McMoRan Exploration's CEO Discusses Q1 2011 Results - Earnings Call Transcript

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McMoRan Exploration (NYSE:MMR)

Q1 2011 Earnings Call

April 18, 2011 10:00 am ET

Executives

Kathleen Quirk - Senior Vice President and Treasurer

James Moffett - Co-Chairman, Chief Executive Officer and President

Richard Adkerson - Co-Chairman

Analysts

Joan Lappin - Gramercy Capital

Eric Anderson - Analyst

Joseph Allman - JP Morgan Chase & Co

Duane Grubert - Susquehanna Financial Group, LLLP

Noel Parks - Ladenburg Thalmann & Co. Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McMoRan Exploration First Quarter 2011 Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Kathleen Quirk, Senior Vice President and Treasurer. Please go ahead, ma'am.

Kathleen Quirk

Thank you, and welcome to the McMoRan Exploration First Quarter 2011 Conference Call. Our results were released earlier this morning, and a copy of the press release is available on our website at mcmoran.com. Our call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the conference call. As usual, we have several slides to supplement our comments this morning and will be referring to the slides during the call. The slides are also accessible using the webcast link on mcmoran.com. In addition to analysts and investors, financial press has also been invited to listen to today's call, and a replay of the webcast will be available on our website later today.

Before we begin our comments, I'd like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements. We'd like to refer everyone 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 Moffett and Richard Adkerson. I'll start by briefly summarizing our financial results and then turn the call over to Richard, who will be reviewing our recent performance and outlook, and then Jim Bob will be providing an exploration update. After our remarks, we'll open up the call for questions.

Today, McMoRan reported net loss applicable to common stock of $27.6 million, $0.17 per share, for the first quarter of 2011 compared with a net loss applicable to common stock of $66.2 million, or $0.74 per share, for the first quarter of 2010. Our first quarter 2011 results included a $21 million impairment charge to reduce certain fields' net carrying value to fair value and $16.4 million in insurance proceeds related to losses -- recovery from losses incurred from the September 2008 hurricane.

Our production in the first quarter averaged 195 million cubic feet of equivalents per day net to McMoRan. That compared with 190 million cubic feet of equivalents a day in the first quarter of 2010. Our production in the first quarter of 2011 was above our reported estimates in January of 175 million cubic feet of equivalents a day because of improved performance at certain fields and lower-than-expected downtime for maintenance.

Our revenues in the first quarter totaled $133.7 million compared to $128.8 million during the first quarter of 2010. Our realized gas prices in the first quarter of 2011 were $4.54 per Mcf compared with the year-ago average of $5.53 per Mcf. And our realized prices for oil averaged $96.76 per barrel in the first quarter of 2011 compared with just over $76 per barrel in the year-ago period.

Our earnings before interest, taxes, depreciation and exploration expense totaled $78.7 million in the first quarter of 2011. And our operating cash flows, which were net of working capital uses of $23 million and net of $22 million in abandonment expenditures totaled $33.5 million in the first quarter of 2011.

Our capital expenditures totaled $96.5 million in the first quarter of 2011. We ended the quarter with total debt of $560 million. That includes $260 million of convertible debt securities. We have $75 million in convertible senior notes due in October 2011 with a conversion price of $16.58 per share and $185.8 million in convertible senior notes due in December 2017 with a conversion price of $16 per share.

We ended the quarter with $837 million in cash. And assuming conversion of McMoRan's remaining outstanding 8% perpetual preferred stock and our convertible debt securities and the convertible perpetual preferred stock, we have approximately 221 million common shares outstanding on a fully converted basis.

I'd now like to turn the call over to Richard, who will be referring to the slide materials on our website.

Richard Adkerson

Good morning, everyone. We have recently distributed our annual report to shareholders and on Slide 3, we have a picture of the cover of that report and the title of it's, "Buried Treasures on the Shelf." For the past 10-plus years, our company has been focused in drilling deep natural gas wells in the shallow waters of the Gulf of Mexico, originally drilling what we call our deep gas play in the 15,000- to 25,000-foot range and for the past 3-plus years, we've been drilling deeper below salt beginning with the Blackbeard project to test ultra-deep prospects. The most significant of those is our Davy Jones project, which is our prime example of a buried treasure. And we're going to give you an update today about where we stand with our programs.

Kathleen reviewed the financial results, these are summarized for you on Slide 4. This quarter, we had a successful production test of one of our deep gas projects, the Laphroaig No. 2 well, in April. Actually, the production test was done in April. We had a gross flow rate of 54 million a day with no water with flowing tubing pressure right at 10,000 PSIs. The results from this flow test will be used to determine the optimal flow rate for the well, and we do expect to begin production in the second quarter of 2011. We have a net revenue interest of just below 30% in this well.

In addition during the second quarter, we're going to go -- be going back to the Blueberry Hill well where we had seen 105-foot of net indicated hydrocarbon producing sand in the Miocene. Last year, the well was completed and we did perform some production tests, which were inconclusive. We are going back during the second quarter to do further production test. This prospect is located on Louisiana State Lease 340 in approximately 10 feet of water. And we have a 90%-plus working interest and just under 63% net revenue interest in this project, so we're going to be going back to Blueberry Hill if we can rationalize where we stand with that well.

On Slide 6, we show our existing wells that we have drilling. The Davy Jones offset appraisal well is located on South Marsh Island Block 234 in 20 feet of water. Now this well is 2.5 miles southwest of our original Davy Jones discovery well. That well, which we previously reported logged 200 feet of Wilcox pay sands just over a year ago. We began drilling this offset well in April 2010. During this quarter, preliminary log results above 27,300 feet confirmed the Wilcox sand continuity from the discovery well and the major structural features of our geologic analysis of the prospect. We have continued to drill that well. We're now at a depth of 30,546 feet. We're preparing to evaluate exploration objectives below this 27,300-foot level, indications are we are in the Cretaceous section, which is below the identified Wilcox pay sands, and we'll be evaluating this with Wireline Logs. We own a 60.4% working interest and a 47.9% net revenue interest.

