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McMoRan Exploration (NYSE:MMR)

Q2 2011 Earnings Call

July 19, 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

Leo Mariani - RBC Capital Markets, LLC

Joseph Bachmann - Howard Weil Incorporated

Joan Lappin - Gramercy Capital Management Corp.

Eric Anderson - Hartford Financial Management, Inc.

Joseph Allman - JP Morgan Chase & Co

Duane Grubert - Susquehanna Financial Group, LLLP

Richard Tullis - Capital One Southcoast, Inc.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McMoRan Exploration 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. Good morning, everyone, and welcome to the McMoran Exploration Second Quarter 2011 Earnings 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 conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. We also have several slides to supplement our comments this morning, and those are also available on our website at mcmoran.com. In addition to analysts and investors, the financial press has been invited to listen to today's call, and a replay webcast will be available on our website later today.

Before we begin our comments today, we'd like to remind everyone that today's press release and some 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 the financial results and then turn the call over to Richard, who will be going through the presentation materials on our website. As usual, after our remarks, we'll open up the call for questions.

Today, McMoRan reported a net loss applicable to common stock of $50.2 million, $0.32 per share, for the second quarter of 2011, compared with a net loss of $21.7 million or $0.23 per share to the second quarter of 2010. The results in the second quarter of 2011 included a number of special items, including a $36.8 million charge to exploration expense for non-commercial well costs associated with Blueberry Hill #9 sidetrack; a $29 million impairment charge to reduce certain fields' net carrying value to fair value; a $20 million adjustment for abandonment obligations, future abandonment obligations associated with certain of our oil and gas properties. A portion of these are expected to be reimbursable under our insurance program when the reclamation expenditures are incurred. And also, we had $12.9 million in insurance proceeds that we recovered during the quarter related to losses incurred from the September 2008 hurricane.

Our production during the second quarter of 2011 averaged 197 million cubic feet of equivalents a day net to McMoRan's interest. That compared with 165 million cubic feet of equivalents a day in the second quarter of 2010. So our production in the second quarter of 2011 was higher than what we have previously estimated of 190 million a day because of favorable production performance.

Our second quarter 2011 oil and gas revenues totaled $155.5 million. That was substantially higher than last year's second quarter of $104.1 million. Our realized gas prices in the second quarter of 2011 averaged $4.71 per Mcf. It was slightly above last year's level of $4.66. And our realized prices for oil and condensate averaged $109 per barrel, compared with $76 per barrel in the second quarter of 2010.

Our earnings before interest, taxes, depreciation and exploration expenses totaled $96.9 million during the second quarter of 2011, and our operating cash flows for the second quarter totaled $102.6 million. That was net of working capital sources of $28 million and calls for abandonment funding of $20 million during the quarter.

Our capital expenditures during the quarter totaled $162 million. Our debt position at the end of the quarter totaled $561 million. That included some convertible securities. We have a $74.7 million in Convertible Senior Notes due in October 2011 with conversion price of $16.58, and $186 million in Convertible Senior Notes due in December 2017 with a conversion price of $16 per share.

We ended the quarter with $765 million in cash. Assuming conversion of our outstanding 8% Convertible Perpetual Preferred Stock and our other convertible preferred securities, we would have, on a fully diluted basis, 221 million common shares.

Now I'd like to turn the call over to Richard, who will be referring to the slide presentations series.

Richard Adkerson

Good morning, everyone. As most of you know, we had an update and review of where we've come to with our ultra-deep program on June 29. That presentation is available in our webcast, if you didn't see it. And I refer those of you who didn't listen to it to go to the webcast. Because of that, we're going to have an abbreviated presentation on the slides today, and I'm going to go through those. And then afterwards, Jim Bob will be available for your questions.

The highlights with our ultra-deep program center on our Davy Jones extension well. And in that well, we've reported that we've seen Tuscaloosa and Lower Cretaceous sands, which significantly expand the resource potential of 4 of the Davy Jones prospects, but really, enhances our overall program because it further expands the opportunities that we have throughout our ultra-deep program.

