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McMoRan Exploration Co. (NYSE:MMR)

Q4 2007 Earnings Call

January 17, 2008 01:00pm

Executives

Kathleen Quirk – SVP and Treasurer

Rich Adkerson – Co-Chairman

Jim Bob Moffett – Co-Chairman

Analysts

Brian Kuzma - JP Morgan

Gary Nuschler - Jefferies & Company

Tom Novack – Merrill Lynch

Tom Terracino - Boston American Asset Management

Joan Lappin – Gramercy Capital

Noel Parks - Ladenburg Thalmann

George Froley - Froley Investments

Operator

Welcome to McMoRan Exploration Fourth Quarter 2007 results.

(Operator instructions.)

I will now turn the conference over to Ms. Kathleen Quirk, Senior Vice President and Treasurer, please go ahead, ma’am.

Kathleen Quirk

Thank you and good morning everyone and welcome to the McMoRan Exploration Fourth Quarter 2007 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. As usual we have several slides to supplement our comments this morning. They will be referring to the slides during the call. They are also accessible using the webcast link on mcmoran.com.

In addition to analysts and investors, the financial press has also been invited to listen to today’s call and a replay of the webcast will be available later today on our website.

Before we begin today’s comments, I would like to remind everyone that today’s press release and certain of our comments in this call include forward-looking statements. Please refer to the cautionary language included in our press release and presentation material and to the risk factors described in our SEC filing.

On the call with me today are McMoRan’s co-chairman, Jim Bob Moffett and Richard Adkerson. I will briefly summarize our financial results for the quarter and then turn the call over to Richard who will view our recent performance and outlook. As usual, after our formal presentation, we will open up the call for questions.

Today, McMoRan reported net income of $9.7 million, $0.20 per share for the fourth quarter of 2007 compared with a net loss of $30.9 million, $1.09 per share for the fourth quarter of 2007. This is the first quarter of results that include the Newfield acquisition that we acquired at Newfield shelf oil and gas properties in August of 2007.

Our income from continuing operations totaled $8.5 million, which include the non-charge charge of $15.9 million for market-to-market accounting adjustments associated with our oil and gas derivative contracts. Our fourth quarter 2007 oil and gas revenues has totaled $247.9 million, this compared to $53.2 million during last year’s fourth quarter, approximately 62% of our fourth quarter 2007 revenues from natural gas and 38% from oil and condensate.

Our fourth quarter production averaged 295 million cubic feet of equivalence per day, net to McMoRan that was significantly higher than the year ago period of 73 million per day and our previous estimate for the quarter of 270 cubic feet of equivalence per day. Our fourth quarter 2007 sales volume included 19.6 Bcf of gas and 1.2 million barrels of oil and condensate compared to 4.1 Bcf of gas and 437,000 barrels in the prior year quarter.

Our realized gas prices in the fourth quarter of 2007 of 727 per Mcf were slightly higher than the year ago period, which averaged 720 and for oil and condensate, it was significantly higher averaging just under $9.00 a barrel compared with $54.00 per barrel in the fourth quarter of 2006.

We also completed some important financing transactions during the period where we replaced our 800 million in bridge financing using connection with the Newfield acquisition with equity and debt financing and Rich will be reviewing that in more detail as well as our operating performance.

I will turn the call over to Richard who will be referring to the slide materials on our website.

Rich Adkerson

Good morning everyone and we have slides here which update our results from the third quarter by giving our fourth quarter results as well as our outlook for 2008.

The key reason factor in our company of course is the announcement of initial drilling results in the Flatrock number two well. We have now run wire line logs since our press release last week. The wire line indicates four pay sands totaling 190 net feet of pay and we will continue to drill this well below. We are now below 15,500 feet to just over 18,000 feet to test the deeper objectives. This gives us four discoveries on five prospects in 2007 including Flatrock, we have one unevaluated well and now, we have had commercial discoveries on 17 of 32 prospects we drilled in our program since 2004.

This is our first full quarter. With the Newfield properties, we closed the transaction in the beginning of the third quarter. It was a transaction which we acquired 320 Bcfe reserves. They had very attractive economics, which fit in with our previous exploration strategy and operating focus in the central part of the Gulf of Mexico.

Our production during the fourth quarter averaged $295 million a day. Our guidance had been $290 million as Kathleen indicated. The efforts that we have of continuing to produce volumes in generating cash flows are the Newfield properties have been successful. We are looking to average $270 million a day into 2008, and we will be working to increase that production as we continue with our evaluation of our exploration program particularly in the Flatrock area.

