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McMoRan Exploration Company 10-Q 2012
mmr2q12_10q.htm
 

NITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
Commission File Number: 001-07791
 
 
McMoRan Exploration Co.
(Exact name of registrant as specified in its charter)

Delaware
72-1424200
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)
   
1615 Poydras Street
 
New Orleans, Louisiana
70112
(Address of principal executive offices)
(Zip Code)
 
(504) 582-4000
(Registrant's telephone number, including area code)
 
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. S Yes ÿ 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).   S  Yes ÿ No
 
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:
 
Large accelerated filer   S
Accelerated filer ÿ
Non-accelerated filer ÿ (Do not check if a smaller reporting company)
Smaller reporting company ÿ
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  ÿYes S No
 
On July 31, 2012, there were issued and outstanding 161,878,049 shares of the registrant’s common stock, par value $0.01 per share.





 
 

 


 
McMoRan Exploration Co.
 
 
Page
   
 
   
 
   
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4
   
5
   
6
   
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8
   
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25
   
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38
   
 
   
38
   
38
   
39
   
39
   
40
   
E-1

















 
 

 

 

 
McMoRan EXPLORATION CO.
(In Thousands)

   
June 30,
 
December 31,
 
   
2012
 
2011
 
ASSETS
             
Current assets:
             
Cash and cash equivalents
 
$
287,144
 
$
568,763
 
Accounts receivable
   
55,303
   
72,085
 
Inventories
   
39,230
   
36,274
 
Prepaid expenses
   
11,052
   
9,103
 
Current assets from discontinued operations, including restricted cash
             
of $473
   
735
   
682
 
Total current assets
   
393,464
   
686,907
 
Property, plant and equipment, net
   
2,321,708
   
2,181,926
 
Restricted cash and other
   
61,322
   
61,617
 
Deferred costs
   
9,736
   
8,325
 
Long-term assets from discontinued operations
   
439
   
439
 
Total assets
 
$
2,786,669
 
$
2,939,214
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
             
Accounts payable
 
$
95,562
 
$
115,832
 
Accrued liabilities
   
105,205
   
160,822
 
Accrued interest and dividends payable
   
14,440
   
14,448
 
Current portion of accrued oil and gas reclamation costs
   
56,557
   
58,810
 
5¼% convertible senior notes
   
67,498
   
66,223
 
Current liabilities from discontinued operations, including sulphur reclamation costs
   
3,448
   
5,264
 
Total current liabilities
   
342,710
   
421,399
 
11.875% senior notes
   
300,000
   
300,000
 
4% convertible senior notes
   
188,416
   
187,363
 
Accrued oil and gas reclamation costs
   
262,680
   
267,584
 
Other long-term liabilities
   
19,973
   
20,886
 
Other long-term liabilities from discontinued operations, including sulphur reclamation costs
   
18,805
   
19,018
 
Total liabilities
   
1,132,584
   
1,216,250
 
Stockholders' equity
   
1,654,085
   
1,722,964
 
Total liabilities and stockholders' equity
 
$
2,786,669
 
$
2,939,214
 
               

The accompanying notes are an integral part of these condensed consolidated financial statements.


 
3

 

 
McMoRan EXPLORATION CO.
(In Thousands, Except Per Share Amounts)

 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Revenues:
                       
Oil and natural gas
$
87,206
 
$
155,469
 
$
194,290
 
$
289,181
 
Service
 
3,089
   
2,839
   
6,652
   
6,131
 
Total revenues
 
90,295
   
158,308
   
200,942
   
295,312
 
Costs and expenses:
                       
Production and delivery costs
 
32,147
   
51,911
   
70,809
   
99,868
 
Depletion, depreciation and amortization expense
 
44,894
   
95,338
   
86,723
   
182,008
 
Exploration expenses
 
65,849
   
47,896
   
73,868
   
60,674
 
General and administrative expenses
 
11,716
   
11,223
   
26,649
   
27,175
 
Main Pass Energy Hub costs
 
30
   
278
   
96
   
513
 
Insurance recoveries
 
-
   
(12,946
)
 
(1,229
)
 
(29,369
)
Gain on sale of oil and gas properties
 
(799
)
 
-
   
(799
)
 
(900
)
Total costs and expenses
 
153,837
   
193,700
   
256,117
   
339,969
 
Operating loss
 
(63,542
)
 
(35,392
)
 
(55,175
)
 
(44,657
)
Interest expense, net
 
-
   
(2,704
)
 
-
   
(8,153
)
Other income, net
 
209
   
230
   
437
   
410
 
Loss from continuing operations before income taxes
 
(63,333
)
 
(37,866
)
 
(54,738
)
 
(52,400
)
Income tax expense
 
-
   
-
   
-
   
-
 
Loss from continuing operations
 
(63,333
)
 
(37,866
)
 
(54,738
)
 
(52,400
)
Loss from discontinued operations
 
(1,825
)
 
(1,989
)
 
(4,928
)
 
(3,233
)
Net loss
 
(65,158
)
 
(39,855
)
 
(59,666
)
 
(55,633
)
Preferred dividends and inducement payments for early
                       
conversion of convertible preferred stock
 
(10,342
)
 
(10,343
)
 
(20,684
)
 
(22,115
)
Net loss applicable to common stock
$
(75,500
)
$
(50,198
)
$
(80,350
)
$
(77,748
)
                         
Basic and diluted net loss per share of common
                       
stock:
                       
Continuing operations
 
$(0.46
)
 
$(0.31
)
 
$(0.47
)
 
$(0.47
)
Discontinued operations
 
(0.01
)
 
(0.01
)
 
(0.03
)
 
(0.02
)
Net loss per share of common stock
 
$(0.47
)
 
$(0.32
)
 
$(0.50
)
 
$(0.49
)
                         
Average common shares outstanding:
                       
Basic and diluted
 
161,577
   
158,454
   
161,532
   
158,154
 

The accompanying notes are an integral part of these consolidated financial statements.


