McMoRan Exploration Company 10-Q 2010
Documents found in this filing:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. SYes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). oYes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “ accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. oYes S No
On October 31, 2010, there were issued and outstanding 95,477,937 shares of the registrant’s Common Stock, par value $0.01 per share.
The accompanying notes are an integral part of these consolidated financial statements.
McMoRan EXPLORATION CO.
The accompanying notes are an integral part of these consolidated financial statements.
McMoRan EXPLORATION CO.
The accompanying notes are an integral part of these consolidated financial statements.
McMoRan EXPLORATION CO.
1. BASIS OF PRESENTATION
The consolidated financial statements of McMoRan Exploration Co. (McMoRan), a Delaware corporation, are prepared in accordance with U.S. generally accepted accounting principles. McMoRan’s consolidated financial statements include the accounts of those subsidiaries where McMoRan directly or indirectly has more than 50 percent of the voting rights and where the right to participate in significant management decisions is not shared with other stockholders, including its two wholly owned subsidiaries, McMoRan Oil & Gas LLC (MOXY) and Freeport-McMoRan Energy LLC (Freeport Energy). MOXY conducts all of McMoRan’s oil and gas operations. The long-term business objective of Freeport Energy is to maximize the value of the offshore structures used in the former sulphur operations, which may include the pursuit of a multifaceted energy services facility, including the potential development of a liquefied natural gas (LNG) regasification and storage facility at the Main Pass Energy Hub (MPEH™) project. McMoRan’s previously discontinued sulphur operations are presented as discontinued operations, and the major classes of assets and liabilities related to its former sulphur business are separately shown for the periods presented.
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in McMoRan’s Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K). The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. All such adjustments are, in the opinion of management, of a normal recurring nature.
2. LONG-TERM DEBT
McMoRan’s long-term debt is summarized below (in thousands):
Senior Secured Revolving Credit Facility
McMoRan’s variable rate senior secured revolving credit facility (credit facility) is secured by substantially all of MOXY’s oil and gas properties and matures in August 2012. The borrowing capacity was $175 million at September 30, 2010. Although McMoRan had no borrowings outstanding under the credit facility during the quarter ended September 30, 2010, a letter of credit in the amount of $100 million is outstanding under the credit facility to support the reclamation obligations assumed in the 2007 oil and gas property acquisition, reducing the remaining availability under the facility to $75 million (Note 9 of the 2009 Form 10-K).
Availability under the credit facility is subject to a borrowing base, which is determined semi-annually each April and October. McMoRan’s lenders are currently reviewing the borrowing base in connection with the October redetermination.
Interest expense includes amortization of the credit facility’s deferred financing costs and other facility fees. During the third quarter and nine months ended September 30, 2010, interest expense on the credit facility totaled $1.5 million and $4.4 million, respectively. Interest expense on the credit facility totaled $1.5 million and $4.2 million for the third quarter and nine months ended September 30, 2009, respectively.
The credit facility contains covenants and other restrictions customary for oil and gas borrowing base credit facilities. McMoRan was in compliance with these covenants at September 30, 2010.
Fair Value of Debt
The fair value of McMoRan’s 5¼% convertible senior notes due October 2011 (5¼% notes) and 11.875% senior notes due November 2014 (11.875% senior notes) is determined at the end of each reporting period using inputs based upon quoted prices for such instruments in active markets. The following table provides the estimated fair value of the 5¼% notes and the 11.875% senior notes as of September 30, 2010 and December 31, 2009 (in thousands):
3. EARNINGS PER SHARE
Basic net loss per share of common stock has been calculated by dividing the net loss applicable to continuing operations, net loss from discontinued operations and net loss applicable to common stock by the weighted-average number of common shares outstanding during the periods presented. For purposes of the earnings per share computations, the net loss applicable to continuing operations includes preferred stock dividends and early conversion inducement payments.