Our independent engineers, Ryder Scott have provided estimates approved reserves which total 360 Bcfe at yearend 2007. That reserve report was based on Flatrock on the information only from the initial discovery well and we will be working hard to add to reserves in the Flatrock area and elsewhere in the exploration program as we go forward in 2008.

As Kathleen said, we have completed our long-term financing in connection with the Newfield transaction, we took out the bridge financing at a difficult time in the financing markets, but we were successful in doing that, and now our focus from a financial perspective is going to be generating cash flows and de-levering the acquisition cost that we incurred.

Page four shows some bar charts that indicate just how significant the acquisition was in terms of our proved reserves, our production volumes. As you can see, we continue to have success in terms of commercial discoveries in our exploration program.

Page five gives some summary on the Flatrock field which is our most significant exploration success that we have had, and in our program, it is exactly what we have been looking for in terms of multi-sand and multi-well opportunity from our deep gas exploration strategy.

The number one well encountered eight pay sands in the third quarter totaling 260 feet of net pay in the Rob-L and Operc sections of the Miocene, we had a production test in October of 2007 in our Operc zone which was one of the zones that was productive, actually it was not our largest, most fixed sand in the wire line log, but this zone tested 75 million a day 14 million to our interest, we expect production to begin imminently. We were operationally headed to get this well on stream during the fourth quarter and there were some pipeline permitting issues that have delayed it, but we have those resolved and the well is scheduled to be hooked up and put online in the very near future.

We then followed up as we have reported earlier with two wells to be drilled, the number two well or the B location is I have mentioned, drilling now below 15,500 feet heading to 18,100 and as it drills deeper, we will continue to evaluate other objectives in the Rob-L and Operc sections.

To date, it has encountered, as I have mentioned four pay sands totaling 190 feet by wire line logs. This well was an important well. It is one mile northwest of our discovery well and gives us good indication of the aerial extent of these thick sands that we have seen in the discovery well.

A second well is being drilled at the D location. It is our number three well. This well is targeting Rob-L and Operc sands seen in the discovery well and it is drilling to 18,800 feet. It is currently just below 15,000 feet. It is 3000 feet south of the discovery and we had seen in the block to the south our hurricane deep prospects, very thick Operc sands which we will be testing here in this important well as we go forward.

All of these indicates multi-well development exploitation further exploration program in the Flatrock area and it will be a focus of what we are going to be doing going forward.

Turning to page six, what this does is validate what we have been about with our DPS exploration program in looking for significant sands at depth in the Miocene section. This laterally shows that the sands appear to have been deposited formerly over a very large area. A broad structure, we actually saw improved sand quality in the number two well versus discovery well over 60 feet lower production in that well over productive sands and of course because of the existing Tiger Shoal facilities and the location of these in the shallow waters of the Gulf, we can bring it on stream very quickly.

In page seven, we have an illustration that shows the area located in the OCS3-10 area where South Marsh Island Block 212, we now had two discovery wells with the number one and the number two Flatrock wells, with the number two well continuing to drill, you can see the location of the number three well and the previous production that we had established in our hurricane prospects in block 217 and the location of the hurricane deep well, McMoRan number 226 well which saw a very thick Jordon of sand 900-foot sand which had production in small sections of that sand, but the sand of element is what has given us excitement and potential about where we are going to be going forward with this.

There is a cross-section illustration of this exploration prospect on page eight. You can see the sand sections in the Miocene that we have been talking about the Rob-L, Operc and the deeper Jordon sands. These prospects are defined by a big fault that we have been calling the Big Blue Fault and what this illustrates is the wells that we have drilled in the block to the south of the hurricane where they had seen production, the discovery well, one Flatrock well in the block to the north, the number two well, and what we will be testing with potentially proposed locations.

What this gives us is the opportunity to have is to have multiple wells in multiple sand packages and is such a very exciting thing for us and something that as I have said will be focus of what we will be doing going forward.

Jim Bob will be talking more about it in a minute. This is all part, as it shows on page nine, a significant area of acreage, it was an original package of over 80,000 acres that was located in the Federal offshore in OCS 310 and on state leases, Louisiana State Lease 340. We had drilled five years ago, a discovery well in the Mound Point area and since then, we have had discoveries in the JB Mountain area, and now the Flatrock area, these are associated with the historical Mound Point and Tiger Shoal fields which together produced more than seven trillion cubic feet above 14,000 feet and they are a very significant structures located at depth and that is what we are testing with the wells that I have been talking about and their significant potential beyond the existing areas that we have seen production on and our team is continuing to evaluate with our partners new exploration drilling opportunities which because of the fact that we have seen production now in a number of these wells have significant less exploration risk that is typical in our deep gas exploration program and this will be, as I have said something that we would be reporting to you on an ongoing basis because of the future work that we will be doing in this OCS 310 Mound Point area.