The Blackbeard East well. This is located in 80 feet of water, South Timbalier Block 144. We began drilling this in early March 2010. We're now down below 32,500 feet. We have some pipe in the well, and we have been working during the first quarter to deal with that. Pending resolution of this issue, our plans are to deepen this well to a proposed depth of 34,000 feet. We believe the well has encountered Sparta sands in the Eocene. This is below the Wilcox and these, of course, Sparta sands have been above the Wilcox. Of course, these sands have been productive in fields in South Louisiana. And we'll be running Wireline Logs to evaluate this interval. We have previously reported on this well that we logged 178 feet of net hydrocarbon-bearing sands in the Miocene. We announced that last December, and we are planning further drilling to evaluate these zones. We've also had indications of hydrocarbon-bearing sands in the Frio section below 30,000 feet. Again, this is another sand section that is prolific onshore in South Louisiana and along the Texas coast. This is the first time Frio sands have been seen either on the shelf or deepwater, and we are considering further drilling to evaluate this section further. We own a 70% working interest in Blackbeard East and a 56.2% net revenue interest.

Another ultra-deep well that we're now drilling is the Lafitte project. You can see it on the map. It's located in Eugene Island Block 223 in 140 feet of water. We began drilling this in early October last year. We're now drilling below -- we're approaching 21,000 feet. This is targeting Miocene objectives and possibly Frio sections below the salt weld. We have a proposed depth in this well of just under 30,000 feet, and we hold a 72% working interest and a 58-plus percent net revenue interest.

In our deep gas drilling program above salt, we are drilling a well we call Hurricane Deep. And this is on the southern flank of our Flatrock structure in 12 feet of water on South Marshall Island 217. We began drilling in January 20, 2011. We're below 17,000 feet, proposed to be drilling to 21,700. We're targeting a thick Gyro sand section that we encountered in an earlier well called -- on Block 226 in 2007, and we have additional potential in deeper Gyro sands. This is a re-drill of a well that was abandoned in 2009 when we had an underground flow and certain of our costs are being recovered with our insurance program. We have a 55% working interest and approximately 39% net revenue interest.

We're also drilling a well we call Boudin. It's in 20 feet of water on Eugene Island Block 26. It began drilling at the end of February. We're now below 10,800 feet, drilling towards 23,000 feet. We're testing Miocene objectives we saw in our JB Mountain well. We have a 74% working interest and a 59% net revenue interest.

We do have a traditional development well associated with properties we acquired from Newfield, Brazos A-23. We commenced drilling that in mid-February. We're now drilling below 14,000 feet with a total depth of 16,000 feet targeted. And we have a 100% working interest and an 81.25% net revenue interest in this project.

Jim Bob will be talking about the geology associated with the wells at Davy Jones. With the initial discovery well, we are progressing the development project that we are working towards getting this well completed and tested and online and we're targeting getting that done by the end of this year and long lead time equipment is being procured and engineering analysis is progressing. And we would expect with successful production test that both the Davy Jones 1 and the No. 2 well that we're now drilling would be available for production soon after we completed getting the wells tested.

Kathleen talked about our 2011 outlook. We're now projecting annual average production at 175 million a day, which is 15 million a day higher than our prior estimate and in the second quarter, 190 million a day. Our capital expenditures which as always will be driven by events and opportunities that are available to us, we are currently estimating now between $400 million to $500 million this year. We have the funds available to fund this and more as we go forward. We are continuing with our program to aggressively address abandonment expenditures that are associated with properties that we acquired from Newfield and our other properties. We're expecting to spend $135 million of that this year and we expect $40 million of that to be covered by insurance, and we're continuing to work with our insurers covering certain of our costs.

Our cash flow models that are shown are based on these plans and this production outlook is shown on Page 9. At forward pricing, we would have cash earnings of $290 million, and you can see the variation for changes in oil and gas prices.

That's a summary of our activities. And I will turn the call over to Mr. Moffett, who will be addressing geologic analysis of where we are. Jim Bob?

James Moffett

Happy to see if I can add some color to that very well done summary. First of all, the Hurricane Deep prospect just to refresh your memory, we really consider this, this southern half of the Flatrock structure, where the Rob-L and Operc, the 2 formations that are just immediately above the top of the Gyro, make up the production to date. And we know we're going to have a good opportunity to have some thick sands based on the 226 well. So we've been waiting patiently to get this well evaluated after the well got away from the other operator and we took it over. So far so good. [indiscernible] Hopefully, we'll have some information. [indiscernible] the south have a Flatrock is symmetrically set out which is already an outstanding field, the largest producing property on the shale by far.

So the next information that we will be looking at is on Slide 12. Pardon me, my slide got out of hand here and didn't want to open up for me. Okay, Slide 12. Slide 12, just reiterate the JB Mountain, Hurricane Deep, Flatrock relationship and just further gives you a good idea of why the Gyro data which produces in the JB Mountain structure to the south, why it represents an excellent target in between these two big producing areas.

Slide 13 is a slide which sort of relates the other, we call it the sausage play, because it's a closure which is what we call a fo bell [ph], a drag fo [ph] in front of a big normal fall, very easily seen on seismic. The real risk in this play is whether the Rob L, Operc, Gyro sand made this far south, the structure is cold, got 4-way closure, we take it across this big fall some of the Rob L, Operc and possibly Gyro sands and make it across. It's a really good-looking structure on trend with JB Mountain, Flatrock and we're 17,000 feet, we'll get that down up and running have a date on it.