 
4

 

McMoRan EXPLORATION CO.
(In Thousands)

 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
     
                         
Net loss
$
(65,158
)
$
(39,855
)
$
(59,666
)
$
(55,633
)
Other comprehensive loss:
                       
Amortization of previously unrecognized pension components, net
 
(10
)
 
(10
)
 
(20
)
 
(20
)
Comprehensive loss
 
(65,168
)
 
(39,865
)
 
(59,686
)
 
(55,653
)
Preferred dividends and inducement payments for early conversion of convertible preferred stock
 
(10,342
)
 
(10,343
)
 
(20,684
)
 
(22,115
)
Comprehensive loss applicable to common stock
$
(75,510
)
$
(50,208
)
$
(80,370
)
$
(77,768
)
                         


The accompanying notes are an integral part of these consolidated financial statements.

 
5

 


McMoRan EXPLORATION CO.
(In Thousands)

 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011
 
     
Cash flow from operating activities:
           
Net loss
$
(59,666
)
$
(55,633
)
Adjustments to reconcile net loss to net cash provided by operating activities:
           
Loss from discontinued operations
 
4,928
   
3,233
 
Depletion, depreciation and amortization expense
 
86,723
   
182,008
 
Exploration drilling and related expenditures, net
 
56,268
   
38,886
 
Compensation expense associated with stock-based awards
 
11,381
   
12,814
 
Amortization of deferred financing costs
 
3,427
   
3,030
 
Reclamation expenditures, net
 
(27,648
)
 
(42,235
)
Increase in restricted cash
 
(2,502
)
 
(2,508
)
Gain on sale of oil and gas properties
 
(799
)
 
(900
)
Other
 
(662
)
 
(313
)
(Increase) decrease in working capital:
           
Accounts receivable
 
15,623
   
(42,594
)
Accounts payable and accrued liabilities
 
(24,670
)
 
30,600
 
Prepaid expenses and inventories
 
(4,905
)
 
17,675
 
Net cash provided by continuing operations
 
57,498
   
144,063
 
Net cash used in discontinued operations
 
(7,031
)
 
(7,923
)
Net cash provided by operating activities
 
50,467
   
136,140
 
             
Cash flow from investing activities:
           
Exploration, development and other capital expenditures
 
(312,272
)
 
(258,894
)
Proceeds from sale of oil and gas properties
 
745
   
900
 
Net cash used in continuing operations
 
(311,527
)
 
(257,994
)
Net cash from discontinued operations
 
-
   
-
 
Net cash used in investing activities
 
(311,527
)
 
(257,994
)
             
Cash flow from financing activities:
           
Dividends paid and inducement payments on early conversion of convertible preferred stock
 
(20,685
)
 
(17,267
)
Credit facility refinancing fees
 
-
   
(1,609
)
Debt and equity issuance costs
 
-
   
(543
)
Proceeds from exercise of stock options and other
 
126
   
909
 
Net cash used in continuing operations
 
(20,559
)
 
(18,510
)
Net cash from discontinued operations
 
-
   
-
 
Net cash used in financing activities
 
(20,559
)
 
(18,510
)
Net decrease in cash and cash equivalents
 
(281,619
)
 
(140,364
)
Cash and cash equivalents at beginning of year
 
568,763
   
905,684
 
Cash and cash equivalents at end of period
$
287,144
 
$
765,320
 
             

The accompanying notes are an integral part of these consolidated financial statements.

 
6

 

McMoRan EXPLORATION CO.
Six Months Ended June 30, 2012
(In Thousands)


 
Preferred
stock
 
Common
stock
 
Capital  in
excess of par
value
 
Accumulated
deficit
 
Accumulated
 other
comprehensive
loss
 
Common
stock held in
treasury
 
Total
Stockholders’
Equity
 
Balance as of December 31, 2011
$
713,999
 
$
1,639
 
$
2,178,775
 
$
(1,123,449
)
$
216
 
$
(48,216
)
$
1,722,964
 
Stock-based compensation
                                         
   expense
 
-
   
-
   
11,381
   
-
   
-
   
-
   
11,381
 
Preferred stock dividends
 
-
   
-
   
(20,685
)
 
-
   
-
   
-
   
(20,685
)
Stock option exercises and other, net
 
-
   
5
   
2,638
   
-
   
-
   
(2,532
)
 
111
 
Net loss
 
-
   
-
   
-
   
(59,666
)
 
-
   
-
   
(59,666
)
Other comprehensive income (loss)
 
-
   
-
   
-
   
-
   
(20
)
 
-
   
(20
)
Balance as of June 30, 2012
$
713,999
 
$
1,644
 
$
2,172,109
 
$
(1,183,115
)
$
196
 
$
(50,748
)
$
1,654,085
 


The accompanying notes are an integral part of this consolidated financial statement.