Our top wells that provide our current production rates are shown on page 10. You can see that with the acquisition, we now have a spread of wells that gives us diversity in terms of where our production volumes are coming from, not being so focused on a limited number of wells, but with the mutual acquisition, we have a diversity of properties and as we work hard to continue to generate these volumes, we have opportunities to exploit the shallower production, there is exploration potential in the shallower areas as well as deeper areas associated with these properties and as we are focused on Mound Point and our other DPS wells, a significant group in our operations team has been working diligently to keep volumes flowing to generate current cash that provides cash for our exploration development activity, as well as generating cash to reduce our debt.

Our Ryder Scott information for the year is presented in the reserve row forward on page 11. We went into the year with just over 75 Bcfe. The Newfield property brought in over 300 Bcfe with reduced 55 Bcf and had reserve additions of over 30 ending up with 364. The PV-10 based on SEC rules and yearend prices was $1.8 billion. We have roughly $200 billion of probable reserves and $200 billion of possible reserves according to Ryder Scott. The important thing of course to note with the Proved Reserve estimates is, is this subject to the criteria that is specified with the SEC rules and there was limited reserves that could be added associated with the Flatrock because we had the information only for one well.

As we go forward, we would be expecting to see our reserves to increase as we further define this area and other areas in our exploration program. Our reserves as illustrated on page 12 are basically two-thirds gas and one-third oil, a significant part of the oil comes from Main Pass facility. As we talked about in our financing, the reserves include significant behind pipe and undeveloped reserves. This has been a feature of the Newfield properties over time and we have our regular plans scheduled efforts to move these undeveloped reserves in the proved developed producing category and our success in this half year that we have been doing that has been as we expect it so we will be working to continue to do that.

Our 2008 outlook is summarized on page 13 as Kathleen have mentioned, we expect to average $270 million a day for the year and that would be the current expectations for the first quarter. As we work to optimize production from the acquired properties and we have an opportunity to increase production beyond this with further exploration development success with our drilling in the OCS 310 State Lease 340 area, we are developing plans to re-enter and deepen the well in Newfield in a venture that was operated by EXON operated the West Blackbeard Ultra deep project, we will continue to access future exploitation, development and exploration opportunities in the acreage acquired from Newfield.

Our capital expending which came in for the year 2007 below what we had previously guided just for timing reasons and there will some carryover of 2007 cost into 2008 of $40 million and including that, we would expect to spend $225 million on capital in 2008 with $90 million for our exploration and exploitation efforts, $95 million for development cost, as always, we will point out that our capital spending will be driven by the opportunities that we have and it will change as we go forward in the year and we will keep apprised of those changes.

I mentioned the Blackbeard Ultra deep exploration prospect. This is a tremendous opportunity for our company. It is located in 70 feet of water at South Timbalier block, 160, a well has been drilled there to below 30,000 feet by the original operator and its partners is that well was drilled, it was seeing geological information that was consistent with the model that was in place that led to the well being drilled in the first place. They had encountered very thing gas bearing sand. The well failed to reach its primary target when it encountered high pressures and temperatures and the operator and the group temporarily abandoned the well in 2006, but the drilling results as I indicated were confirming the geology expectations when we acquired the producing properties of Newfield, we acquired rights to this group of leases and we have been working since the acquisition on plans to re-enter and deepen the well and we expect to do that with our partners in the first half of 2008.

We have a 27% working interest in this property, our current expectations are that the deepening to drill the well another 1500 to 2000 feet would be on a gross basis approximately $30 million. The nature of this prospect is illustrated on page 15.

It actually from a geological perspective is similar in its objectives to the successful wells that have been drilled into the lower Miocene in the deep water, and a series of these wells, the Chevron, now they had a discovery that, the Tahiti and the Tonga project are wells that tested similar aged rocks, but were drilled in the deep water. These sands are deposited in the shallow waters of the Gulf, but they are located at depths that have never been drilled in the shallow waters and that this well was the initial well that the industry was drilling to test these prospects.

It is drilling through the Miocene sections that we have been focused on in our DPS exploration program, but we will be going beyond the Salt well fault that would take us down into the older Miocene-aged rocks. It is a very significant structure, we believe the well can be drilled and drilled safely and if we are successful, it gives us the opportunity of testing a very significant prospect, very significant particularly for a company of our size and we have a substantial work into this prospect and this is, as I have said, an additional add-on opportunity to the DPS exploration program that we have pursuing.