Let’s just spend a couple of minutes on the shale because I know everybody is anticipating this great moment, the results of the 3 where we are currently drilling and so are we. Let’s remember and remind ourself what we do know. The Davy Jones well, which sort of set the tone after we drill the West Blackbeard well and successfully seen hydrocarbons in the Miocene was a big well for the industry and for us, because we went up into shallow water less than 30 feet and we proved the top of the Wilcox is 26 down feet. Sounds like [indiscernible] if you don't know what that means, but at 26 down feet, the Wilcox pulled all the other structures that people had been mapping above the salt weld and got it within the reach of the drill bit. And so that's one of the most exciting things is that we now know.

The Blackbeard well and the feed well are these extremely important. For instance, in the case of the Blackbeard well, as you noticed on Chart 13 -- 14, excuse me, we've got the trend shown and we've added the Oligocene/Frio play, as a result of the sand that we saw productive by log analysis on the below 30,000 feet and Blackbeard East well. Now we also have 21 other zones that have hydrocarbon shows by mud low [ph], we don't know what that means we [indiscernible]. the salt weld and mostly in conjunction with the salt mass, salt mass is comparing it to here in Louisiana. So what we also know about Blackbeard East is it’s so important and I'll show you on a cross section that we now have reprocessed the data on trend with this and most importantly, what we thought to be natural salt reflection turned out to be hydrocarbons.

So if you go to Slide 20, I want to go to it, we'll come back to Davy Jones in just a minute. Slide 20 is very important that's why I want to go over it first and talk about the regional implications of these 3 penetrations that we're drilling. You'll notice the model that we drew, which is the middle cartoon shows up above 20,000 feet, so multiple sands in the Upper Miocene. We show those sands in the left and an actual copy of the log. Look at the diagram to the east. We talked about this a little bit at the last energy conference and this is so important because since that time, all that data that you see is right in the 20,000-foot level, see it says, salt weld. Those advances look brighter than the advance above and below them. They appear to be pretty congruous. We've now gone and reprocessed this data and we found 3 more of these lost [ph] right below the salt weld, which we've said before we drill the Blackbeard East well, it's definitely salt. These [indiscernible] so well and they're big and they're at 20,000 feet or less, which gives us some conventional wells in the program. And the wells, they can be drilled for about 1/3 of what we've been spending to get to those salt welds, because we don't have to spend the big bucks to set the big intermediate pipe and the big surface pipe which slows all of these ultra-deep wells, those that have to run these multiple lines. So once again, the interesting news is that just from this bore hole at Blackbeard East and, of course, correlating with the logs [indiscernible] and there's one more really important thing and that is that the thickness of one of the prospects, a prospect called Barbosa is especially interesting because it's about 3x as thick as the event is at Blackbeard East but correlates with it perfectly and that structure covers about 8,000 acres structurally. So once again, we're talking some major reserve potential in the 17,000- to 20,000-foot range and I want to emphasize that we had no clue but to assume that, that was salt before we drilled the wells at Davy, which had no salt in the salt weld. Blackbeard West and now Blackbeard East, and I think we will find some really interesting reserves as a result of those wells.

Now Davy Jones, we'll go back to it for just a minute, because I had 2 slides for you in there. Now those slides, go back on your PowerPoint and get the 2 cross sections that we have across Davy Jones. One is the Northeast-Southwest which goes -- ties the 2 wells and shows the big East-West closure. Again, for those of you that have followed us, you pretty well are tuned in to what I mean when I say East-West closure. You'll notice to the East and Northeast and to the Southwest how the beds dip down at almost a 40-degree angle. Of course, that's so important to get the, not only the hydrocarbon but to get the columns in your hydrocarbon. We've got that approved because of this testing procedure that we're getting prepared for.

So the other slide, which follows Slide 20, is the North-South line and that North-South line, I just felt we had to keep putting in front of you and in front of us because the important thing we have to say there is you got an 8-mile long, North-South axis and for those of you that, that doesn't impress, got to break for you because there's almost no major structures except in the salt weld play of that magnitude left in the United States.

So you have a major North-South and East-West, 4-way and every zone that’s got porosity has the potential to produce as soon as this structure makes out but that’s usually the history of these doggone varied footprint structures. So we hope on this Slide 17, once again as you see, this is a simple North-South axis and you can see clearly, that's a 4-way closure. So what we don't know is we don’t have the flow test we're all waiting for. We don't know that we've got the feed where we expect to see some Miocene and hopefully can get some essentially new trial logs, that’ll give us some good crossover, identify the porosity in those rocks. That will be huge for us to get that. We have that information on the shallow part of Blackbeard East and that's why as I said, the information that we tied across the trend is so doggone important. And of course, we're hoping in the Davy Jones well, we're getting ready to log. We have almost 4,000 feet of sections that we have logged with Wireline, and we've got multiple shows by mud log in both the sandstones and the carbonates.

Let me just take a minute and then we’ll stop and let you ask questions. On the carbonates, the reason why we are focusing on carbonate is because as I'm sure that those of you who are doing research on world-class fields, most of your big fields have carbonate production. An analog for us is the field in Mexico called Cantarell, which a nest of production that has produced 6 billion barrels. All we're doing is looking for these mega structures that we're trying to pin down for you.

So there's a lot of potential here. It's becoming more and more apparent that we can take and be sure that we understand all of our data. When we finally get it, declared or completion, and once when the completion is verified, the rest of them will all fall in line. Okay. I know we have a lot of questions out there that we've been trying to field. If you want to stop here and let them ask questions, Richard?

Richard Adkerson

It sounds good, Jim Bob. Operator, we'll open the line for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Noel Parks with Ladenburg Thalmann.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Just a couple of things. I missed just a little bit of what Jim Bob was saying about at Blackbeard East, these indications that you would have assumed were salt actually looked like that they might be productive. Could you just review a little bit of that there? Just at Blackbeard East where the indications that you originally would have thought were salt, instead you now think they actually might be productive sand. Could you just go over a little bit more on that?

