10-Q 1 mmr1q13_10q.htm MMR 1Q13 10Q mmr1q13_10q.htm
 

UNITED 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 March 31, 2013
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).   T  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   T
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.
ÿ Yes S No
 
On April 30, 2013, there were issued and outstanding 163,100,608 shares of the registrant’s Common Stock, par value $0.01 per share.

 
 

 


 
McMoRan Exploration Co.
 
 
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E-1





 
2

 



 
McMoRan EXPLORATION CO.

   
March 31,
 
December 31,
 
   
2013
 
2012
 
   
(In Thousands)
 
ASSETS
             
Current assets:
             
Cash and cash equivalents
 
$
103,674
 
$
114,867
 
Accounts receivable
   
57,150
   
52,548
 
Inventories
   
27,069
   
28,532
 
Prepaid expenses
   
10,129
   
15,186
 
Current assets from discontinued operations, including restricted cash
             
of $473
   
737
   
2,013
 
Total current assets
   
198,759
   
213,146
 
Property, plant and equipment, net
   
2,424,356
   
2,394,522
 
Restricted cash and other
   
61,099
   
61,319
 
Deferred financing costs and other
   
6,389
   
7,696
 
Long-term assets from discontinued operations
   
439
   
439
 
Total assets
 
$
2,691,042
 
$
2,677,122
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
             
Accounts payable
 
$
88,800
 
$
83,937
 
Accrued liabilities
   
78,196
   
131,648
 
Accrued interest and dividends payable
   
21,761
   
14,433
 
Current portion of accrued oil and gas reclamation costs
   
45,925
   
57,336
 
5¼% convertible senior notes
   
67,832
   
67,832
 
Current liabilities from discontinued operations, including sulphur reclamation costs
   
1,648
   
2,328
 
Total current liabilities
   
304,162
   
357,514
 
11.875% senior notes
   
300,000
   
300,000
 
4% convertible senior notes
   
189,997
   
189,470
 
Accrued oil and gas reclamation costs
   
195,015
   
188,245
 
Other long-term liabilities
   
15,217
   
17,204
 
Other long-term liabilities from discontinued operations, including sulphur reclamation costs
   
21,724
   
21,478
 
Total liabilities
   
1,026,115
   
1,073,911
 
Stockholders' equity
   
1,664,927
   
1,603,211
 
Total liabilities and stockholders' equity
 
$
2,691,042
 
$
2,677,122
 
               
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 

McMoRan EXPLORATION CO.

   
Three Months Ended  March 31,
 
   
2013
 
2012
 
   
(In Thousands, Except Per Share Amounts)
 
Revenues:
             
Oil and natural gas
 
$
78,536
 
$
107,084
 
Service
   
2,910
   
3,563
 
Total revenues
   
81,446
   
110,647
 
               
Costs and expenses:
             
Production and delivery costs
   
32,644
   
38,662
 
Depletion, depreciation and amortization expense
   
36,402
   
41,829
 
Exploration expenses
   
10,092
   
8,019
 
General and administrative expenses
   
15,278
   
14,933
 
Insurance recoveries
   
-
   
(1,229
)
Gain on sale of oil and gas properties
   
(76,824
)
 
-
 
Main Pass Energy Hub™ costs
   
114
   
66
 
Total costs and expenses, net
   
17,706
   
102,280
 
Operating income
   
63,740
   
8,367
 
Interest expense, net
   
-
   
-
 
Other income, net
   
16
   
228
 
Income from continuing operations before income taxes
   
63,756
   
8,595
 
Income tax expense
   
-
   
-
 
Income from continuing operations
   
63,756
   
8,595
 
Loss from discontinued operations
   
(803
)
 
(3,103
)
Net income
   
62,953
   
5,492
 
Preferred dividends on convertible preferred stock
   
(10,304
)
 
(10,342
)
Net income (loss) applicable to common stock
 
$
52,649
 
$
(4,850
)
               
Basic net income (loss) per share of common stock:
             
Continuing operations
 
$
0.33
 
$
(0.01
)
Discontinued operations
   
(0.01
)
 
(0.02
)
Net income (loss) per share of common stock
 
$
0.32
 
$
(0.03
)
               
Diluted net income (loss) per share of common stock:
             
Continuing operations
 
$
0.29
 
$
(0.01
)
Discontinued operations
   
(0.01
)
 
(0.02
)
Net income (loss) per share of common stock
 
$
0.28
 
$
(0.03
)
               
Average shares outstanding:
             
Basic
   
162,731
   
161,487
 
Diluted
   
225,532
   
161,487
 
 
The accompanying notes are an integral part of these consolidated financial statements.


 
4

 



McMoRan EXPLORATION CO.


   
Three Months Ended
 
   
March 31,
 
   
2013
 
2012
 
   
(In Thousands)
 
               
Net income
 
$
62,953
 
$
5,492
 
Other comprehensive income (loss):
             
Amortization of previously unrecognized pension components, net
   
(10
)
 
(10
)
Comprehensive income
   
62,943
 
$
5,482
 
Preferred dividends on convertible preferred stock
   
(10,304
)
 
(10,342
)
Comprehensive income (loss) applicable to common stock
 
$
52,639
 
$
(4,860
)



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


 
5

 

McMoRan EXPLORATION CO.

   
Three Months Ended
 
   
March 31,
 
   
2013
 
2012
 
   
(In Thousands)
 
Cash flow from operating activities:
             
Net income
 
$
62,953
 
$
5,492
 
Adjustments to reconcile net loss to net cash provided
             
by operating activities:
             
Loss from discontinued operations
   
803
   
3,103
 
Depletion, depreciation, and amortization expense
   
36,402
   
41,829
 
Exploration drilling and related expenditures
   
489
   
-
 
Compensation expense associated with stock-based awards
   
3,737
   
8,504
 
Reclamation expenditures, net of prepayments by third parties
   
(7,061
)
 
(11,665
)
Increase in restricted cash
   
(1,252
)
 
(1,253
)
Gain on sale of oil and gas properties
   
(76,824
)
 
-
 
Other
   
(184
)
 
(976
)
(Increase) decrease in working capital:
             
Accounts receivable
   
(4,397
)
 
8,373
 
Accounts payable and accrued liabilities
   
7,604
   
(9,888
)
Prepaid expenses and inventories
   
6,521
   
(3,367
)
Net cash provided by continuing operations
   
28,791
   
40,152
 
Net cash provided by (used in) discontinued operations
   
79
   
(3,099
)
Net cash provided by operating activities
   
28,870
   
37,053
 
               
Cash flow from investing activities:
             
Exploration, development and other capital expenditures
   
(114,522
)
 
(163,364
)
Proceeds from sale of oil and gas properties
   
79,023
   
-
 
Net cash used in continuing operations
   
(35,499
)
 
(163,364
)
Net cash activity from discontinued operations
   
-
   
-
 
Net cash used in investing activities
   
(35,499
)
 
(163,364
)
               
Cash flow from financing activities:
             
Dividends paid on convertible preferred stock
   
(10,304
)
 
(10,342
)
Proceeds from exercise of stock options and other
   
5,740
   
(375
)
Net cash used in continuing operations
   
(4,564
)
 
(10,717
)
Net cash activity from discontinued operations
   
-
   
-
 
Net cash used in financing activities
   
(4,564
)
 
(10,717
)
Net decrease in cash and cash equivalents
   
(11,193
)
 
(137,028
)
Cash and cash equivalents at beginning of year
   
114,867
   
568,763
 
Cash and cash equivalents at end of period
 
$
103,674
 
$
431,735
 

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

 
6

 

McMoRan EXPLORATION CO.
Three Months Ended March 31, 2013
(in thousands)


 
Preferred
stock
 
Common
stock
 
Capital  in
excess of par
value
 
Accumulated
deficit
 
Accumulated
 other
comprehensive
income (loss)
 
Common
stock held in
treasury
 
Total
Stockholders’
Equity
 
Balance as of December 31, 2012
$
712,082
 
$
1,648
 
$
2,167,796
 
$
(1,227,743
)
$
176
 
$
(50,748
)
$
1,603,211
 
Stock-based compensation
                                         
   expense
 
-
   
-
   
3,737
   
-
   
-
   
-
   
3,737
 
Preferred stock dividends
 
-
   
-
   
(10,304
)
 
-
   
-
   
-
   
(10,304
)
Stock option exercises and other, net
 
-
   
11
   
8,243
   
-
   
-
   
(2,914
)
 
5,340
 
Net income
 
-
   
-
   
-
   
62,953
   
-
   
-
   
62,953
 
Other comprehensive income (loss)
 
-
   
-
   
-
   
-
   
(10
)
 
-
   
(10
)
Balance as of March 31, 2013
$
712,082
 
$
1,659
 
$
2,169,472
 
$
(1,164,790
)
$
166
 
$
(53,662
)
$
1,664,927
 


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, 2012 (2012 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 February 2013, the Financial Accounting Standards Board issued an Accounting Standards Update (ASU) that clarified the reclassification requirements from accumulated other comprehensive income to net income. This ASU requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount is reclassified in its entirety to net income in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to the related note on the face of the financial statements for additional information. McMoRan adopted this guidance effective January 1, 2013, which did not have a material impact on its financial statements.