From a financial summary standpoint, in the fourth quarter, we had $250 million of revenues just under $200 million of EBITDAX and $44 million of CAPEX. We have drawn under our bank credit facility $274 million that includes roughly $50 million that we drew down to complete the takeout of our $800 million bridge financing. The rest was done with our public offerings and we have availability under that credit facility as of the end of the year of $266 million which reflects $100 million in lines of credit that we have drawn for reclamation cost.

Our equity offerings that we issued in November 9, 2007 were very well received. We raised just over $200 million in common stock offering and $259 million in a mandatory or convertible preferred offering and that gave us gross proceeds of $460 million from the equity offerings. We then sold $300 million of senior notes in a very difficult bond market situation, but those proceeds with approximately $50 million for a bank credit facility allowed us to achieve our objectives of taking out the bridge financing that was a temporary financing that we had in place that allowed us to do the Newfield deal, so we have our capital structure in place and we earning significant cash flows as illustrated by the chart on page 18, when we look at plan production levels and if we look at our cost structure and apply forward pricing, our 2008 EBITDAX would be an excess of $800 million. You can see the variances for different prices and then after we take into account our capital expenditures and interest in other cost, dividends on our preferred et cetera, you can see that under forward prices, we would have just under $400 million of excess cash flows during that year which will give us the ability to de-lever quickly.

Our Main Pass project continues to have focus within our company. We are talking with potential energy suppliers to develop a commercial situation there. This is a facility that is now being permitted to store gas and underground storage facilities and to receive LNG and re-gas it and produce it. We are looking for other potential uses for this project including the possibility of storing natural gas liquids, but it is a potential future value for our company. We are not spending relatively insignificant amounts of money to keep this project as a viable future value generator for our company in the future. The LNG market is one right now that makes it difficult to attain long-term slack contracts, but the attraction of this project will be able to give us some opportunities for future values and we will continue to work on it.

The summary for our company then is that we are working to maintain and improve our financial flexibility by reducing our debt and strengthening our balance sheet, at the same time, we have the capital to pursue these potential opportunities with our deep gas program with the Blackbeard program with the other exploration activities we will manage our risk with our capital through joint venture and partner arrangements and we are generating substantial cash flows to reduce our debts.

With that, we would be happy to respond to questions.

Question and Answer Session

Operator

(Operator Instructions)

Rich Adkerson

Operator, any questions?

Operator

Yes, there are. The first question comes from the line of Brian Kuzma with JP Morgan, please go ahead.

Brian Kuzma –JP Morgan

I was hoping you could walk me through your production guidance looking out into ’08. Particularly as I look at First Quarter ’08, you call in for $270 million a day versus $295 in the Fourth Quarter when you got Flatrock, Hurricane Deep and Liberty Canal all coming online for a full quarter? Is there something I am missing here?

Rich Adkerson

Well, it is the combination of those wells coming on quarter and then the natural decline rates that we have that is built in to the Newfield properties. So we are actually, for the year, seeing an outlook for better production than we had originally been anticipating and we still do not know yet, Brian, what the additional wells at Flatrock we will be able to add to the production, so this is just what we have based on our current models of the existing wells and the initial production rates from these other wells.

Brian Kuzma –JP Morgan

Okay, and so like how many Flatrock wells would be in that $270 for the full year?

Rich Adkerson

It is only not for the full year because of the timing they are coming in, but by the end of they year, it is built on having some production from three wells.

Brian Kuzma –JP Morgan

Okay that is it? Just three wells.

Rich Adkerson

That is just it, right.

Brian Kuzma –JP Morgan

Okay, and then—

Rich Adkerson

But we have plans as we indicated of other proposed locations so there will be other drillings, so we will be updating these volumes. As we get the drilling done and evaluate the production rates from these wells as we go forward and we have optimism that we will have a good chance of beating these rates.

Brian Kuzma –JP Morgan

I see. And then, so what is your outlook for the Newfield properties and do you expect just to see like the typical like 30% decline on these properties?

Rich Adkerson

These wells are typical Gulf of Mexico shallow wells, the team that we have, but I think most of the people in the call know that we are virtually all the people from Newfield have been working with these properties. We have our people now in Houston working with them and we have been very pleased with the efforts that they have had in terms of migrating the non-producing reserves in the producing categories of dealing with the day-to-day deals of managing this production and the operations, and the team has been doing really a great job with it. There are opportunities associated with it because there was a significant probable and possible reserves that we acquired in connection with the acquisition, so we are going to keep working with it everyday, but these properties as we have been saying all along typical Gulf of Mexico, shallow water productions that can be produced because of the quality of the sands in a very rapid way and so that results in decline curves.

For example, we have got over 80 re-completions in our budget plan for 2008 as part of this program.

Brian Kuzma –JP Morgan

Well, okay. And has Hurricane deep come online yet?