McMoRan had a net loss from continuing operations in both the third quarter and nine months ended September 30, 2010 and 2009. Accordingly, the assumed exercise of stock options, as well as the assumed conversion of McMoRan’s 8% convertible perpetual preferred stock (8% preferred stock), 6¾% mandatorily convertible preferred stock (6¾% preferred stock) and 5¼% notes, have been excluded from the diluted net loss per share calculations. These instruments were excluded because they are considered to be anti-dilutive, meaning their inclusion would have decreased the reported net loss per share from continuing operations during these periods. The excluded share amounts are summarized below (in thousands):
Outstanding stock options excluded from the computation of diluted net income (loss) per share of common stock because their exercise prices were greater than the average market price of McMoRan’s common stock during the periods presented are as follows:
4. DERIVATIVE CONTRACTS
In connection with the 2007 oil and gas property acquisition and related financing (Note 9 of the 2009 Form 10-K), MOXY entered into derivative contracts for a portion of the anticipated production from its proved developed producing oil and gas properties at the time of the acquisition for the years 2008 through 2010. See Note 1 of the 2009 Form 10-K for McMoRan’s accounting policies regarding derivative contracts.
At September 30, 2010, McMoRan’s outstanding oil and gas derivative contracts (all of which relate to remaining 2010 production) were as follows:
Because these oil and gas derivative contracts were not designated as hedges for accounting purposes, unrealized (gains) losses representing changes in the related fair values along with realized (gains) losses representing cash settlements are recognized immediately in McMoRan’s operating results at each reporting period. McMoRan’s realized and unrealized (gains) losses on these contracts were as follows (in thousands):
The original cost of the put options entered into for the 2008-2010 periods was $4.6 million. There was no cost for entering into the swap contracts. The derivative contracts are reported at fair value on McMoRan’s balance sheets. The fair value of McMoRan’s swaps and puts is based on transaction counterparty acknowledgments and is corroborated using quoted market prices and internal valuation model analyses. McMoRan has classified the fair value measurement of its derivative instruments as
being derived from Level 2 inputs, as defined under U.S. generally accepted accounting principles (Note 7 of the 2009 Form 10-K). The following tables provide fair value measurement information for these instruments as of September 30, 2010 and December 31, 2009 (in thousands):
5. INCOME TAXES
As of September 30, 2010 and December 31, 2009, McMoRan had approximately $446.7 million and $415.0 million, respectively, of unrecognized tax benefits relating to its reported net losses and other temporary differences from operations. McMoRan recorded a full valuation allowance against these deferred tax assets (Note 13 of the 2009 Form 10-K). If future circumstances permit the allowance to be reversed, McMoRan’s effective tax rate would be positively affected in future periods to the extent these deferred tax assets are recognized.
Interest or penalties associated with income taxes are recorded as components of the provision for income taxes, although no such amounts have been recognized in the accompanying financial statements. Currently, McMoRan’s major taxing jurisdictions are the United States (federal) and Louisiana (state). Tax periods open to audit for McMoRan include federal income tax returns subsequent to 2006 and Louisiana income tax returns subsequent to 2005. Net operating loss amounts associated with prior periods are also subject to audit.
6. OIL AND GAS ACTIVITIES
Pending Acquisition of Plains Exploration & Production Company’s Shallow Water Gulf of Mexico Assets & Related Financing Transactions.
On September 20, 2010, McMoRan announced an agreement to acquire Plains Exploration and Production Company’s (PXP) shallow water Gulf of Mexico Shelf assets for a combination of stock and cash. Under the terms of the transaction, McMoRan will issue 51 million shares of McMoRan common stock and pay $75 million in cash to PXP to acquire all of PXP’s interests and exploration rights in the shallow waters of the shelf of the Gulf of Mexico (Acquisition). The closing of the acquisition is expected by year-end 2010 and is subject to McMoRan’s stockholder approval of the issuance of common stock to PXP, as required by New York Stock Exchange (NYSE) rules, the completion of financing transactions, receipt of regulatory approvals and other customary closing conditions.
