McMoRan Exploration Company: Bonanza or White Elephant?

Includes: FCX, MMR
by: Bruce Vanderveen

McMoRan Exploration (NYSE:MMR) is small ($300 million market cap.) exploration and production company that owns or controls interest in some 603 oil and gas leases in the Gulf of Mexico and onshore Louisiana and Texas. Proved oil and natural gas reserves as of December, 2007 totaled 363.9 bcfe (billion cubic feet equivalent).

McMoRan Exploration has its origins in Freeport-McMoRan Copper & Gold Inc.’s (NYSE:FCX) oil, gas and sulpher operations which were split off in the 1990s. Several board members serve on the boards of both companies.

McMoRan has been engaged in the development of the Main Pass Energy Hub, an offshore Liquid Natural (LNG) gas distribution and storage facility. The hub is intended to function as a port to offload and store LNG.

As of December 31, 2007 the company had $93 million total cash ($1.327 cash per share) and $374 million in debt. Like many energy companies, McMoRan reported a loss the last two quarters of 2008.

Researching the company I found potential negative and positive aspects.

The Negative: It was difficult to find much information on McMoRan’s Main Pass Energy Hub. The website, has lots of pictures, but the most recent update that I could find, under the “Whats New” link at the top of the home page, had a 2008 heading but the latest post was April 4 of 2007 — not very new and not in 2008. Either they have a very poor web people or the site is suffering from profound neglect.

Of course, imported LNG no longer is as important to the US as predicted just a few years back. Significant natural gas reserves have been found domestically in recent years. Current low gas prices (now under $4 per 1000 cubic feet) have to be a negative for LNG activity. The hub site’s home page prominently cautions the project is “subject to significant risks, including determining the feasibility of developing the project, securing significant project financing, and obtaining regulatory approval“. From the photos it looks like a lot may have already been invested in this former sulphur mining site,

I am open to the view that this hub may be a gem, waiting to be uncovered, rather than a white elephant. The company could help with new website updates or press releases concerning the hubs current status.

The positive (maybe): Business Week, in its February 16, 2009 article on Exxon (NYSE:XOM), mentioned that McMoRan took over a deep, abandoned Exxon well (Blackbeard) and, drilling even deeper, found significant oil deposits. The article says Mr. James R. Moffett, co-chairman of the company, declared that McMoRan “… may have found , between a half-billion and several billion barrels of oil” in Blackbeard.

It is also worth noting that Mr. Moffett on March 4 and 5 of 2009, purchased some $2 million dollars worth of common stock in the company at prices of $3.76 and $3.90 a share (Yahoo Finance). This may explain the recent uptick in stock price.

I would be cautious with McMoRan. It will be interesting to see if the former Blackbeard well is as rich in reserves as Mr. Moffett seemed to think. If so, score one for McMoRan over Exxon. If not, maybe the rumored discovery is just good PR in a down market. I look forward to reading the 2008 annual report to see the latest on the former Exxon well.

Disclosure: Long MMR (for now).