James Moffett

Okay, thank you, Noel. I wanted to be sure I got the gist of it. As a matter of fact, we know that there is no salt or a lot of salt from the sediment are very easy to differentiate. And in that zone where we had that and you can see the porosity there. We had 3 different pay zones, starting at 19,500 feet, and went all the way down to 19,700. So we had over 500 feet of section there where we had some sands and one at the bottom was rather sand. It made up the same sections and that's what gave us a lot of confidence that this log we've seen in the Blackbeard East well was just the beginning because of the K2 model that we've mentioned, it ties to southwest and deepwater. And so there's no question that there is no salt at this location. It's going to be salty zones, but I'm the last and always trying not to be as good. That's just what we're saying, we're going to have to wait and see, we should be able to tell pretty quick as it deteriorates, which one it is, whether it's [indiscernible].

Noel Parks - Ladenburg Thalmann & Co. Inc.

Great. At Davy Jones, just looking through the press release and your comments, the assumption being that you could find thicker sands to the north even compared to what you've found in the #1 and #2 sands. I mean, is that something that you consider to be very likely or something that just has a fair chance. And I'm just curious, what would it mean if the sands turned out to be the same or even thinner to the north? What would that mean for the model?

Richard Adkerson

Jim Bob, did you catch Noel's follow-up question?

James Moffett

No.

Richard Adkerson

He was asking about the Davy Jones sands thickening on the flank and what our views are about the likelihood of that happening and what that might mean.

James Moffett

I thought he was making a statement. Excuse me, Noel. The sands at Davy Jones and all of these structures because they're so -- have so much vertical expression, are more than likely going to have thickening on the flanks. You just normalize it back. In case of the Wilcox and the Tuscaloosa, there's even some feeling that there'll be even more sand piles on the northern side of these structures because of the enormous amount of sand that we believe is coming from the mouth of the Mississippi River, which is set just north of these structures at Davy Jones. But yes, I sit back, as we've said about Blackbeard as you go off the slide in the Phase 2 model that we have is now low. If that structure is moving, you’re going to get less sediment deposit on the top of it than you do on the flank of it. And that's what creates this wedging or thickening.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Okay, great. That’s it for me.

Operator

Your next question comes from Duane Grubert [Susquehanna Financial Group].

Duane Grubert - Susquehanna Financial Group, LLLP

Jim Bob, can you talk about the tactical decisions related to the fish at Blackbeard East. So maybe update us on the fishing jobs. And what do you do if you get it out and what do you do if you don't get it out?

James Moffett

Great question and let me see if I can keep from boring everybody. Talking about fishing in the hole is not as exciting as talking about blowing the hole. Unfortunately, this Sparta zone that's [indiscernible] 500 feet deep clogging us out of the hole has had us hung up. The reason why this strategic decision to fish up until now, is when we're going in, and we've gone over the pipe, and what you could actually do is all you need to know. The fish is you swallow the drill pipes in the hole, maybe pipe is still smaller than the ID of your existing hole. We've had it, we wash over at 60 feet an hour, 6-0, and we can drill about 70 in an hour or so. As long as we can wash over it at that kind of rate, then you gave us 2 advantages. #1, if we could get that and jerk it out, as seen in this oil-based mud. If we could do that and we can clean the hole out, you'll go in there and see if we can get a log on this floor. Why are we interested? Well, because as far as sand is thick by all matter of calculations and what we really hope to do is see that kind of reservoir quality across the whole trend. So if we can get back to it getting the fish out of the hole and improve it as far as you know we have the Frio which is slightly younger, and sits over the top of this quarter, we already have it, it's in front of my log – Wireline log, would just be another indication. Which is big, it traps at every angle where you get porosity. So that will give us production from 19,500 feet all the way down below 30,000 feet in the Frio as far -- with the Wilcox yet to come. But let's just say we can't get to doggone fish, and the mechanical risk of fishing seems to be trying to get in and grab the pipe. Once you unscrew it with a grapple and then try to back it off by shooting of a string shot, as we call it, inside the pipe, it pops it loose by [indiscernible]. So far that hasn't happened. And what we can do if we can't get the fish out, we want to use this hole and take every benefit because the shallow – shallow out of the bed is around these 19,500 feet to 20,000 feet plus or minus and from 22,500 feet down to 24,500 and some other interesting target. That would do, if we can get those up there for a plus amount, you can bet that you can give us a big write off amount, pretty some of the other things are too worn out that it would [indiscernible] positive we have. Here, we've got the stack pays, all the way from 19,500 to 32,000 feet at Davy Jones. I'd tell you the reason why we have at Davy Jones and Blackbeard East, such a potential, we have big surface area and we have these plays stacked on top of each other where we have the Flatrock. It's what made South Louisiana famous. So we're very encouraged, as I said before, as we reprocess this data that we have. Other analogs now that are identical when we correlate them on the side. And then, we just got to get some penetrations. And I don't want to repeat myself but let's say, between 17,000 and 20,000 feet, we can test these dudes for a third of what we're going to spend to get through the salt weld.

Duane Grubert - Susquehanna Financial Group, LLLP

All right. Yes, so fair enough. So strategy is if you unfortunately can't deepen this one, you would complete up hole. Would you then do something different with the Blackbeard West well if you have to go to plan B on this one and complete up hole?

James Moffett

Well, Blackbeard West has got hydrocarbons in it and we actually are looking at the shallow part of that hole, Duane. I’ll try to have more information so I can go completely transparent with you. But as a part of this reprocessing and looking at the information of where we [indiscernible], if we can see that carbonized sections, then we'd have maybe a carbonate facility section and I'll call tomorrow. Since we're in this phone bill, all this reservoirs going to have a primary and secondary porosity [indiscernible] interesting.

Duane Grubert - Susquehanna Financial Group, LLLP

Okay. And then going back to Davy Jones, Richard, in passing had mentioned that you'd be able to put possibly both Davy Jones #1 and Davy Jones #2 on shortly after getting the production test. We're all familiar with the equipment issues and timing on Davy Jones #1. But what do you think the timing is on Davy Jones #2? And is it possible it might come on even before the other one?

