SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001
Commission File Number: 001-07791
McMoRan Exploration Co.
Incorporated in Delaware 72-1424200
(IRS Employer Identification No.)
1615 Poydras Street, New Orleans, Louisiana 70112
Registrant's telephone number, including area code: (504)582-4000
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. Yes X No _
On June 30, 2001, there were issued and outstanding 15,864,931
shares of the registrant's Common Stock, par value $0.01 per
share.
McMoRan EXPLORATION CO.
TABLE OF CONTENTS
Page
Part I. Financial Information
Financial Statements:
Condensed Balance Sheets 3
Statements of Operations 4
Statements of Cash Flow 5
Notes to Financial Statements 6
Remarks 9
Report of Independent Public Accountants 10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II. Other Information 19
Signature 21
Exhibit Index E-1
2
McMoRan EXPLORATION CO.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
McMoRan EXPLORATION CO.
CONDENSED BALANCE SHEETS (Unaudited)
June 30, December 31,
2001 2000
-------- --------
(In Thousands)
ASSETS
Cash and cash equivalents $ 3,600 $ 48,906
Accounts receivable 25,588 37,537
Inventories 3,150 11,183
Prepaid expenses 1,763 354
-------- --------
Total current assets 34,101 97,980
Property, plant and equipment, net 133,910 116,231
Sulphur business assets, net 69,876 72,977
Other assets, including restricted cash of $3.5 million 12,416 12,136
-------- --------
Total assets $250,303 $299,324
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 21,884 $ 39,249
Accrued liabilities 44,757 45,933
Borrowings outstanding on sulphur credit facility 58,000 46,000
Current portion of accrued sulphur reclamation costs 1,135 15,548
Current portion of accrued oil and gas reclamation costs 2,594 -
Other 1,046 1,274
-------- --------
Total current liabilities 129,416 148,004
Accrued sulphur reclamation costs 62,917 53,639
Accrued oil and gas reclamation costs 16,821 15,980
Long-term debt 23,000 -
Other long-term liabilities 22,500 22,524
Stockholders' equity (4,351) 59,177
-------- --------
Total liabilities and stockholders' equity $250,303 $299,324
======== ========
The accompanying notes are an integral part of these financial
statements.
3
McMoRan EXPLORATION CO.
STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- --------- -------- --------
(In Thousands, Except Per Share Amounts)
Revenues $ 31,522 $ 52,469 $ 74,998 $ 105,353
Costs and expenses:
Production and delivery costs 26,144 57,127 71,408 100,114
Depreciation and amortization 4,815 79,720 10,155 88,760
Exploration expenses 12,473 14,102 47,899 26,146
General and administrative expenses 5,736 6,566 10,661 11,199
-------- --------- -------- ---------
Total costs and expenses 49,168 157,515 140,123 226,219
-------- --------- -------- ---------
Operating loss (17,646) (105,046) (65,125) (120,866)
Interest expense, net (1,460) (1,166) (3,086) (2,376)
Other income, net 89 3,762 4,406 3,788
-------- --------- -------- ---------
Loss from operations before
provision for income taxes (19,017) (102,450) (63,805) (119,454)
Provision for income taxes - (34,942) - (34,942)
-------- --------- -------- ---------
Net loss $(19,017) $(137,392) $(63,805) $(154,396)
======== ========= ======== =========
Basic and diluted net
loss per share $(1.20) $(9.11) $(4.02) $(11.21)
====== ====== ====== =======
Basic and diluted average
common shares outstanding 15,861 15,078 15,856 13,779
====== ====== ====== ======
The accompanying notes are an integral part of these financial
statements.
4
McMoRan EXPLORATION CO.
STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-------------------------
2001 2000
-------- ---------
(In Thousands)
Cash flow from operating activities:
Net loss $(63,805) $(154,396)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 10,155 88,760
Exploration drilling and related expenditures 36,680 11,618
Noncash sulphur inventory write-down 9,974 7,790
Gain on the sale of sulphur assets (553) (2,260)
Change in deferred tax asset - 34,942
Employee-related charges to exit sulphur operations - 7,500
Change in assets and liabilities:
Reclamation and mine shutdown expenditures (10,367) (534)
Other (71) (2,031)
(Increase) decrease in working capital:
Accounts receivable 12,317 532
Accounts payable and accrued liabilities (11,822) (5,518)
Inventories and prepaid expenses (3,178) (321)
-------- ---------
Net cash used in operating activities (20,670) (13,918)
-------- ---------
Cash flow from investing activities:
Exploration, development and
other capital expenditures (64,498) (19,185)
Proceeds from assuming Homestake's
16.7 percent interest in Main Pass 2,500 -
Purchase of oil and gas interests - (38,650)
Proceeds from disposition of assets 2,034 1,547
-------- ---------
Net cash used in investing activities (59,964) (56,288)
-------- ---------
Cash flow from financing activities:
Net proceeds from equity offering - 50,274
Net borrowings on sulphur credit facility 12,000 20,102
Proceeds from long-term debt, net 23,000 17,000
Purchases of McMoRan common stock - (15,282)
Other 328 (1,888)
-------- ---------
Net cash provided by financing activities 35,328 70,206
-------- ---------
Net decrease in cash and cash equivalents (45,306) -
Cash and cash equivalents at beginning of year 48,906 -
-------- ---------
Cash and cash equivalents at end of period $ 3,600 $ -
======== =========
The accompanying notes are an integral part of these financial
statements.
5
McMoRan EXPLORATION CO.
NOTES TO FINANCIAL STATEMENTS
1. DECISION TO EXIT SULPHUR OPERATIONS
In July 2000, McMoRan Exploration Co. (McMoRan) undertook a plan
to exit its sulphur mining operations and to sell its remaining
sulphur transportation, logistics and marketing assets. Main
Pass sulphur mine production ceased on August 31, 2000. McMoRan
retained the services of Chase Securities Inc. to assist it in
the marketing of its sulphur transportation and marketing assets
to third parties (see below).
On February 26, 2001, McMoRan announced it had entered into
a letter of intent with Savage Industries Inc. to form a joint
venture, which would own and operate McMoRan's recovered sulphur
business. The letter of intent provided that McMoRan and Savage
would each own a 50 percent interest in the joint venture.
McMoRan would contribute the assets currently comprising its
sulphur transportation, marketing and terminaling business to the
new joint venture. The joint venture would operate these assets
and would continue to serve both producers and consumers of
sulphur. It is expected that the joint venture would enter into
new long-term service agreements, which are currently in the
process of being negotiated, with major U.S. oil refiners and gas
processors to provide off-take security and market access for
their sulphur by-product.
The terms of the letter of intent contemplate Savage
contributing cash to the joint venture and becoming its operator.
The joint venture would use the new contracts to be completed
with sulphur producers to secure financing. It is expected that
the joint venture would distribute at least $55 million in cash
to McMoRan at closing of the contemplated transaction. McMoRan
will use the proceeds from the transaction to repay borrowings
under its sulphur credit facility, which totaled $58 million at
June 30, 2001.
The contemplated joint venture transaction is subject to
securing joint venture financing arrangements, completion of
definitive agreements, board approvals and certain other
approvals. Upon formation of the joint venture, McMoRan's
transportation, logistics and marketing assets would be
contributed to the joint venture and thus be eliminated from
McMoRan's consolidated balance sheet and McMoRan would account
for its interest in the joint venture using the equity method of
accounting. The reclamation obligations associated with
McMoRan's nonoperating sulphur mining facilities are not included
in the contemplated joint venture transaction.
In June 2001, Homestake Sulphur Company LLC transferred its
sulphur and oil interests in Main Pass Bock 299 to Freeport-
McMoRan Sulphur LLC (Freeport Sulphur), a wholly owned subsidiary
of McMoRan. Freeport Sulphur received $2.5 million in cash and
Homestake's 16.7 percent interest in the Main Pass oil assets and
sulphur mine in return for assuming Homestake's future Main Pass
reclamation obligations associated with the related facilities,
currently estimated to total $7.1 million. The transaction was
treated as a purchase. Main Pass oil's operating results
subsequent to June 1, 2001, are included in McMoRan's
consolidated financial statements on or as of June 30, 2001.
There was no gain or loss recorded by McMoRan on this
transaction.
For additional information about the proposed joint venture
and the sulphur credit facility see Notes 3 and 9 of the "Notes
To Financial Statements" included in McMoRan's 2000 Annual Report
on Form 10-K, as well as "Decision to Exit Sulphur Operations"
and "Capital Resources and Liquidity" included in Items 7 and 7a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations and Disclosures About Market Risks" also
included within McMoRan's 2000 Annual Report on Form 10-K.