2.  DEFINITIVE MERGER AGREEMENT
On December 5, 2012, McMoRan announced entry into a definitive agreement (the merger agreement) under which Freeport-McMoRan Copper & Gold Inc. (FCX) will acquire McMoRan for approximately $3.4 billion in cash, or $2.1 billion net of the aggregate 36 percent ownership interest in McMoRan currently held by FCX and Plains Exploration & Production Company (PXP) (the FCX/MMR merger). The related per-share consideration consists of $14.75 in cash and 1.15 units in the Gulf Coast Ultra Deep Royalty Trust, a newly formed royalty trust, which will hold a five percent overriding royalty interest in future production from McMoRan’s existing shallow water ultra-deep prospects. Completion of the FCX/MMR merger is subject to stockholder approval.  On May 3, 2013, McMoRan announced it will hold a special meeting of its stockholders on June 3, 2013, to vote on the proposed FCX/MMR merger. The FCX/MMR merger is expected to close in the second quarter of 2013, subject to satisfaction of all conditions to closing.

Also on December 5, 2012, FCX announced a definitive merger agreement under which FCX will acquire PXP for per-share consideration equivalent to 0.6531 shares of FCX common stock and $25 in cash (approximately $3.4 billion in cash and 91 million shares of FCX common stock) (the FCX/PXP merger). The FCX/PXP merger is subject to the approval of PXP’s stockholders.  On April 18, 2013, PXP announced that it will hold a speical meeting of its stockholders on May 20, 2013, to vote on the proposed FCX/PXP merger.  The FCX/PXP merger is also expected to close in the second quarter of 2013, subject to satisfaction of all conditions to closing. PXP owns 51 million shares of McMoRan common stock, which PXP acquired in December 2010 as part of an asset acquisition transaction with McMoRan.
 
 
 
 
8

 
Substantial capital expenditures have been and will continue to be required in McMoRan’s exploration and development activities, especially for the development and exploitation of its significant ultra-deep exploration and development projects. McMoRan’s capital expenditures have been financed in part with internally generated cash from operations, the continued availability of which is dependent on a number of variables including production from McMoRan’s existing proved reserves, sales prices for natural gas and oil, and McMoRan’s ability to acquire, locate and produce new reserves.  McMoRan has also financed its capital expenditures with proceeds from debt and equity financings and participation by partners in exploration and development projects.  McMoRan’s ongoing exploration and development activities require substantial financial resources, which McMoRan believes can be met following completion of the FCX/MMR merger. Should the FCX/MMR merger not occur, McMoRan expects to continue to financially support its near-term operating requirements and a limited capital expenditure budget with cash on hand, internally generated cash from operations and if required, potential asset sales, joint venture transactions or other financings. On a longer-term basis additional capital would be required to continue McMoRan’s aggressive drilling and development program, the funding for which would require additional asset sales, debt, equity, partnering or other financing arrangements.

3.  DIVESTITURES OF OIL AND GAS PROPERTIES
On January 17, 2013, McMoRan completed the sale of its Laphroaig field to Energy XXI Limited for cash consideration, after closing adjustments, of $80 million and the assumption of approximately $0.6 million of related abandonment obligations. The Laphroaig field represented approximately 10 percent of McMoRan’s total average daily production for the fourth quarter 2012 and four percent of McMoRan’s total estimated reserves at December 31, 2012. Independent reserve engineers’ estimates of proved reserves for the Laphroaig field at December 31, 2012 approximated 101,000 barrels of oil and 8.7 billion cubic feet of natural gas (9.4 billion cubic feet of natural gas equivalents). The transaction was effective January 1, 2013.

On January 28, 2013, McMoRan completed the sale of certain properties in the Breton Sound area to Century Exploration New Orleans, LLC (Century). Consideration consisted of the assumption of related abandonment obligations by Century of approximately $4.6 million and payment by McMoRan to Century of $0.6 million in cash (the Century Sale). The properties involved in the Century Sale represented approximately two percent of McMoRan’s total average daily production for the fourth quarter of 2012 and less than one percent of its total estimated reserves at December 31, 2012.  Independent reserve engineers’ estimates of proved reserves for the properties involved in the Century Sale at December 31, 2012 totaled approximately 16,600 barrels of oil and natural gas liquids and 0.4 billion cubic feet of natural gas (0.5 billion cubic feet of natural gas equivalents). As of December 31, 2012 the estimated present value of future net cash flows discounted at 10 percent (PV-10) was negative. The Century Sale was effective October 1, 2012.

McMoRan recorded gains totaling approximately $76.8 million in the first quarter of 2013 in connection with sales of oil and gas properties. McMoRan may consider additional sales of noncore assets during 2013.

4.  DEBT
McMoRan’s short-term and long-term debt is summarized below (in thousands).

 
March 31,
 
December 31,
 
 
2013
 
2012
 
11.875% senior notes
$
300,000
 
$
300,000
 
5¼% convertible senior notes
 
67,832
   
67,832
 
4% convertible senior notes, net of discount of $10,003 and $10,530, respectively
 
189,997
   
189,470
 
Senior secured revolving credit facility
 
-
   
-
 
Total debt
 
557,829
   
557,302
 
Less current maturities
 
(67,832
)
 
(67,832
)
Long-term debt
$
489,997
 
$
489,470
 


 
9

 

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 credit 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 August 16, 2014.  The credit facility’s borrowing capacity is $150 million. There were no borrowings outstanding under the credit facility as of March 31, 2013. As of December 31, 2012 a $100 million letter of credit (LOC) in favor of a third party beneficiary for reclamation surety was outstanding against the credit facility. In January 2013, McMoRan reached an agreement with the beneficiary to suspend the LOC requirement through June 30, 2013.
 
Availability under the credit facility is subject to a borrowing base which is subject to redetermination by its lenders semi-annually each April and October. In the fourth quarter of 2012, in connection with the semi-annual redetermination of McMoRan’s borrowing base, McMoRan’s lenders affirmed the $150 million borrowing base subject to a continuing priority lien on $35 million of cash deposited in a separate deposit account until the next redetermination (in the second quarter of 2013). In February 2013, after giving effect to McMoRan’s sales of oil and gas properties in January 2013 (Note 3), the amount of cash subject to priority lien was increased to $60 million. 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.

Fair Value of Debt
The fair value of McMoRan’s 5¼% convertible notes (5¼% 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 March 31, 2013 and December 31, 2012 (in thousands):

 
March 31,
 
December 31,
 
 
2013
 
2012
 
5¼% notes
$
69,874
 
$
68,999
 
11.875% senior notes
 
316,500
   
320,250
 
4% notes
 
230,140
   
224,686
 

Interest Expense, Net
Interest expense, which includes the amortization of deferred financing costs and credit facility fees, is reflected net of amounts capitalized to McMoRan’s in-progress drilling projects. Interest capitalized by McMoRan totaled $13.2 million and $14.3 million in the three months ended March 31, 2013 and 2012, respectively.

5.  EARNINGS PER SHARE
Basic net earnings (loss) per share of common stock has been calculated by dividing McMoRan’s net income (loss) applicable to continuing operations, net income (loss) from discontinued operations and net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the periods presented.  Diluted earnings (loss) per share reflects the dilutive effect of shares of common stock that would have been outstanding had those shares of common stock been issued during the periods presented in which McMoRan recognizes income from continuing operations. For purposes of the earnings per share computations, the net income (loss) applicable to continuing operations is net of preferred stock dividends.