Rich Adkerson

Like the Flatrock well, we expect it to come on very shortly.

Brian Kuzma –JP Morgan

Okay. Let me ask you a couple of quick questions on Flatrock then. Are you seeing any preliminary indications on the number three well that would suggest that your primary formations would be pressure continuous?

Rich Adkerson

We were just not to the point yet, the well has not gotten to the objectives. Drilling so far has not provided certainly any negative information, but that is what we are going to be looking for as that well gets down to test the Rob-L and Operc objectives as it reaches this targeted depth, but it is just not to that point yet.

Operator

Our next question comes from the line of Mr. Gary Nuschler with Jefferies & Company. Please go ahead.

Gary Nuschler – Jefferies & Company

First question, Flatrock two and three are currently drilling, you expect those to be down by the end of the quarter?

Rich Adkerson

By the end of the next quarter.

Gary Nuschler – Jefferies & Company

When do you expect it to be down?

Rich Adkerson

The Flatrock two well is now drilling below 15,500 feet. It should reach its objectives in the second quarter, and then the third well will make great progress and will be testing objectives by then and it should be scheduled also to be completed by the end of the first quarter, but the third well should be down in the second quarter.

Gary Nuschler – Jefferies & Company

Okay, and I guess my question is going into the second quarter, it looks like Flatrock three will continue to be drilling, but what are your expectations for the exploration program. I know Blackbeard, I think that is going to get re-entered in that quarter. Any other wells lined up?

Rich Adkerson

We have other proposed locations in the Flatrock area. We had indicated that on the charts. And we have other prospects in the Mound Point. OCS-310 area that we are working now to get drilling arrangements, our drilling rigs and operations approved to drill those, so our focus in terms of our deep gas drilling program, as we go forward into 2008 will be in Flatrock as well as Mound Point, JB Mountain areas.

Operator

Our next question comes from the line of Mr. Tom Novack with Merrill Lynch, please go ahead, sir.

Tom Novack – Merrill Lynch

Can you update us on your estimate for 2008 reclamation spending?

Kathleen Quirk

We have got budgeted about $80 million in reclamation spending for 2008. The timing of that could shift around. That is what is in the cash flows that you are looking at. We also have under the arrangements with Newfield, we have an escrow arrangement where we are required to put in $15 million a year, so that is reflected in our numbers as well.

Tom Novack – Merrill Lynch

The convertible senior note maturing this year, if it remains out of the money, is the plant still to take that with free cash flow or would you think about refinance some of that?

Kathleen Quirk

We have options. Certainly, we would have options within our cash flow and borrowing capacity to handle that maturity if it does not convert. We would also have options to think about whether or not we would want to refinance.

Tom Novack – Merrill Lynch

Regarding Blackbeard, can you remind us who the partners are what their respective interest levels are?

Rich Adkerson

The partners include Newfield has an interest. We are discussing with the other partners right now about the plans for participation. The other partners have had interest in it, but we have not completed the drilling arrangements, but we are very confident that we would be able to put the group together and get the well drilled.

Tom Novack – Merrill Lynch

Okay, if everyone does participate, would that be on a heads up basis?

Rich Adkerson

Our current plans are for us to keep our working interest that we have in oil which would give us roughly 27% working interest in an AFE for the project we are now ambitioning that would be around $30 million.

Operator

Our next question comes from the line of Mr. Tom Terracino with Boston American Asset Management, please go ahead.

Tom Terracino - Boston American Asset Management

So on the 363.9 of Proved Reserves, how much of that is Flatrock?

Kathleen Quirk

It is roughly 134 Bcf to our interest is included for Flatrock.

Tom Terracino - Boston American Asset Management

Okay, so theoretically, if Flatrock is a TCF, you have got 18%, theoretically that is 180, if my math is correct?

Kathleen Quirk

The 8-ace number would be just over 60.

Tom Terracino - Boston American Asset Management

Okay, just wondering about how big is Block 212? The acreage.

Rich Adkerson

It is a standard 5000 acre of offshore block.

Tom Terracino - Boston American Asset Management

Okay, thank you very much.

Operator

Our next question comes from the line of Ms. Joan Lappin with Gramercy Capital. Please go ahead.

Joan Lappin – Gramercy Capital

Could you talk about Main Pass. You mentioned that there are issues about in the current environment of getting long-term via gas supplies so could you review what those are?

Rich Adkerson

Well at least, it has to do with the global LNG market. Today, gas prices are higher outside the United States than inside the US. LNG will play an important role in the future of the gas market in the United States, but at the present time, given the other alternatives that LNG produces half to sell their market in the global marketplace and given the development of LNG receiving ports in the United States, producers are not now feeling compelled to commit to long term supply arrangements for receipts in the United States.