2. EARNINGS PER SHARE
Basic and diluted net loss per share of common stock was
calculated by dividing net loss applicable to common stock by the
weighted-average number of common shares outstanding during the
periods presented. Stock options representing 55,000 shares of
common stock during the second quarter of 2001, 72,000 shares of
common stock for the six months ending June 30, 2001, 133,000
shares of common stock during the second quarter of 2000 and
190,000 shares of common stock for the six months ended June 30,
2000 that otherwise would have been included in the calculation
of diluted net loss per share were excluded from the calculation
as anti-dilutive considering the net losses incurred during the
periods presented.
6
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 the common
stock during the period are as follows:
Second Quarter Six Months
----------------- ------------------
2001 2000 2001 2000
------ ------ ------ ------
Outstanding options (in thousands) 1,836 1,282 1,822 1,153
Average exercise price $18.60 $19.76 $18.63 $20.04
3. FINANCIAL INSTRUMENTS AND CONTRACTS
Effective January 1, 2001, McMoRan adopted Statement of Financial
Accounting Standards 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133, as amended,
establishes accounting and reporting standards requiring that
derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The
accounting for changes in the fair value of a derivative
instrument depends on the intended use of the derivative and the
resulting designation.
McMoRan's use of financial contracts to manage risks has
been limited. McMoRan's only current contracts involve forward
sales contracts for oil produced at Main Pass in view of the
required production costs at the field. During the second
quarter of 2001, McMoRan settled forward sales contracts covering
24,000 barrels of oil at a cost of $0.2 million. For the six
months ended June 30, 2001, McMoRan settled forward sales
contracts covering 48,000 barrels of oil at a cost of $0.4
million. These costs reduced McMoRan's oil revenues for each of
these periods. At June 30, 2001, McMoRan had remaining forward
sales contracts for 48,000 barrels of oil, all of which will be
settled by December 31, 2001. The fair value of these forward
sales contracts, which totaled losses of $0.3 million at June 30,
2001, were recorded to "Accumulated Other Comprehensive Loss" and
"Accrued liabilities" in the accompanying balance sheet.
McMoRan recognizes gains and losses currently for ineffectiveness
associated with its forward sales contracts. These gains and
losses were immaterial during the periods presented.
McMoRan had no items of other comprehensive income in 2000.
McMoRan's total comprehensive loss for the periods ended June 30,
2001 follows (in thousands):
Second Six
Quarter Months
-------- --------
Net loss $(19,017) $(63,805)
Other comprehensive loss:
Cumulative effect loss of change in
accounting principle - (492)
Change in unrealized derivatives' fair value (73) (245)
Reclassification to earnings 215 436
-------- --------
Total comprehensive loss $(18,875) $(64,106)
4. RATIO OF EARNINGS TO FIXED CHARGES
McMoRan's ratio of earnings to fixed charges calculation resulted
in shortfalls of $52.8 million during the six months ended June
30, 2001 and $112.8 million for the six months ended June 30,
2000. For this calculation, earnings consist of income from
continuing operations before income taxes and fixed charges.
Fixed charges include interest and that portion of rent deemed
representative of interest.
5. BUSINESS SEGMENTS
McMoRan has two operating segments: "oil and gas" and "sulphur."
McMoRan's oil and gas are produced offshore in the Gulf of
Mexico. The sulphur business segment includes purchasing,
transporting, terminaling, processing and marketing of recovered
sulphur, using its extensive logistics network of sulphur
terminaling and transportation assets in the Gulf Coast region.
Additionally, Frasch sulphur was produced at the Main Pass mine
located offshore Louisiana, until August 31, 2000. The segment
data presented below were prepared on the same basis as the
consolidated McMoRan financial statements.
7
Oil & Gas Sulphur Other Total
-------- -------- -------- ---------
(In Thousands)
Three months ended June 30, 2001:
Revenues $ 16,093 $ 15,429 $ - $ 31,522
Production and delivery 9,452 16,692 - 26,144
Depreciation and amortization 4,064 751 - 4,815
Exploration expenses 12,473 - - 12,473
General and administrative
expenses 3,252 1,372 1,112 5,736
-------- -------- -------- ---------
Operating loss (13,148) (3,386) (1,112) (17,646)
Interest expense, net (89) (1,371) - (1,460)
Other income, net 26 27 36 89
-------- -------- -------- ---------
Net loss $(13,211) $ (4,730) $ (1,076) $ (19,017)
======== ======== ======== =========
Exploration, development and
other capital expenditures $ 29,888 $ - $ - $ 29,888
======== ======== ======== =========
Total assets $155,981 $ 89,873 $ 4,449 $ 250,303
======== ======== ======== =========
Three months ended June 30, 2000:
Revenues $ 15,720 $ 36,749 $ - $ 52,469
Production and delivery 5,619 51,508 - 57,127
Depreciation and amortization 5,534 74,186 - 79,720
Exploration expenses 14,102 - - 14,102
General and administrative
expenses 2,112 3,898 556 6,566
-------- -------- -------- ---------
Operating loss (11,647) (92,843) (556) (105,046)
Interest expense (595) - (571) (1,166)
Other income, net 1,450 2,312 - 3,762
Income tax provision - - (34,942)a (34,942)
-------- -------- -------- ---------
Net loss $(10,792) $(90,531) $(36,069) $(137,392)
======== ======== ======== =========
Exploration, development and
other capital expenditures $ 8,674 $ 5 $ - $ 8,679
======== ======== ======== =========
Total assets $151,227 $109,894 $ 762 $ 261,883
======== ======== ======== =========
Six Months ended June 30, 2001:
Revenues $ 31,891 $ 43,107 $ - $ 74,998
Production and delivery 19,236 52,172 - 71,408
Depreciation and amortization 7,155 3,000 - 10,155
Exploration expenses 47,899 - - 47,899
General and administrative
expenses 5,883 2,781 1,997 10,661
-------- -------- -------- ---------
Operating loss (48,282) (14,846) (1,997) (65,125)
Interest expense, net (357) (2,729) - (3,086)
Other income, net 362 3,978 66 4,406
-------- -------- -------- ---------
Net loss $(48,277) $(13,597) $ (1,931) $ (63,805)
======== ======== ======== =========
Exploration, development and
other capital expenditures $ 64,498 $ - $ - $ 64,498
======== ======== ======== =========
8
Oil & Gas Sulphur Other Total
-------- -------- -------- ---------
(In Thousands)
Six months ended June 30, 2000:
Revenues $ 32,725 $ 72,628 $ - $ 105,353
Production and delivery 12,695 87,419 - 100,114
Depreciation and amortization 12,340 76,420 - 88,760
Exploration expenses 26,146 - - 26,146
General and administrative
expenses 4,005 5,827 1,367 11,199
-------- -------- -------- ---------
Operating loss (22,461) (97,038) (1,367) (120,866)
Interest expense (1,129) - (1,247) (2,376)
Other income, net 1,466 2,322 - 3,788
Income tax provision - - (34,942)a (34,942)
-------- -------- -------- ---------
Net loss $(22,124) $(94,716) $(37,556) $(154,396)
======== ======== ======== =========
Exploration, development and
other capital expenditures $ 19,145 $ 40 $ - $ 19,185
======== ======== ======== =========
a. Reflects elimination of recorded deferred tax asset based on
changes in estimated future taxable income related to our planned
exit from active participants in the sulphur business.
6. NEW ACCOUNTING STANDARD
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143 "Accounting
for Asset Retirement Obligations," which requires the fair value
of liabilities for asset retirement obligations to be recorded in
the period incurred. The standard is effective for fiscal years
beginning after June 15, 2002, with earlier application
permitted. Upon adoption of the standard, McMoRan will be
required to use a cumulative-effect approach to recognize
transition amounts for any existing asset retirement obligation
liabilities, asset retirement costs and accumulated depreciation.
McMoRan has not yet determined the transition amounts.
-----------------
Remarks
The information furnished herein should be read in conjunction
with McMoRan's financial statements contained in its 2000 Annual
Report on Form 10-K. The information furnished herein reflects
all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the periods.
All such adjustments are, in the opinion of management, of a
normal recurring nature.
