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Greetings from Denver and the EnerCOMConference where McMoRan presented on 8/13. It’s interesting to observe that as we really near the end of problem solving at Davy Jones, investors are so shell shocked they can’t believe the flow test might really happen soon. Many cannot see the forest for the trees or the enormity of this Shallow Water Ultra Deep play vs. the limited prospects of the shale plays they love so dearly. Most shale wells are unimaginative step out wells a short distance away from other known discoveries. Many of the public shale players are recent arrivals in those plays and are paying the price for being followers, not leaders. Their potential returns on invested capital are tiny compared to the potential enormity of the Shallow Water Ultra Deep which can totally transform the U.S. energy picture for the future. Add to that MMR’s Main Pass Energy Hub where it has reapplied for an export permit to use this facility 20 miles offshore to export oil to other parts of the world where gas prices are far above the current <$3 in the United States.

Nobody on earth wanted to have flow tested this well prior to this EnerCOM energy gathering more than Moffett so that this might have been the finest champagne party of this century. Instead, after almost a year of delays, Davy Jones is still not giving up its bounty without a final fight. So, the flow test is still to come.

Jim Bob Moffett stood resolutely in the break out session and at the McMoRan dinner last night and patiently answered the same questions again and again. What about your balance sheet? Aren’t you going to run out of money? Do you honestly think you will have a successful flow test? Is there really permeability in these rocks? How big is this play? Really? Ironically, the well wants to flow so much that the latest problems have revolved around containing the flow, not encouraging it.

As future well completions in the Shallow Water Ultra Deep move forward, rest assured there will be a whole series of protocols that will be standard operating procedure. For one thing, wells will never again be designed to have tiny pipe at the bottom of the hole, making all efforts difficult because there is no room to maneuver tools and equipment. Wells surely won’t be using Schlumberger’s remote control small guns to perforate the casing. The folks at BOEMRE won’t be requiring the interruption of a flow test to move the rig back off the well. And wells will have packers routinely placed at the bottom of the production tubing so that no matter what comes flowing up after perforation of the well, it can easily be contained and controlled. Moffett takes responsibility on himself for not foreseeing that the original multiple O ring type assembly currently being pulled out of the hole would have to contain a far larger perforation project than originally conceived for one zone at a time instead of what resulted from perforating all zones at once. These recent completion activities and “redos” at Davy have cost the group another $70 million. You can’t sue the Government but one wonders what culpability might be laid at Schlumberger’s feet when all the dust settles.

Halliburton’s Boots and Coots pressure control experts are finally off the well. So we can presume that the final preparations for the flow test are now underway. If you look at Moffett’s latest presentations, I believe the slides and cartoons are aimed not at the public markets but at the huge investors who will soon be coming out of the woodwork to turn this into a full blown commercial development to rival the biggest and most important energy projects in the history of the U.S. oil and gas industry.

Many of the folks in the room, some of whom control or influence vast pools of money, don’t seem to see the forest for the trees or grasp what is coming about here. At the conference, if you go into the presentation rooms of those producing from shale plays onshore in the various parts of the country, there is standing room only, just as there was last year. Those investors don’t seem too concerned that shale requires $5-7 gas to be profitable in the present $3 world for natural gas prices. They don’t seem afraid of the write downs of reserve values that are coming at the end of the year. They only seem to focus on the $300 million + cost of Davy Jones and are sure that it will never produce economically. They don’t understand that at some point DJ became a science experiment for the entire play and its proof of concept.

A major topic at dinner was about the cost of future wells. Moffett seems particularly happy with future use of expandable liner to limit the starting size of pipe that must be used. He thinks future wells, particularly those on land at Lineham Creek (Chevron is the operator) and at its new huge Highlander prospect onshore where it will be the operator, can be brought in for $75 million per well. Everything on land is much cheaper from land rigs, or even barge rigs in the swamp areas where there is less than 10 feet of water, to not needing support helicopters and delivery boats. Also, onshore with some of the targeted formations closer to the surface, the support costs are much less, too. Even offshore wells will be far cheaper going forward even if more than $100 million.