At Blackbeard East, we are now preparing for bypass operations, which we will undertake to deepen that well to test its objective, and our Lafitte well is now drilling below salt. It was over a year ago that we started the significant activities related to our Davy Jones No. 1 well that will allow us to complete and flow test that well. We are on track for doing that by the end of this year. Kathleen reported on our favorable production performance for the quarter. We're seeing very positive production results of our new well at Laphroaig, which is part of our deep gas program. Our second quarter rate exceeded our April estimates, and we have adjusted our annual estimates for production higher. At the end of the quarter, we had the $765 million in cash.

Some of the details on our second quarter results are included on Slide 4, and Kathleen went over those. I'll just point out that our net loss did include our dry hole costs, impairment charges, our reclamation charges, offset somewhat by insurance proceeds. Our EBITDAX number was just under $100 million. That includes $28 million from working capital and $20 million in abandonment expenditures. And for the quarter, our capital expenditures were just over $160 million, and we expect those to be roughly $500 million for the year.

The map on Page 5 shows the current status of the wells we have in progress. The Davy Jones offset appraisal well that I mentioned earlier is located at South Marsh Island 234 and 20 feet of water. This well is 2.5 miles southwest of the Davy Jones discovery well. And in January of '10, we logged 200 feet of Wilcox pay in that well. In June of this year, we obtained results from wireline logs and those logs saw potential productive hydrocarbons in the Cretaceous section in this No. 2 well, both in the Tuscaloosa and the Lower Cretaceous carbonate sections. And this is very significant because first of all, it confirmed our geologic model, but also indicated expanded resource potential as I talked about.

We will flow test this well to confirm the commercial productivity of these potential high carbon -- hydrocarbons, and we expect to do that in mid-year next year.

The previous logs results above 27,300 feet confirmed 120 net feet of hydrocarbon Wilcox sands, and that indicated continuity across this major structural feature of the Davy Jones prospect, which what we saw in the No. 1 well. We've set a 6 5/8 inch production liner to 30,500 feet, and the well has been temporarily abandoned. As I said, we are now planning the equipment that allow us to flow test this in the second quarter of next year.

Jim Bob and his team are analyzing up dip locations for subsequent drilling to the north to evaluate the Tuscaloosa and the Lower Cretaceous carbonates higher on the Davy Jones structure. The Tuscaloosa sand, of course, are correlated to the prolific Tuscaloosa trend and onshore in South Louisiana. And this carbonate section that we've seen looks to be consistent with productive field located on both onshore and offshore Mexico, where there's been very significant production, of course. This is the first time that the Cretaceous sandstones and limestones have been encountered off Central Louisiana. We hold 60.4% working interest and right at 48% net revenue interest in this well.

The Blackbeard East well, which you can see located on your map, is located in 80 feet of water in South Timbalier 144. In this month, we have now commenced operations to bypass the equipment that was lost in the hold at approximately 30,700 feet to evaluate targets in the Eocene. The well is permitted to 34,000 feet. Based on interpretations of the drilling data that we've obtained prior to this mechanical issue, we believe this well encountered Sparta sands in the Eocene younger than the Wilcox. These sands are known -- have had experience of being productive onshore in South Louisiana. We need to analyze this with wireline logs.

Previously, in the Blackbeard East, we logged 178 feet of net hydrocarbon bearing sands in the Miocene. We announced that at year-end last year, we're planning a 25,000-foot offset appraisal well to evaluate these zones. This wireline logs also indicated hydrocarbon bearing sands. In the Frio section above 30,000 feet, we announced this in January, the Frio, of course, is prolific onshore in South Louisiana and extends along the Texas coast. This is the first Frio sand with indicated hydrocarbons encountered either in the Shelf or in deepwater in the Gulf of Mexico, offshore Louisiana, where now Jim Bob and his team are evaluating down dip drilling opportunities on the planks of the structure to evaluate this section. Blackbeard East, we have a 70% working interest, 56.2% net revenue interest.

You can also see spotted on the map the Lafitte project. This is a Eugene Island Block 223 in 140 feet of water. This well was spud in early October of last year. It's now drilling below 24,000 feet. It's targeting Miocene objectives and possibly Frio sections below the salt. The proposed depth is right at 30,000 feet, and we've got a 72% working interest, 58.3% net revenue interest.

The Blackbeard West, our first well that was at part of our ultra-deep program, is located at South Timbalier 168 in 80 feet of water. We have identified a new location within this Blackbeard West unit a Ship Shoal 188 to evaluate the Miocene age sands seen in Blackbeard East above 25,000 feet. And we're developing plans to commence drilling this ultra-deep well, targeting depths at 26,000 feet during the second half of this year. It's approximately 4 miles west of Blackbeard West No. 1, which is on South Timbalier 168 that I mentioned. We hold a 67.3% working interest in Blackbeard West and a 51% net revenue interest. That's for the Ship Shoal well.