Richard Adkerson

No, we would test Davy Jones #1 and then #2 would be available. Some of the equipment that we're putting on Davy Jones #1 will allow us to put Davy Jones #2 on immediately after that, or almost in conjunction with it.

Duane Grubert - Susquehanna Financial Group, LLLP

All right. Very good. Thank you.

James Moffett

And Duane on that story, as I said earlier, and we've talked about it before, that's one of the reasons why we're so anxious to follow up and see just how many shallower velocities that associated right whether the salt welds has some size to them because those could go on production immediately without having any unconventional equipment. So we're very impressed with those -- the data that is tying them together.

Operator

The next question comes from the line of Eric Anderson with Hartford Financial.

Eric Anderson - Analyst

Jim Bob, just following up on that comment. How many of the prospects do you feel after you've reprocessed the data are like the Barbosa one that you just mentioned? I know you've got like a 12 to 15 in total, so how many of the 12 to 15 do you think are potentially at the shallower?

James Moffett

So far, Eric, we have 4 that look like they're just brothers and sisters. And the Barbosa being the biggest of the 3. It has got, as I say about 8,000 acres on enclosure. The darn thing, if it's an analog and doesn't reflect itself, could be 300 to 500 feet deep. So it's kind of spooky and sub-symmetrical. The analog to this by the way is that oil field, it’s already produced about 250 million barrels a day in that flex trend in the comps received. And now, we have some examples and some lines cut through that field. And this darn long thing has almost identical seismic velocity signal. So we like the shape of this damn thing, we like the fact that the reflectors are booming which is again, 80 feet sand why we though they will probably base of salt, and everybody when they did them thought the salt weld will always be salt. And the reason why I say the analog the cargo [ph] field is important because it's clear this is a [indiscernible]. You can see it in the step below in front of you is strapped towards like [indiscernible]. So you don't want to lose this [indiscernible].

Eric Anderson - Analyst

Okay. Can I ask a question about Slide #16? It looks like at your current depth, which I believe is your planned total depth at 30,544, it looks like you're about halfway into the zone. And is that, I mean, are you stopping there basically because that's where seismic says you should stop or is there a reason why you wouldn't want to go through the whole Cretaceous zone?

James Moffett

Good question, Duane (sic) [Eric], and the reason we're stopping, in our apartment [ph] we are required to go to this depth, and we have to run a tieback string. And what does that mean? A tieback means that you have a drilling line as you’ve been drilling in for months. And after so many months, the engineering groups get tired, concerned about the fatigue of the metal. So they make you literally cover it up. The government and the OEM make you go in and run a liner, inside of the liner. So as you cover up the area that’s been exposed to the rotation of that drill pipe for all those many months. And so that's why the stopping point. Now, interestingly as I said earlier, I hope I made it clear, we're in the Cretaceous. We're deep in the Cretaceous. The Paleo is not as specific as we'd like it to be, but it's definitely Cretaceous Paleo. We’re actually in this specific as we'd like it to be, if you go to the deep water up to the Port Hudson trend, there's Paleo available. But at this dip position since we’re 100 miles south of Port Hudson onshore Tuscaloosa, and we're a couple of hundred miles north of Tiber and some [indiscernible] have Cretaceous. We're kind of right now in geological section, both lithologically and Paleontologically. But the zones are clearly dependable and we have seen bones as deep as [indiscernible]. The interesting news there is, you've seen the model perfectly because now as the Wilcox pull the way up at 26,000 feet as we found out from the Davy Jones where now we see the Cretaceous penetrating completely, and we're seeing here with much of the shows in the Cretaceous and as in the section is folded like it is, those salt welds you've all heard me talk about, the compression versus tension pressing, [indiscernible]. That gives us the ability [indiscernible] to having the carbonates. We want to make sure that they don't have reservoir quality rock that’s being created by some of this folding, et cetera.

Eric Anderson - Analyst

Jim Bob, you said the word shows, were you referring to mud log shows?

James Moffett

At Blackbeard East?

Eric Anderson - Analyst

No, at DJ #2.

James Moffett

DJ has most of the hydrocarbon zones of interest, as far as [indiscernible]. I don't know exactly how many they've got of the possible shows, but probably 8 or so of those. And the reason why the covenant was made in particular is because we've had situations with LWD's that were carl [ph] shows and tried to be [indiscernible] and we had just the opposite. So as far as [indiscernible] trying to say well we’ve had -- paying this and paying that, we've got [indiscernible].

Eric Anderson - Analyst

But once you do your tieback or after -- you're going to log it first, then you do your tieback?

James Moffett

That's right. Trying to log only the lower Wilcox section, [indiscernible], all of the carbonation checks here. We have fraction porosity, which is a little different technology than just [indiscernible].

Eric Anderson - Analyst

So does that mean that once you've done that, that you potentially could go deeper or you'll decide that once you finish the logging?

James Moffett

We will look at the section, try to see how many hydrocarbon zones we think we have. And if we didn't have any carbons, playing more likely [indiscernible] deep in [indiscernible] we’re pretty well precluded from drilling deeper because the engineering dynamics just get really tough if you set the ladder, we're an 8.5-inch hole right now. We wouldn't want to go much lower than that just because of the circulating densities when you try to drill those holes. And we have, other than to stay and pipe it, at the Blackbeard East as you know with all these deep wells, we've had a memo now of that kind of problem. We just got unlucky when that [indiscernible] sand flows was flowing over there. It can happen anytime with these deep wells, but today, we think we have it pretty well under control. And if we could get as much done with the hole open before we put pipe over it, we'd be in a lot better shape, but we have to have a tieback, which is our fold [ph].