Energy XXI, MMR’s junior partner, and Tex Moncrief are reportedly on pins and needles with the rest of us but with no wavering in their conviction about the Ultra Deep. Fortunes are made with patience and by leading, not following, the pack. This group fits that description in spades. Moncrief loves to tell the story of getting hooked on the oil patch when out with his Dad as a young boy in a pair of rubber boots watching a well start to gush oil into the air. Davy is trying to gush, too. It shouldn’t be long now until all the believers get their reward, including the public shareholders.

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McMoRan Exploration Co. MMR -0.50% today provided an update on the Davy Jones No. 1 workover currently in progress on South Marsh Island Block 230. As previously reported McMoRan successfully perforated 165 feet of Wilcox sands and on July 13 commenced operations to run production tubing. Prior to removing the blow out preventer and installing the production tree, McMoRan performed a routine pressure test on the seal system, which indicated that the seal assembly located at approximately 16,400 feet needed to be replaced. McMoRan believes the seal assembly was impacted by the increased use of high density mud used in operations designed to suppress flow in the well. Once the well is stable, McMoRan plans to install a production packer above a new seal assembly which would enable a double seal completion. As a result, the flow test previously anticipated during the week of July 30 is now expected to be conducted during the month of August 2012.

James R. Moffett, Co-Chairman, President and CEO of McMoRan, said: “In our efforts to unlock “Davy Jones’ Locker”, we encountered flow in the well prior to setting all of the production tubing. To address this, we have modified our original design to include a double seal which should allow us to achieve a measurable flow test and bring the well on production safely. While we are disappointed by the delay, we are encouraged by the well’s attempts to flow. We look forward to obtaining results from the measurable flow test as soon as possible to determine the potential of the first shallow water, ultra-deep sub-salt completion on the Gulf of Mexico Shelf.”

As previously reported, McMoRan has drilled two successful ultra-deep 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 offset appraisal well (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, indicating continuity across the major structural features of the Davy Jones prospect, and also encountered 192 net feet of potential hydrocarbons in the Tuscaloosa and Lower Cretaceous carbonate sections.

Davy Jones involves a large ultra-deep structure encompassing four OCS lease blocks (20,000 acres). McMoRan is the operator and holds a 63.4 percent working interest and a 50.2 percent net revenue interest in Davy Jones. Other working interest owners in Davy Jones include: Energy XXI EXXI -2.39% (15.8%), JX Nippon Oil Exploration (Gulf) Limited (12%) and Moncrief Offshore LLC (8.8%).

McMoRan Exploration Co. is an independent public company engaged in the exploration, development and production of natural gas and oil in the shallow waters of the GOM Shelf and onshore in the Gulf Coast area. Additional information about McMoRan is available on its internet website ” www.mcmoran.com “.

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For the last several months all eyes have been focused on the successful completion of The Davy Jones #1 Well in just 20’ of water in theLouisianaswamp.  McMoran is the operator and its key partners are Energy XXI and Tex Moncrief.   The well has cost a large fortune and has taken far more time and money to complete than ever expected.

That said, one of the tasks of the partnership group has been to explore the vast area that stretches from Blackbeard West, the first of MMR’s ultra deep Gulf of Mexico discoveries to Blackbeard East, Lafitte, and the two Davy Jones wells closer to shore. The targeted sands were down more than 30,000’ and some of the wells went further to see what was there to see. Conditions are harsh and forbidding. New equipment had to be invented to control the temperatures and pressures.

Along the way, the group has worked hard to correlate the sands they discovered and various geologic formations covering a vast geographic expanse in their efforts to prove their geologic theory about deposition of hydrocarbons deep under theGulf of Mexico. Most of their wells are the deepest drilled to date below the mudline. The original geologic concepts have had to be modified from theories to reflect what has actually been encountered with the drill bit.