9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of McMoRan Exploration
Co.:
We have reviewed the accompanying condensed balance sheet of
McMoRan Exploration Co. (a Delaware Corporation) as of June 30,
2001, and the related statements of operations for the three-
month and six-month periods ended June 30, 2001 and 2000 and the
statements of cash flows for the six-month periods ended June 30,
2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally
accepted in the United States, 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 reviews, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the balance sheet of
McMoRan Exploration Co. as of December 31, 2000, and the related
statements of operations, cash flows and stockholders' equity for
the year then ended (not presented herein), and, in our report
dated March 16, 2001, we expressed an unqualified opinion on
those financial statements. In our opinion, the information set
forth in the accompanying condensed balance sheet as of December
31, 2000, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
July 19, 2001
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
We engage in the exploration, development and production of
oil and gas offshore in the Gulf of Mexico and onshore in the
Gulf Coast region and in the purchasing, transporting,
terminaling, processing and marketing of recovered sulphur. We
became a publicly traded entity on November 17, 1998 when McMoRan
Oil & Gas Co. and Freeport-McMoRan Sulphur Inc. combined their
operations. As a result, McMoRan Oil & Gas LLC and Freeport-
McMoRan Sulphur LLC (Freeport Sulphur) became our wholly owned
subsidiaries.
OPERATIONAL ACTIVITIES
The following are our recent significant operational
activities.
Exploration Activities:
Louisiana State Lease 340. In February 2001, drilling
commenced on the Louisiana SL 340 (Mound Point) No. 2
exploratory well. The well is currently drilling below 18,100
feet and has a planned total depth of 18,500 feet. The Mound
Point prospect is situated on part of 62,000 acres previously
held by Texaco and is located in less than 10 feet of water.
Existing production facilities located in fields in the area
could accommodate production from this prospect. Our net share
of drilling and related costs associated with the No. 2 well
totaled $9.6 million at June 30, 2001. We have rights to earn
a 30.4 percent working interest and a 22.8 percent net revenue
interest in the well.
Planned 2001 Exploration Drilling. We expect to commence
exploratory drilling at three to five additional prospects during
the second half of 2001. During the third quarter of 2001, we
plan to commence drilling our Barite prospect on West Cameron
Block 624 and our Lighthouse Point -Shallow prospect (12,500 foot
objective) at Louisiana State Lease 340. Additional wells are
planned at both the Thunderbolt prospect (see Eugene Island Block
97 below), and the Hornung prospect, at Eugene Island Block 108,
which is south of and adjacent to Block 97. We anticipate
drilling an exploratory well at the Hornung prospect during the
first half of 2002. Additional prospects could be added as
evaluation of our 645,000-acre lease position continues. Most of
this lease position was acquired from Texaco and Shell at the
beginning of 2000. We currently expect to spend approximately
$115 million on exploration and development activities during
2001, of which $64.5 million has been expended through June 30,
2001 (see "Capital Resources and Liquidity" below).
Lease Sale Results. The Minerals Management Service awarded us
the three leases on which we were high bidder at the Central Gulf
of Mexico Lease Sale 178-1 held in March 2001. We paid a total
of $0.8 million for Eugene Island Block 216, Vermilion Block 208
and South Marsh Island Block 183, all of which are adjacent to
blocks currently controlled by us. The addition of these leases
brought the total gross acreage controlled by us to approximately
645,000 acres. These blocks are examples of our continued focus
on adding to our existing lease acreage by buying, farming-in or
participating in leases adjacent to our existing lease inventory
where large geologic structures known to contain productive
horizons previously have been identified.
Viosca Knoll Block 863. On May 9, 2001 the Viosca Knoll Block
863 (Margarita-North) No. 1 exploratory well commenced drilling.
It reached its total planned depth of 5,505 feet on May 19, 2001
and was logged and evaluated. While log results indicated the
presence of hydrocarbons, they were determined to be non-
commercial. As a result the well was plugged and abandoned.
Accordingly, our second-quarter 2001 results include a charge of
$1.7 million to exploration expense for our share of the drilling
and related costs associated with this well.
Vermilion Block 144/145. During the second quarter of 2001, we
commenced reclamation operations at the Vermilion Block 144
platform. This platform was used to drill the Vermilion Block
144 No. 3 exploratory well, which was plugged and abandoned
during the fourth quarter of 2000. We have accrued
approximately $2.3 million to exploration expense during the
second quarter of 2001 for increased costs estimated to complete
the plugging and abandonment activities at Vermilion Block 144.
Development Activities:
Eugene Island Block 193. The development of the Eugene Island
Block 193 (North Tern Deep) No. 3 well, discovered in late
December 2000, has been completed with initial production
commencing in mid-June 2001. As operator, we recently
announced that the well has a gross flow rate approximating 60
million cubic feet of natural gas equivalent per day (Mmcfe/d),
approximately 20 Mmcfe/d to our net revenue interest.
Halliburton Company has elected to participate in this prospect
under terms of our
11
previously announced alliance. Pursuant to
Halliburton's election, our net revenue interest in the North
Tern Deep prospect currently totals approximately 33.4 percent
until payout, at which time it will increase to approximately
39.7 percent.
Eugene Island Block 97 The Eugene Island Block 97
(Thunderbolt) No. 1 well was drilled and evaluated in the
fourth quarter of 2000. This discovery was developed rapidly,
with initial production commencing approximately four months
subsequent to its discovery. The Thunderbolt No. 2 well, which
was drilled and evaluated in the first quarter of 2001, was
also developed rapidly with initial production commencing in
mid-June approximately three months subsequent to its
discovery. We recently announced that the Thunderbolt wells
have a combined gross daily flow rate of approximately 14
Mmcfe/d, 4 Mmcfe/d to our interest. We have an approximate
38.0 percent working interest and 27.4 percent net revenue
interest in the Thunderbolt prospect, which is located in 27
feet of water approximately 25 miles offshore Louisiana.
Vermilion Blocks 195/196/197, Ship Shoal Block 296 and Main
Pass Blocks 86/97 Initial production commenced at the Ship
Shoal Block 296 (Raptor) No. 1 well in late-June 2001 and from
the Vermilion Block 196 (Lombardi) No. 2 well in early-July
2001. Recently we announced that these two prospects have a
combined gross flow rate of approximately 67 Mmcfe/d, 33
Mmcfe/d for our net interest. Development is also progressing
at the Main Pass Block 86 (Shiner) No. 1 and 2 wells, with
their initial production anticipated later in the second half
of 2001. We recently announced the flow test results of the
Shiner No. 1 and No. 2 wells, which indicated the aggregate
gross daily production from the wells was 34 Mmcfe/d, 17
Mmcfe/d to our net revenue interest. We hold a 61.8 percent
working interest and a 43.5 percent net revenue interest in the
Raptor prospect, which was discovered in July 2000 and is
located in 260 feet of water approximately 62 miles offshore
Louisiana. We have a 47.5 percent working interest and a 34.2
percent net revenue interest in the Lombardi prospect, which
was discovered in September of 2000 and is located in 115 feet
of water approximately 50 miles offshore Louisiana. We have a
71.3 percent working interest and a 51.3 percent net revenue
interest in the Shiner prospect, which was discovered in the
fourth quarter of 2000, and is located in 70 feet of water
approximately 45 miles offshore Louisiana. When all of these
prospects are on production, we anticipate that our net share
of combined flow from these fields will approximate 44 Mmcfe/d.
Vermilion Block 160 During the second quarter of 2001, we
commenced recompletion activities at the Vermilion Block 160
field unit. Production from the Vermilion Block 160 field was
shut-in during June 2001 while the recompletion activities were
performed. In July 2001 the AJ-3 well was restored at a gross
daily flow rate of approximately 18 Mmcfe/d, 7 Mmcfe/d to our net
revenue interest. As operator, we are continuing recompletion
activities at this field, specifically on the AJ-6 well. We
have an approximate 41.8 percent working interest and a 35.8
percent net revenue interest in the Vermilion Block 160 field
unit, which is located in approximately 100 feet of water, 42
miles offshore Louisiana. Also during June 2001, our Vermilion
Block 160 BJ-1 well ceased production and was temporarily
abandoned while we evaluate certain remedial activity
alternatives.
RESULTS OF OPERATIONS
We have two operating segments: "oil and gas" and "sulphur."