 
7

 

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 shareholders, 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  at the Main Pass Energy HubTM (MPEH™) project located at Main Pass Block 299 (Main Pass).  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, 2011 (2011 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.

New Accounting Standard
In June 2011, the Financial Accounting Standards Board issued an Accounting Standards Update (ASU) in connection with guidance on the presentation of comprehensive income. This ASU requires an entity to present the components of net income and other comprehensive income and total comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU was effective for McMoRan’s 2012 interim reporting, and McMoRan adopted this ASU by presenting comprehensive income as a separate statement in this Form 10-Q for the three- and six-month periods ended June 30, 2012 and 2011. The adoption of this accounting standard had no other impact on McMoRan’s financial position or results of operations.

2.  LONG-TERM DEBT
McMoRan’s long-term debt is summarized below (in thousands).

 
June 30,
 
December 31,
 
 
2012
 
2011
 
11.875% senior notes
$
300,000
 
$
300,000
 
5¼% convertible senior notes, net of discount of $679 and $1,954
 
67,498
   
66,223
 
4% convertible senior notes, net of discount of $11,584 and $12,637
 
188,416
   
187,363
 
Senior secured revolving credit facility
 
-
   
-
 
Total debt
 
555,914
   
553,586
 
Less current maturities
 
(67,498
)
 
(66,223
)
Long-term debt
$
488,416
 
$
487,363
 

Senior Secured Revolving Credit Facility
McMoRan has a variable rate senior secured revolving credit facility (credit facility) that is secured by substantially all of MOXY’s oil and gas properties and matures on June 30, 2016, provided that the facility will mature on August 16, 2014 if McMoRan’s 11.875% senior notes are not redeemed or refinanced with senior notes with a term extending at least through 2016 by that date.  The credit facility’s borrowing capacity is $150 million, and under certain conditions it may be increased to a capacity of $300 million with additional lender commitments. There were no borrowings outstanding under the credit facility as of June 30, 2012. After giving effect to a $100 million letter of credit outstanding as surety support to a third party associated with reclamation obligations, availability under the credit facility totaled $50 million.
 
 
8

 
Availability under the credit facility is subject to a borrowing base that is redetermined semi-annually each April and October. In July 2012, in connection with the semi-annual redetermination of McMoRan’s borrowing base, McMoRan’s lenders affirmed the $150 million borrowing base until the next redetermination and subject to McMoRan providing a first priority lien on $35 million of cash deposited in a separate deposit account which will remain in place until the next redetermination (anticipated to be in October 2012).  Use of the cash is unrestricted; however, to the extent McMoRan uses any portion of the cash prior to completion of the next redetermination, the borrowing base would be reduced on a dollar for dollar basis.

The credit facility includes covenants and other restrictions customary for oil and gas borrowing base credit facilities. McMoRan is currently in compliance with these covenants.

Exchange Offer for 5¼% Convertible Senior Notes
On October 6, 2011, McMoRan completed an offer to exchange up to $74.7 million aggregate principal amount of its former 5¼% Convertible Senior Notes due October 6, 2011 (former 5¼% notes).  Approximately $68.2 million of the former 5¼%notes were tendered and accepted for exchange for an equal principal amount of newly issued 5¼% Convertible Senior Notes due October 6, 2012 (5¼% new notes).  McMoRan repaid $6.5 million of the remaining principal amount of the former 5¼% notes, which matured in accordance with their terms on October 6, 2011.  The terms of the 5¼% new notes are substantially identical to the terms of the former 5¼% notes, except that the 5¼% new notes have a maturity date of October 6, 2012. The impact of this exchange transaction, which was recorded as a modification of debt in the fourth quarter of 2011, resulted in the recognition of an approximate $2.6 million debt discount related to the fair value of the instruments’ embedded conversion option that is being accreted as a component of interest expense over the one year term of the 5¼% new notes.

McMoRan may seek to refinance or extend the maturity of the 5¼% new notes prior to the October 2012 redemption date.

Fair Value of Debt
The fair value of McMoRan’s 5¼% new notes, 11.875% senior notes due November 2014 (11.875% senior notes) and 4% convertible senior notes due December 2017 (4% notes) is determined at the end of each reporting period using level 2 inputs based upon prices for exchanges of such instruments in other recent transactions by other market participants.  The following table reflects the estimated fair value of these obligations as of June 30, 2012 and December 31, 2011 (in thousands):

 
June 30,
 
December 31,
 
 
2012
 
2011
 
5¼% new notes
$
68,480
 
$
73,590
 
11.875% senior notes
 
308,250
   
318,000
 
4% notes
 
221,774
   
232,600
 

Interest Expense, Net
Interest expense, which includes the amortization of deferred financing costs and revolving credit facility fees, is reflected net of amounts capitalized to McMoRan’s in-progress drilling projects. Interest capitalized by McMoRan totaled $14.3 million in the second quarter of 2012 and $28.5 million for the six months ended June 30, 2012. Capitalized interest totaled $11.6 million in the second quarter of 2011 and $20.5 million for the six months ended June 30, 2011.

3.  EARNINGS PER SHARE
Basic net loss per share of common stock has been calculated by dividing McMoRan’s 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 conversion inducement payments.

