of how we laid out how we thought the sand could be distributed so if you have 200 bcf, you'd probably have two wells at 100 bcf each. And then you go up from there in multiples.

At 100 million a day, about 30 million a day, 30 billion cubic feet a year, it would take you almost three and a half years, four years with some decline toward the end of the life of the sand, you can decide how many wells you want to drill. You can play the game in multiples of 100 bcf as to how many wells you might generate.

And secondly this sand, like the sand we just talked about in the Hurricane, is it going to be like the Tom Sauk well north of the 800 feet dig and just be one big, big reservoir, or is it going to be broken up into more than one sand? Like I say, we may not have any sand between here and the end of the fault, but if we have 2000 feet to drill, and we've indicated we have indications that this may be a sand piled with gas, let's just say half of the next 2000 feet, that would be another 1000 feet of potential reservoir.

The trap seems to be sealed. But you can see why the anxiety of the thing, it just the same as the thing that cause this delay. But what we've seen so far, as I say, the earmark, because it looks like the way we targeted these other wells, we've got some [inaudible] and should have some more thickness below us. Let's see what's coming on. We've stimulated ourselves and you to give you the understanding that with the other well control we have, we've got a Flatrock type of wedge play that may not cover as much surface area as Flatrock because it's got higher relief. But you've got bigger sands, you'd end up with the same amount of acres of reservoir.


Your next question comes from [Edwin Ochine – Bathco Capital]

[Edwin Ochine – Bathco Capital]

You did give LOE for the quarter. What was it in DDMA then on a unit basis and what is the guidance going forward based on the production data given?

Kathleen Quirk

Our depreciation rate for the quarter included the impairments that we talked about. On an MCF basis it ran about 435 for the quarter. The normal rate is closer to 325.

[Edwin Ochine – Bathco Capital]

So three and a quarter is the guidance going forward. Is that correct?

Kathleen Quirk

That's correct.

[Edwin Ochine – Bathco Capital]

In terms of the $38 million of charges, what portion of that was cash incurred in the quarter?

Kathleen Quirk

I don't think we have that handy. It would have been funded over a couple of quarters, but a good piece of it was funded in the second quarter.


Your next question comes from Richard Tullis – Capital One South Co.

Richard Tullis – Capital One South Co.

The guidance for Q2, $220 million a day, does that include a provision for any hurricane shut in days for, hopefully it won't come to this, but due to any storms this year?

Kathleen Quirk

It doesn't include anything unusual. There's normally scheduled down time but nothing that would require us to shut down.

Richard Tullis – Capital One South Co.

What's the P&A obligation for 2010? Is it similar to this year?

Richard Adkerson

It's roughly similar. We continually review the situation, make judgment decisions about which of the obligations to advance and then which ones can be deferred in a way that's consistent with our obligations to MMS and what's prudent to do from an operational standpoint. But right now, and this may change, it's roughly the same.

Richard Tullis – Capital One South Co.

Looking forward, what do you see for the hedge strategy going into 2010 and beyond? I know you're only say 5% to 10% for the rest of this year and into 2010 right now.

Richard Adkerson

The only hedges that we put in place were the ones, and this is what's remaining, it's a program that we put in place in connection with the financing for the Newfield transaction of 2007. At this point we can say we'll evaluate what we're doing. We haven't historically had an active hedging program, but it's something that we'll continue to monitor and make decisions on based on circumstances.


Your next question comes from Biju Perincheril – Jefferies.

Biju Perincheril – Jefferies

The Davy Jones, if that's successful, if that could be completed with off the shelf equipment or will you need special design equipment?

James Moffatt

It probably will require special design equipment considering the depths and the pressures that we have to deal with.

Biju Perincheril – Jefferies

So that would be like a one year time period we're looking for, and where do we stand on the Blackbeard production?

James Moffatt

There's so much capacity now that wasn't available when we tried to make the plans for the Blackbeard. Of course there is still the deep well program that has been slowed down by the drop in gas prices. As you know the shell back then dropped to almost nothing except for what we're doing.

So the type, depending on what the pressures are, all we can do is estimate it right now. It depends on how thick the sands are, where we're going to decide to complete. If we find the cretaceous, whether it's in the Wilcox where it's stacked on top of each other, and what kind of tie back strings we're going to need. That kind of pipe with those wall thicknesses and the special safety values, that's going to take a little more time.

But having said that, once again since we're in 20 feet of water, in 18 months we would hope to have that situation behind us so we can go in and pop them in the ground and in that length of time be coming up with a way to move the gas as the pipeline is already laid and the facility to build our own.

Once again, in 20 feet of water, we've got a lot of options. There are a lot of existing facilities around. So I think that outlines what will happen once we see the log and see where we're going to be producing, what the exact pressures are so we know what safety valves have to be in the equipment, etc.