 
10

 

A reconciliation of net income and weighted average shares of common stock outstanding for purposes of calculating diluted income per share for the three months ended March 31, 2013 follows (in thousands):

 
First Quarter
 
 
2013
 
Net income
$
62,953
 
Preferred dividends
 
(10,304
)
Net income applicable to common stock
 
52,649
 
Add income impact of assumed conversion of:
     
5.75% preferred stock
 
10,062
 
8% preferred stock
 
242
 
Diluted income applicable to common stock
$
62,953
 
       
Weighted-average shares of common stock outstanding
 
162,731
 
Add stock issuable upon conversion or exercise of:
     
5.75% preferred stock
 
43,750
 
8% preferred stock
 
1,766
 
5¼% notes
 
4,092
 
4% notes
 
12,500
 
Dilutive stock options
 
693
 
Weighted average shares of common stock outstanding for purposes of diluted income per share
 
225,532
 
       
Diluted income per share
$
0.28
 

McMoRan had a net loss from continuing operations (as defined above) in the first quarter of 2012. Accordingly, the incremental shares of common stock that would 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% notes have been excluded from the diluted net loss per share calculation for the first quarter of 2012.  These shares of common stock were excluded because their issuance is considered to be anti-dilutive, meaning their inclusion would have reduced the reported amount of net loss per share from continuing operations for the three month period ended March 31, 2012. The excluded common share amounts are summarized below (in thousands):

 
First Quarter
 
 
2012
 
       
Stock options a
 
1,223
 
Shares issuable upon assumed  conversion of:
     
  5.75% preferred stock b
 
43,750
 
  8% preferred stock b
 
2,046
 
  5¼% notes c
 
4,113
 
  4% notes c
 
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 less than the average market price of McMoRan’s common stock for the period presented.
b.  
Amount represents total equivalent shares of common stock assuming conversion of the respective convertible preferred stock instruments. Preferred dividends of McMoRan’s 5.75% preferred stock and 8% preferred stock were $10.3 million for the quarter ended March 31, 2012.  See Note 9 of the 2012 Form 10-K for additional information regarding McMoRan’s 5.75% and 8% preferred stock.
c.  
There was no net interest expense on the 5¼% notes or the 4% notes during the quarter ended March 31, 2012 (all interest amounts were capitalized to McMoRan’s in-progress drilling projects). Additional information regarding McMoRan’s 4% notes and 5¼% notes is disclosed in Note 7 of the 2012 Form 10-K.
 
 
 
11

 
Outstanding stock options excluded from the computation of diluted net 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 follow:

   
First Quarter
 
   
2013
   
2012
 
Outstanding options (in thousands)
   
5,312
     
8,580
 
Average exercise price per share
 
$
17.78
   
$
16.87
 

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

   
First Quarter
 
   
2013
 
2012
 
Stock options awarded to employees (including directors)
 
$
3,211
 
$
7,927
 
Stock options awarded to non-employees
   
429
   
453
 
Restricted stock units
   
97
   
124
 
Total stock-based compensation cost
 
$
3,737
 
$
8,504
 

A summary of the classification of stock-based compensation by financial statement line item for the three-month periods ended March 31, 2013 and 2012 follows (in thousands):

   
First Quarter
 
   
2013
 
2012
 
General and administrative expenses
 
$
2,787
 
$
4,229
 
Exploration expenses
   
944
   
4,239
 
Main Pass Energy HubTM costs
   
6
   
36
 
Total stock-based compensation cost
 
$
3,737
 
$
8,504
 

On January 28, 2013, McMoRan’s Board of Directors granted 928,000 stock options to its employees at an exercise price of $15.91 per share (the 2013 stock options). The weighted average per share fair value of the 2013 stock options was $10.42, and the 2013 stock options become exercisable in 25 percent annual increments beginning one year from the date of grant, expiring ten years after the grant date. McMoRan recorded $ 1.0 million in compensation costs related to the 2013 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. 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, which were issued to McMoRan’s Co-Chairmen and Treasurer in lieu of cash compensation in 2012 (collectively, the 2012 stock options). The weighted average per share fair value of the 2012 stock options was $8.80.  McMoRan recorded $ 5.9 million in charges related to immediately vested 2012 stock options in the first quarter of 2012. There were no immediately vested 2013 stock options granted in the first quarter of 2013, and no stock options were granted to McMoRan’s Co-Chairmen or Treasurer.

As of March 31, 2013, total compensation cost related to nonvested approved stock option awards not yet recognized in earnings was approximately $21.7 million, which is expected to be recognized over a weighted average period of approximately two years.

Under the terms of McMoRan’s stock incentive plans, unvested stock options, excluding the 2013 stock options, become fully vested and exercisable upon a change of control with respect to McMoRan’s ownership. However, specifically with respect to the FCX/MMR merger, McMoRan’s executive officers have waived their rights to the accelerated vesting provisions of the McMoRan stock options they currently hold (Note 2).
 
 
 
12

 
For additional information regarding McMoRan’s accounting for stock-based awards, see Notes 1 and 12 of the 2012 Form 10-K.

7.  INCOME TAXES
As of March 31, 2013 and December 31, 2012, McMoRan had approximately $472.0 million and $494.7 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 13 of the 2012 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.  Tax periods open to audit primarily include federal and Louisiana income tax returns subsequent to 2008.  Net operating loss amounts prior to this time are also subject to audit.

8. OIL AND GAS ACTIVITIES
Exploration and Operations.
McMoRan has incurred drilling costs for in-progress and/or unproven exploratory wells totaling approximately $1.2 billion at March 31, 2013. In addition, McMoRan’s allocated costs under purchase accounting for the working interests acquired in properties associated with McMoRan’s current in-progress and unproven wells totaled $693.5 million at March 31, 2013.

As of March 31, 2013, McMoRan had six wells (the Davy Jones initial discovery well (Davy Jones No. 1), the Davy Jones offset appraisal well – (Davy Jones No. 2), Blackbeard West No. 1, Hurricane Deep, Blackbeard East and Lafitte) with costs that have been capitalized for a period in excess of one year following the completion of initial exploratory drilling operations.

In 2010, the Davy Jones No. 1 well logged 200 net feet of pay in multiple Wilcox sands, which were all full to base. Davy Jones No. 2, which is located two and a half miles southwest of Davy Jones No. 1, confirmed 120 net feet of pay in multiple Wilcox sands and also encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonate sections. McMoRan is the operator and holds a 63.4 percent working interest and a 50.2 percent net revenue interest in each of Davy Jones No. 1 and Davy Jones No. 2 (collectively, the Davy Jones complex).

Davy Jones No. 1 completion activities were initiated in the fourth quarter of 2011 and initial flow testing procedures were attempted in March 2012, however McMoRan encountered mechanical issues with the well’s originally designed perforating equipment. Subsequent activities to flow test the well were conducted in 2012, and additional procedures to achieve a measurable flow rate are required.  Future plans will incorporate data gained to date at the Davy Jones complex as well as core and log data from the in-progress well at Lineham Creek, located onshore approximately 50 miles northwest of the Davy Jones complex. The rig was moved off location in February 2013 while a large-scale hydraulic fracture treatment is designed to penetrate the Wilcox reservoirs to facilitate hydrocarbon movement into the wellbore. McMoRan’s investment in well drilling, completion and other costs specifically attributable to Davy Jones No. 1 approximated $339.4 million as of March 31, 2013.

Long-lead equipment required for completing and testing Davy Jones No. 2 is expected to be available in the third quarter of 2013. The Davy Jones complex is located on a 20,000 acre structure that has multiple additional drilling opportunities.

McMoRan expects to commence operations at the Davy Jones complex prior to July 24, 2013 or request approval of a lease expiration extension by the Bureau of Safety and Environmental Enforcement of the United States Department of the Interior (BSEE).

McMoRan’s total investment in the Davy Jones complex, which includes $474.8 million in allocated property acquisition costs, totaled approximately $1.0 billion at March 31, 2013.
 
 
 
13

 
The Blackbeard West No. 1 ultra-deep exploration well on South Timbalier Block 168 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 lease rights to the Blackbeard West Unit (including Blackbeard West No. 1) are currently held by activities associated with Blackbeard West No. 2 (discussed below) while McMoRan’s evaluation of Blackbeard West No. 1 continues. McMoRan holds a 69.4 percent working interest and a 56.5 percent net revenue interest in Blackbeard West No. 1. McMoRan’s investment in the Blackbeard West No. 1 drilling costs approximated $31.1 million at March 31, 2013.

The Blackbeard West No. 2 ultra-deep exploration well on Ship Shoal Block 188 was drilled to a total depth of 25,584 feet in January 2013. Through logs and core data, McMoRan has identified three potential hydrocarbon bearing Miocene sand sections between approximately 20,800 and 24,000 feet. Completion plans are under development for submission to BSEE in connection with the overall Blackbeard West Unit plan. 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 $92.9 million at March 31, 2013. In addition, McMoRan has approximately $27.6 million of allocated property acquisition costs for the Blackbeard West unit.

The Hurricane Deep well, on South Marsh Island Block 217, was drilled to a total depth of 21,378 feet in July 2011.  Log results indicated the presence of Operc and Gyro sands that McMoRan determined could be pursued in an updip location.  The well was temporarily abandoned to preserve the wellbore while McMoRan evaluates opportunities to sidetrack or deepen the well. McMoRan’s total investment in Hurricane Deep, which includes $24.8 million in allocated property acquisition costs, totaled $55.5 million at March 31, 2013.