McMoRan had net losses from continuing operations (as defined above) in the three- and six-month periods ended June 30, 2012 and 2011. Accordingly, the incremental common shares that would
 
 
9

 
 
have been issued upon exercise of stock options, as well as conversion of McMoRan’s 5.75% convertible perpetual preferred stock (5.75% preferred stock), 8% convertible perpetual preferred stock (8% preferred stock), 4% notes and 5¼% new (and former 5¼%) notes have been excluded from the diluted net loss per share calculations.  These common shares were excluded because their issuance is considered to be anti-dilutive, meaning their inclusion would have reduced the reported net loss per share from continuing operations during these periods.  The excluded common share amounts are summarized below (in thousands):


   
Second Quarter
   
Six Months
 
   
2012
   
2011
   
2012
   
2011
 
Stock options a
   
631
     
1,982
     
903
     
2,263
 
Shares issuable upon assumed
                               
conversion of:
                               
5.75% preferred stock b
   
43,750
     
43,750
     
43,750
     
43,750
 
    8% preferred stock b
   
2,046
     
2,046
     
2,046
     
2,306
 
5¼% new (and former 5¼%) notes c
   
4,113
     
4,508
     
4,113
     
4,508
 
4% notes c
   
12,500
     
12,500
     
12,500
     
12,500
 

a.  
McMoRan uses the treasury stock method to determine total shares related to in-the-money stock options for purposes of its diluted earnings per share calculation.  The amounts represent stock options with an exercise price that is less than the average market price for McMoRan’s common stock for the periods presented.
b.  
Amount represents total equivalent common shares assuming conversion of the preferred stock. During the six months ended June 30, 2011, McMoRan induced conversion of approximately 8,100 shares of its 8% preferred stock (Note 7).  Preferred stock dividends and inducement payments for the early conversion of shares of McMoRan’s 8% preferred stock totaled $10.3 million and $20.7 million for the three- and six-month periods ended June 30, 2012, respectively and $10.3 million and $22.1 million for the three- and six-month periods ended June 30, 2011, respectively.  See Note 8 of the 2011 Form 10-K for additional information regarding McMoRan’s 5.75% preferred stock and 8% preferred stock.
c.  
There was no net interest expense on the 5¼% new notes or the 4% notes during the three- and six-month periods ended June 30, 2012. Interest expense, net on the former 5¼% notes totaled $0.2 million and $0.6 million, respectively during the three- and six-month periods ended June 30, 2011 and interest expense, net on the 4% notes totaled $0.5 million and $1.5 million, respectively, during the three and six-month periods ended June 20, 2011. Additional information regarding McMoRan’s 4% notes and 5¼% new (and former 5¼%) notes is disclosed in Note 6 of the 2011 Form 10-K.


Outstanding stock options which were excluded from the computation of diluted net loss per share of common stock because their exercise prices were higher than the average market price of McMoRan’s common stock during the periods presented follow:

   
Second Quarter
   
Six Months
 
   
2012
   
2011
   
2012
   
2011
 
Outstanding options (in thousands)
   
11,830
     
1,346
     
11,780
     
1,356
 
Average exercise price
 
$
15.71
   
$
20.19
   
$
15.74
   
$
20.17
 


 
10

 


4.  STOCK-BASED COMPENSATION
Compensation cost charged to expense for stock-based awards follows (in thousands):


 
Second Quarter
   
Six Months
 
 
2012
 
2011
   
2012
 
2011
 
Stock options awarded to employees and directors
$
2,456
 
$
2,731
   
$
10,383
 
$
12,115
 
Stock options awarded to non-employees
 
307
   
133
     
760
   
506
 
Restricted stock units
 
114
   
102
     
238
   
193
 
Total stock-based compensation cost
$
2,877
 
$
2,966
   
$
11,381
 
$
12,814
 


A summary of the classification of stock-based compensation by financial statement line item for the second quarter and six-months ended June 30, 2012 and 2011 follows (in thousands):

 
Second Quarter
   
Six Months
 
 
2012
 
2011
   
2012
 
2011
 
                           
General and administrative expenses
$
1,891
 
$
1,639
   
$
6,120
 
$
6,872
 
Exploration expenses
 
985
   
1,305
     
5,224
   
5,837
 
Main Pass Energy Hub costs
 
1
   
22
     
37
   
105
 
Total stock-based compensation cost
$
2,877
 
$
2,966
   
$
11,381
 
$
12,814
 
 
 

On February 6, 2012, McMoRan’s Board of Directors granted 1,953,500 stock options to its employees at an exercise price of $13.00 per share, including immediately exercisable options for an aggregate of 445,000 shares.  Options for these 445,000 shares were issued to McMoRan’s Co-Chairmen and Treasurer in lieu of cash compensation in 2012. On June 1, 2012 McMoRan granted 120,000 stock options and 30,000 restricted stock units to its non-employee directors and advisory directors. The exercise price for the directors’ stock options was $8.82 per share. The weighted average per share fair value of the 2,073,500 options granted during the six months ended June 30, 2012 was $8.61.  McMoRan recorded $6.0 million in charges related to immediately vested stock options during the six months ended June 30, 2012. 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, under the terms of McMoRan’s employee stock option plans, results in one-year’s compensation expense being immediately recognized at the effective date of the stock option grant.  McMoRan’s Board of Directors granted 1,737,500 stock options to its employees at an exercise price of $17.25 per share on February 7, 2011. On June 1, 2011 McMoRan granted 120,000 stock options and 30,000 restricted stock units to its non-employee directors and advisory directors. The exercise price for the directors’ stock options was $17.60 per share. The weighted average per share fair value of the 1,857,500 options granted during the six months ended  June 30, 2011 was $10.76.  McMoRan recorded $7.4 million in charges related to immediately vested stock options during the six months ended June 30, 2011.