Eric Anderson - Analyst

Okay. Could I just ask finally, what have you found in terms of -- as you've gone through the Rob-L zone at Lafitte, have there been any similarities between it and what you've experienced at Blackbeard East? I know that when you first punched through the Rob-L zone at Blackbeard East a number of months ago, you were surprised to see one, how thin the salt was; and then immediately got into some hydrocarbon-bearing zones. Have you found it to be similar over at Lafitte or are you not at that point yet that you could make that comparison?

James Moffett

We haven’t actually had a hydrocarbon zone in Lafitte. We haven't seen any Paleo to indicate that we're through the salt weld. What we saw in Lafitte that makes us feel that we were in a salt weld is that we actually drilled some stuff they call that hydride, the hand salt, there are 15% or 20% of it and the share redistributed in the sands, in the shelves embedded in the sand were [indiscernible]. That's just indicative as you got some mineralization going on because of that [indiscernible] in the deep water. What it does is the salt weld as you know, you've seen it [indiscernible] the only reason why salt weld was named salt weld is it’s just like taking 2 pieces of metal and rolling them together. Mother nature [indiscernible].

Eric Anderson - Analyst

Okay. I appreciate you taking my call.

Operator

Your next question comes from the line of Joan Lappin with Gramercy Capital.

Joan Lappin - Gramercy Capital

Richard made some comment about Blueberry Hill. What do you need to do to go back in there and fix that up? And also, how soon do you think you're going to get around to logging Davy #2?

James Moffett

Okay. Those are 2 good questions. Well, first of all, we waited till we tested the Laphroaig well because we had to rig up a barge, a special test barge. We got that test made. We waited for 2 reasons because the sand -- and the sand at Blueberry Hill are similar because they're both deep, though different age. One is from the largest sands and the other is shallow [indiscernible]. But they are similar in terms of the environment of their positions. So with that similarity, we're hoping that all that information would give us the kind of confidence we need to give you a straight-up interpretation on the log at both Davy Jones, Lafitte and all the rest of these plays. And we'll get that, we just have to get a good quality of log and it’ll be very straightforward. But the log that we're running at Davy Jones to answer your second question, we're logging it now, because we have that 3,000 feet of open hole. As we said, we drilled through the Cretaceous. We're still in the Cretaceous. But we have this many few [indiscernible] oh my gosh, we must have 8 or 10 places where we have elevation in gas. So you just hate to call any one of those zones anything other than what it is and the answer to all this is, what we need to do is to get a good thorough evaluation of all these zones by log, and then we'll have a lot of confidence and be able to give you some idea about that problem. As I say, just looking at the two log which is why we were...

Joan Lappin - Gramercy Capital

Are you talking about -- you mean Blueberry Hill?

James Moffett

Well, Laphroaig and Blueberry Hill, remember I made a comparison?

Joan Lappin - Gramercy Capital

Yes, but I mean is there a problem at Laphroaig too?

James Moffett

No ma'am. What I said was Laphroaig was so positive. I wanted to see how that sand tested because when you get to those depths and you look at logs [indiscernible] porosity. You never know what the real probability of porosity is because you do it all by interpreting. [indiscernible] and if you convert it to the logs, Blueberry Hill and Laphroaig, Blueberry Hill actually looks like it's more porous than Laphroaig. But just to give you a confirmation, I want to see how that Laphroaig well is going to test, and it's an indication almost an open flow rate that you could slow that sucker in. As you could never see, and that’s the interesting thing, you came to close to seeing as you didn't have just an open [indiscernible]. That's what we should have seen in Blueberry. Are you following what I'm saying?

Joan Lappin - Gramercy Capital

Yes. So now with that added info, when will you go back and test Blueberry Hill, and what do you think went wrong with the other tests?

James Moffett

We're headed back there right now. We're going to take that test [indiscernible]. Right now we spent the money. [indiscernible] And it’s just right up the coast from where we are. We're going to go set up on Blueberry. We are going to write a survey which will tell us how many perforations are open and then we will re-perforate, and as I say, you can deduce 2 things from the way this well performs that the sand quality is not as good as the log says it was. Or it’s a smaller reservoir than you would believe you could find in these kinds of process or you can always say is you got [indiscernible] contaminated sands, et cetera. The reason why we've included that, Joan, is if you calculate the two wells of Blueberry and Laphroaig, you get almost [indiscernible] of probability indicating. As a matter of fact, the professionals [indiscernible] when they have to grab a [indiscernible] at Blueberry Hill before we perforated it. And we [indiscernible] reservoir that's deep with this kind of pressure. So when we flowed the well, we couldn't get the balanced flow repression that we thought we should have been getting where the logs actually [indiscernible] on both Laphroaig and this log show that you ought to have [indiscernible] probability where Laphroaig is 50 million a day, that’s the most it’ll draw down. Here we perforate Blueberry Hill [indiscernible] reservoir. So the log data in the actual test leaves you scratching your head. And the interpretation is that possibly we're all going [indiscernible] perforations and that there was -- that we just were drawing down a couple of feet to the sand as opposed to the whole 9 or 10 feet of sand. [indiscernible].

Joan Lappin - Gramercy Capital

So you're suspicious that it's a well problem, not a reservoir problem? Would that be a good summary?

James Moffett

[Indiscernible] quite that way. I'm saying that we don't know why we would have gotten one correlation and one interpretation that was uniform. That was -- this was a great sand, a good portion part [indiscernible] thickness. Of all the big wells we've tested, Flatrock, JB Mountain, [indiscernible] never have seen this kind of performance.

Joan Lappin - Gramercy Capital

Now listen, you've only drilled a couple of wells so far, and it's good that you keep learning new stuff or you get bored.

James Moffett

I'd rather not get bored this way. But you're right, Miss Joan, we have to stay on our [indiscernible]

Joan Lappin - Gramercy Capital

Okay. So to go back to Davy Jones, you're logging now? Is the logging in progress?