Joan Lappin – Gramercy Capital

And what is the kind of market clearing fulcrum pivot point for that to change?

Rich Adkerson

Well, that is something that varies with global energy market situation and I do not think you could pinpoint a specific price to say what it would be.

Operator

The next question comes from the line of Mr. Noel Parks with Ladenburg Thalmann, please go ahead

Noel Parks – Ladenburg Thalmann

I have a few questions, just a housekeeping item. In the 30.8 Bcfe of additions, how much of that is attributable to additions and revisions?

Rich Adkerson

Let us see, I will see if we can find that information for you.

Noel Parks – Ladenburg Thalmann

Okay, I will move on to something else. About the former Newfield properties, at that time of the acquisition, you noted there were 30 locations where you were interested in looking for deep gas according to the Mali pursuing it of some time, can you give us any sense of what you found to continuing to pursue those locations so far?

Rich Adkerson

Yes, we are actively continuing to that analysis. Our team is doing that in conjunction with the significant amount of work we are doing in the Flatrock area, but I will tell you that our team is encouraged by what they think will be the possibilities there. There is nothing specific to report to you, but they are encouraged by the possibilities.

Jim Bob Moffett

I have not been able to comment because my line was needed. Let me just see if I can answer the question that was just asked and make comments on some of the other questions.

The prospects that we are looking at on the Newfield properties, we have a large number of prospects that we have in the preliminary stages for the deeper part of the prospect which is above the so called Ultra Deep. We also have additional Ultra Deep prospects going at 450,000 acres, and we have some prospects that are on the shallow portion of the acreage that maybe development that would use in addition to the proven Ryder Scott reserves.

Let me go back and answer a couple of things because as I said, my line was needed and I do think some of you want to hear my comments.

The question about Flatrock, the reserves that we were able to add, because of the fact that the only well that was down at yearend and because of the rules under the Ryder Scott numbers, we have not been able to add any of the reserves on a proven basis that were indicated by the Number 2 well. So therefore, the numbers that you see, we would significantly change if the Number 2 well had been down by the yearend. The timing being what it was, they will all come in, in the First Quarter.

The Number 3 well that you asked about is not down deep enough yet to be into the deeper part of the Rob-L.

If you remember the slide that Richard referred to that showed the Rob-L prospects to the north and underneath the Number 3 location in the Jordana to the south of that. Until we get below the 15,000-foot level, we cannot really evaluate any of the deeper potential of the Rob-L or the Operc sections. So I want you to know that that is in our reserves.

I think the question referred to the sites on Bcf, again if you have 180 Bcf, it is only to get credits for the entire Bcf assuming it is there and we can drill it up, but as you know, it would be really what I just referred to in Ryder Scott, the only 13Bs of our Ryder Scott numbers are attributed to the Number 1 well.

If we have had the Number 2 well, then we will re-emphasize that, we would have been able to not only get credit for the reserves or add a Number 1 but give the acreage between the Number 1 and 2 well much more credibility and obviously, Number 3, if it is what we expect either in the lower Rob-L or Operc, with add reserves that would have been in the first well and a deeper Operc sands. So again I apologize that I could not comment directly on the questions as they were asked because of the problem with the communication. So I hope that answers the questions. If I have not commented on any of your questions or want to hear my comments on your questions, please let me know if I have not answered them.

Operator

Our next question comes from Mr. George Froley with Froley Investments, please go ahead.

George Froley – Froley Investments

Could you compare and contrast what is going on in Brazil with the deep drilling and Green Canyon and ours, do we just have a smaller layer of salt, I mean, it is way smaller than it is in Green Canyon. What is it like in Brazil, what does Brazil look like compared to these two?

Jim Bob Moffett

Let us stay with that without getting into much detail, it is really another part of the basin. There is a huge separation between what you are talking about in our deep drilling in both the Miocene and the so-called Frio. It is really another basin and the sedimentary patterns over there were not affected by the Mississippi River. Most of the bed that you are seeing in the deep water play in a reference chart, they play on the shelf, is our sediments that were introduced into the Gulf of Mexico from the Mississippi River. So, once you get away from part of the basin, it changes completely because of the environment and deposition and a different sediment source.

George Froley – Froley Investments

Okay, so it is really not comparable. PetroBox does not have expertise in this area that would help us.

Jim Bob Moffett

Well the only thing they would have is this drilling knowledge and the whole key to this ultra-deep play and the key to the play that we have just discovered at Flatrock is to being able to overcome the pressures of other people considered impenetrable, and so the work that they are doing down there as far as the drilling techniques into the drillings and the deeper formations are dealing with the heat, temperatures and pressures, all of that technology can be transferred in normal gradients and pressure gradients that occur as you get into these deeper formations, but PetroBox has their own staff that works at the Gulf of Mexico and they have been very active, so they have people that are familiar with the geology of the Gulf of Mexico, a portion of the basin that we are discussing in this context.