The oil and gas segment includes all of our oil and gas
operations located in the Gulf of Mexico and Gulf Coast region,
including the oil operations at Main Pass. Our sulphur segment
includes purchasing, transporting, terminaling, processing and
marketing of recovered sulphur, using our extensive logistics
network of sulphur terminaling and transportation assets in the
Gulf Coast region. We also produced Frasch sulphur at the Main
Pass mine until August 31, 2000. As a result of our anticipated
exploration expenditures and the requirements of the successful
efforts accounting method to expense all nonproductive
exploratory drilling costs, as well as certain other exploration
expenditures, we are likely to continue to report operating
losses in future periods. Selected summary comparative data by
segment for the second-quarter and six-month periods ended June
30, 2001 and 2000 follow:
12
Second Quarter Six Months
-------------------- ---------------------
2001 2000 2001 2000
-------- --------- -------- ---------
(Dollars in thousands, except for realized prices)
FINANCIAL DATA
Operating losses
Oil and gas $(13,148) $ (11,647) $(48,282) $ (22,461)
Sulphur (3,386) (92,843)a (14,846) (97,038)a
Other (1,112) (556) (1,997) (1,367)
-------- --------- -------- ---------
Total $(17,646) $(105,046) $(65,125) $(120,866)
======== ========= ======== =========
OPERATIONAL DATA
Sales volumes:
Gas (thousand cubic
feet, or MCF) 1,716,900 2,528,500 3,372,500 6,041,900
Oil (barrels)b 324,300 282,000 501,000 603,400
Sulphur (long tons) 443,300 696,100 952,000 1,372,400
Average realizations:
Gas (per MCF) $ 4.81 $ 3.52 $ 5.84 $ 3.00
Oil (per barrel)b 23.68 23.78 23.63 23.83
Sulphur (per long ton) 34.78 52.22 45.27 52.35
a. Includes $85.6 million in noncash charges to write off the
remaining book value of the Main Pass sulphur mine, to reduce the
carrying values of its related assets, to record the remaining
unaccrued estimated Main Pass reclamation costs and to accrue
certain sulphur employee-related separation costs.
b. Includes sales of sour crude oil from the Main Pass oil
operations. The Main Pass barrels sold totaled approximately
282,300 barrels at an average realization of $23.24 in the second
quarter of 2001 and 222,400 barrels at an average realization of
$22.27 per barrel in the second quarter of 2000. For the six
month periods Main Pass barrels sold totaled approximately
425,600 barrels at an average realization of $22.93 per barrel in
2001 and 486,500 barrels at an average realization of $22.45 per
barrel in 2000.
Oil and Gas Operations
A summary of increases (decreases) in our oil and gas revenues
between the periods follows (in thousands):
Second Six
Quarter Months
------- -------
Oil and gas revenues - prior year periods $15,720 $32,725
Increase (decrease)
Sales volumes:
Oil 1,006 (2,440)
Gas (2,857) (8,008)
Price realizations:
Oil (32) (100)
Gas 2,215 9,578
Other 41 136
------- -------
Oil and gas revenues - current year periods $16,093 $31,891
======= =======
Our oil and gas revenues increased approximately two percent
during the second quarter of 2001 compared to revenues for the
second quarter of 2000. Oil and gas revenues decreased
approximately three percent during the six month period in 2001
when compared to 2000. Revenues for both the second quarter and
six months ended June 30, 2001 benefited from substantially
higher average gas realizations over prices realized in 2000.
The increase in gas realizations was offset by a reduction in our
volumes sold during 2001 when compared to volumes sold during
2000. The decreases in gas sales volumes resulted from normal
production declines of our producing fields and the depletion of
reserves at the Vermilion Block 159 CJ-1 well.
13
Oil prices realized during the first half of 2001 remained
virtually unchanged from the oil prices realized during the first
half of 2000. Our oil sales volumes increased during the second
quarter of 2001 over last year primarily from an increase in our
interest in sales from Main Pass 299, reflecting our acquisition
of Homestake Sulphur Company LLC's 16.7 percent interest in the
field (see Note 1 and "Capital Resources and Liquidity"). Oil
sales volumes also benefited from the oil production from Eugene
Island Blocks 193/208/215, which commenced production during the
second quarter of 2000. Oil sales volumes for the six months
ended June 30, 2001 decreased from sales volumes during the same
period in 2000 primarily because production from Main Pass 299
was shut-in during February 2001 for platform and equipment
maintenance. Recently, we announced that production has
commenced from four properties discovered during 2000, with a
fifth property anticipated to commence production later in 2001
(see "Operational Activities" above). Accordingly, we expect our
oil and gas sales volumes to substantially increase during the
second half of 2001 compared with the first half of 2001. Our
average production for the third quarter of 2001 is expected to
approximate 60 Mmcfe/d and 75 Mmcfe/d for the fourth quarter of
2001. Additionally, our net share of oil production from Main
Pass 299 is expected to approximate 3,000 barrels per day for the
remainder of 2001.
Production and delivery expense totaled $9.4 million during
the second quarter of 2001 and $19.2 million for the six months
ended June 30, 2001 compared with $5.6 million and $12.7 million
for the comparable periods in 2000. The increases primarily
reflect increased costs associated with production from the Main
Pass 299 field including platform and equipment maintenance
costs, which totaled $0.8 million during the second quarter of
2001 and $1.9 million for the six months ended June 30, 2001.
Additionally, our production and delivery costs include $2.1
million in the second quarter of 2001 and $5.0 million for the
six months ended June 30, 2001 for well workover costs compared
with a total of $0.7 million and $2.6 million for well workover
costs during the comparable periods last year. We performed
well workovers at the Vermilion Block 160 field unit and the
Vermilion Block 160 BJ-1 well during the second quarter of 2001
(see "Operational Activities" above) and at Eugene Island Block
193/208/215 during the first quarter of 2001. The well workover
costs during 2000 primarily reflect our efforts to re-establish
production from Eugene Island Blocks 193/208/215 during the
second quarter, as well as efforts to re-establish production
from the Brazos Block A-19 JC#1 well in the first quarter of
2000. These increased costs were partially offset by lower
production volumes of gas and reduced net profit payments because
of a reduction in revenues from the Vermilion Block 160 field
unit.
Depreciation and amortization expense totaled $4.1 million
during the second quarter of 2001 and $7.2 million for the six
months ended June 30, 2001 compared to $5.5 million and $12.3
million for the comparable periods of 2000. The decreases
primarily reflect the lower production volumes during the first
half of 2001 compared to the first half of 2000, partially offset
by the commencement of production from our recent discoveries.
Our unit-of-production depreciation and amortization rates are
based on estimated proved and proved developed reserves as
required under the successful-efforts accounting method. These
rates are revised whenever significant changes in estimated
reserves occur, with such changes applied prospectively. Oil and
gas reserve estimates are inherently imprecise and are subject to
change as new technical information, including production
history, about the properties is obtained. Because a large
proportion of our production during the remainder of 2001 will be
initial production from our recent discoveries, significant
changes in our depreciation rates may occur as production history
is established for these properties.
Our exploration expenses have increased substantially
because of our expanded exploration program. Our exploration
expenses will fluctuate in future periods based on the number,
results and costs of our exploratory drilling projects and the
incurrence of geological and geophysical costs, including seismic
data. Summarized exploration expenses are as follows (in
millions):
Second Quarter Six Months
--------------- ----------------
2001 2000 2001 2000
----- ----- ----- -----
Geological and geophysical,
including 3-D seismic purchases $ 5.4 $ 5.2 $ 9.4 $13.0
Dry hole costs, including lease
amortization costs 5.6a 7.9b 36.7a,c 11.6b,d
Other 1.5 1.0 1.8 1.5
----- ----- ----- -----
$12.5 $14.1 $47.9 $26.1
===== ===== ===== =====
a. Includes nonproductive exploratory well costs associated
with the Viosca Knoll Block 863 No. 1 well
14
and additional plugging and abandonment costs associated with the
Vermilion Block 144 No. 3 well.
b. Includes nonproductive exploratory well costs associated
with the Grand Isle Block 40/41 No. 8 well.
c. Includes nonproductive exploratory well drilling and related
costs, primarily associated with the West Delta Block 12 No. 1
and the Garden Banks Block 272 No. 1 wells.
d. Includes nonproductive exploratory well costs associated
with the State Tract 210 No. 6 well.