James Moffett

No, ma'am. What's going on we're just are coming out of the hole and then complete the drilling. We're going to what we call a hole over which is nothing more than a fancy bit with a reemer [ph] up the hole, and we're just going to go in and circulate and start to drill back down. Hopefully we can do that at [indiscernible] an hour. And the whole plan is to get this thing [indiscernible].

Joan Lappin - Gramercy Capital

Is it weeks or is it months until we hear about Davy 2?

James Moffett

You’ll hear it right away with the initial [indiscernible]. As you know, we don't like to keep anything, good or bad as a secret. Good or bad, or moderately good or moderately bad, we present it to you in a very straightforward way.

Joan Lappin - Gramercy Capital

Okay. So my last question goes back to Richard's answer to an earlier question. I'm a little confused as to I mean, other than we had to wait on Davy 1 to produce for the equipment to be available that the government said was okay and that they're muster. So now that you have the equipment and these wells aren't that far apart from each other, a couple of miles, I assume there are pipelines right nearby that you can hook up to, and is that why you're going -- they might both be starting to produce at almost the same time?

James Moffett

That's correct. Obviously, that's we've been doing for the last couple of years. Remember, Joan, we inherited a lot of stuff from the other operator. All that had been planned. And once we got the actual bottom, oil pressures et cetera, et cetera, then we started to sharpen our pencil and this design team has put it together with a bunch of consultants and our own people. And they've completed most of the high-pressure wells in the world. So we've got a world of data and hopefully, we're going to have the [indiscernible] wells where we can have enough out there, we can make carbon copies of the essential types, the tiebacks rings, the tubing, the [indiscernible] et cetera, et cetera. One good thing about it is all we're doing is just taking the size of the [indiscernible] No, we're not redesigning [indiscernible]. We're not redesigning wellheads. They’re all going to be just like when you look at it, you'll say well, Jim Bob, what's the difference in this and the one you had before and it’s all going to be because you’ve got heavier metal in it.

Joan Lappin - Gramercy Capital

Thank you.

Operator

Our final question comes from the line of Joseph Allman with JPMorgan.

Joseph Allman - JP Morgan Chase & Co

Jim Bob, just to be clear, Lafitte, are you still drilling in the salt weld in your view or are you through the salt weld? And was the salt weld where you thought it would be or actually did it wind up a little bit deeper than you thought?

James Moffett

The salt weld is approximately where we thought it was, Joe. If you remember, we always kind of have a zone [indiscernible] straight-line, especially this big. For us, salt weld so we had a range of 20,000 to 22,000 feet. And we've been at just over a thousand feet.

Joseph Allman - JP Morgan Chase & Co

So again, just to clarify, as far as you know, you're still drilling in the salt weld?

James Moffett

There's no question about that. We got into the salt weld. We had 15% salt in some [indiscernible] compared to the [indiscernible] in the wrong section that we drilled down to 19,000 plus where 2 [indiscernible] and this stuff jumped up to 6 [indiscernible] which is really unusual at this depth to see a shale with [indiscernible] with that stuff as [indiscernible].

Joseph Allman - JP Morgan Chase & Co

Right, okay. That’s helpful. And then in terms of the next wells that you plan to drill in the ultra-deep shale play, it sounds as if you're going to do an offset well to Blackbeard East. And then, obviously, you're drilling Lafitte now. So what are the next wells that you plan on drilling? And it sounds as if you've got 3 rigs on the play. Are you going to have 3 or are you going to move up to 4 or 5? Can you just talk about that?

James Moffett

[indiscernible] As you've seen on the maps, Joe, if Lafitte hits, which is 5 wells and then you've got Captain Blood to the South of Lafitte, and all of them sort of share a common basin, so they’re pretty spectacular, I can tell you that.

Joseph Allman - JP Morgan Chase & Co

Okay. But is there a plan at this point to increase the rig count in this play?

James Moffett

Well, Joe, it's a little premature. We've got 4 rigs tied up right now and we have options on all of them. The first thing to think about it, as you know, we invest in any one of these zones, Lafitte, [indiscernible] when you live to have all the hard work and so you can not have all this interpretation flying around. [indiscernible] yourself and you feel good about going and doing it.

Joseph Allman - JP Morgan Chase & Co

But related to the activity, what kind of conversations are you having with the drilling contractors or other service companies about the magnitude of wells you plan to drill? So for example, are you telling the drilling contractors to get ready to drill 30 wells or 50 wells or what kind of conversations are you having with service companies and drilling contractors?

James Moffett

[indiscernible] Joe, that we've been working on this completion equipment. We have these possible categories shallow shale being 17,000 to 20,000 feet, and intermediate 24,000 to 25,000 feet and below that you're going to have a lot of approximation as to how many wells you want to drill or saying that [indiscernible] drilling per well. And that's going to determine your flow rates as [indiscernible] to be completed at recovery years. And not have a big impact on the number of rigs you [indiscernible].

Joseph Allman - JP Morgan Chase & Co

Okay. And lastly, but related in terms of acreage, you've got these 3 prospect areas in the ultra-deep shale play, the Lafitte area, the Blackbeard area and the Davy Jones area. And so in terms of acreage exploration, what kind of acreage exploration issues do you have to deal with whereby you actually have to step it up and actually drill some more wells?

Richard Adkerson

Jim Bob, he was asking about acreage exploration and how that plays into our drilling plans.