As of June 30, 2012, total compensation cost related to nonvested approved stock option awards not yet recognized in earnings was approximately $21.3 million, which is expected to be recognized over a weighted average period of approximately one year.

For additional information regarding McMoRan’s accounting for stock-based awards, see Notes 1 and 11 of the 2011 Form 10-K.

5.  INCOME TAXES
As of June 30, 2012 and December 31, 2011, McMoRan had approximately $480.3 million and $459.4 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 (see Note 12 of the 2011 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.
 
 
 
11

 
 
 
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.  Tax periods open to audit primarily include federal and Louisiana income tax returns subsequent to 2007.  Net operating loss amounts prior to this time are also subject to audit.

6. OIL AND GAS ACTIVITIES
Exploration and Operations.
McMoRan has incurred drilling costs for in-progress and/or unproven exploratory wells totaling $900.1 million at June 30, 2012. In addition, McMoRan’s allocated costs for the working interests acquired in properties associated with McMoRan’s current in-progress and unproven wells totaled $685.5 million at June 30, 2012.

As of June 30, 2012, McMoRan had three wells (the Davy Jones initial discovery well - “Davy Jones No. 1”, the Davy Jones offset appraisal well - “Davy Jones No. 2” and Blackbeard West No. 1) with costs that have been capitalized for a period in excess of one year following the completion of initial exploratory drilling operations. Completion activities are currently in progress on the Davy Jones No. 1 well, and completion activities for the Davy Jones No. 2 well are planned to commence following the Davy Jones No. 1 completion, testing, and production assessment process. McMoRan’s total investment in the Davy Jones complex, which includes $474.8 million in allocated property acquisition costs, totaled $905.5 million at June 30, 2012.

The Blackbeard West No. 1 well was drilled to a total depth of 32,997 feet in October 2008 and logs below 30,067 feet indicated potential hydrocarbon bearing zones measuring 220 net feet requiring further evaluation.  The well has been temporarily abandoned while McMoRan evaluates whether to drill deeper or complete the well to test the existing zones. McMoRan’s investment in the Blackbeard West No. 1 drilling costs approximated $31.3 million at June 30, 2012. On November 25, 2011, McMoRan commenced drilling the Blackbeard West No. 2 ultra-deep exploration well on Ship Shoal Block 188.  In May 2012, McMoRan set a liner after the well encountered a high pressure gas flow immediately below the salt weld.  The well is currently drilling below 21,400 feet to evaluate this high pressure section and other objectives below the salt weld.  The well is targeting Miocene aged sands seen below the salt weld approximately 13 miles east at Blackbeard East and has a proposed total depth of 24,500 feet.  McMoRan holds a 69.4 percent working interest and a 53.1 percent net revenue interest in Ship Shoal Block 188. McMoRan’s investment in Blackbeard West No. 2 totaled $50.4 million at June 30, 2012. In addition, McMoRan has approximately $27.6 million of allocated property acquisition costs for the Blackbeard West unit.

The Blackbeard East ultra-deep exploration by-pass well, which is located on South Timbalier Block 144 in 80 feet of water, was drilled to a total depth of 33,318 feet in January 2012.  Exploration results from the well indicate the presence of hydrocarbons below the salt weld in geologic formations including Upper/Middle Miocene, Frio, Vicksburg, and Sparta carbonate.  Pressure and temperature data below the salt weld in the Miocene sands between 19,500 feet and 24,600 feet at Blackbeard East indicate that a completion at these depths could utilize conventional equipment and technologies. Currently McMoRan holds the lease rights to South Timbalier 144 through August 17, 2012. McMoRan is submitting initial development plans for Blackbeard East to the Bureau of Safety and Environmental Enforcement of the United States Department of the Interior (BSEE). McMoRan plans to test and complete the Upper Miocene sands during 2013 using conventional equipment and technologies.  Additional plans for further development of the deeper zones continue to be evaluated.  McMoRan’s ability to preserve its interest in Blackbeard East will require approval from the BSEE of its development plans.

McMoRan holds a 72.0 percent working interest and a 57.4 percent net revenue interest in Blackbeard East.  McMoRan’s total investment in Blackbeard East, which includes $130.5 million in allocated property acquisition costs, totaled $303.0 million at June 30, 2012.

The Lafitte ultra-deep exploration well, which is located on Eugene Island Block 223 in 140 feet of water, was drilled to a total depth of 34,162 feet in March 2012. Exploration results from the well indicate the presence of hydrocarbons below the salt weld in geologic formations including Middle/Lower Miocene,
 
 
 
12

 
 
Frio, Upper Eocene, and Sparta carbonate.  The Upper Eocene sands are the first hydrocarbon bearing Upper Eocene sands encountered either on the shelf of the Gulf of Mexico or in the deepwater offshore Louisiana. Currently McMoRan holds the lease rights to Eugene Island Block 223 through October 8, 2012. McMoRan expects to submit development plans for Lafitte to the BSEE prior to the lease expiration date to preserve its lease rights while development activities progress. McMoRan’s ability to preserve its interest in Lafitte will require approval from the BSEE of its development plans.
 