Sulphur Operations
A summary of the increases (decreases) in our sulphur revenues
between the periods follows (in thousands):
Second Six
Quarter Months
-------- --------
Sulphur revenues - prior year period $ 36,749 $ 72,628
Increase (decrease)
Sales volumes (13,201) (22,008)
Price realization (7,731) (6,740)
Other (388) (773)
-------- --------
Sulphur revenues - current year period $ 15,429 $ 43,107
======== ========
Our sulphur revenues decreased by 58 percent for the second
quarter of 2001 and 41 percent for the six months ended June 30,
2001 when compared to the comparable periods in 2000. The
revenue reductions reflect decreases of sales volumes of 36
percent for the second quarter of 2001 and 31 percent for the six
months ended June 30, 2001 when compared to the same periods in
2000, as well as a decrease in our average sulphur realizations
totaling approximately 33 percent for the second quarter of 2001
and 14 percent for the six months ended June 30, 2001 when
compared to the same periods last year. Sales volumes and
average realizations for sulphur reflect significantly reduced
demand because of depressed conditions in the historically
cyclical phosphate fertilizer industry, the principal consumer of
sulphur. Several large phosphate fertilizer producers announced
and implemented production curtailments in late 2000 and early
2001 and the industry is now operating at approximately two-
thirds capacity, a 10-year low. These curtailments have
contributed to the decrease in sulphur prices that averaged
$64.50 per ton in the fourth quarter of 2000. The sulphur price
has decreased by an average $37 per ton during the first half of
2001 to a current average sulphur market price of $27.50 per ton
in Tampa, Florida.
We sell a significant portion of the sulphur we purchase to
IMC-Agrico Company, now known as IMC Phosphate Company (IMC), a
phosphate fertilizer producer, under a long-term supply contract.
Our sales to IMC totaled 46.1 percent of our total revenues and
94.3 percent of our total sulphur sales during the second quarter
of 2001 and 53.3 percent of our total revenues and 92.9 percent
of our total sulphur sales volumes for the six months ended June
30, 2001. In 2000, sales to IMC totaled 48.6 percent of our
total revenues and 70.1 percent of our total sulphur sales
volumes during the second quarter and 49.1 percent of our total
revenues and 72.0 percent of our total sulphur sales volumes for
the six months ended June 30, 2000. Sales to IMC are based on
market prices and include a premium with respect to a portion of
the sales. The agreement requires IMC to purchase approximately
75 percent of its annual sulphur consumption from us for as long
as it has a requirement for sulphur. We are currently involved
in litigation with respect to certain terms of this contract.
Both parties continue to operate under terms of the contract.
See Part II-Item 1 "Legal Proceedings."
Sulphur production and delivery expense totaled $16.7
million during the second quarter and $52.2 million for the six
months ended June 30, 2001 compared to $51.5 million and $87.4
million for the same periods last year. Production and delivery
expenses during the second quarter and six months ended June 30,
2000 included $11.5 million of charges associated with our
planned exit from active participation in the sulphur business.
These charges included the writeoff of our sulphur material and
supplies inventory totaling $6.1 million and a $5.4 million
accrual for certain sulphur employee-related separation costs.
The decreases also reflect the reduced volumes sold during the
first half of 2001 which reflect the major U.S. fertilizer
producers' production curtailments, including IMC's closure of
all its Mississippi River region plants. IMC recently announced,
that it will resume production from two of its Louisiana plants
in late-July 2001. We anticipate that our near-term sulphur
sales will increase as a result of this decision by IMC. The
reductions in production and delivery costs during the first half
of 2001 were partially offset by charges to adjust our sulphur
inventory carrying amount to its net realizable value which totaled
$4.6 million during the second quarter and $10.0 million for the six
months ended June 30, 2001 compared with a $1.7 million charge
recorded in the first quarter of 2000.
15
Sulphur depreciation expense totaled $0.8 million during the
second quarter and $3.0 million for the six months ended June 30,
2001 compared with $74.2 million and $76.4 million for the
comparable periods during 2000. During the second quarter and
six months ended June 30, 2000, we recorded $72.0 million of
depreciation expense associated with our decision to cease
operations at the Main Pass sulphur mine and for our planned exit
from active participation in the sulphur business. The $72.0
million noncash charge included a $20.1 million charge to
writeoff the remaining book value of the Main Pass sulphur mine,
a $19.1 million charge to reduce certain assets used in the
handling of mined sulphur to their net realizable value and a
$32.8 million charge to record the remaining unaccrued estimated
reclamation costs associated with the Main Pass sulphur mine.
Other
General and administrative expense totaled $5.7 million for
the second quarter and $10.7 million for the six months ended
June 30, 2001 compared to $6.6 million for the second quarter and
$9.1 million for the six months ended June 30, 2000. Excluding
the effects of a $2.1 million second-quarter 2000 accrual for
certain sulphur employee-related separation costs, the increases
primarily reflect our increasing oil and gas activities that were
partially offset by decreased sulphur costs in accordance with
our plan to exit active participation in the sulphur business.
Interest expense totaled $1.5 million during the second
quarter and $3.1 million for the six months ended June 30, 2001
compared to $1.2 million during the second quarter and $2.4
million for the six months ended June 30, 2000. The increase
reflects our increased borrowings during 2001, which at June 30,
2001 totaled $58.0 million for the sulphur credit facility and
$23.0 million on our oil and gas credit facility (see Note 9
"Halliburton Alliance and Long-Term Debt" included in our 2000
Annual Report on Form 10-K). Capitalized interest (related to
oil and gas development activities) during the second quarter and
six months ended June 30, 2001 totaled $0.3 million. We did not
capitalize any interest during the first half of 2000.
CAPITAL RESOURCES AND LIQUIDITY
Operating activities used cash of $20.7 million during the
six months ended June 30, 2001 compared to a use of cash of $13.9
million during the six months ended June 30, 2000. The decrease
in operating cash flow can be attributed primarily to the
decrease in revenues, particularly sulphur revenues, Main Pass
sulphur mine reclamation costs of $10.4 million and working
capital changes. We expect increased oil and gas revenues during
the second half of 2001, reflecting the recently commenced
production from our discoveries during 2000 see "Operations
Activities", above.
Net cash used in investing activities totaled $60.0 million
for the six months ended June 30, 2001 compared with $56.3
million for the six months ended June 30, 2000. Our exploration
and development capital expenditures totaled $64.5 million for
the first half of 2001, which includes $36.7 million of
nonproductive exploratory drilling and related costs primarily
associated with the West Delta Block 12 No. 1, Garden Banks Block
272 No. 1, Viosca Knoll Block 863 No. 1 and Vermilion Block 144
No. 3 exploratory wells. Additionally, our first half-2001
capital expenditures included approximately $26.3 million of
development costs primarily associated with our 2000 discoveries.
Other capital expenditures included the costs relating to our
remedial operations at West Cameron Block 616, Eugene Island
Block 193/208/215 and the Vermilion Block 160 field unit. We
sold one unproved oil and gas lease during the first quarter of
2001 for $1.0 million and we sold various sulphur assets for $0.7
million during the second quarter of 2001. In June 2001, we
received $2.5 million from Homestake Sulphur Company LLC
(Homestake) in a transaction associated with Main Pass 299 (see
below).
Our investing activities for the six months ended June 30,
2000 include $37.8 million of costs associated with the Shell
lease acquisition in January 2000 (see Note 4 "Acquisition and
Exploration Program" included in our 2000 Annual Report on Form
10-K). Our exploration and development capital expenditures
totaled $19.2 million during the first half of 2000, which
included nonproductive exploratory drilling and related costs of
$11.6 million associated with the Grand Isle Block 40/41 No. 8
well and the State Tract 210 No. 6 exploratory well, and various
capitalized costs associated with re-completion efforts at our
existing producing wells.
Financing activities provided cash of $35.3 million during
the six months ended June 30, 2001 compared to $70.2 million
during the six months ended June 30, 2000. Financing proceeds
during the first half of 2001 include $12.0 million of borrowings
on the sulphur credit facility and $23.0 million of borrowings
under our oil and gas credit facility (see below). The proceeds
during the first half of 2000 primarily reflect the proceeds we
received in April 2000 from the completion of an equity offering
in which we sold 3.8 million shares of our common stock for
$14.00 per share. Our net proceeds from the
16
completion of the equity offering totaled $50.3 million. Cash
provided from financing activities during the first half of 2000
also reflects additional net borrowings of $37.1 million under
our long-term revolving bank facilities, offset in part by
purchases of McMoRan's common stock under our stock repurchase
program (see Note 1 "Background and Basis of Presentation-Share Purchase
Program" included in our 2000 Annual Report on Form 10-K) and
other financing costs.
At June 30, 2001, we had cash totaling $3.6 million and a
guaranteed bank facility (see Note 9 "Halliburton Alliance and
Long-Term Debt" included in our 2000 Annual Report on Form 10-K).