James Moffett

Again, I thought you were making a statement. As I said at the beginning of this show, what we've been able to do by taking each of these wells and potentially use the Blackbeard East, we've taken each of these signatures from the various levels of production, such as porosity [indiscernible] we keep talking about. And then we reprocess the seismic and say if these porosity anomalies are similar, then they represent similar lithology. And our acreage position, fortunately, we bought the acreage. We bought a new feel of [indiscernible] of what we call the primary structures. And so the primary structures as one thing in common, once you get those salt weld, you just have, [indiscernible] from whatever that you got, a salt well, we had at the basement. That means every [indiscernible] What we've been doing is pinning the tail on the donkey because at this depth position, we're defining major sections. And major sections to us, Joe, means what's your window of opportunity. I don't want to be redundant but for instance, when we drilled Davy Jones, we got excited about that because Davy Jones is the front and the top of the Wilcox. And that meant that it probably defined the top of the Cretaceous, [indiscernible] sure enough we got in the Cretaceous about 30,000 feet, which is where we predicted. Now we have to wait and see how many zones over here, if we have any, but that's where we're going to be logging it. The rest of our acreage, we’ve broken it down into trends. You've seen us draw these East-West trends and we had the Miocene Wilcox, which was the Blackbeard trend, Lafitte. And up jumps the Frio as we’ve discussed and the Sparta possibility. So we have two more objectives there, and they all could be objectives in our other acreage blocks on these primary structures. So what it's doing is defining the total window of opportunity, I call it. So when you get to blow the salt weld at 20,000 feet or 22,000, you're going to have Miocene, you'll have Wilcox, before you get to Wilcox, now you've got to slip in the Oligocene as well as the Sparta and the Frio. So what I -- to answer your question in general, as I say, I thought you were making a statement. In general, what we're doing we’re spending a lot of money on these wells, but we are defining the number of objectives how many sands we can stack on each of these primary structures, which is used to each of the prospects. Interestingly enough, Joe, you guys are on the phone in the most recent energy conference, one of the majors for the first time came out and declared the deep, ultra-deep below salt weld opportunities as one of their 3 primary targets for the exploration in 2011, 2012. And they presented some slides at that conference, which were trying to show the trends. They thought they'd been proved up by the data that everybody’s gotten so far. So I think everybody now is convinced that every one of these primary structures has a chance to have the Miocene and the Frio, maybe the Sparta, that’s the one we’ve got to get logged first and, of course, more importantly, now that we've seen the Cretaceous and seen it’s not came in as bad as we had expected to define the top of the Wilcox, Davy Jones is 26,000. So when you look at the Miocene/Frio/Wilcox/Cretaceous/Lower Tuscaloosa, these are all prolific. [Indiscernible] The Tuscaloosa is the equivalent of the Woodbine in Texas where you got the most, one of the most famous fields you'll ever find in the East Texas Oilfield which is Woodbine Sandstone production. So there's more than potentials and as far as the Wilcox, that trend goes all the way from South Texas into Alabama. And of course, the Miocene is well known as being one of the really good sugar pops of the oil and gas patch. So we have all of those units available to us. And some real interesting primary structures that were just doggone it not -- you just couldn't see them before. We are working on the salt weld. We didn’t have attenuation [indiscernible] about 25,000 feet. But now we are and now we see the quality of this. So what has it got to do with our acreage play? Acreage is acreage unless you have a definite objective. You take [indiscernible] and now as you got the shale gas play, you got acreage being so based on performance in the shale gas, but you had to know what the shale gas [indiscernible] was and that's the way acreage trades and that’s how you buy acreage. So you get these objectives, that means that they're going to be under every one of these plays? Can't guarantee that, but more than likely they will be because of the way the sands came onto the shelf and formed the East-West trends and, as I say, if you noticed the slides from the most recent energy conference the majors they just sort of came out of the closet [indiscernible] and they predict the trends almost identically to the way we've done it. It's getting down to geology 101.

Joseph Allman - JP Morgan Chase & Co

So just in terms -- I'm assuming that you're on some kind of clock, and you need to drill wells, otherwise you'll lose the leases. So could you just talk about that a little bit?

James Moffett

Well, fortunately, what they've done, Joe, is as you know, they gave us these big units. They have [indiscernible] years ago but when they saw deep play came along especially on the shelf and in the deepwater, they realized that there was going to be a big lead time on drilling some of these wells. So if you drill one well inside of unit, you hold the entire 15,000 to 20,000 acres, whatever the unit size is. You have to keep going and you have to continuously plan your development well. But the units don't specify how many wells you have to drill. In other words, if you come on production with 2 or 3 wells until you learn some production history, you may decide to not trend these wells and go for the layered formations because the costs of these wells you've got to be sure that you get [indiscernible] as a minimum to be sure you get a good return for your investment. And so to answer your question, the acreage position is in good shape, some stuff on the primary term, some stuff by operations. The Blackbeard East unit, we are through there but we’ve still got a rig on there. Lafitte, we've got rig on that one. Blackbeard East, Davy Jones and Lafitte and the other rigs that we have are deep. So the acreage, we believe we can get around to drilling it and all and we have good cooperation from the federal [indiscernible] and we'll get our acreage drilled up and get it protected. You all going to see it evaluated going up substantially. Remember I made the comparison to what they paid for deepwater trench before Thunder Horse was drilled. People have seen out there and [indiscernible] objectives were and when Thunder Horse was drilled the acreage went from $100,000 for 5,000 acres to $100 million for 5,000 acres. So defining those objectives and confirming the production, and I just want to make another quick point is I know there's a lot of frustration that we haven’t had a flow test on some of these wells. But on the Wilcox, for instance in the deepwater, [indiscernible] the Wilcox probably 40 there's only one Wilcox well in the deepwater that’s been tested and that's the Jack well. So all the development drilling that’s being proposed by Chevron, it’s about a $40 billion program. And [indiscernible] is based on one flow test and that's because they're taken in formation and correlated it across all the rest of the blocks and says it cost them $100 million with that floating equipment to test [indiscernible] they haven’t tested any more wells. We haven’t got all the information we need yet, Joe. We're gaining on it.

Joseph Allman - JP Morgan Chase & Co

Okay. Thank you. Very helpful.

Richard Adkerson

Thanks, Joe. Thank you everyone for participating, and we look forward to continuing to pursue our program and report the results to you.

Operator

Ladies and gentlemen, that concludes our call for today. Thank you for your participation and you may now disconnect.

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