The Blackbeard East ultra-deep well (South Timbalier Block 144 #1 BP1 well), is located in 80 feet of water, and 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 Miocene, Middle Miocene, Frio, Vicksburg, and Sparta carbonate.  McMoRan’s lease rights to South Timbalier Block 144 were scheduled to expire on August 17, 2012. Prior to the expiration, McMoRan submitted an application for Suspension of Production (SOP) to the BSEE to allow McMoRan to continue to hold its rights to the lease. In addition, McMoRan subsequently submitted to BSEE an Application for Permit Modification (APM) related to its development plans for Blackbeard East to test and complete the Middle Miocene sands in the South Timbalier 144 #1 BP1 well. In April 2013 BSEE approved McMoRan’s APM for completion of the Blackbeard East well. McMoRan continues to pursue approval of a unit to facilitate development of the Blackbeard East prospect.  The unit would consist of South Timbalier Blocks 144, 145, 164 and 165. McMoRan continues to hold its rights to the South Timbalier 144 lease while the SOP application is under administrative consideration by BSEE. McMoRan’s ability to continue to preserve its interest in the South Timbalier 144 lease will require final approval of the SOP from BSEE, and McMoRan’s ability to continue to preserve the entirety of the Blackbeard East prospect will require final approval by BSEE of the SOP and the unit.

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 $311.4 million at March 31, 2013.

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, Frio, Upper Eocene, and Sparta carbonate. McMoRan’s lease rights to Eugene Island Block 223 were scheduled to expire on October 8, 2012. Prior to the lease expiration, McMoRan submitted its initial development plans to complete and test the Jackson/Yegua sands in the upper Eocene of Lafitte to BSEE. McMoRan continues to hold its rights to this lease while its development plans are under administrative consideration by BSEE.

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 $198.3 million at March 31, 2013.
 
 
 
14

 
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.  See Note 1 of the 2012 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 2012 Form 10-K, when events and circumstances indicate that proved oil and gas property carrying amounts may 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’s first quarter 2013 results include impairment charges totaling $19.1 million relating to well performance reserve revisions. In the comparable prior year period McMoRan recorded impairment charges totaling $7.1 million for certain properties, reflecting the impact of higher than anticipated recompletion costs, a decline in estimated future market prices for natural gas, well performance issues, and other economic factors. 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 2012 Form 10-K.

Insurance Claims.
Approximately $1.2 million of insurance proceeds related to a property damage claim was recorded in the first quarter of 2012.


 
15

 

Accrued Reclamation Obligations.
For more information regarding McMoRan’s accounting policies for asset retirement obligations see Notes 1 and 15 of the 2012 Form 10-K. A summary of changes in McMoRan’s consolidated asset retirement obligations (including both current and long-term obligations) since December 31, 2012 follows (in thousands):

 
Oil and
     
 
Natural Gas
 
Sulphur
 
Asset retirement obligations at January 1, 2013
$
245,580
 
$
17,435
 
Liabilities settled
 
(265
)
 
(9
)
Scheduled accretion and other expense
 
1,849
   
270
 
Assumed by others (properties sold)
 
(6,278
)
 
-
 
Other, net
 
54
   
-
 
Asset retirement obligations at March 31, 2013
$
240,940
 
$
17,696
 

9. OTHER MATTERS
Legal Proceedings.
McMoRan may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of our business.  Management believes that potential liability from any of these pending or threatened proceedings will not have a material adverse effect on McMoRan’s financial condition or results of operations.

Between December 11, 2012 and December 26, 2012, ten putative class actions challenging the FCX/MMR merger were filed on behalf of all of McMoRan’s stockholders by purported McMoRan stockholders.  Nine were filed in the Court of Chancery of the State of Delaware (the “Delaware Court of Chancery”).  On January 9, 2013, one of the actions was voluntarily dismissed by the plaintiff. On January 25, 2013, the Delaware Court of Chancery consolidated the remaining eight actions into a single action, In re McMoRan Exploration Co. Stockholder Litigation, No. 8132-VCN. One action was also filed on December 19, 2012 in the Civil District Court for the Parish of Orleans of the State of Louisiana: Langley v. Moffett et al., No. 2012-11904. The actions name some or all of the following as defendants: McMoRan and its directors, FCX, the Gulf Coast Ultra Deep Royalty Trust, INAVN Corp., a wholly-owned subsidiary of FCX (the “merger sub”), another subsidiary of FCX, and PXP. The lawsuits allege, among other things, that members of its board of directors breached their fiduciary duties to McMoRan’s stockholders because they, among other things, pursued their own interests at the expense of stockholders, failed to maximize stockholder value with respect to the FCX/MMR merger, and failed to disclose material facts regarding the FCX/MMR merger, and that FCX, the merger sub and PXP aided and abetted that breach of fiduciary duties. The consolidated Delaware action also asserts breach of contract claims against FCX and PXP derivatively on behalf of McMoRan. These lawsuits seek, among other things, an injunction barring or rescinding the FCX/MMR merger, damages, and attorney’s fees and costs.

In addition, between December 14, 2012 and March 5, 2013, fourteen derivative actions challenging the FCX/MMR merger and/or the FCX/PXP merger were filed on behalf of FCX by purported FCX stockholders.  Eleven were filed in the Delaware Court of Chancery and three were filed in the Superior Court of the State of Arizona, County of Maricopa (the “Arizona Superior Court”).  On January 25, 2013, the Delaware Court of Chancery consolidated ten of the Delaware actions into a single action, In re Freeport-McMoRan Copper & Gold Inc. Derivative Litigation, No. 8145-VCN. An eleventh Delaware action, Stephen Blau MD Money Purchase Pension Plan Trust v. Moffett et al., No. 8384-VCN, filed March 5, 2013 has not yet been consolidated.  By orders dated January 17, 2013 and February 8, 2013, the Arizona Superior Court consolidated  the Arizona actions into In re Freeport-McMoRan Derivative Litigation, No. CV2012-018351. The parties to the consolidated Delaware action have agreed to allow the Arizona plaintiffs to intervene in the consolidated Delaware action, and the Arizona plaintiffs have agreed to seek a permanent stay of the Arizona action. The actions name some or all of the following as defendants: the directors and certain officers of FCX, two FCX subsidiaries, McMoRan and certain of its directors and officers, and PXP and certain of PXP’s directors. These lawsuits allege, among other things, that the FCX directors breached their fiduciary duties to FCX stockholders because they, among other things, pursued their own interests at the expense of stockholders in approving the FCX/MMR merger and the FCX/PXP merger.  These lawsuits further allege that the other defendants aided and abetted that breach of fiduciary duties. These lawsuits seek, among other things, an injunction barring or rescinding both the FCX/MMR merger and the FCX/PXP merger and requiring submission of both the FCX/MMR
 
 
 
16

 
merger and the FCX/PXP merger to a vote of FCX stockholders, damages, and attorneys’ fees and costs.
 
The MMR plaintiffs have filed a motion for preliminary injunction. The FCX plaintiffs have told the court that they do not intend to file a motion for preliminary injunction.  McMoRan believes the lawsuits are without merit and intends to defend vigorously against them.

Subsequent Events Evaluation.
McMoRan evaluated subsequent events for purposes of its March 31, 2013 financial reporting through the date of filing of this quarterly report on Form 10-Q with the Securities and Exchange Commission.

10.  GUARANTOR FINANCIAL STATEMENTS
MOXY is an unconditional guarantor of McMoRan’s 11.875% senior notes.  See Notes 7 and 18 of the 2012 Form 10-K for additional information regarding these senior notes and MOXY’s guarantee.

               The following 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 March 31, 2013 and December 31, 2012 and the related condensed consolidating statements of operations and cash flow for the three months ended March 31, 2013 and 2012, which should be read in conjunction with the Notes to these condensed consolidated financial statements:
 
 
 
17

 
 CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
March 31, 2013
(In Thousands)

           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
   
(In Thousands)
 
ASSETS
                               
Current assets:
                               
Cash and cash equivalents
 
$
406
 
$
101,198
 
$
2,070
 
$
-
 
$
103,674
 
Accounts receivable
   
-
   
57,061
   
89
   
-
   
57,150
 
Inventories
   
-
   
27,069
   
-
   
-
   
27,069
 
Prepaid expenses
   
517
   
9,612
   
-
   
-
   
10,129
 
Current assets from discontinued
                               
operations
   
-
   
-
   
737
   
-
   
737
 
Total current assets
   
923
   
194,940
   
2,896
   
-
   
198,759
 
Property, plant and equipment, net
   
-
   
2,424,325
   
31
   
-
   
2,424,356
 
Investment in subsidiaries
   
1,607,709
   
-
   
-
   
(1,607,709
)
 
-
 
Amounts due from affiliates
   
639,825
   
-
   
-
   
(639,825
)
 
-
 
Restricted cash and other
                               
assets
   
2,952
   
64,536
   
-
   
-
   
67,488
 
Long-term assets from discontinued operations
   
-
   
-
   
439
   
-
   
439
 
Total assets
 
$
2,251,409
 
$
2,683,801
 
$
3,366
 
$
(2,247,534
)
$
2,691,042
 
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)
                   
Current liabilities:
                               
Accounts payable
 
$
412
 
$
88,349
 
$
39
 
$
-
 
$
88,800
 
Accrued liabilities
   
2,837
   
75,363
   
-
   
(4
)
 