McMoRan also announced that, upon concurrent completion of the PXP transaction, it will privately issue $900 million in equity-linked securities to fund future capital expenditures associated with McMoRan’s expanded asset base and for general corporate purposes. The financing includes $200 million of 7-year 4% Convertible Senior Notes, which will be sold to institutional investors (Institutional Investors), and $700 million of 5¾% Convertible Perpetual Preferred Stock, of which $500 million of one series will be sold to Freeport-McMoRan Copper & Gold Inc. (FCX) and $200 million of another series will be sold to the Institutional Investors. McMoRan is a party to a services agreement with FM Services Company (Services Company), a wholly owned subsidiary of FCX, under which the Services Company provides McMoRan with executive, technical, administrative, accounting, financial, tax and other services pursuant to a fixed fee arrangement. See Note 15 of the 2009 Form 10-K for more information regarding transactions with the Services Company.
The total value (purchase price) of the Acquisition will be determined at the date of closing, and it will be subject to adjustment based on final settlement of certain items. Based upon the value of
McMoRan’s common stock as of the day prior to the Acquisition’s September 20, 2010 announcement date ($14.57 per share), the aggregate value of the cash and stock portions of the estimated purchase consideration approximated $820 million. The effective date of the Acquisition is August 1, 2010. Changes related to the impact of movements in the trading value of McMoRan’s common stock through the closing date of the Acquisition, and estimated closing adjustments to reflect the August 1, 2010 effective date, including post August 1, 2010 revenues, operating expenses and capital and reclamation expenditures relating to the acquired properties all will be factors in determining the final recorded purchase price. Because a significant portion of the purchase consideration is comprised of a fixed amount of McMoRan common stock, changes in McMoRan’s common stock value through the date of closing could materially impact the total recorded purchase price.
The closings of the financing transactions are conditioned upon concurrent completion of the PXP transaction, our stockholder approval of the issuance of securities to FCX, and other customary closing conditions. The description of the agreements and information related to the acquisition and issuance of McMoRan equity-linked securities contained in Item 1.01 of McMoRan’s current report on Form 8-K filed with the SEC on September 23, 2010 are incorporated herein by reference.
Exploration and Operations.
McMoRan has investments in seven in-progress or unproved properties totaling $167.6 million at September 30, 2010, including, $5.7 million for the Lafitte exploration well, $11.6 million for the Hurricane Deep sidetrack well, $31.5 million for the Blackbeard East well, $31.2 million for the South Timbalier Block 168 No. 1 (Blackbeard West) well, $25.9 million for the Davy Jones offset appraisal well, $37.2 million for the initial Davy Jones well and $24.5 million for the Blueberry Hill exploratory well.
McMoRan currently holds the rights to the Blackbeard West lease under a Suspension of Operations (SOO) agreement with the Bureau of Ocean Energy Management Regulation and Enforcement Agency (BOEMRE), the term of which extends through November 30, 2010. McMoRan is pursuing a new SOO to provide additional time for McMoRan to complete its assessment and to secure the commercial arrangements necessary to facilitate further development of this property. While McMoRan believes it is reasonably likely that an extension of time will be obtained, there are no assurances that its efforts will be successful, which could result in McMoRan being required to relinquish its ownership rights in this property.
If current or future well assessment, stimulation, or completion efforts are not successful in generating production that will allow McMoRan to recover all or a portion of its investment in any of the respective wells referenced above, McMoRan may be required to write down its investment in such properties to their estimated fair value. See Note 1 of the 2009 Form 10-K for additional information regarding the periodic assessment of potential impairments to McMoRan’s properties.