Operator

We have a follow-up question from the line of Joan Lappin with Gramercy Capital, please go ahead

Joan Lappin - Gramercy Capital

I am wondering if you could discuss on Slide 15. There is a proposed location of Blackbeard east, which shows the potential, I guess you think of three different pools in the lower, the middle and I guess, it is hard to read this, two on the lower or one in the I do not know, whatever. If you could explain that slide, I would appreciate it and then also, in your reference slides, what you are trying to show us in Slide 26. So page 15 and page 26, if you could talk about those two I would appreciate it.

Jim Bob Moffett

Yes, in Slide 15 that you are referring to, the reason why you see different references to prospect names, this Blackbeard prospect has a very large area, some 25,000 acres. The original prospect that was drilled, which was called Blackbeard West is the well that we are going to be deepening.

In this cross section it does not completely show you how these prospects connect. If you take Blackbeard East and West, it is really one big structure with what we call the saddle in between and therefore if the Blackbeard West location is successful and we prove that the sands as a matter of fact do exist then Blackbeard East would be a well, that would be a follow-up well on this very large structure to basically expand the side of the field from just the Blackbeard West.

So, Blackbeard is one prospect with a west portion and an east portion and that is what the intentions of that slide is, to show you how big the structures underneath this salt well or the blue area that is shown is a separation between the upper Miocene and then the Deep play.

So again there are few structures above the salt where they cover 25,000 acres and that is why it is so important to get this well deep and then prove that the deep water sands is a matter of fact, do occur in the shelf and under the shallow water prospects that we are drilling, because it is a time of Miocene deposition that put the sands into the basin. The Gulf of Mexico basin that we are dealing with, or the deep water line goes all the way back in our current codes for this, what the deep water drilling has done and the seismic depth has allowed us on three days to get underneath this so called salt-well foam.

This is all one basin that had the same environment deposition and what is currently known as the shelf and in the deep water. The shelf edge bringing it back to the current coastline. I hope that clarifies it for you Joan. Then you wanted to know about the Slide 26, was that your next question?

Operator

We have our following question, a follow-up from the line of Brian Kuzma, please go ahead.

Brian Cuzma – JP Morgan

Did you want to tell me about Slide 26? Do you have a rig lined up for Blackbeard, and whose rig is it?

Jim Bob Moffett

Yes we do. The rig is lined up. We will be spending a lot of time with the partners as Richard said and most of the original partners, which was PetroBox and now the Italian oil company that bought Dominion. Most of these people have already expressed a very big interest in getting this well deep and so we are drilling new feed ourselves, and the rest of those people we will have an opportunity to get the original parties with the exception of (inaudible) and BP back on track and I think someone asked if it would be heads up and yes everyone would be paying a proportionate portion of the cost. By now, they would come in quickly on 26. Again, Slide 26 is only to show you the two different deep and ultra deep plays.

The reason why we tried to make this model as clear is if people get confused between what we call deep gas and the deep water gas play. And then you have on top of that the ultra deep.

So the deep gas plays that we are drilling, which is a Flatrock type of play is known as what is above the so called traditionally Hinge Orion (ph) faults or salt well and that is shown in this, the middle of this cross-section show up in a blue color and above that we have our so called Deeper pool concept which is shown on the right of that under the so called Precious Prospect where you have a shallow filling of Miocene and it produces in the deep Miocene as you migrate to the right side of the chart.

Below that salt well you have this deep water prospect. The Blackbeard prospect is shown to give you some idea of how the two are related but separate in terms of the fact that they are related because both Miocene prospects, but the geology, the tectonics or the stresses that were causing the deeper highs are located in different places than the geologic forces that form these deeper pools place under the shallow pool from the Plane of Plaxin, so we were just trying to show on Slide 26. I have to differentiate for you going forward and explain the deep gas play in shallow water shelf. The ultra-deep play and shallow water shelf and then the deep-gas play that we referred to before in deep water. I hope that clarifies it for you Joan.

Operator

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

Noel Parks – Ladenburg Thalmann

Actually, I think the operator is muting people or cutting off their line after they ask their first question so it does not give you a chance to follow up so, I have a key question that I would like to get through. One just real basic one, the LOE expense was much lower this quarter than I had expected. I think about 183, and is that indicative of what we might see going forward with combined properties now?

Kathleen Quirk

Yes, it is about what you can expect going forward. Quarter-to-quarter a little bit but on average that is pretty close.

