McMoRan Exploration Co. (MMR:US) has lost almost a third of its value in the last two days on investors’ concerns that its Davy Jones well in the Gulf of Mexico is a dud.
McMoRan said yesterday a production flow test this month on the well was inconclusive, another setback in a year-long series of delays in its effort to prove the well’s worth. The stock dropped (MMR:US) 11 percent to $8.57 at 2:45 p.m. in New York today, compounding a 22 percent drop yesterday. The shares earlier today touched the lowest price since 2009.
McMoRan’s announcement of the test failure “may have raised more questions regarding the well’s ability to produce commercial amounts of gas,” JPMorgan Chase & Co. analysts led by Joseph Allman said in a note dated yesterday.
Davy Jones No. 1 is the latest big bet by McMoRan Chief Executive Officer Jim Bob Moffett, an oilman ranked by billionaire T. Boone Pickens as among the top five U.S. wildcatters. McMoRan is seeking to pioneer ultra-deep production from a well drilled in shallow water off the Gulf Coast, tunneling 29,000 feet amid high temperatures and pressures. The company said it will try the flow test again, without specifying when or how long it might be before results are available.
With the Davy Jones well, which Moffett believes has tapped into a formation containing trillions of cubic feet of gas, McMoRan has “really put all their eggs in this one basket,” Leo Mariani, an analyst at RBC Capital Markets, said in an interview before the latest test. The well underpins McMoRan’s aspirations for ultra-deep exploration, and Mariani predicted in that interview that if it doesn’t work, “the stock’s getting whacked.”
Yesterday, Mariani’s firm cut its rating on McMoRan to sector perform from outperform.
McMoRan said it is struggling with a component known as barite that adds weight to the drilling mud used to hold back flow after a well is drilled and before flow tests begin. The barite concoction has clogged the well, and McMoRan has been unable to clear it after months of effort. The company said it will try using a solvent to remove the mud before retrying the flow test.
If McMoRan cannot unclog the site, it “potentially might have to abandon the well,” JPMorgan said. The company may try repeated treatments if the solvent doesn’t do the job the first time, Moffett said on a conference call with analysts and investors today.
McMoRan shares remained overvalued after yesterday’s plunge, JPMorgan said in its note. The market had already given the company “significant credit for success at Davy Jones” and other ultra-deep fields, the firm said.
McMoRan will continue to seek “home runs” for shareholders and will build value through its complete portfolio of prospects, Moffett said during the conference call today. The company yesterday cited positive data from exploratory wells onshore in Louisiana and in the Gulf.
The company’s $300 million of 11.875 percent bonds maturing in November 2014 dropped 4 cents on the dollar to 100.938 cents as of 12:44 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest price since June 2010, the data show.
McMoRan may begin to draw on a credit facility starting late in the first quarter, RBC said in its note yesterday. The company may need to bring in a joint-venture partner or seek other financing in the near term, according to RBC.
“However, we think that capital is unlikely to be as available without an ultra-deep production test,” RBC said in the note.
McMoRan operates and has a 63.4 percent working interest in Davy Jones, according to yesterday’s statement. Other partners include Energy XXI Bermuda Ltd., JX Nippon Oil Exploration (Gulf) Ltd. and Moncrief Offshore LLC, according to the statement.
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