78,196
 
Current portion of debt
   
67,832
   
-
   
-
   
-
   
67,832
 
Current portion of oil and gas
                               
accrued reclamation costs
   
-
   
45,925
   
-
   
-
   
45,925
 
Other current liabilities
   
21,476
   
285
   
-
   
-
   
21,761
 
Current liabilities from discontinued
                               
operations
   
-
   
-
   
1,644
   
4
   
1,648
 
Total current liabilities
   
92,557
   
209,922
   
1,683
   
-
   
304,162
 
Long-term debt
   
489,997
   
-
   
-
   
-
   
489,997
 
Amounts due to affiliates
   
-
   
634,994
   
4,831
   
(639,825
)
 
-
 
Accrued oil and gas reclamation costs
   
-
   
195,015
   
-
   
-
   
195,015
 
Other long-term liabilities
   
3,928
   
9,673
   
1,616
   
-
   
15,217
 
Long-term liabilities from discontinued
                               
operations
   
-
   
-
   
21,724
   
-
   
21,724
 
Total liabilities
   
586,482
   
1,049,604
   
29,854
   
(639,825
)
 
1,026,115
 
Stockholders’ equity (deficit)
   
1,664,927
   
1,634,197
   
(26,488
)
 
(1,607,709
)
 
1,664,927
 
Total liabilities and stockholders’
                               
equity (deficit)
 
$
2,251,409
 
$
2,683,801
 
$
3,366
 
$
(2,247,534
)
$
2,691,042
 


 
18

 

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2012
(In Thousands)

           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
   
(In Thousands)
 
ASSETS
                               
Current assets:
                               
Cash and cash equivalents
 
$
94
 
$
113,803
 
$
970
 
$
-
 
$
114,867
 
Accounts receivable
   
2,546
   
49,881
   
121
   
-
   
52,548
 
Inventories
   
-
   
28,532
   
-
   
-
   
28,532
 
Prepaid expenses
   
703
   
14,483
   
-
   
-
   
15,186
 
Current assets from discontinued
                               
operations
   
-
   
-
   
2,013
   
-
   
2,013
 
Total current assets
   
3,343
   
206,699
   
3,104
   
-
   
213,146
 
Property, plant and equipment, net
   
-
   
2,394,491
   
31
   
-
   
2,394,522
 
Investment in subsidiaries
   
1,535,803
   
-
   
-
   
(1,535,803
)
 
-
 
Amounts due from affiliates
   
638,964
   
-
   
-
   
(638,964
)
 
-
 
Restricted cash and other
                               
assets
   
3,309
   
65,706
   
-
   
-
   
69,015
 
Long-term assets from discontinued operations
   
-
   
-
   
439
   
-
   
439
 
Total assets
 
$
2,181,419
 
$
2,666,896
 
$
3,574
 
$
(2,174,767
)
$
2,677,122
 
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)
                   
Current liabilities:
                               
Accounts payable
 
$
604
 
$
83,244
 
$
89
 
$
-
 
$
83,937
 
Accrued liabilities
   
2,179
   
129,516
   
1
   
(48
)
 
131,648
 
Current portion of debt
   
67,832
   
-
   
-
   
-
   
67,832
 
Current portion of oil and gas
                               
accrued reclamation costs
   
-
   
57,336
   
-
   
-
   
57,336
 
Other current liabilities
   
13,679
   
754
   
-
   
-
   
14,433
 
Current liabilities from discontinued
                               
operations
   
-
   
-
   
2,280
   
48
   
2,328
 
Total current liabilities
   
84,294
   
270,850
   
2,370
   
-
   
357,514
 
Long-term debt
   
489,470
   
-
   
-
   
-
   
489,470
 
Amounts due to affiliates
   
-
   
634,161
   
4,803
   
(638,964
)
 
-
 
Accrued oil and gas reclamation costs
   
-
   
188,245
   
-
   
-
   
188,245
 
Other long-term liabilities
   
4,444
   
11,144
   
1,616
   
-
   
17,204
 
Long-term liabilities from discontinued
                               
operations
   
-
   
-
   
21,478
   
-
   
21,478
 
Total liabilities
   
578,208
   
1,104,400
   
30,267
   
(638,964
)
 
1,073,911
 
Stockholders’ equity (deficit)
   
1,603,211
   
1,562,496
   
(26,693
)
 
(1,535,803
)
 
1,603,211
 
Total liabilities and stockholders’
                               
equity (deficit)
 
$
2,181,419
 
$
2,666,896
 
$
3,574
 
$
(2,174,767
)
$
2,677,122
 

 
19

 


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 2013
(In Thousands)

           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
   
(In Thousands)
 
Revenues:
                               
Oil and natural gas
 
$
-
 
$
78,536
 
$
-
 
$
-
 
$
78,536
 
Service
   
-
   
2,910
   
15
   
(15
)
 
2,910
 
Total revenues
   
-
   
81,446
   
15
   
(15
)
 
81,446
 
Costs and expenses:
                               
Production and delivery costs
   
-
   
32,659
   
-
   
(15
)
 
32,644
 
Depletion, depreciation and amortization
                               
expense
   
-
   
36,402
   
-
   
-
   
36,402
 
Exploration expenses
   
-
   
10,092
   
-
   
-
   
10,092
 
General and administrative expenses
   
4,143
   
11,135
   
-
   
-
   
15,278
 
Main Pass Energy Hub™ costs
   
-
   
-
   
114
   
-
   
114
 
Gain on sale of oil and gas properties
   
-
   
(76,824
)
 
-
   
-
   
(76,824
)
Total costs and expenses
   
4,143
   
13,464
   
114
   
(15
)
 
17,706
 
Operating income
   
(4,143
)
 
67,982
   
(99
)
 
-
   
63,740
 
Interest expense, net
   
-
   
-
   
-
   
-
   
-
 
Equity in income (losses) of consolidated
                               
subsidiaries
   
67,102
   
-
   
-
   
(67,102
)
 
-
 
Other income (expense), net
   
(6
)
 
22
   
-
   
-
   
16
 
Income (loss) from continuing operations
                               
before income taxes
   
62,953
   
68,004
   
(99
)
 
(67,102
)
 
63,756
 
Income tax expense
   
-
   
-
   
-
   
-
   
-
 
Income (loss) from continuing operations
   
62,953
   
68,004
   
(99
)
 
(67,102
)
 
63,756
 
Income (loss) from discontinued operations
   
-
   
-
   
(803
)
 
-
   
(803
)
Net income (loss)
   
62,953
   
68,004
   
(902
)
 
(67,102
)
 
62,953
 
Preferred dividends
   
(10,304
)
 
-
   
-
   
-
   
(10,304
)
Net income (loss) applicable to common stock
 
$
52,649
 
$
68,004
 
$
(902
)
$
(67,102
)
$
52,649
 
                                 




 
20

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 2012
(In Thousands)

           
Freeport
     
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
Eliminations
 
McMoRan
 
       
Revenues:
                               
Oil and natural gas
 
$
-
 
$
107,084
 
$
-
 
$
-
 
$
107,084
 
Service
   
-
   
3,563
   
6
   
(6
)
 
3,563
 
Total revenues
   
-
   
110,647
   
6
   
(6
)
 
110,647
 
Costs and expenses:
                               
Production and delivery costs
   
-
   
38,668
   
-
   
(6
)
 
38,662
 
Depletion, depreciation and amortization
                               
expense
   
-
   
41,829
   
-
   
-
   
41,829
 
Exploration expenses
   
-
   
8,019
   
-
   
-
   
8,019
 
General and administrative expenses
   
2,193
   
12,740
   
-
   
-
   
14,933
 
Main Pass Energy HubTM costs
   
-
   
-
   
66
   
-
   
66
 
Insurance recoveries
   
-
   
(1,229
)
 
-
   
-
   
(1,229
)
Total costs and expenses
   
2,193
   
100,027
   
66
   
(6
)
 
102,280
 
Operating income (loss)
   
(2,193
)
 
10,620
   
(60
)
 
-
   
8,367
 
Interest expense, net
   
-
   
-
   
-
   
-
   
-
 
Equity in income (losses) of consolidated
                               
subsidiaries
   
7,691
   
-
   
-
   
(7,691
)
 
-
 
Other income (expense), net
   
(6
)
 
234
   
-
   
-
   
228
 
Income (loss) from continuing operations
                               
before income taxes
   
5,492
   
10,854
   
(60
)
 
(7,691
)
 
8,595
 
Income tax expense
   
-
   
-
   
-
   
-
   
-
 
Income (loss) from continuing operations
   
5,492
   
10,854
   
(60
)
 
(7,691
)
 
8,595
 
Loss from discontinued operations
   
-
   
-
   
(3,103
)
 
-
   
(3,103
)
Net income (loss)
   
5,492
   
10,854
   
(3,163
)
 
(7,691
)
 