Noel Parks – Ladenburg Thalmann

The DDNA also, on the unit cost basis, similar going forward do you think.

Kathleen Quirk

Yes, we are in the roughly four in a quarter so, estimate for 2008. One follow-up note to a question you asked previously about the revisions and additions, majority of that was addition of the 31 it was 29 of addition and the balance was two of revisions.

Noel Parks – Ladenburg Thalmann

I have started asking before about the 30 locations that you got from the new field property, you were going to keep confidential on and I just want to get a stance. Do your technical folks have a stance of narrowing down on a set of them that they in particular would be looking out for the nearer term or next year or two or are they still looking at all of them as a whole at this point?

Jim Bob Moffett

No, on that point the 30 prospects that we had, I mean the reason why they are on that map is because of the deeper pool concept. The best place to find the deeper pool is below a significant fill. Yes we have been focused on checking those but we have the team of people that are looking at the whole spread of acreage in terms of the maturization of the prospects.

When will we take prospects from the status of looking at them and as supposed to set them up, these drilling prospects? There is so much focus right now and looking at the results of our deeper pool concept at Flatrock and the surrounding wells that we had discussed and we are trying to be sure that we get the benefit of every bit of data. And it starts to give us a signature because everywhere we drill and tie into this side, we gives us a better idea of which part of these deeper pools have the bigger pockets of production. And so, to try to be able to take it and say what should we be spending our money on in 2008 relating to the question with Vancouver asking about production.

We only have for the First Quarter, we have only put the first well into the First Quarter and we have got Number 2 well now, it is already indicating that it is going to have multiple pay, if it has multiple pay and then Number 3, it should be productive in the lower Rob-L and Operc what those multiple pay set up is that you have a whole group of wells that you will be drilling to different levels and so therefore in projecting our productions for 2008 we have not gone overboard in trying to assume how many of those multiple locations we will focus our dollars for because that will be the biggest bank for the buck. You are in shallow water. You have a huge production facility that is being upgraded everyday as we speak with Chevron and a shelf and plane trying to be sure we stay out in front of these high volume wells.

So, rather than throw numbers into our production forecast, even for the first quarter, you are just trying to wait and get these two wells down and by doing that that will give us a better feel or since we got to hold on to these other leases of our production when we would want to allocate chaplain to the new locations that we would be drilling under these 30 prospects and other prospects that we would have, that we acquired in the new field of transaction, it might have a deeper pool. I hope that clarifies it for you.

Noel Parks – Ladenburg Thalmann

Also on the new field properties, could you just tell us a little more about what you are looking at as far as those behind high reserves that they have and also, if you could give us a sense of what you might be spending just for maintenance CAPEX on the Newfield properties out of your overall budget this year.

Jim Bob Moffett

I think we have allocated $80 million for the capital budget. If they ask you a question about the prospects themselves, the prospects in our Ryder Scott reserves at the time we filed our Ryder Scott numbers and we bought the property. So all we are doing with that program, we have a separate group of people that do nothing, but follow up on the timing of the production and recompletions on that group of wells. Now, when those wells are all drilled and logs that are on record. You reserve it there, it is just a matter of timing and you cannot go after them until you complete the zone to the currently productive. So we call those behind type reserves and those passages that we originally reported on Newfield. So you have categories or prospects.

You have the prospects that we call the legacy properties that we own charged of the new field acquisition and then you have the new field 1:48 behind pipe reserves that do not require any additional wells to state the reserves. It is just a matter of timing and then you have the deep prospects that you just referred under the 30 place that we showed on the slides. That are part of our focus and then you have the ultra-deep place on top of that. So that is why the categories and prospects are there. To show you the diversity of what we added by adding to our reserve and adding to our production and adding to the food that we can look to be able to enhance both production rights.

That is why it is so hard for us to project this thing. We have very big players, opportunities and they are going to be all get sorted out. We will go after the one that gave us the biggest bank for the buck and the regional comment that is the Flatrock area is so important. It these multiple pace can be logged and quantified in these wells, it will set up these locations, all of which could be just started in 2008. Let us hope we have that. Would consider that good problems.

Operator

We do have another follow-up question from the line of Joan Lappin with Gramercy Capital, please go ahead.

Joan Lappin – Gramercy Capital

Yes. I am okay, I was one of these people that the operator shut off.

Operator

And we have no further questions at this time.

Rich Adkerson

Well, thank you everyone for participating. We look forward to reporting results to look forward in the 2008. We expect to be a great year for McMoRan. If you have additional need for information you have our contact information when we have to respond to it. Have a good day.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation.

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Source: McMoRan Exploration Co. Q4 2007 Earnings Call Transcript

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