With our deep gas drilling program, we successfully commenced production on the 2 well -- No. 2 well at Laphroaig in April of this year. Production has averaged 50 million equivalents today, 15 net to McMoran in both in May and June. This is in St. Mary's Parish onshore Louisiana in the Marsh. We hold a 38.4% working interest and a 29.5% net revenue interest. Also, in our deep gas program drilling above salt, we're drilling Boudin well in 20 feet of water at Eugene Island 26. We began drilling this -- or at the end of February, we're drilling below 19,000 feet with a target at approximately 23,000 feet. And this is testing the Miocene objectives that we have established production in the JB Mountain area. We've got 53.5% working interest and a 42.4% net revenue interest in that well.

And finally, also in our deep gas program, we have drilled a Hurricane Deep prospect. It's in 12 feet of water of South Marsh Island 270 -- 217, drilled to a vertical depth of just over 21,000 feet. We saw in logs the presence of Operc and Gyro sands that we believe could be productive in an up dip location. We temporarily abandoned the well. We're preserving this wellbore as we evaluate decisions to test these locations through side tracking or perhaps deepen this well to test sub-salt production.

Page 6 shows the information that we have on this really significant project to develop the completion equipment for the Davy Jones discovery well. This includes high-pressure production trees, safety valves, blowout preventers and specialized tubulars. It's really a major project that we've been working on since April of last year with a team of experienced engineers and experts who worked on challenging production projects all over the world. And they're making great projects. This is coming together, we believe, and we still expect to be able to flow test this well by the end of this year. And then we will work in parallel to develop the equipment necessary to flow test the appraisal well by mid-year next year.

With the flow test, the successful flow test, because these waters are located in shallow waters near existing market points. We can put those on production very quickly after a successful flow test. The schematic of this is shown on Slide 7, where we show the 2 wells, the distance between them, the pipeline connections, the tie-ins to the delivery system. The production facilities will have initial capacity of 150 million a day, which is expandable to 275 million a day. And that is the status we are with Davy Jones.

Now where we are overall with our ultra-deep program, the activities to date have sequentially, overtime, as we drilled these wells and gotten data, have really confirmed the objectives that we set out to achieve in this program. We've shown that wells can be drilled safely below the salt well at these depths and these pressures zones and evaluate it. We've confirmed now our geologic model, which ties in production that was seen in the deepwater drilling in the Gulf of Mexico with the history of the industry onshore and have established the existence of 5 sand carbonate sections below the salt well.

As we've seen these, the reservoir quality has been good, which was a question many had going into this. So we have high-quality reservoirs with large structural features below salt. And we're now developing the expertise and technology so that we can complete these high-pressure, higher temperature reservoirs. And we've also identified prospects to access these type of prospects at shallower depths where we can use more conventional completion opportunities.

Now what's before us? The big issue is the flow testing of the Davy Jones well. Successful flow test would allow us to begin to recognize proved reserves, probable reserves, to identify the reserve potential will require beyond that additional delineation drilling. And as we go through this, we're applying all this knowledge that we've gained to identify other prospects. We've got a very significant acreage position that will lead us going forward.

To date, on Slide 9, we've summarized what we see is the resource potential from drilling that has been accomplished to date. And you can see, Blackbeard West, Blackbeard East, the 2 Davy Jones wells, the Barbosa well, where we see very significant potential from these wells. And when you look at our significant net revenue interest in the wells, it results in a significant 7.5 potential of -- to our company, 1 trillion cubic feet equivalents to our company from drilling to date.

Beyond the wells that we've drilled to date, on Slide 10, we show the areas where we have prospect acreage that will allow us to identify further prospects, and this is an ongoing process. But this is what we see today. We started with this at Blackbeard prospects, the Miocene, Wilcox play, Blackbeard East expanded that to the Frio play. And now with what we've seen in the Davy Jones appraisal well, we significantly expand the Wilcox opportunities. And now with the Cretaceous play, with the Tuscaloosa and the fractured carbonates, all of this is adding together to really encourage us with our program. And it's -- we are very, very excited about these opportunities.