McMoRan holds a 72.0 percent working interest and a 58.3 percent net revenue interest in Lafitte.  McMoRan’s total investment in Lafitte, which includes $35.8 million in allocated property acquisition costs, totaled $192.3 million at June 30, 2012.
 
The Boudin deep gas exploration well, which was located in 20 feet of water on Eugene Island Block 26 was drilled to a total depth of 24,284 feet in October 2011. Drilling results indicated potential hydrocarbon bearing zones within a laminated sand section in the Rob-L of the Miocene. McMoRan’s lease at Eugene Island Block 26 was set to expire during the second quarter of 2012. Prior to the expiration, McMoRan requested a lease extension from the BSEE to provide McMoRan additional time required to assess potential alternatives for a completion. On June 15, 2012, McMoRan received notice from BSEE that the request to extend the Boudin lease was denied. As a result, McMoRan recorded a charge to exploration expense to fully impair its investment in Boudin of approximately $55.7 million in the three- and six-month periods ended June 30, 2012.

If current or future activities are not successful in generating production that will allow McMoRan to recover all or a portion of its investment in any of its in-progress and/or unproven wells, McMoRan may be required to write down its investment in such properties to their estimated fair value. See Note 1 of the 2011 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 2011 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.  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 a 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 from that property, an impairment charge to reduce the capitalized costs to the property’s estimated fair value is required.

McMoRan recorded impairment charges totaling $4.6 million and $11.7 million during the second quarter and six months ended June 30, 2012, respectively, following an impairment assessment of the carrying value of its oil and gas properties. The impairment charge recorded in the second quarter of 2012 was primarily due to the depletion of one property, and the additional impairment charges incurred during the six months ended June 30, 2012, reflect higher than anticipated recompletion costs, a decline in market prices, well performance issues, and other economic factors. In the second quarter and six months ended June 30, 2011, McMoRan recorded impairment charges totaling $29.2 million and $50.7 million, respectively. The majority of the charges recorded in the second quarter of 2011 ($23.8 million) was related to downward adjustments to proved reserves following the evaluation of drilling results at a
 
 
13

 
 
proved undeveloped location. The six months ended June 30, 2011 also included approximately $15.6 million related to a proved undeveloped property which was deemed impaired following unsuccessful attempts to achieve an economically acceptable farm-out arrangement with a third party for development of the property. McMoRan considers the fair value measurements used in its impairment evaluations to be derived from Level 3 inputs.

Additional impairment charges may be recorded in future periods if prices weaken, or if other unforeseen operational or other 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 2011 Form 10-K.

2008 Hurricane Activity.
In December 2011, McMoRan reached a settlement with its insurers to finalize all outstanding claims from the 2008 hurricane events. As a result, McMoRan recognized no insurance recoveries relating to the 2008 hurricane claims during the six months ended June 30, 2012, although, approximately $1.2 million of insurance proceeds related to a separate property damage claim were recorded in the first six months of 2012. Net insurance recoveries of $12.9 million and $29.4 million, respectively, related to the 2008 hurricane events were recorded during the second quarter and six months ended June 30, 2011.

Accrued Reclamation Obligations.
For more information regarding McMoRan’s accounting policies for asset retirement obligations see Notes 1 and 15 of the 2011 Form 10-K.   A summary of changes in McMoRan’s consolidated discounted asset retirement obligations (including both current and long-term obligations) since December 31, 2011 follows (in thousands):


 
Oil and
     
 
Natural Gas
 
Sulphur
 
Asset retirement obligations at beginning of year
$
326,394
 
$
17,745
 
Liabilities settled
 
(30,907
)
 
(3,229
)
Scheduled accretion and other expense
 
20,470
   
3,332
 
Other, net
 
3,280
   
-
 
Asset retirement obligations at June 30, 2012
$
319,237
 
$
17,848
 


7. OTHER MATTERS
8% Preferred Stock Conversions.
During the first six months of 2011, McMoRan privately negotiated the induced conversion of approximately 8,100 shares of its 8% preferred stock with a liquidation preference of $8.1 million into approximately 1.2 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 conversion of these shares of 8% preferred stock, McMoRan paid an aggregate of $1.5 million in cash to the holder of these shares, which was recorded as a component of preferred dividends and inducement payments for early conversion of preferred stock in the first quarter of 2011.

In July 2012, approximately 1,900 shares of McMoRan’s 8% preferred stock were converted with a liquidation preference of $1.9 million into approximately 0.3 million shares of McMoRan common stock (at a conversion rate equal to 146.1454 shares of common stock per share of 8% preferred stock). Following this transaction, approximately 12,000 shares of McMoRan’s 8% preferred stock remain outstanding.

 
14

 

 
Subsequent Events Evaluation.
McMoRan evaluated subsequent events for purposes of its June 30, 2012 financial reporting through the date of filing of its quarterly report on Form 10-Q with the Securities and Exchange Commission.