5,492
 
Preferred dividends
   
(10,342
)
 
-
   
-
   
-
   
(10,342
)
Net income (loss) applicable to common stock
 
$
(4,850
)
$
10,854
 
$
(3,163
)
$
(7,691
)
$
(4,850
)
                                 












 
21

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)
Three Months Ended March 31, 2013
(In Thousands)

           
Freeport
 
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
McMoRan
 
   
(In Thousands)
 
                           
Cash flow from operating activities:
                         
Net cash provided by (used in) continuing
                         
operations
 
$
5,953
 
$
22,944
 
$
(106
)
$
28,791
 
Net cash used in discontinued operations
   
-
   
-
   
79
   
79
 
Net cash provided by (used in) operating
                         
activities
   
5,953
   
22,944
   
(27
)
 
28,870
 
                           
Cash flow from investing activities:
                         
Exploration, development and other
                         
capital expenditures
   
-
   
(114,522
)
 
-
   
(114,522
)
Proceeds from sale of oil and gas properties
   
-
   
79,023
   
-
   
79,023
 
Net cash used in investing activities
   
-
   
(35,499
)
 
-
   
(35,499
)
                           
Cash flow from financing activities:
                         
Dividends paid and conversion inducement
                         
payments on convertible preferred stock
   
(10,304
)
 
-
   
-
   
(10,304
)
Proceeds from exercise of stock options
   
5,740
   
-
   
-
   
5,740
 
Investment from parent
   
(1,100
)
 
-
   
1,100
   
-
 
Amounts payable to consolidated affiliate
   
23
   
(51
)
 
28
   
-
 
Net cash (used in) provided by financing
                         
     activities
   
(5,641
)
 
(51
)
 
1,128
   
(4,564
)
                           
Net increase (decrease) in cash and cash
                         
equivalents
   
312
   
(12,606
)
 
1,101
   
(11,193
)
Cash and cash equivalents at beginning
                         
of year
   
94
   
113,804
   
969
   
114,867
 
Cash and cash equivalents at end of period
 
$
406
 
$
101,198
 
$
2,070
 
$
103,674
 
                           


 
22

 



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)
Three Months Ended March 31, 2012
(In Thousands)

           
Freeport
 
Consolidated
 
   
Parent
 
MOXY
 
Energy
 
McMoRan
 
       
                           
Cash flow from operating activities:
                         
Net cash provided by (used in)
                         
continuing operations
 
$
10,144
 
$
30,037
 
$
(29
)
$
40,152
 
Net cash used in discontinued operations
   
-
   
-
   
(3,099
)
 
(3,099
)
Net cash provided by (used in)
                         
operating activities
   
10,144
   
30,037
   
(3,128
)
 
37,053
 
                           
Cash flow from investing activities:
                         
Exploration, development and other
                         
capital expenditures
   
-
   
(163,364
)
 
-
   
(163,364
)
Net cash used in investing activities
   
-
   
(163,364
)
 
-
   
(163,364
)
                           
Cash flow from financing activities:
                         
Dividends paid
   
(10,342
)
 
-
   
-
   
(10,342
)
Proceeds from exercise of stock options
   
(375
)
 
-
   
-
   
(375
)
Investment from parent
   
(3,000
)
 
-
   
3,000
   
-
 
Amounts payable to consolidated affiliates
   
(12,674
)
 
12,565
   
109
   
-
 
Net cash provided by (used in)
                         
financing activities
   
(26,391
)
 
12,565
   
3,109
   
(10,717
)
                           
Net decrease in cash and cash
                         
equivalents
   
(16,247
)
 
(120,762
)
 
(19
)
 
(137,028
)
Cash and cash equivalents at beginning
                         
of year
   
16,341
   
552,365
   
57
   
568,763
 
Cash and cash equivalents at end of
                         
period
 
$
94
 
$
431,603
 
$
38
 
$
431,735
 
                           


11. RATIO OF EARNINGS TO FIXED CHARGES
McMoRan recognized income from continuing operations totaling $63.8 million for the first quarter of 2013 resulting in a ratio of earnings to fixed charges of 4.8 for that period. McMoRan recognized income from continuing operations totaling $8.6 million for the first quarter of 2012, which was inadequate to cover its fixed charges of $14.4 million for that period. For this calculation, earnings consist of income (loss) from continuing operations and fixed charges. Fixed charges include interest and that portion of rent deemed representative of interest.
 
 

 
23

 

 
 



To the Board of Directors and Stockholders of McMoRan Exploration Co.:

We have reviewed the condensed consolidated balance sheet of McMoRan Exploration Co. (a Delaware corporation) as of March 31, 2013, and the related condensed consolidated statements of operations, comprehensive income (loss), and cash flow for the three-month periods ended March 31, 2013 and 2012, and the condensed consolidated statement of equity for the three month period ended March 31, 2013. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of McMoRan Exploration Co. as of December 31, 2012, and the related consolidated statements of operations, comprehensive income (loss), cash flow and changes in stockholders’ equity for the year then ended (not presented herein), and in our report dated February 22, 2013, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ ERNST & YOUNG LLP

New Orleans, Louisiana
May 6, 2013


 
24

 


OVERVIEW

In management’s discussion and analysis “we,” “us,” and “our” refer to McMoRan Exploration Co. and its wholly owned consolidated subsidiaries, McMoRan Oil & Gas LLC (MOXY) and Freeport-McMoRan Energy LLC (Freeport Energy).  You should read the following discussions in conjunction with our consolidated financial statements, the related discussion and analysis of financial condition and results of operations and our discussion of “Business and Properties” in our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K) filed with the Securities and Exchange Commission (SEC).  The results of operations reported and summarized below are not necessarily indicative of future operating results. Unless otherwise specified, all references to Notes refers to Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.  Also see the 2012 Form 10-K for a glossary of definitions for some of the oil and gas industry terms we use in this Form 10-Q.

We engage in the exploration, development and production of oil and natural gas in the shallow waters (less than 500 feet of water) of the Gulf of Mexico (GOM) and onshore in the Gulf Coast area of the United States.  Our exploration strategy is focused on targeting large structures on the “deep gas play,” and on the “ultra-deep play.”  Deep gas prospects target large deposits at depths typically between 15,000 and 25,000 feet.  Ultra-deep prospects target objectives at depths typically below 25,000 feet. We have one of the largest acreage positions in the shallow waters of the Gulf of Mexico and Gulf Coast areas, which are our regions of focus. We have rights to approximately 797,000 gross acres, including approximately 388,000 gross acres associated with the ultra-deep gas play below the salt weld.  Our focused strategy enables us to make efficient use of our geological, engineering and operational expertise in these areas where we have more than 40 years of operating experience. We also believe that the scale of our operations in the Gulf of Mexico allows us to realize certain operating synergies and provides a strong platform from which to pursue our business strategy. Our oil and gas operations are conducted through MOXY, our principal operating subsidiary.
 
On December 5, 2012, we announced entry into a definitive agreement (the merger agreement) under which Freeport-McMoRan Copper & Gold Inc. (FCX) will acquire us for approximately $3.4 billion in cash, or $2.1 billion net of the aggregate 36 percent ownership interest in McMoRan currently held by FCX and Plains Exploration & Production Company (PXP) (the FCX/MMR merger). The related per-share consideration consists of $14.75 in cash and 1.15 units in the Gulf Coast Ultra Deep Royalty Trust, a newly formed royalty trust, which will hold a five percent overriding royalty interest in future production from our existing shallow water ultra-deep prospects. Completion of the FCX/MMR merger is subject to stockholder approval.  On May 3, 2013, we announced we will hold a special meeting of our stockholders on June 3, 2013, to vote on the proposed FCX/MMR merger. The FCX/MMR merger is expected to close in the second quarter of 2013, subject to satisfaction of all conditions to closing.

Also on December 5, 2012, FCX announced a definitive merger agreement under which FCX will acquire PXP for per-share consideration equivalent to 0.6531 shares of FCX common stock and $25 in cash (approximately $3.4 billion in cash and 91 million shares of FCX common stock) (the FCX/PXP merger). The FCX/PXP merger is subject to the approval of PXP’s stockholders.  On April 18, 2013, PXP announced that it will hold a speical meeting of its stockholders on May 20, 2013, to vote on the proposed FCX/PXP merger.  The FCX/PXP merger is also expected to close in the second quarter of 2013, subject to satisfaction of all conditions to closing. PXP owns 51 million shares of McMoRan common stock, which PXP acquired in December 2010 as part of an asset acquisition.
 
From October 2012 through January 2013, we completed oil and gas property sales for aggregate proceeds of approximately $135.3 million, and the properties associated with the sales represented approximately 18 percent of our 2012 annual production and 14 percent of estimated proved reserves at December 31, 2012. Approximately $79 million of these proceeds were received in the first quarter of 2013.