As also discussed in Note 1 of the 2009 Form 10-K, when events and circumstances indicate that proved oil and gas property carrying amounts might not be recoverable from estimated future undiscounted cash flows, a reduction of the carrying amount to estimated fair value is required. McMoRan estimates the fair value of its properties using estimated future cash flows based on proved and risk-adjusted probable oil and natural gas reserves as estimated by independent reserve engineers as adjusted for current period production. Future cash flows are determined using published period-end forward market prices adjusted for property-specific price basis differentials, net of estimated future production and development costs and excluding estimated asset retirement and abandonment expenditures. If the undiscounted cash flows indicate that the property is impaired, McMoRan discounts the future cash flows using a discount factor that considers market participants’ expected rates of return for similar type assets if acquired under current market conditions.
The determination of oil and gas reserve estimates is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those based on actual production. Subsequent evaluation of the same reserves may result in variations in estimated reserves and related estimates of future cash flows, and these variations may be substantial. If the capitalized costs of an individual oil and gas property
exceed the related estimated future net cash flows, an impairment charge to reduce the capitalized costs to the property’s estimated fair value is required.
McMoRan recorded impairment charges of $11.3 million and $82.0 million, respectively, during the third quarter and nine months ended September 30, 2010 following impairment assessments of the carrying value of its oil and gas properties. These charges reflect the impact of declines in the market prices of natural gas during the first and third quarters of 2010 and negative reserve revisions resulting from well performance issues encountered at certain properties during the second quarter of 2010. McMoRan also recorded impairment charges of $11.2 million and $64.8 million, respectively, during the third quarter and nine months ended September 30, 2009. McMoRan considers the fair value measurements used in its impairment evaluations to be derived from Level 3 inputs.
Since the fourth quarter of 2008, the decline in market prices for oil and natural gas coupled with other operational factors triggered impairment assessments that ultimately resulted in significant impairment charges for several of McMoRan’s oil and gas property investments. Additional impairment charges may be recorded in future periods if prices weaken further, or if other unforeseen operational issues occur that negatively impact McMoRan’s ability to fully recover its current investments in oil and gas properties.
For more information regarding the risks associated with the declines in the future market prices of oil and natural gas and the other factors that could impact current reserve estimates, see Part I, Item 1A. “Risk Factors” included in the 2009 Form 10-K.
2008 Hurricane Activity.
Hurricanes Gustav and Ike impacted Gulf of Mexico operations prior to making landfall on the Louisiana and Texas coasts in September 2008. Although there was no significant damage to McMoRan’s properties resulting from Hurricane Gustav, Hurricane Ike caused significant structural damage to several platforms in which McMoRan had an investment interest. Since the third quarter of 2008, McMoRan has recorded charges totaling in excess of $180 million related to incurred repair costs, property impairments and additional estimated reclamation costs associated with the damaged properties. While a portion of these costs has been funded to date, a significant amount of the remaining expenditures, particularly for asset retirement obligations, will be funded by McMoRan over the next several years. Consistent with McMoRan’s claims experience to date, McMoRan expects to realize a substantial recovery in future periods under its insurance program for a large portion of these hurricane related costs, reimbursement for which is received after damage-related expenditures are funded and related claims are approved. McMoRan recognized net insurance proceeds of $5.6 million and $14.8 million, respectively, in the third quarter and nine months ended September 30, 2010. McMoRan recognized net insurance proceeds of $18.7 million in the nine months ended September 30, 2009 as the initial payment associated with certain of McMoRan’s insured losses resulting from these hurricanes. Since 2009, McMoRan has recognized net insurance proceeds of $39.3 million related to the 2008 hurricane events in the Gulf of Mexico.
Accrued Reclamation Obligations.