8.  GUARANTOR FINANCIAL STATEMENTS
MOXY is an unconditional guarantor of McMoRan’s 11.875% senior notes.  See Notes 6 and 18 of the 2011 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 June 30, 2012 and December 31, 2011, the related condensed consolidating statements of operations for the three- and six-month periods ended June 30, 2012 and 2011 and cash flow for the six-month periods ended June 30, 2012 and 2011, which should be read in conjunction with the notes to these condensed consolidated financial statements:

 
15

 



CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
June 30, 2012
(In Thousands)



           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
       
ASSETS
                               
Current assets:
                               
Cash and cash equivalents
 
$
90
 
$
286,871
 
$
183
 
$
-
 
$
287,144
 
Accounts receivable
   
-
   
55,303
   
-
   
-
   
55,303
 
Inventories
   
-
   
39,230
   
-
   
-
   
39,230
 
Prepaid expenses
   
1,721
   
9,331
   
-
   
-
   
11,052
 
Current assets from discontinued
                               
operations
   
-
   
-
   
735
   
-
   
735
 
Total current assets
   
1,811
   
390,735
   
918
   
-
   
393,464
 
Property, plant and equipment, net
   
-
   
2,321,678
   
30
   
-
   
2,321,708
 
Investment in subsidiaries
   
1,558,123
   
-
   
-
   
(1,558,123
)
 
-
 
Amounts due from affiliates
   
666,190
   
-
   
-
   
(666,190
)
 
-
 
Restricted cash and other assets
   
3,953
   
67,105
   
-
   
-
   
71,058
 
Long-term assets from discontinued operations
   
-
   
-
   
439
   
-
   
439
 
Total assets
 
$
2,230,077
 
$
2,779,518
 
$
1,387
 
$
(2,224,313
)
$
2,786,669
 
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                   
Current liabilities:
                               
Accounts payable
 
$
340
 
$
94,879
 
$
343
 
$
-
 
$
95,562
 
Accrued liabilities
   
1,320
   
104,044
   
-
   
(159
)
 
105,205
 
Current portion of debt
   
67,498
   
-
   
-
   
-
   
67,498
 
Current portion of oil and gas
                               
accrued reclamation costs
   
-
   
56,557
   
-
   
-
   
56,557
 
Other current liabilities
   
13,694
   
746
   
-
   
-
   
14,440
 
Current liabilities from discontinued
                               
operations
   
-
   
-
   
3,289
   
159
   
3,448
 
Total current liabilities
   
82,852
   
256,226
   
3,632
   
-
   
342,710
 
Long-term debt
   
488,416
   
-
   
-
   
-
   
488,416
 
Amounts due to affiliates
   
-
   
662,459
   
3,731
   
(666,190
)
 
-
 
Accrued oil and gas reclamation costs
   
-
   
262,680
   
-
   
-
   
262,680
 
Other long-term liabilities
   
4,724
   
13,635
   
1,614
   
-
   
19,973
 
Long-term liabilities from discontinued
                               
  operations
   
-
   
-
   
18,805
   
-
   
18,805
 
Total liabilities
   
575,992
   
1,195,000
   
27,782
   
(666,190
)
 
1,132,584
 
Commitments and contingencies
                               
Stockholders’ equity (deficit)
   
1,654,085
   
1,584,518
   
(26,395
)
 
(1,558,123
)
 
1,654,085
 
Total liabilities and stockholders’ equity
                               
(deficit)
 
$
2,230,077
 
$
2,779,518
 
$
1,387
 
$
(2,224,313
)
$
2,786,669
 

 
16

 

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2011
(In Thousands)


           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
       
ASSETS
                               
Current assets:
                               
Cash and cash equivalents
 
$
16,341
 
$
552,365
 
$
57
 
$
-
 
$
568,763
 
Accounts receivable
   
1,850
   
70,235
   
-
   
-
   
72,085
 
Inventories
   
-
   
36,274
   
-
   
-
   
36,274
 
Prepaid expenses
   
668
   
8,435
   
-
   
-
   
9,103
 
Current assets from discontinued
                               
operations
   
-
   
-
   
682
   
-
   
682
 
Total current assets
   
18,859
   
667,309
   
739
   
-
   
686,907
 
Property, plant and equipment, net
   
-
   
2,181,896
   
30
   
-
   
2,181,926
 
Investment in subsidiaries
   
1,596,091
   
-
   
-
   
(1,596,091
)
 
-
 
Amounts due from affiliates
   
677,128
   
-
   
-
   
(677,128
)
 
-
 
Restricted cash and other assets
   
4,641
   
65,301
   
-
   
-
   
69,942
 
Long-term assets from discontinued operations
   
-
   
-
   
439
   
-
   
439
 
Total assets
 
$
2,296,719
 
$
2,914,506
 
$
1,208
 
$
(2,273,219
)
$
2,939,214
 
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)
                   
Current liabilities:
                               
Accounts payable
 
$
217
 
$
115,121
 
$
494
 
$
-
 
$
115,832
 
Accrued liabilities
   
787
   
160,309
   
-
   
(274
)
 
160,822
 
Current portion of debt
   
66,223
   
-
   
-
   
-
   
66,223
 
Current portion of oil and gas
                               
accrued reclamation costs
   
-
   
58,810
   
-
   
-
   
58,810
 
Other current liabilities
   
13,694
   
754
   
-
   
-
   
14,448
 
Current liabilities from discontinued
                               
operations
   
-
   
-
   
4,990
   
274
   
5,264
 
Total current liabilities
   
80,921
   
334,994
   
5,484
   
-
   
421,399
 
Long-term debt
   
487,363
   
-
   
-
   
-
   
487,363
 
Amounts due to affiliates
   
-
   
674,613
   
2,515
   
(677,128
)
 