On January 17, 2013, we completed the sale of the Laphroaig field to Energy XXI Limited for cash consideration after closing adjustments of $80 million and the assumption of related abandonment obligations of approximately $0.6 million. The Laphroaig field represented approximately 10 percent of our total average daily production for the fourth quarter 2012 and four percent of our total estimated reserves at December 31, 2012. Independent reserve engineers’ estimates of proved reserves for the Laphroaig
 
 
 
25

 
field at December 31, 2012 totaled approximately 101,000 barrels of oil and 8.7 billion cubic feet of natural gas (9.4 billion cubic feet of natural gas equivalents). The transaction was effective January 1, 2013 (Note 3).

On January 28, 2013, we completed the sale of certain of our Breton Sound area properties to Century Exploration New Orleans, LLC (Century). Consideration consisted of the assumption of related abandonment obligations by Century of approximately $4.6 million and payment by us to Century of $0.6 million (the Century Sale). The properties involved in the Century Sale represented approximately two percent of our total average daily production for the fourth quarter of 2012 and less than one percent of our total estimated reserves at December 31, 2012.  Independent reserve engineers’ estimates of proved reserves for the properties involved in the Century Sale at December 31, 2012 totaled approximately 16,600 barrels of oil and natural gas liquids and 0.4 billion cubic feet of natural gas (0.5 billion cubic feet of natural gas equivalents). As of December 31, 2012 the estimated present value of future net cash flows discounted at 10 percent (PV-10) was negative. The Century Sale was effective October 1, 2012 (Note 3).
 
During the three months ended March 31, 2013, we paid $114.5 million for capital-related projects primarily associated with our exploration activities. Drilling results, follow on development opportunities and general market factors will determine our level of future capital expenditures for the remainder of 2013 and beyond, as capital spending will continue to be driven by opportunities and the availability of capital.

Substantial capital expenditures have been and will continue to be required in our exploration and development activities, especially for the development and exploitation of our significant ultra-deep exploration and development projects. Our capital expenditures have been financed in part with internally generated cash from operations, the continued availability of which is dependent on a number of variables including production from our existing proved reserves, sales prices for natural gas and oil, and our ability to acquire, locate and produce new reserves.  We have also financed our capital expenditures with proceeds from debt and equity financings and participation by partners in exploration and development projects. Our ongoing exploration and development activities require substantial financial resources, which we believe can be met following completion of the FCX/MMR merger discussed above. Should the completion of the FCX/MMR merger not occur, we expect to continue to financially support our near-term operating requirements and a limited capital expenditure budget with cash on hand, internally generated cash from operations and if required, potential asset sales, joint venture transactions or other financings. On a longer-term basis additional capital would be required to continue our aggressive drilling and development program, the funding for which would require additional asset sales, debt, equity, partnering or other financing arrangements.

North American Natural Gas and Oil Market Environment

Our first quarter 2013 production volumes were comprised of approximately 54 percent natural gas and 46 percent oil and natural gas liquids, while our revenues were derived 76 percent from oil and natural gas liquids and 24 percent from natural gas. North American natural gas averaged $3.49 per MMbtu during the first quarter of 2013.  The spot price for natural gas was $4.03 per MMbtu on May 2, 2013.  The average oil price for the first quarter of 2013 was $94.41 per barrel and the spot price for oil was $93.95 per barrel on May 2, 2013.  Future oil and natural gas prices are subject to change and these changes are not within our control (see Item 1A. “Risk Factors” included in the 2012 Form 10-K).

In the first half of 2012, the spot price for natural gas fell below $2.00 per MMbtu; however, natural gas prices have improved in recent months from the 10-year lows seen in 2012. The improvement in natural gas prices has resulted from lower than expected injections into storage driven by cooler-than-normal weather conditions and coal displacement. While market observers expect near-term prices to remain under pressure, some analysts expect natural gas prices to improve over the longer term with industry-led drilling directed to oil and natural gas liquids plays, reduced shale gas drilling activity and industrial consumption increases in response to low prices. Prolonged weak natural gas market conditions would likely have a negative impact on our results of operations and financial condition and may require us to reduce planned capital spending and adjust aspects of our current business strategy.
 
 
 
26

 
 
OPERATIONAL ACTIVITIES

Production Update
First-quarter 2013 production averaged  103 MMcfe/d net to us, compared with 156 MMcfe/d in the first quarter of 2012.  Production is expected to average approximately 95 MMcfe/d in the second quarter of 2013. McMoRan’s estimated production rates are dependent on the timing of planned recompletions, production performance, weather and other factors.

Production from the Flatrock field averaged a gross rate of approximately 89 MMcfe/d (37 MMcfe/d net to us) in the first quarter of 2013, compared with 136 MMcfe/d (56 MMcfe/d net to us) in the first quarter of 2012.  Production from Flatrock is expected to be lower for 2013 compared to 2012 as a result of declines in the currently producing zones.  Following depletion of currently producing zones, we are planning several recompletions to additional pay zones which are expected to increase production in future years. We own a 55.0 percent working interest and a 41.3 percent net revenue interest in the Flatrock field.

Oil and Gas Activities.

Shallow Water Ultra-Deep Exploration and Development Activities.  Since 2008, our drilling activities in the shallow waters of the GOM below the salt weld (i.e. listric fault) have successfully confirmed our geologic model and the highly prospective nature of this emerging geologic trend.  The data from seven wells drilled to date indicate the presence below the salt weld of geologic formations including Upper/Middle/Lower Miocene, Frio, Vicksburg, Jackson, Yegua, Sparta carbonate, Wilcox, Tuscaloosa and Cretaceous carbonate, which have been prolific onshore, in the deepwater GOM and in international locations. The results of these activities indicate the potential for a major new geologic trend spanning 200 miles in the shallow waters of the GOM and onshore in the Gulf Coast area. Further drilling and flow testing will be required to determine the ultimate potential of this new trend.

We have incurred drilling costs for in-progress and/or unproven exploratory wells totaling approximately $1.2 billion at March 31, 2013. In addition, our allocated costs for the working interests acquired in properties associated with our current in-progress and unproven wells totaled $693.5 million at March 31, 2013.


 
27

 

Lineham Creek Onshore Well
The Lineham Creek exploration prospect, which is located onshore in Cameron Parish, Louisiana, is currently drilling below the salt weld at 29,400 feet. In November 2012, the well encountered pay sands above 24,000 feet, as identified by wireline logs.  Independent reserve engineers retained by us have assigned initial estimates of proved, probable and possible reserves associated with interim drilling results through December 31, 2012, from the sands encountered above 24,000 feet in this ultra-deep exploratory well including 12.9 Bcfe of net proved reserves, 46.6 Bcfe of net probable reserves and 82.2 Bcfe of net possible reserves. These proved reserves are believed to be the first proved reserves to be recorded in the sub-salt, ultra-deep trend. Development plans will be determined following completion of drilling and evaluation of the well’s deeper objectives. The well, which is targeting Eocene and Paleocene objectives below the salt weld, has a proposed total depth of 30,500 feet.  We hold a 36.0 percent working interest. Our investment in Lineham Creek totaled $62.4 million at March 31, 2013.

Lomond North Onshore Well
The Lomond North ultra-deep prospect, which is located onshore in the Highlander area, primarily in St. Martin Parish, Louisiana, is currently drilling below 18,400 feet. This exploratory well has a proposed total depth of 30,000 feet and is targeting Eocene, Paleocene and Cretaceous objectives below the salt weld.  We control rights to approximately 80,000 gross acres in Iberia, St. Martin, Assumption and Iberville Parishes, Louisiana.  We are operator and currently hold a 72.0 percent working interest. Our investment in Lomond North totaled $66.8 million at March 31, 2013.

Davy Jones
Davy Jones No. 1 completion activities were initiated in the fourth quarter of 2011, and initial flow testing procedures were attempted in March 2012; however we encountered mechanical issues with the well’s originally designed perforating equipment. Subsequent activities to flow the well were conducted in 2012, and additional procedures to achieve a measurable flow rate are required. Future plans will incorporate data gained to date at Davy Jones as well as core and log data from the in-progress well at Lineham Creek, located onshore approximately 50 miles northwest of Davy Jones. The rig was moved off location in February 2013 while a large-scale hydraulic fracture treatment is designed to penetrate the Wilcox reservoirs to facilitate hydrocarbon movement into the wellbore. Our investment in well drilling, completion and other costs specifically attributable to Davy Jones No. 1 approximated $339.4 million as of March 31, 2013.

Long-lead equipment required for completing and testing Davy Jones No. 2 is expected to be available in the third quarter of 2013. The Davy Jones complex is located on a 20,000 acre structure that has multiple additional drilling opportunities.

We expect to commence operations at the Davy Jones complex prior to July 24, 2013 or request approval of a lease expiration extension by the Bureau of Safety and Environmental Enforcement of the United States Department of the Interior (BSEE).