For our outlook, Kathleen gave you the details, and they're in the press release. I won't dwell on them. But we are showing higher annual production guidance of 10 million a day, and that just reflects performance. CapEx, we're seeing -- now we believe we'll be in the $500 million range. That's always subject to what we see and how things unfold as we go forward.

We're really working hard to get these reclamation obligations funded and behind us, and we're making great progress with that. A part of this was what we acquired in relation to the new field deal and we have a big emphasis in doing that to reduce Hurricane risk and just to get it behind us.

Our cash flow slide that we updated -- I will finish with this, it is shown on Slide 12. It shows what our cash earnings, our EBITDAX earnings would be at current forward oil and gas prices and sensitivities to those prices. It's up $40 million from our April call because of production guidance, primarily. The current estimate is based on $4.48 gas and $99 oil for the remaining 6 months. And this will give us the cash flows that will be available to help fund our operations, along with our existing cash balances.

With that summary, I'll turn the slide over to Jim Bob, our Co-Chairman, Chief Executive Officer and Chief Explorationist.

James Moffett

Thank you, Richard. We covered almost everything at the call a couple of weeks ago. So I think we'll just open it up for questions and answers.

Richard Adkerson

Sounds good. Operator, you want to open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeb Bachmann with Howard Weil.

Joseph Bachmann - Howard Weil Incorporated

Just had a couple of questions. First, Jim Bob, on the new location within Blackbeard West unit, is this going to fulfill your requirements to hold the unit? Or do you guys still need to come up with a plan of action for the South Tim 168 block to hold on to that?

James Moffett

We believe this location will fulfill our obligation.

Joseph Bachmann - Howard Weil Incorporated

Okay. And is this going to be drilled with the EXL 3 rig? Or what rig are you guys planning to use on this prospect?

James Moffett

Well, we're hoping to use it. The well is shallower than the deep [indiscernible] wells. We hoping the revenue have smaller rig and then a smaller downward borehole [indiscernible], which will reduce the cost significantly.

Joseph Bachmann - Howard Weil Incorporated

Okay. And then switching gears to Lafitte. Has the LWD 2 given you guys any kind of idea what you're seeing so far in the Miocene, or is it just too early to tell?

James Moffett

Well, frankly, we had to set pipe since our last call. We've been through what we call the disturbed zone that we talked to you about. The rebel zone has been thicker than we could see on the seismic. We know it because we have Lower Miocene strategic -- now we can go back into younger rock and it the looks like that this section has been drug up. So the disturbed zone or rebel zone you've heard people referred to, we have some lost returns. Some loss returns that has slowed us down. But to answer your question, we haven't seen any kind of -- what we consider to be the normal section that we expect to have once we get through this rebel zone.

Operator

Your next question comes from the line of Duane Grubert with Susquehanna Financial.

Duane Grubert - Susquehanna Financial Group, LLLP

Yes, Jim Bob, could you just refresh us a little bit? Your slides indicate that the Lafitte well is interesting and important because it sets up a couple of other plays. Can you give us some basics on why that is? Why would the Lafitte well, if encouraging, be very encouraging for these other couple of prospects?

James Moffett

Thank you for your question. It's exactly that there's a structural area what we call the Lafitte platform and the prospect and Barataria, and the [indiscernible] in particular, so whatever sands we have in this well, assuming that we have sands in the program, it will be the same objectives in Captain Blood and Barataria. On the slide, though, on Page 23, it shows us the Blackbeard West and East wells to the East of this area, Davy Jones is at North of it. So what this well is, it's the first well we drilled in this part of our shelf. Going forward, it just gives us that much more information on what sands we can expect in this portion of the shelf. But also, of course, we have the Miocene with the potential, part of it is in the Frio sand and Blackbeard East. Even though it's East of this location. We think we've got a good opportunity. We see a possible Frio objective. But it's just simply that this is a data point, sort of pinning the tail of the donkey of the West, the Southwest part of our shelf play, it's probably going to help us define what the latter case is going to look like.

Duane Grubert - Susquehanna Financial Group, LLLP

Okay. And then a totally different issue, on getting the Davy Jones well production flow tested in 2011 rather than 2012. Do you have any kind of incentive structure with the various vendors to make that happen? And also, where are you exactly relative to the schedule, which I think is very detailed? Where are you versus where you thought you were, planning-wise, maybe a few weeks ago?