On June 19^th, EXXI will be holding its Annual Analyst Day at the Waldorf Astoria in NYC.  It is always a really  informative event.  This year should be no exception.  EXXI has focused mainly on being an “oily” company in the properties it has purchased since the company was formed a few years ago.  It leapt forward into the bigger leagues by buying a large tract of older properties from XOM at the end of 2010 for a billion dollars. These wells  are very significant to EXXI but had become irrelevant to Exxon. When the deal was negotiated, oil was at $80. For the last 18 months, prices have been much higher than that so the debt paydown has  been far more rapid than ever expected.  EXXI also does a great job of hedging its exposures. It also sells based on Brent pricing instead of WTI and that helps, too.

EXXI has largely confined its gas efforts to be a significant junior partner to McMoran. Often Jim Bob Moffett disperses information about his drilling program by having John Schiller give updates on the latest progress. So it is reasonable to expect some new information at the meeting this week.

However, as the last year has unfolded, the Cupola Play has grown in importance to both of these companies and to the Moncriefs as well.  As the five wells listed above were drilled, the partners have refined their perception of the salt weld and what it portends for future exploration projects. In some cases, anomalies that presented themselves on the seismic data were believed to be extensive salt. When drilling, that was not always the case. In some of the wells, the salt was thin or absent.

The model has been revised in recent presentations by both MMR and EXXi showing the targeted sands much closer to the surface than originally believed.  It has sometimes been slow going just under the salt because significant rubble zones have been encountered that are much like glacial moraines or breccia, a zone of broken rock, that is typical of the rocks and debris pushed forward as a glacial moraine by advancing glaciers and then left behind when the glaciers begin to retreat. New York‘s  Long Island is such a glacial moraine left in the last ice age only 10,000 years ago.

We have already been told that Ship Shoal 188, AKA Blackbeard West #2, experienced a kick just as the salt weld was penetrated. That is a very encouraging sign for the theory that the cupolas provided very effective seals for hydrocarbons.  About a month ago, Schiller stated at one of his talks that they believed C5 hydrocarbons were present.  We also know that the pressures at Ship Shoal 188 are such that this well, if successful and a discovery, can be produced with conventional off the shelf equipment including just 20,000 lb. Blow Out Preventers.  The pressures increased by over 2000 lbs in the space of just 160 vertical feet of drilling as the salt was penetrated.  That kind of increase is significant and very promising for significant hydrocarbons to be present.  Also at these shallower depths, there is a very good chance that what is trapped is heavy hydrocarbons with far more economic value.

Ship Shoal 188 was drilled  because it helps to prove the Cupola Theory and to preserve MMR’s rights to the vast unit that is Blackbeard West, particularly if it is brought onto production rapidly.  MMR confirmed a few weeks ago that the expectation was that SS 188 might be coming online, if a discovery, simultaneously with Davy Jones #1.  Now it sounds as if this well will be fast tracked and completed perhaps even in the second half of 2012.  That is important to cash flow because what is likely to come out of this well is much higher value products than the natural gas at the bottom of the Ultra Deep wells. With Nat. gas selling in the low $2’s these days, production that can be sold for two or three times that would make SS 188 a very successful well.And the better news is that if the Cupola Theory is proved valid, just to the west is the Barbosa prospect which on seismic they have shared for months now looks many times the size of SS 188.  I expect the announcement of a rig out there at Barbosa soon. McMoRan always reports its quarterly results rapidly after the end of a fiscal quarter. I’d bet that Moffett will be talking a lot about Barbosa on his next quarterly call and maybe he will have some more information for us about Ship Shoal as well.

We also know that the partners will be showing up at lease sales this week to expand their acreage portfolios with the new focus onshore rather than offshore, or so they have said.  We know they are engaged with Chevron at Lineham Creek onshoreLouisiana. In SEC parlance, we and they are assembling the mosaic of information as they develop this enormous play which stretches for 200 square miles already and maybe soon even more.  We should learn soon what their areas of focus will be going forward.   This next week and the next month should be important ones for the Shallow Water Ultra Deep play. As Jim Bob always likes to say: “Stay tuned!”

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