We have drilled two sub-salt wells in the Davy Jones field.  The Davy Jones No. 1 well logged 200 net feet of pay in multiple Wilcox sands, which were all full to base.  The Davy Jones No. 2 well, which is located two and a half miles southwest of Davy Jones No. 1, confirmed 120 net feet of pay in multiple Wilcox sands, indicating continuity across the major structural features of the Davy Jones prospect, and it also encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonate sections.

We are the operator and hold a 63.4 percent working interest and a 50.2 percent net revenue interest in the Davy Jones complex.  Our total investment in the Davy Jones complex, which includes $474.8 million in allocated property acquisition costs, totaled approximately $1.0 billion at March 31, 2013.

Blackbeard East
The Blackbeard East ultra-deep well (South Timbalier Block 144 #1 BP1 well), is located in 80 feet of water, and 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 Miocene, Middle Miocene, Frio, Vicksburg, and Sparta carbonate.  Our lease rights to South Timbalier Block 144 were scheduled to expire on August 17, 2012. Prior to the expiration, we submitted an application for Suspension of Production (SOP) to the BSEE to allow us to continue to hold our rights to
 
 
 
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the lease. In addition, we subsequently submitted to BSEE an Application for Permit Modification (APM) related to our development plans for Blackbeard East to test and complete the Middle Miocene sands in the South Timbalier 144 #1 BP1 well. In April 2013 BSEE approved our APM for completion of the Blackbeard East well. We continue to pursue, with BSEE, approval of a unit to facilitate development of the Blackbeard East prospect.  The unit would consist of South Timbalier Blocks 144, 145, 164 and 165. We continue to hold our rights to the South Timbalier 144 lease while the SOP application is under administrative consideration by BSEE. Our ability to continue to preserve our interest in the South Timbalier 144 lease will require final approval of the SOP from BSEE, and our ability to continue to preserve the entirety of the Blackbeard East prospect will require final approval by BSEE of the SOP and the unit.

We hold a 72.0 percent working interest and a 57.4 percent net revenue interest in Blackbeard East.  Our total investment in Blackbeard East, which includes $130.5 million in allocated property acquisition costs, totaled $311.4 million at March 31, 2013.

Lafitte
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, Frio, Jackson, Yegua, and Sparta carbonate. Our lease rights to Eugene Island Block 223 were scheduled to expire on October 8, 2012. Prior to the lease expiration, we submitted our initial development plans to complete and test the Jackson/Yegua sands in the upper Eocene of Lafitte to BSEE. This completion will require the development of 30,000 psi equipment. We continue to hold our rights to this lease while the development plans are under administrative consideration by BSEE.

We hold a 72.0 percent working interest and a 58.3 percent net revenue interest in Lafitte.  Our total investment in Lafitte, which includes $35.8 million in allocated property acquisition costs, totaled $198.3 million at March 31, 2013.

Blackbeard West Unit
The Blackbeard West No. 1 ultra-deep exploration well on South Timbalier Block 168, which 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 we evaluate whether to drill deeper or complete the well to test the existing zones. Our lease rights to the Blackbeard West Unit (including Blackbeard West No. 1) are currently held by activities associated with Blackbeard West No. 2 (discussed below) while our evaluation of Blackbeard West No. 1 continues. We hold a 69.4 percent working interest and a 56.5 percent net revenue interest in Blackbeard West No. 1. Our investment in the Blackbeard West No. 1 drilling costs approximated $31.1 million at March 31, 2013.

The Blackbeard West No. 2 ultra-deep exploration well on Ship Shoal Block 188 was drilled to a total depth of 25,584 feet in January 2013. Through logs and core data, we have identified three potential hydrocarbon bearing Miocene sand sections between approximately 20,800 and 24,000 feet.  Initial completion efforts are expected to focus on the development of approximately 50 net feet of laminated sands in the Middle Miocene located at approximately 24,000 feet.  Additional development opportunities in the well bore include approximately 80 net feet of potential low-resistivity pay at approximately 22,400 feet and an approximate 75 foot gross section at approximately 20,900 feet.  Pressure and temperature data indicate that a completion at these depths could utilize conventional equipment and technologies.  Completion plans are under development for submission to BSEE in connection with the overall Blackbeard West Unit plan. We hold a 69.4 percent working interest and a 53.1 percent net revenue interest in Ship Shoal Block 188.  Our investment in Blackbeard West No. 2 totaled $92.9 million at March 31, 2013. In addition, we have approximately $27.6 million of leasehold costs for the Blackbeard West Unit resulting from allocated property acquisition costs.

Hurricane Deep
The Hurricane Deep well, which is located in 12 feet of water on South Marsh Island Block 217, was drilled to a total depth of 21,378 feet in July 2011. Log results indicated the presence of Operc and Gyro sands that we determined could be pursued in an updip location. The well was temporarily abandoned to preserve the wellbore while we evaluate opportunities to sidetrack or deepen the well. Our
 
 
 
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total investment in Hurricane Deep, which includes $24.8 million in allocated property acquisition costs, totaled $55.5 million at March 31, 2013.

If current or future activities are not successful in generating production that will allow us to recover all or a portion of our investment in any of our in-progress and/or unproven wells, we may be required to write down our investment in such properties.

Acreage Position
As of March 31, 2013, we owned or controlled (through farm-in, farm-out, options or other arrangements) interests in 942 oil and gas leases in the Gulf of Mexico and onshore Louisiana and Texas covering approximately 797,000 gross acres (474,000 acres net to our interests). Our acreage position includes 613,000 gross acres (369,000 acres net to our interests) located on the outer continental shelf of the Gulf of Mexico. This acreage position includes approximately 388,000 gross acres associated with our ultra-deep gas play. Approximately 102,000 net acres (66,000 net acres associated with ultradeep properties) owned by us are scheduled to expire over the remainder of 2013; however, a significant portion of this acreage is expected to be retained by drilling operations or other means.

RESULTS OF OPERATIONS

Our first-quarter 2013 operating income of $63.7 million includes (a) gains totaling $76.8 million on the sale of certain oil and gas properties; (b) oil and gas property impairment charges of $19.1 million; (c) $3.7 million in charges related to stock-based compensation expense; and excludes (d) approximately $13.2 million in interest expense capitalized to in-progress drilling projects.

Our first-quarter 2012 operating income of $8.4 million includes (a) oil and gas property impairment charges of $7.1 million; (b) $8.5 million in charges related to stock-based compensation expense; and excludes (c) approximately $14.3 million in interest expense capitalized to in-progress drilling projects.

Summarized operating data follows:
 
 
 
First Quarter
 
2013
 
2012
Sales Volumes
     
Gas (thousand cubic feet, or Mcf)
5,063,300
 
8,795,100
Oil (barrels)
456,800
 
610,100
Natural gas liquids (barrels)
250,800
 
288,600
Average Realizations
     
Gas (per Mcf)
$      3.74
 
$      2.59
Oil (per barrel)
$  110.19
 
$  112.70
Natural gas liquids (NGLs) (per barrel)
36.67
 
53.76
All hydrocarbon products (per Mcf equivalent)
8.43
 
7.54


 
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Oil and Gas Operations
Revenues.   A summary of increases (decreases) in our oil and natural gas revenues between the periods follows (in thousands):

   
First
 
   
Quarter
 
Oil and natural gas revenues – 2012 period
 
$
107,084
 
Increase (decrease)
       
Price realizations:
       
Natural gas
   
5,823
 
Oil and condensate
   
(1,147
)
Sales volumes:
       
Natural gas
   
(9,665
)
Oil and condensate
   
(17,277
)
NGL revenue
   
(6,322
)
Other
   
40
 
Oil and natural gas revenues – 2013 period
 
$
78,536
 
         

Our oil and natural gas sales volumes totaled 9.3 billion cubic feet of natural gas equivalents (Bcfe) in the first quarter of 2013, a 35 percent decrease from the 14.2 Bcfe of sales volume generated in the first quarter of 2012. The decrease in sales volumes between comparable periods is primarily due to the sale of certain oil and gas properties during the fourth quarter of 2012 and in January 2013 as well as expected production declines associated with certain of our maturing oil and gas properties. Average realizations received for natural gas sold during the first quarter of 2013 increased 44 percent from amounts received in the first quarter of 2012. Average realizations received for oil sold during the first quarter of 2013 decreased two percent from amounts received in the first quarter of 2012, and average realizations received for NGLs sold during the first quarter of 2013 decreased 32 percent from amounts received in the first quarter of 2012 (see “North American Natural Gas and Oil Market Environment” above).  Our service revenues totaled $2.9 million in the first quarter of 2013 and $3.6 million in the first quarter of 2012.

Production and delivery costs. The following table reflects our production and delivery costs for the quarters ended March 31, 2013 and 2012 (in millions, except per Mcfe amounts):

 
First Quarter
 
     
Per
     
Per
 
 
2013
 
Mcfe
 
2012
 
Mcfe
 
Lease operating expense
$21.2