As previously discussed in "Operational Activities" above,
Halliburton has elected to participate in the North Tern Deep
prospect at Eugene Island Block 193. In mid-April 2001, we
received a $2.9 million reimbursement of a portion of our
previously incurred acquisition, exploration and development
costs associated with the No. 3 well as of Halliburton's election
date. In accordance with the terms of our guaranteed credit
facility agreement, the portion of the proceeds that represented
a reimbursement of previously incurred acquisition and
exploration costs ($2.3 million) reduced our availability under
the facility to approximately $47.7 million. Development cost
reimbursements do not reduce our borrowing availability under the
facility. Our remaining availability under this facility totaled
$24.7 million at June 30, 2001. At July 31, 2001 our borrowings
under this facility totaled $28.0 million.
We anticipate that our exploration, development and other
capital expenditures during the second half of 2001 will total
approximately $50.0 million. We believe that increased operating
cash flows during the second half of 2001 from the increased oil
and gas production associated with our 2000 discoveries, together
with the approximate $25.0 million of availability still
remaining under the guaranteed portion of our oil and gas credit
facility, will be adequate to fund our remaining 2001 planned
expenditures. Additionally, as a result of the recent
commencement of production from our 2000 discoveries, we believe
we will be able to obtain additional financing because of our
increased oil and gas revenues and reserve base. We are also
continuing to pursue additional financing opportunities,
including arrangements with third-party investors to participate
in our exploration and development activities.
At June 30, 2001, borrowings on the sulphur credit facility
totaled $58.0 million and at July 31, 2001 totaled $59.0 million.
Our availability under this facility is $64.2 million. Our
sulphur subsidiary, Freeport Sulphur, is the borrower under this
facility, which is secured by substantially all of its assets,
including its Main Pass oil interests. We guarantee this
facility and have pledged our equity ownership in our oil and gas
subsidiary to secure the guarantee. In April 2001, we amended
this facility to extend its maturity from April 30 to August 31,
2001. In the amendment, we agreed that Freeport Sulphur would
sell its Main Pass oil interests to our oil and gas subsidiary at
fair value (as determined by an independent engineer's estimate
of future cash flows from the field's remaining reserves) if
Freeport Sulphur fails to repay the entire outstanding balance of
the facility at its maturity. The proceeds from that sale would
be applied to reduce the outstanding balance on this facility,
although the proceeds would not be sufficient to repay the entire
balance. This provision is in addition to any other rights of
the lenders, including the right to enforce our guarantee, if
Freeport Sulphur fails to repay the entire debt at maturity.
Our objectives are either (1) to form the proposed sulphur
joint venture (see Note 1 and discussion below) and satisfy
Freeport Sulphur's obligation under the sulphur credit facility
with the proceeds realized by August 31, 2001, (2) to obtain an
extension of the sulphur credit facility's maturity date or (3)
to obtain alternative financing using the values inherent in our
company's assets. These assets include our oil and gas reserves
and Freeport Sulphur's transportation and terminaling assets,
which are planned to be included in the proposed sulphur joint
venture discussed below. The transportation and terminaling
assets are strategically critical to the producers and consumers
of sulphur, and have the capability to generate substantial cash
flows independent of the commodity price of sulphur by providing
services to the sulphur industry.
Efforts are ongoing to establish the proposed sulphur joint
venture (see Note 1). Formation of the sulphur joint venture is
subject to entering into new long-term service agreements with a
group of major U.S. oil refiners and natural gas processors,
negotiation of the joint venture agreements, and obtaining
financing for the capital structure of the joint venture, all of
which are in the process of being negotiated. The formation of
the joint venture is also subject to completion of definitive
agreements, board approvals and certain other approvals.
Substantial progress has been achieved in the negotiation
of the long-term service contracts and we expect to conclude
these negotiations successfully; however, it will be difficult
to complete this process by August 31, 2001.
17
If we are unable to complete the joint venture transaction
by this time, we would be required to extend the maturity of
Freeport Sulphur's bank debt or obtain alternative financing that
would allow us to repay the bank debt. We have initiated
discussions on both alternatives but the outcome of these
discussions is presently uncertain.
We have substantially completed the initial reclamation
phase at the Main Pass sulphur mine, including the plugging and
abandonment of the sulphur wells and removal of the living
quarters and warehouse facility. The remaining cost for
dismantling and removing the remaining Main Pass sulphur
structures is expected to be deferred for many years, subject to
Minerals Management Service (MMS) approval, as we pursue our
plans discussed below for alternative future use of these
facilities.
Our ability to defer these dismantlement costs is subject to
obtaining approvals from the MMS, which has regulatory authority
to ensure offshore leaseholders fulfill the abandonment and site
clearance obligations related to their properties. The MMS
requires lessors to demonstrate financial responsibility for such
obligations by posting a bond or otherwise demonstrating a
defined minimum level of financial capacity, unless the lessor
qualifies for an exemption. The MMS has not previously required
us to post a bond for the dismantlement and abandonment costs for
the Main Pass sulphur and oil facilities but has required that
we, as the parent company of Freeport Sulphur, guarantee the
obligations of Freeport Sulphur to pay these costs. In July
2001, the MMS advised us that it is considering requiring us or
Freeport Sulphur either to post a bond, currently estimated at
approximately $35 million, to cover the costs of abandoning the
Main Pass sulphur and oil facilities, or to enter into other
funding arrangements acceptable to the MMS. The MMS has
indicated a willingness to consider alternatives to a bond and we
are now developing an alternative plan to be presented to MMS for
its approval, which would take into account that expenditures of
abandoning the Main Pass sulphur facilities would not be required
for many years.
In April 2001, we signed an agreement with Trinity Storage
and Schlumberger M-I to establish a business enterprise engaged
in commercial brine production and the disposal of non-hazardous
oilfield waste at Main Pass. Commercial brine production has
commenced at Main Pass. We are awaiting final regulatory
approval for the use of Main Pass for storage of non-hazardous
oilfield waste. Proceeds generated under this joint project are
expected to fund a significant portion of the remaining future
Main Pass reclamation costs.
In June 2001, Freeport Sulphur acquired Homestake's 16.7
percent interest in Main Pass and assumed their estimated $7.1
million portion of the remaining reclamation obligations at the
Main Pass sulphur mine, related facilities and Main Pass oil
facilities. Main Pass oil's operations subsequent to June 1,
2001 are included in our operating results.
CAUTIONARY STATEMENT
Management's Discussion and Analysis of Financial Condition
and Results of Operations contain forward-looking statements.
All statements other than statements of historical fact included
in this report, including, without limitation, statements
regarding plans and objectives of our management for future
operations, our exploration and development activities and expenses,
oil and gas production and volumes, formation of the sulphur joint
venture, financing activities, MMS approvals and other regulatory
issues and reclamation costs are forward-looking statements.
Important factors that could cause actual oil and gas
operations results to differ materially from our expectations
include, without limitation, variations in the market prices of
oil and natural gas, drilling results, the availability of
financing, unanticipated fluctuations in flow rates of producing
wells, oil and natural gas reserve expectations; the ability to
satisfy future cash obligations and environmental costs;
depletion rates, economic and business conditions, general
development risks and hazards and risks inherent with the
production of oil and gas, such as fires, natural disasters,
blowouts and the encountering of formations with abnormal
pressures, changes in laws or regulations and other factors, many
of which are beyond our control. Important factors that could
affect the future results of our sulphur operations include
without limitation, the ability to ultimately form the proposed
sulphur joint venture, demand for sulphur, the availability of
financing, the ability to satisfy future cash obligations and
environmental costs, the reliance on IMC as a customer, the
seasonality and volatility of sulphur markets, increased
competition in the transporting and terminaling of sulphur, and
environmental issues. Further information regarding these and
other factors that may cause our future performance to differ
from that projected in the forward-looking statements are
described in more detail under "Cautionary Statements" in our
2000 Annual Report on Form 10-K.
18
-------------------------
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
Freeport-McMoRan Sulphur LLC v. IMC-Agrico Company, Civ. Act. No.
462,776 (19th Jud. Dist. Ct. for Parish of East Baton Rouge, La.;
filed July 22, 1999). The sulphur supply agreement between our
subsidiary, Freeport-McMoRan Sulphur LLC (FSC) and IMC-Agrico,
now known as IMC Phosphate Company (IMC), requires good faith
renegotiation of the pricing provisions if a party can prove that
fundamental changes in IMC's operations or the sulphur and
sulphur transportation markets invalidate certain assumptions and
result in the performance by that party becoming "commercially
impracticable" or "grossly inequitable." In the fourth quarter
of 1998, IMC attempted to invoke this contract provision in an
effort to renegotiate the pricing terms of the agreement. After
careful review of the agreement, IMC's operations and the
referenced markets, we determined that there is no basis for
renegotiation of the pricing provisions of the agreement. After
discussions failed to resolve this dispute, FSC filed suit
against IMC seeking a judicial declaration that no basis exists
under the agreement for a renegotiation of its pricing terms.
