Jim Bob Moffett’s billion-dollar bet on an ultra-deep natural gas well in the Gulf of Mexico is looking shakier by the day. The chief executive officer of McMoRan Exploration (MMR) announced on Nov. 26 that a test to determine the productive capacity of the Davy Jones No. 1 well, where drilling began in June 2009, had proved inconclusive.
It was the latest in a yearlong series of delays in verifying the well’s potential. “I would have thought that they would have certainly been producing at least some gas at this point,” says Leo Mariani, an analyst at RBC Capital Markets (RY). The news sent company shares tumbling 34 percent in two days and cast doubt about McMoRan’s goal of unlocking vast new stores of oil and gas in the shallow waters of the Gulf of Mexico.
Having spent $961 million on the Davy Jones project through September, New Orleans-based McMoRan has “really put all their eggs in this one basket,” says Mariani. If Davy Jones doesn’t work, he adds, that “really makes it difficult for this company going forward.”
Davy Jones is the latest big bet by Moffett, whom billionaire oilman T. Boone Pickens calls one of America’s top five wildcatters. Louisiana-born and a geologist by training, Moffett in his younger days helped discover the Grasberg gold and copper mine in the jungles of Indonesia—the largest-ever gold and copper find by reserves.
Drilling at the Davy Jones site, which sits in a mere 20 feet of water about 12 miles off Louisiana’s Gulf Coast, has reached 29,000 feet into the earth, withstanding temperatures and pressures that melt and disable conventional drilling equipment. Moffett has said the well has tapped into a formation containing trillions of cubic feet of gas, opening a new part of the earth to exploration. The shallow portion of the Gulf is one of the most explored oil and gas regions in the world—hundreds of wells have been drilled to depths of 10,000 to 12,000 feet. A major strike at Davy Jones’s depth would likely set off a round of wildcatting not seen in the area for decades.
Finding oil and gas that deep is easier than getting it out. McMoRan said its problem is linked to a mineral known as barite that energy companies use to add weight to the drilling mud used to hold back flow after a well has been drilled, before testing begins. In this case, the barite concoction has clogged the well—preventing a reliable flow test—and McMoRan has been unable to clear it.
The company said it will try using a solvent to remove the mud before retrying the test. Failure to deal with the clogging means McMoRan “potentially might have to abandon the well,” according to JPMorgan Chase.
Moffett, who started out as an oil-field roustabout and worked his way up to be the CEO of oil and gas and mining companies, isn’t one to give up easily. He got on a conference call with analysts and investors the day after announcing the test failure to say McMoRan would keep trying to unclog Davy Jones even as it continues to search for other oil and gas “home runs” in the Gulf region. He declined to comment for this story.
JPMorgan analysts say McMoRan’s stock remains overvalued because the price still reflects expectations of success at Davy Jones and other ultra-deep fields. Shares would have to fall another 72 percent from the Nov. 27 price of $8.18 to match JPMorgan’s estimated value for McMoRan of $2.31 a share. Analysts at RBC say the company may need to raise more money or find a joint-venture partner “in the near-term,” according to a Nov. 26 report.
Moffett still has supporters, including Leon Cooperman, founder of Omega Advisors, which has invested more than $100 million in McMoRan. “It’s been slow going,” says Cooperman. “But I’m optimistic that he has uncovered values well in excess of the price of the stock, and we intend to stay with him.”
The bottom line: McMoRan saw its stock plunge 34 percent after it spent $961 million to find gas at 29,000 feet but couldn’t show the well worked.