James Moffett

Well, in fact, we're on target. We had a hiccup because of the horrible disaster in Japan because some tie back streams might be affected. But the Japanese company has been able to successfully finish all of that. So other than that, we have no delays. You've seen the picture of the equipment, which are really prototypes. And so there've been 25,000 pound tree and the little indicators of all the important parts there had been assembled and had been hydro tested. So we're on target.

Duane Grubert - Susquehanna Financial Group, LLLP

Okay. And then back to Lafitte, you don't have anything specific in your written release, but you did mention that you've had to set pipe and that you had some lost returns. Can you give us any color on what that suggests to you about the quality of the zone you're going through? Anything at all on that?

James Moffett

Well, what it does is, if I can explain, the salt was a couple hundred feet thick in the zone below it, was 1,500 feet so far. And what you've seen in this third zone is pressures that are going to be higher than what you'll see once we get completely through this third zone. And that's because you have -- this section has been drug up and sort of capsulized in this fault zone. Remember, this is a big salt well and then w-e-l-d, which means, as the salt was -- it weld it -- so the 2 plays welded together. And that process, the sediment that were there, basically, is left as residue. I think I mentioned before, when we try to [ph] the material that gets caught up in a glacier, and the glacier is advancing and retreating and if you have ever seen any of these big glaciers in Canada where you have these terminal and lateral. And so, the material inside this is rebel zone, to answer your question specifically, it won't affect the normal section below the salt well. But we would not have had the effect of the friction and the torque of being caught in this salt well is not the likely stuff we've been drilling.

Duane Grubert - Susquehanna Financial Group, LLLP

Okay. And I think at the late June call, you had said it'd be about 45 days of drilling. Does it sound still reasonable through the Miocene section from the end of June through your existing plant?

James Moffett

Well, the trouble we've had in getting through this disturbed zone might add a week or 2 to that, maybe as much as 2 weeks. So we still hope that the data we fear most is starting to set back to get in here and get down below 24,000 feet and see if we what's caught up in this big Lafitte trap.

Operator

[Operator Instructions] Your next question comes from the line of Leo Mariani with RBC.

Leo Mariani - RBC Capital Markets, LLC

Quick question on the new well you guys are drilling, kind of an offset test to shallower zone to Blackbeard West. Just curious what the net cost of that well is going to be McMoRan? And also, I was just looking to kind of get in terms of where you currently stand, what else is left to be drilled here in the second half of 2011 in terms of what's on the docket right now?

James Moffett

Well, the well you're talking about, the Blackbeard well, is going to be probably around 75 million a year to 2,610 [ph]. And what else is left on the docket? A lot of that is going to depend on what we see and the fleet as we go in most depth of in the next few weeks. And also, now that we -- or are probably going to get around these at Blackbeard East, we will see what the Sparta looks like. And at the same time, we're looking at the shallower zones above 25,000 feet. There's 2 of those. And we're also looking at the possibility of where we might be, to see the Frio, which we've discussed before in the dialogue [ph]. So the salt zone also has various levels and there is models for sand -- the wedge down there for from some of the deeper zones, like the Frio, and then just seeing a 360 degrees geometry of the zone above 25,000 feet. There was actually 5 of those.

Operator

Our next question comes from the line of Noel Parks with Ladenburg Thalmann.

Noel Parks - Ladenburg Thalmann & Co. Inc.

I just wanted to go back to Lafitte for a second. I was struck by -- you're saying that, I think, it was 150 feet of salt that you found at Lafitte. And I was just wondering if that was sort of different from the original amount that you had for the orientation of the salt, which I thought you expected to be sort of on kind of in a vertical deposition, or more or less vertical deposition. And so, I guess, just trying to get a sense of aside from the rebelized zone, whether the -- I guess, your model of the salt has changed substantially by what you found at Lafitte?

James Moffett

No. Thank you for the question. As you look on Page 22, you can actually see the salt on the lower, to the left of the diagram that shows the trail at Lafitte. The salt -- the top of the salt, you barely just about where we thought it was. It's very hard to predict the base of the salt, especially when you have this so-called disturbed zone. And that's what you're seeing below the salt on the log that we posted on Page 22. So the thickness of the zone, the overall thickness, though is about as we had predicted. But there's more sediments that's being disturbed than there were salt. Without the salt, it might be somewhat thicker. So we had to top it, the disturbed zone, which because of the fact that you have this -- with slabs of sediment, it looks different on the seismic. And that was one of the reasons why we had put the salt [ph] maybe a little bit thicker than it turned out to be. I hope that the diagram on Page 22 helps you out.