On July 25, 2000, IMC filed a supplemental demand alleging
that FSC's suspension of sulphur production at Main Pass and the
proposed sale of FSC's sulphur transportation assets constitute a
statement of intent to breach the sulphur supply agreement. IMC
further alleges that FSC cannot assign the sulphur supply
agreement without IMC's consent. On December 22, 2000, IMC filed
a motion for partial summary judgment with respect to its claim
that FSC cannot assign the sulphur supply agreement without IMC's
consent. The sulphur supply agreement permits assignments under
many circumstances without IMC's consent, including the sale of
all or substantially all of FSC's assets; the agreement also
permits any assignment with IMC's consent. IMC contends that the
sale of FSC's sulphur transportation, logistics and marketing
assets without Main Pass will not be substantially all of FSC's
assets; thus, IMC's consent would be needed to assign the sulphur
supply agreement. On February 1, 2001, FSC filed a response to
IMC's supplemental demand and motion for partial summary judgment
on these issues. In March 2001, the court ruled that the ceasing
of production from Main Pass was not a breach of the sulphur
supply agreement but refused to grant either of the two parties
summary judgment motions relating to the assignment of the
sulphur supply agreement.
On April 10, 2001, IMC requested renegotiation of the terms of
the sulphur supply agreement because of cessation of production
from Main Pass and the proposed joint venture with Savage
Industries Inc. On April 11, 2001, FSC responded to IMC's
request stating that matters raised in IMC's April 10 letter did
not rise to the level required to cause renegotiation of the
terms of the sulphur supply agreement.
On July 13, 2001, FSC filed a series of motions for partial
summary judgment and exceptions for prescription and no cause of
action to dismiss on all substantive claims. The issue of
assignability of the sulphur supply agreement, however, is
excluded from these motions and the structure contemplated in the
Savage joint venture is premised on the basis that FSC will not
assign the agreement and will remain the seller to IMC Phosphate.
Under the Sulphur Supply Agreement in order for IMC Phosphate to
invoke renegotiation of the pricing terms, it must satisfy each
of the following substantive preconditions: (1) a fundamental
change must have occurred in IMC Phosphate's operations and
sulphur and sulphur transportation markets that render (i)
assumptions about those operations, sulphur markets and sulphur
transportation markets invalid and (ii) performance of the
Sulphur Supply Agreement by IMC Phosphate commercially
impracticable or grossly inequitable; (2) the allocation and
pricing provisions of Articles IV and V must no longer yield
generally balanced and equitable results; (3) IMC Phosphate must
notify FSC in writing in "reasonable detail" of exactly what
assumptions have been rendered invalid, what fundamental changes
in IMC Phosphate's operations, sulphur markets and sulphur
transportation markets occurred that rendered the assumptions
invalid, how performance of the Sulphur Supply Agreement has
become commercially impracticable or grossly inequitable as a
result of fundamental changes, and why the allocation and pricing
provisions of Articles IV and V no longer yield generally
balanced and equitable results; and (4) the change in markets
must not be due to an "ordinary cyclical change."
19
In these motions FSC argues that the baseline for any such
measurement is when FSC was substituted as seller on December 22,
1997 which constituted a novation or new contract. (IMC
Phosphate argues July 1993 is the baseline.) Prior to the 1997
transaction IMC Phosphate was well aware of the very issues of
which it now complains. We do not believe that IMC Phosphate can
establish the necessary preconditions to invoke renegotiation
and thus believe their claims are without merit. The hearing has
been scheduled for September 17, 2001.
Daniel W. Krasner v. James R. Moffett; Rene L. Latiolais; J.
Terrell Brown; Thomas D. Clark, Jr.; B.M. Rankin, Jr.; Richard C.
Adkerson; Robert M. Wohleber; Freeport-McMoRan Sulphur Inc. and
McMoRan Oil & Gas Co., Civ. Act. No. 16729-NC (Del. Ch. filed
Oct. 22, 1998). Gregory J. Sheffield and Moise Katz v. Richard
C. Adkerson, J. Terrell Brown, Thomas D. Clark, Jr., Rene L.
Latiolais, James R. Moffett, B.M. Rankin, Jr., Robert M. Wohleber
and McMoRan Exploration Co., (Court of Chancery of the State of
Delaware, filed December 15, 1998.) These two lawsuits were
consolidated on January 13, 1999. The complaint alleges that
Freeport-McMoRan Sulphur Inc.'s directors breached their
fiduciary duty to Freeport-McMoRan Sulphur Inc.'s stockholders in
connection with the combination of Freeport Sulphur and McMoRan
Oil & Gas. The plaintiffs contend that the transaction was
structured to give preference to McMoRan Oil & Gas stockholders
and failed to recognize the true value of Freeport Sulphur. The
plaintiffs claim that the directors failed to take actions that
were necessary to obtain the true value of Freeport Sulphur such
as auctioning the company to the highest bidder or evaluating
Freeport Sulphur's worth as an acquisition candidate. The
plaintiffs also claim that McMoRan Oil & Gas Co. knowingly aided
and abetted the breaches of fiduciary duty committed by the other
defendants. In January 2001, the court granted the motions to
dismiss for the defendants with 30 days leave for the plaintiffs
to amend. In February 2001, the plaintiffs filed an amended
complaint and the defendants have filed a motion to dismiss. We
believe this suit is without merit and will continue to defend
this action vigorously.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits to this report are listed in the Exhibit Index
appearing on page E-1 hereof.
(b) During the period covered by this Quarterly Report on Form
10-Q the registrant filed the following Current Reports on Form
8-K:
* A report disclosing an event under Item 5 dated April 9,
2001.
* A report disclosing an event under Item 5 dated May 31,
2001.
20
McMoRan Exploration Co.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
McMoRan Exploration Co.
By: /s/ C. Donald Whitmire, Jr.
--------------------------------
C. Donald Whitmire, Jr.
Vice President and Controller-
Financial Reporting
(authorized signatory and
Principal Accounting Officer)
Date: August 7, 2001
21
McMoRan Exploration Co.
Exhibit Index
Exhibit
Number
2.1 Agreement and Plan of Mergers dated as of August 1,
1998. (Incorporated by reference to Annex A to McMoRan's
Registration Statement on Form S-4 (Registration No. 333-
61171) filed with the SEC on October 6, 1998 (the
McMoRan S-4)).
3.1 Amended and Restated Certificate of Incorporation of
McMoRan. (Incorporated by reference to Exhibit 3.1 to
McMoRan's 1998 Annual Report on Form 10-K (the McMoRan
1998 Form 10-K).
3.2 By-laws of McMoRan as amended effective February 1,
1999. (Incorporated by reference to Exhibit 3.2 to the
McMoRan 1998 Form 10-K).
4.1 Form of Certificate of McMoRan Common Stock
(Incorporated by reference to Exhibit 4.1 of the McMoRan
S-4).
4.2 Rights Agreement dated as of November 13, 1998.
(Incorporated by reference to Exhibit 4.2 to McMoRan
1998 Form 10-K).
4.3 Amendment to Rights Agreement dated December 28, 1998.
(Incorporated by reference to Exhibit 4.3 to McMoRan
1998 Form 10-K).
4.4 Standstill Agreement dated August 5,1999 between McMoRan
and Alpine Capital, L.P., Robert W. Bruce III, Algenpar,
Inc, J.Taylor Crandall, Susan C. Bruce, Keystone, Inc.,
Robert M. Bass, the Anne T. and Robert M. Bass
Foundation, Anne T. Bass and The Robert Bruce Management
Company, Inc. Defined Benefit Pension Trust.
(Incorporated by reference to Exhibit 4.4 to McMoRan's
Third Quarter 1999 Form 10-Q).
10.1 Main Pass 299 Sulphur and Salt Lease, effective May 1,
1988. (Incorporated by reference to Exhibit 10.3 to
Freeport Sulphur's Registration Statement on Form S-1
(Registration No. 333-40375) filed with the SEC on
November 17, 1997 (the Freeport Sulphur S-1).
10.2 Joint Operating Agreement by and between Freeport-
McMoRan Resource Partners, IMC-Fertilizer, Inc. and
Felmont Oil Corporation, dated as of May 1, 1988.
(Incorporated by reference to Exhibit 10.5 to the
Freeport Sulphur S-1).