That's going to depend on what people anticipate the surface pressure will be on a well on a shut in basis. Remember this will be the only well up in this shallow part of our Davy Jones complex. It will be the only well that attested below the Sauk well.


Your next question comes from Gregg Brody – J.P. Morgan.

Gregg Brody – J.P. Morgan

On the Blueberry Hill, when do you think you'll reach target depth now?

James Moffatt

I hope we'll be kicked off. We're having to take [inaudible] up to the surface. I hope we'll be kicked off right around 19,000 feet. It took us about 12 days to drill the hole that we've got to redrill. Based on the way that we're drilling, it would be in the same sized hole, so I hope in a couple of weeks we'll be back down to where we are.

We had hoped to actually pull the fish out of the hole as you know, but this gas bubble was so potent that it stuck a pipe and we couldn't get backed off at 21,000 feet. Just the mechanics of using a sling shot backing pipe off there. We didn't want to sever the pipe that deep because we needed the pump. If we weren't going to get the fish, you have this big sand and there's one other sand up the hole, the water sand, you don't want that in communication with your by-pass hole.

So we had to concrete the fish in the hole to secure that hole both inside the drill pipe and outside the drill pipe so that this zone that we have by the hole is our completion zone as the pressures draw down and in the hole, we didn't want a cross flow to occur from this upper sand that we've see. So that's why we've had to go through this routine.

The easy thing would have been not to get stuck so you have to kick my tail for that. We usually get through these thinks and don't have it happen, but the sand was so thick, and as deep as it was, we thought we had the bubbles behind us, and all of a sudden the bubbles kicked our behind.

And when you're at a 21 degree angle hole at this depth, we had no problem with the hole but the gas coming into the hole, it just stabilized the hole for 30 seconds and the thing will jump up and bite you. But again, we're know where it is now and we'll be able to handle it as we go back down.

I hope in about two weeks, assuming we don't have any problems with drills like we did the first time, any time you drill below 18,000 feet, you have to caution yourself about whether you can repeat at the same time.

Gregg Brody – J.P. Morgan

Is that at 21,000 or 24,000 feet in two weeks?

James Moffat

24,000. But to get to the sand, two weeks I would hope to be back in the sand and drilling the lower part of this sand which is right at 22,000 feet. Then we're going to have some decisions to make to be honest with you, and that's why we've just got to wait until we drill past this sand, because there will be pressures on us psychologically.

Let's just say we drill up another 200 feet of sand. We've got this sand sitting there and keep drilling and have another mechanical problem, we'd have to have a third by-pass. We may start to think about taking a completion here and do some deeper drilling in the straight hole that we were talking about awhile ago.

But it just depends on whether there's any more sand under this thing. We could drill out of the sand in 10 feet. We could stay in sand because of the sand pile we're in. So we're really going to have to make a decision after we see this thing blossom and see how thick the reservoir may be.

The log will confirm whether we're right because remember if you look at the drill rate and you look at the sand as it came up on the mud log, and this flow rate, this thing appears to have porosity that are going to be substantially like the porosities we've seen in the sands in the Flatrock area. It's just the way the [inaudible] is and the way the thing drills and the way the sand we saw, you can see the sand grains in the mud logs.

But we have to wait so all we're giving you is our best instincts. It's hard to disclose this stuff because you don't want to have something this significant without giving as many details as we can give. We've given you all we've got.

Gregg Brody – J.P. Morgan

The P&A expenditures, how much did you actually accrue? How much cash flow did you have this quarter? Is that the number that's showing up on the cash flow statement?

Kathleen Quirk

It's in the operating cash flows. We estimate $80 million for the year. We haven't spent that. We've got a big number in the third quarter and the timing of that may slip some, but we've got $40 million or $50 million or so left to spend this year.

Gregg Brody – J.P. Morgan

So that $25 million I'm seeing for this month, that's the number?

Kathleen Quirk

That's the cash number, right.

[Gregg Brody – J.P. Morgan

What about the escrow amount that you have to contribute?

Kathleen Quirk

That's a total for the year $15 million.

Gregg Brody – J.P. Morgan

Is any of that reflected in your cash flow this quarter?

Kathleen Quirk

We pay $4 million a quarter into an escrow account.

Gregg Brody – J.P. Morgan

The CapEx adjustments were $180 million from $200 million. Could you explain where the $20 million is coming out of? Is that from partners?

Richard Adkerson

It's a combination of partner arrangements and timing of expenditures and the actual updated estimates of what the expenditures are. So when we give these CapEx expenditures, they're not within a tolerance of $20 million. That's a current outlook, but it could be more or less.


There are no further questions at this time. I will now turn the conference back to management for any closing remarks.

Richard Adkerson

Thanks everyone for participating and we look forward to reporting our progress as we go forward.

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