Operator

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

Eric Anderson - Hartford Financial Management, Inc.

My question relates to Blackbeard East. The shallower appraisal well that you've got permitted and planned for, I believe, some time later this year, which block is that going to be going on in terms of the Blackbeard East unit?

James Moffett

So let's see...

Eric Anderson - Hartford Financial Management, Inc.

Is that 144 or 165?

James Moffett

I think it's going to be -- Blackbeard East or West?

Kathleen Quirk

It's West.

James Moffett

Eric, did you say Blackbeard East or Blackbeard West, Eric?

Eric Anderson - Hartford Financial Management, Inc.

East. Blackbeard East

James Moffett

We've got several locations that are being permitted and frankly, we haven't decided on which one of them we're going to target. And the reason being here, we may actually go after the lower most ones that are around 24,000 feet. And those are within sidetrack as this start to borehole. But you know, as we have not got a better mechanical test or geological tests below the pipe versus your 26,000 feet. So depending on whether they are after those zones, or whether they are after the so-called velocity amount, which is right under the salt well. We have a slide on Page 19. If you'll notice, the Upper Miocene and Middle Miocene -- so, depending on which ones we want to focus on. We actually drilled an alternate location. That will determine which of these wells. What you do to try to give yourself flexibility, you put an exploration plan together, and it's got more than -- it's got multiple location especially since we have these multiple objectives. And, generally, that's when we determine which one of these zones is the upper, middle Miocene that we focus these salt well on.

Operator

Your next question comes from Richard Tullis with Capital One Southcoast.

Richard Tullis - Capital One Southcoast, Inc.

Just a couple of CapEx questions. Jim Bob, I saw where the development CapEx budget -- looks like it's going up about $50 million from the low-end expectations previously. What's the main driver or drivers there?

James Moffett

Yes. The better half on the cost of the wells today and the anticipation of the locations and we just talked about the Blackbeard East and Blackbeard West. Probably, the most important thing that we've talked about several months ago is that we drilled below the salt in Blackbeard East. We have no salt and we drilled all the salt there. And instead of salt, if you remember, we ended up with some pay we were going in the upper Miocene. And associated with that, we would pay what we call the velocity event that sort of drapes over the top of Blackbeard East. And what it did was to focus on -- so it you focus on the 3 more of those similar events to the West and they're looking at Barbosa anomaly in Blackbeard West. And so those are the big reasons why we have added some different projects. If you look on Page 20, if you remember, we pointed that day before, if you'll look at Blackbeard East, you will see, I guess, several, only No. 1 well that's located there. And that's got -- it shows that drape underneath the salt well. And if you go to the West, you will see Block 188, which is an identical looking velocity anomaly. Then further to the west, you have Barbosa. So what happens with the -- with our thinking, our budget thinking, is we added these layers. When we first started, we basically, focused on the Wilcox and the deep objective and the Miocene and the Shale. What we have done is just to glaze the Miocene target above 25,000 feet, with this so-called velocity now in place, showing on Page 20. I mean, you also have got the Frio, which is another possible layer in the layer change it was going after. So those things have been taking into consideration, especially the stuff, particularly on Page 20, which is associated with this velocity number, those wells are going to be above 25,000 feet and can be drilled with the smaller rig, a smaller pipe and then completed with conventional equipment as supposed to having to -- use higher pressure equivalent that we have to use below 25,000 feet. So those are the kind of things that are really running our budget right now.

Operator

Your next question comes from the line of Joseph Allman with JPMorgan.

Joseph Allman - JP Morgan Chase & Co

Jim Bob, I guess, I'd like to just clarify that what's taking so long with Lafitte. I think -- is it the actual, the kicks that you got in the rock [ph] returns that have really slowed things down there? And could you relate that to the drilling at Blackbeard East and at Davy Jones No. 2? Because those wells took a real long time to drill. Is it just complicated drilling here and it's just going take a long time for pretty much every well? Or do you think these are just individual, separate problems that probably won't be repeatable?