10.3 Agreement to Coordinate Operating Agreements by and
between Freeport-McMoRan Resource Partners,
IMC-Fertilizer and Felmont Oil Corporation, dated as of
May 1, 1988. (Incorporated by reference to Exhibit 10.6
to the Freeport Sulphur S-1).
10.4 Joint Operating Agreement by and between Freeport-
McMoRan Resource Partners, IMC-Fertilizer, Inc. and
Felmont Oil Corporation, dated as of June 5, 1990.
(Incorporated by reference to Exhibit 10.4 to the
Freeport Sulphur S-1).
10.5 Amendment No. 1 to Joint Operating Agreement dated July
1, 1993 between Freeport McMoRan Resource Partners, IMC
Fertilizer, Inc. and Homestake Sulphur Company.
(Incorporated by reference to Exhibit 10.14 to McMoRan's
1999 Annual Report on Form 10-K (the McMoRan 1999 Form
10-K)).
10.6 Amendment No. 2 to Joint Operating Agreement dated
November 30, 1993 between Freeport McMoRan Resource
Partners, IMC Fertilizer, Inc. and Homestake Sulphur
Company. (Incorporated by reference to Exhibit 10.15 in
the McMoRan 1999 Form 10-K).
E-1
10.7 Processing and Marketing Agreement between the Freeport
Sulphur (a division of Freeport-McMoRan Resource
Partners) and Felmont Oil Corporation dated as of June
19, 1990 (Processing Agreement). (Incorporated by
reference to Exhibit 10.11 to the Freeport Sulphur S-1).
10.8 Amendment Number 1 to the Processing Agreement.
(Incorporated by reference to Exhibit 10.12 to the
Freeport Sulphur S-1).
10.9 Amendment Number 2 to the Processing Agreement.
(Incorporated by reference to Exhibit 10.13 to the
Freeport Sulphur S-1).
10.10 Agreement for Sulphur Supply, as amended, dated as of
July 1, 1993 among Freeport-McMoRan Resource Partners,
IMC Fertilizer and IMC-Agrico Company (Sulphur Supply
Agreement). (Incorporated by reference to Exhibit 10.9
to the Freeport Sulphur S-1).
10.11 Side letter with IGL regarding the Sulphur Supply
Agreement. (Incorporated by reference to Exhibit 10.10
to the Freeport Sulphur S-1).
10.12 Services Agreement dated as of November 17, 1998 between
McMoRan and FM Services Company. (Incorporated by
reference to Exhibit 10.11 to McMoRan 1998 Form 10-K).
10.13 Participation Agreement between McMoRan Oil & Gas and
Gerald J. Ford dated as of December 15, 1997
(Incorporated by reference to Exhibit 10.6 to the
McMoRan Oil & Gas Co. (MOXY) 1997 10-K).
10.14 Offshore Exploration Agreement dated December 20, 1999
between Texaco Exploration and Production Inc. and
McMoRan Oil & Gas. (Incorporated by reference to Exhibit
10.34 in the McMoRan 1999 Form 10-K).
10.15 Participation Agreement dated as of June 15, 2000 but
effective as of March 24, 2000 between McMoRan Oil & Gas
and Halliburton Energy Services, Inc. (Incorporated by
reference to Exhibit 10.34 to McMoRan's Second-Quarter
2000 Form 10-Q).
10.16 Letter Agreement dated August 22, 2000 between Devon
Energy Corporation and Freeport Sulphur. (Incorporated
by reference to Exhibit 10.36 to McMoRan's Third-Quarter
2000 Form 10-Q).
10.17 Exploration Agreement dated November 14, 2000 between
McMoRan Oil & Gas LLC and Samedan Oil Corporation.
(Incorporated by reference to Exhibit 10.17 to McMoRan's
2000 Form 10-K).
10.18 Amended and Restated Credit Agreement dated November 17,
1998 among Freeport Sulphur, as borrower, McMoRan, as
Guarantor and, the financial institutions party thereto.
(Incorporated by reference to Exhibit 10.29 to McMoRan
1998 Form 10-K).
10.19 Amendment to the amended and restated credit facility as
of November 17, 1998, dated August 11, 2000 among
Freeport Sulphur, as borrower, McMoRan, as Guarantor
and, the financial institutions party thereto.
(Incorporated by reference to Exhibit 10.26 to McMoRan's
Third Quarter 2000 Form 10-Q).
10.20 Amendment, dated as of April 16, 2001, to the Credit
Agreement dated as of December 12, 1997, as amended and
restated as of November 17, 1998, as amended as of
January 20, 1999 and as of August 11, 2000, among
Freeport Sulphur, as borrower, McMoRan as Guarantor and,
the financial institutions party thereto.
E-2
10.21 Amended and Restated Credit Agreement dated June 15,
2000 among McMoRan Oil and Gas, as borrower, Chase Bank
of Texas, National Association, as agent and the Lenders
Signatory thereto. (Incorporated by reference to
Exhibit 10.31 to McMoRan's Second- Quarter 2000 Form 10-
Q).
10.22 Asset Sale Agreement for Main Pass Block 299 between
Freeport-McMoRan Resource Partners, Limited Partnership
(Freeport-McMoRan Resource Partners) and Chevron USA,
Inc. dated as of May 2, 1990. (Incorporated by reference
to Exhibit 10.2 to the Freeport Sulphur S-1).
10.23 Asset Purchase Agreement between Freeport-McMoRan
Resource Partners and Pennzoil Company dated as of
October 22, 1994 (Asset Purchase Agreement).
(Incorporated by reference to Exhibit 10.7 to the
Freeport Sulphur S-1).
10.24 Amendment No. 1 to the Asset Purchase Agreement dated as
of January 3, 1995. (Incorporated by reference to
Exhibit 10.8 to the Freeport Sulphur S-1).
10.25 Agreement for Purchase and Sale dated as of August 1,
1997 between FM Properties Operating Co. and McMoRan Oil
& Gas (Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by McMoRan Oil & Gas
dated as of September 2, 1997).
10.26 Asset Purchase Agreement dated effective December 1,
1999 between SOI Finance Inc., Shell Offshore Inc. and
McMoRan Oil & Gas. (Incorporated by reference to Exhibit
10.33 in the McMoRan 1999 Form 10-K).
10.27 Employee Benefits Agreement by and between Freeport-
McMoRan Inc. and Freeport Sulphur. (Incorporated by
reference to Exhibit 10.1 to Freeport Sulphur's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997 (Freeport Sulphur 1997 10-K)).
Executive and Director Compensation Plans and
Arrangements (Exhibits 28 through 36).
10.28 McMoRan Adjusted Stock Award Plan. (Incorporated by
reference to Exhibit 10.1 of the McMoRan S-4).
10.29 McMoRan 1998 Stock Option Plan. (Incorporated by
reference to Annex D to the McMoRan S-4).
10.30 McMoRan 2000 Stock Incentive Plan. (Incorporated by
reference to Exhibit 10.5 to McMoRan's Second-Quarter
2000 Form 10-Q).
10.31 Stock Bonus Plan (Incorporated by reference from
McMoRan's Registration Statement on Form S-8
(Registration No. 333-67963) filed with the SEC on
November 25, 1998.
10.32 McMoRan 1998 Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to Exhibit 10.2
of the McMoRan S-4).
10.33 McMoRan's Performance Incentive Awards Program as
amended effective February 1, 1999. (Incorporated by
reference to Exhibit 10.18 to McMoRan's 1998 Form 10-K).
10.34 McMoRan Financial Counseling and Tax Return Preparation
and Certification Program, effective September 30, 1998.
(Incorporated by reference to Exhibit 10.13 to McMoRan's
1998 Form 10-K).
E-3
10.35 McMoRan 2001 Stock Bonus Plan. (Incorporated by
reference to Exhibit 10.35 to McMoRan's First-Quarter
2001 Form 10-Q).
10.36 McMoRan 2001 Stock Incentive Plan
10.37 Agreement for Consulting Services between Freeport-
McMoRan and B. M. Rankin, Jr. effective as of January 1,
1991)(assigned to FM Services as of January 1, 1996); as
amended on December 15, 1997 and on December 7, 1998.
(Incorporated by reference to Exhibit 10.32 to McMoRan
1998 Form 10-K).
10.38 Supplemental Agreement between FM Services and B.M.
Rankin, Jr. dated February 5, 2001. (Incorporated by
reference to Exhibit 10.36b to McMoRan's 2000 Form 10-
K).
15.1 Letter dated July 19, 2001 from Arthur Andersen LLP
regarding the unaudited financial statements.
E-4