For more information regarding McMoRan’s accounting policies for asset retirement obligations see Notes 1 and 16 of the 2009 Form 10-K. A summary of changes in McMoRan’s asset retirement obligations (including both current and long-term obligations) since December 31, 2009 follows (in thousands):
Product inventories totaled $0.5 million at September 30, 2010 and $0.6 million at December 31, 2009, consisting solely of oil production from Main Pass Block 299. Materials and supplies inventory totaled $38.8 million at September 30, 2010 and $47.2 million at December 31, 2009, representing the cost of supplies to be used in McMoRan’s drilling activities, primarily drilling pipe and tubulars. These costs will be partially reimbursed by third party participants in wells supplied with these materials. There were no lower of cost or market adjustments charged to operations with respect to McMoRan’s inventories during the quarter or nine months ended September 30, 2010. McMoRan charged $3.3 million to operations for inventory lower of cost or market adjustments during the nine months ended September 30, 2009, respectively.
Recent Events in the Gulf of Mexico.
On April 20, 2010, the Deepwater Horizon, an offshore drilling rig located in the deepwater of the Gulf of Mexico, sank following a catastrophic explosion and fire. This event significantly and adversely disrupted oil and gas exploration activities in the Gulf of Mexico and ultimately resulted in the temporary suspension of all deepwater drilling and exploration activity in the Gulf of Mexico. The suspension previously imposed by the U.S. government was lifted on October 13, 2010; however, delays in obtaining drilling permits and compliance with new safety regulations could slow activity by Gulf of Mexico operators. McMoRan has continued to advance its exploration and development activities despite a challenging regulatory environment.
While the suspension did not apply to any of McMoRan’s current operations or prospects, new regulations and enhanced safety certifications have been issued for all operations in the Gulf of Mexico. McMoRan completed the necessary initial certifications in June 2010 and is providing required information to secure permits for future drilling. The processing of permits has been slower than previously experienced, and continued delays in obtaining permits from the Department of the Interior could impact the timing of drilling new wells scheduled during the remainder of 2010 and beyond. McMoRan's in-progress drilling operations, including the wells currently drilling at Davy Jones and Blackbeard East have not been affected. Additionally, McMoRan was recently successful in obtaining a permit to drill its Lafitte ultra-deep exploratory well and operations have commenced. Other permits submitted to the Department of the Interior are still under review.
The events described above have heightened the challenges to McMoRan of managing and deploying available resources to ensure that its commitments are effectively managed and met. McMoRan has significant drilling and other commitments associated with its business strategy. Although the current operating environment has had no significant impact on McMoRan’s ability to effectively manage its commitments to date, uncertainties associated with McMoRan’s ability to obtain necessary permits could impact future financial results.
7. OTHER MATTERS
8% Preferred Stock Conversions.
During the third quarter ended September 30, 2010, McMoRan privately negotiated the induced conversion of approximately 7,000 shares of its 8% preferred stock with a liquidation preference of $7.0 million into approximately 1.0 million shares of McMoRan common stock (at a conversion rate equal to 146.1454 shares of common stock per share of 8% preferred stock). To induce the early conversions of these shares of 8% preferred stock, McMoRan paid an aggregate of $1.4 million in cash to the holders of these shares which is included as a charge in McMoRan’s consolidated statements of operations within preferred dividends and inducement payments for early conversion of convertible preferred stock. McMoRan induced conversion of approximately 64,200 shares of its 8% preferred stock with a liquidation preference of $64.2 million into approximately 9.4 million shares of its common stock during the nine months ended September 30, 2010. McMoRan paid an aggregate of $12.2 million in cash to the holders of these shares during the nine months ended September 30, 2010 to induce the early conversions of these shares. Following these transactions, approximately 22,100 shares of McMoRan’s 8% preferred stock remain outstanding.
6¾% Preferred Stock.
McMoRan has 1.6 million shares of its 6¾% preferred stock ($158.9 million liquidation preference) which will automatically convert on November 15, 2010 into between approximately 10.7 million and 12.8 million common shares of McMoRan common stock. The conversion rate depends on the applicable average
closing market price of McMoRan common stock over the 20-trading-day period beginning on October 14, 2010, and ending on November 10, 2010. If the applicable average closing market price of McMoRan’s common stock is above $14.88, then the conversion rate per $100 face amount of the 6¾% preferred stock will be 6.7204. The conversion rate would be 8.0645 if the applicable average closing market price of our common stock is below $12.40. For average common stock prices greater than or equal to $12.40 and equal to or less than $14.88, the conversion rate will be equal to $100 divided by McMoRan’s average closing common stock price during the 20-trading-day period. The average closing market price of McMoRan’s common stock from October 14, 2010 through November 8, 2010 was $16.50 per share.