James Moffett

No, it's all of the above. If you take the salt well or disturbed rebel zone and all of the drilling in the Gulf of Mexico offshore, whether it's deep water, or Shale, and as you know, below the salt is pretty famous. And different wells have different problems. Some of these wells are drilled back probably in the so-called flash drilling, [indiscernible] drilling this disturbed zone below the salt and things would have similar kicks in the well we didn't take on. But there, if you look at the wells we drill, generally, the Blackbeard East well had very nominal problem. We had, I gas show that actually was shown on Page 20, and that well is certainly in yellow. But it is relatively moderate in terms of the drilling problem. At Davy Jones No. 2, the outset, we had a lot of problems. We improved the salt well because once we did, we had salt in the first well in Davy Jones, salt well and the No. 2, where we didn't have the salt. And so you saw, we had a very good section that was older, rock was been drug up in this so-called fault zone or rebel zone. And that gave us a little bit of problem. So a lot of this depend on how much salts you have in each of these wells, and then just how thick the rebel zone is.

Operator

Our last question comes from the line of Joan Lapin with Gramercy Capital.

Joan Lappin - Gramercy Capital Management Corp.

I'm just going to go off and -- I really would like to ask you 2 things. I'd like to ask about, on the -- on Slide 22, it says: "Kick C1-C3." Could you explain what that means, please? And I'd also like you to -- we haven't talked for over a year about main -- the Main Pass Energy Hub. And now that gas prices outside the United States are so much higher than they are here, would you -- what would it take for you to re-permit that for outbound instead of inbound traffic?

James Moffett

Thank you very much. Let's talk about the #22. What specifically did you ask about that slide?

Joan Lappin - Gramercy Capital Management Corp.

Would you explain -- it says "kick" and underneath it, it says "C1-C3." What does that mean? And what -- is that telling us what kicked?

James Moffett

I'm sorry. What that is, Joan, is the same thing we've been talking about. This step that you're seeing below the salt is obviously low and within this so-called disturbed rebel zone. And that's part of the fault play I was discussing. And those slabs of formation have been caught in that weld. And when we say kicked, what that means is when you drill it, it all flows on you. And then you, basically, have to phase your pumps strokes up to be able to put more hydro stat on it and when you do that and sometimes when you do that, you'll start to lose a little mud. We call it ballooning. The best way to describe it is in the zone the wells huff and then they puff. A huff meaning that they try to flow on you, and then when you try to get that under control by increasing your pump pressure, you have more of a hydro static that will take mud on it. We had to sit there and just huff and puff and go through. But that's what the kick versus the loss returns means. The kick means that the well is flowing on you and loss returns mean that that the well is [indiscernible]. I hope that addresses your issue.

Operator

And I will now turn the call back over to management for any closing remarks.

Richard Adkerson

Operator, Jim Bob, Joan also asked about the Main Pass Energy Hub.

James Moffett

Well, Joan, I'll answer that. And unfortunately, we don't have any. The Main Pass Energy Hub, it's interesting that you are bringing it up, Joan, because we have had, most recently, some inquiries about not only we use the Main Pass as a possible energy terminal to export this where there've been some interesting storage with well with some of these oils they are apparently being used for storage. They are waiting to get to market. But it is hard to put a number right now on just exactly what it's going to take for people to decide if they're going to spend the money to more and more terminals to export. As you know [indiscernible] has gotten a permit to do it to the West. But as the Main Pass has always been -- since it's offshore, and there'll be -- the platforms are still there, over probably $500 million worth of metal, maybe even more today with the cost of all the construction and metal going up. But yes, we continue to keep that in an active role and listen as people go through these different changes in their philosophy, we are dealing with gas, the gas market is hard to predict because you've got the tsunami in Japan, making everyone take another look at nuclear energy. And you know the publicity about that. So I think a lot of that is not going to have an impact on people that are going to weigh in for gas, the proceeds of nuclear, and we'll see how much the velocity because firmly of what they're going through in Japan today. I hope that answers your questions, Joan.

Okay. I think that -- are there any more questions?

Richard Adkerson

I don't think we have more questions, Jim Bob. We -- I just want everybody on the line to know that we are available for follow-up if you have any questions following this call. Call David, and we'll coordinate getting responses to him. We appreciate everybody's interest.

James Moffett

I second that.

Operator

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

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