-
 
Accrued oil and gas reclamation costs
   
-
   
267,584
   
-
   
-
   
267,584
 
Other long-term liabilities
   
5,471
   
13,799
   
1,616
   
-
   
20,886
 
Long-term liabilities from discontinued
                               
operations
   
-
   
-
   
19,018
   
-
   
19,018
 
Total liabilities
   
573,755
   
1,290,990
   
28,633
   
(677,128
)
 
1,216,250
 
Stockholders’ equity (deficit)
   
1,722,964
   
1,623,516
   
(27,425
)
 
(1,596,091
)
 
1,722,964
 
Total liabilities and stockholders’
                               
equity (deficit)
 
$
2,296,719
 
$
2,914,506
 
$
1,208
 
$
(2,273,219
)
$
2,939,214
 
 
 




 
17

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, 2012
(In Thousands)


           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
       
Revenues:
                               
Oil and natural gas
 
$
-
 
$
87,206
 
$
-
 
$
-
 
$
87,206
 
Service
   
-
   
3,089
   
11
   
(11
)
 
3,089
 
Total revenues
   
-
   
90,295
   
11
   
(11
)
 
90,295
 
Costs and expenses:
                               
Production and delivery costs
   
-
   
32,158
   
-
   
(11
)
 
32,147
 
Depletion, depreciation and amortization
                               
expense
   
-
   
44,894
   
-
   
-
   
44,894
 
Exploration expenses
   
-
   
65,849
   
-
   
-
   
65,849
 
General and administrative expenses
   
2,299
   
9,417
   
-
   
-
   
11,716
 
Main Pass Energy HubTM costs
   
-
   
-
   
30
   
-
   
30
 
Gain on sale of oil and gas property
   
-
   
(799
)
 
-
   
-
   
(799
)
Total costs and expenses
   
2,299
   
151,519
   
30
   
(11
)
 
153,837
 
Operating loss
   
(2,299
)
 
(61,224
)
 
(19
)
 
-
   
(63,542
)
Equity in losses of consolidated
                               
subsidiaries
   
(62,853
)
 
-
   
-
   
62,853
   
-
 
Other income, net
   
(6
)
 
215
   
-
   
-
   
209
 
Loss from continuing operations
                               
before income taxes
   
(65,158
)
 
(61,009
)
 
(19
)
 
62,853
   
(63,333
)
Income tax expense
   
-
   
-
   
-
   
-
   
-
 
Loss from continuing operations
   
(65,158
)
 
(61,009
)
 
(19
)
 
62,853
   
(63,333
)
Loss from discontinued operations
   
-
   
-
   
(1,825
)
 
-
   
(1,825
)
Net loss
   
(65,158
)
 
(61,009
)
 
(1,844
)
 
62,853
   
(65,158
)
Preferred dividends and other related
                               
preferred stock costs
   
(10,342
)
 
-
   
-
   
-
   
(10,342
)
Net loss applicable to common stock
 
$
(75,500
)
$
(61,009
)
$
(1,844
)
$
62,853
 
$
(75,500
)
                                 






















 
18

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Six Months Ended June 30, 2012
(In Thousands)


           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
       
Revenues:
                               
Oil and natural gas
 
$
-
 
$
194,290
 
$
-
 
$
-
 
$
194,290
 
Service
   
-
   
6,652
   
17
   
(17
)
 
6,652
 
Total revenues
   
-
   
200,942
   
17
   
(17
)
 
200,942
 
Costs and expenses:
                               
Production and delivery costs
   
-
   
70,826
   
-
   
(17
)
 
70,809
 
Depletion, depreciation and amortization
                               
expense
   
-
   
86,723
   
-
   
-
   
86,723
 
Exploration expenses
   
-
   
73,868
   
-
   
-
   
73,868
 
General and administrative expenses
   
4,492
   
22,157
   
-
   
-
   
26,649
 
Main Pass Energy HubTM costs
   
-
   
-
   
96
   
-
   
96
 
Insurance recoveries
   
-
   
(1,229
)
 
-
   
-
   
(1,229
)
Gain on sale of oil and gas property
   
-
   
(799
)
 
-
   
-
   
(799
)
Total costs and expenses
   
4,492
   
251,546
   
96
   
(17
)
 
256,117
 
Operating loss
   
(4,492
)
 
(50,604
)
 
(79
)
 
-
   
(55,175
)
Interest expense, net
   
-
   
-
   
-
   
-
   
-
 
Equity in losses of consolidated
                               
subsidiaries
   
(55,162
)
 
-
   
-
   
55,162
   
-
 
Other income (expense), net
   
(12
)
 
449
   
-
   
-
   
437
 
Loss from continuing operations before
                               
income taxes
   
(59,666
)
 
(50,155
)
 
(79
)
 
55,162
   
(54,738
)
Income tax expense
   
-
   
-
   
-
   
-
   
-
 
Loss from continuing operations
   
(59,666
)
 
(50,155
)
 
(79
)
 
55,162
   
(54,738
)
Loss from discontinued operations
   
-
   
-
   
(4,928
)
 
-
   
(4,928
)
Net loss
   
(59,666
)
 
(50,155
)
 
(5,007