Activity within McMoRan’s stockholders’ equity accounts for the nine months ended September 30, 2010 follows:
Interest expense capitalized by McMoRan totaled $3.1 million in the third quarter of 2010 and $6.3 million for the nine months ended September 30, 2010. Capitalized interest totaled $0.8 million in the third quarter of 2009 and $3.2 million for the nine months ended September 30, 2009.
McMoRan provides certain health care and life insurance benefits (Other Benefits) to retired employees. See Note 12 of the 2009 Form 10-K for more information regarding the Other Benefits plan. The components of net periodic benefit cost for McMoRan’s Other Benefits plan follows (in thousands):
For information regarding McMoRan’s accounting for stock-based awards, see Note 1 of the 2009 Form 10-K. Compensation cost charged to expense for stock-based awards follows (in thousands):
On February 1, 2010, McMoRan’s Board of Directors granted a total of 1,766,500 stock options to its employees at an exercise price of $15.73 per share, including immediately exercisable options for an aggregate of 445,000 shares. Options representing 400,000 of these 445,000 shares were issued to McMoRan’s Co-Chairmen in lieu of cash compensation in 2010. McMoRan recorded $6.7 million in charges related to immediately vested stock options in the first quarter of 2010. These charges included the compensation costs associated with the immediately exercisable options and the compensation costs related to stock options granted to retiree-eligible employees, which resulted in one-year’s compensation expense being immediately recognized at the effective date of the stock option grant. The weighted average fair value per share of the 1,816,500 options granted during the nine months ended September 30, 2010 was $10.18.
McMoRan’s Board of Directors granted a total of 1,815,500 stock options to its employees at an exercise price of $6.44 per share on February 2, 2009. McMoRan recorded $2.9 million in charges related to immediately vested stock options in the first quarter of 2009. The weighted average fair value per share of the 1,855,500 options granted in the nine months ended September 30, 2009 was $3.98.
As of September 30, 2010, total compensation cost related to unvested, approved stock option awards not yet recognized in earnings was approximately $18.1 million, which is expected to be recognized over a weighted average period of approximately one year.
McMoRan’s comprehensive loss follows (in thousands):
Subsequent Events Evaluation.
McMoRan evaluated subsequent events for purposes of its September 30, 2010 financial reporting through the date of filing of its quarterly report on Form 10-Q with the Securities and Exchange Commission.
8. NEW ACCOUNTING STANDARDS
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance which added new requirements for fair value disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The guidance also clarified existing requirements regarding the level of disaggregation as well as inputs and valuation techniques used to measure fair value. The guidance is effective for the first reporting period beginning after December 31, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 31, 2010. The adoption of this guidance had no material impact on McMoRan’s fair value disclosures.
9. GUARANTOR FINANCIAL STATEMENTS
MOXY is an unconditional guarantor of McMoRan’s 11.875% senior notes. See Notes 6 and 19 of the 2009 Form 10-K for additional information regarding these senior notes and MOXY’s guarantee.
The following unaudited consolidating financial information includes information regarding McMoRan, as parent, MOXY and its subsidiaries, as guarantors, and Freeport Energy, as the non-guarantor subsidiary. Included are the condensed consolidating balance sheets at September 30, 2010 and December 31, 2009 and the related condensed consolidating statements of operations and cash flow for the quarter and nine months ended September 30, 2010 and 2009, which should be read in conjunction with the Notes to these condensed consolidated financial statements:
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
September 30, 2010
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2009
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, 2010