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12 11, 2011 by The Times-Picayune
A dramatic change has recently occurred in the energy outlook of the United States: national energy independence, formerly little more than a slogan or yearning, has become a realistic prospect.
New discoveries and extraction technologies prompted the Financial Times to note last month that "many analysts expect that in the coming decade the U.S. will leapfrog Saudi Arabia and Russia to become the world's largest producer of liquid hydrocarbons."
Still, it just may be that some of the most abundant new sources are yet to be revealed. Possibly as soon as this month, a small New Orleans company, with no more than 120 employees, will learn whether its Davy Jones well, the ultradeep hole it has been drilling in 20 feet of water a few miles off the coast of Vermilion Parish, will be the natural-gas bonanza that preliminary testing suggests it will be.
If so, it will be great news for the company, McMoRan Exploration, as well as a triumph for its CEO, James "Jim Bob" Moffett. He has long believed that the shallow waters of the Gulf, though widely considered a spent energy source, have phenomenal deposits of natural gas far beneath the pincushion of drilling sites from earlier decades.
McMoRan is a spinoff from minerals giant Freeport-McMoRan. It was not a happy day for New Orleans a few years ago when Freeport relocated its corporate headquarters from New Orleans to Phoenix. What a delicious irony it would be if the small unit left behind on Poydras Street turns out to have been the parent company's most valuable gem.
My students at Burkenroad Reports at Tulane's Freeman School of Business have been writing reports on the company for more than a decade. While the major oil companies were focused on drilling for oil far offshore in 5,000 or 8,000 or 10,000 feet of water, Moffett and McMoRan embarked on a prodigious challenge of their own by drilling to unprecedented depths of 33,000 feet and more beneath the ocean floor, but in shallow water depths.
With down-hole temperatures of 440 degrees F. and pressures of 27,000 pounds per square inch, such depths proved too daunting and expensive for Exxon-Mobil, which sold its Blackbeard well, at the mouth of the Mississippi, to McMoRan in 2008. McMoRan, a firm with about 0.6 percent of Exxon-Mobil's capitalization, has pressed ahead with high hopes as well as auspicious geologic findings. The company expects to have results of key flow tests from Davy Jones this month and from its Blackbeard and Lafitte wells early next year. People are taking notice, including Boone Pickens, whose hedge fund recently increased its position in MMR.
Meanwhile, the company has gone wide as well as deep. As the major oil companies exited the shallow portions of the Gulf, McMoRan bought up so much acreage that it is now one of the largest owners there, its holdings rivaling those of such giants as Chevron, Exxon-Mobil and Shell. Moffett is said to believe that as much as 100 trillion cubic feet of gas may lie beneath the company's acreage, which is 50 times the current monthly natural-gas consumption of the entire country. Obviously, a resource of that size would have enormous implications not only for the company's investors but for the regional and national economy.
At the same time, another small company has embarked on analogous drilling onshore. Stone Energy, which is headquartered in Lafayette, is drilling several deep and ultradeep wells in Vermilion and Cameron parishes in the belief that gas-bearing reservoirs below the shallow Gulf bleed onshore, and that onshore drilling offers a way to tap an abundant hydrocarbon resource without incurring the considerable expenses of underwater operations. To underscore the difficulties in this kind of drilling, this week Stone announced they were temporarily suspending drilling operations in their Lighthouse Bayou Project. They have reached the technical limits of their current drilling equipment and will return to the well in 2012.
McMoRan and Stone are both speculative and intriguing investments, but the two companies are quite different. McMoRan's fate depends almost entirely on whether a group of offshore wells, in waters ranging up to 100 feet deep, proves to be the natural-gas bonanza the company hopes it to be. Stone, in contrast, has a balanced portfolio of projects that run the gamut of advanced energy exploration -- undertakings ranging from its deep and ultradeep drilling for natural gas in coastal Louisiana to its 75,000-acre Marcellus Shale natural-gas play in eastern Pennsylvania and West Virginia. Stone also has oil plays over some 80,000 acres at various locales in the Rocky Mountains and oil wells in the shallow and deep waters of the Gulf. Just last month the company bid to increase its stake in deep water through the purchase of several fields from a BP eager to shed assets, a deal that Stone hopes will close next month.
The national financial meltdown of 2008-09 was a near-death experience for the firm. Since then, Stone has regained its financial footing and has expanded considerably beyond its conventional shelf properties in the Gulf. It has thereby greatly reduced its overall operational risks, while keeping tight controls on costs and instituting a three-year plan to maintain stability of its cash flows. Good progress was made on the latter goal this year when the company struck oil on every well it drilled on the Gulf shelf, with a result that it enjoyed a 25 percent increase in cash flow over what it expected.
In short, this is a firm increasingly assured of steady cash flow from the conventional shelf at the same time that it has embarked in a range of ventures that could vastly increase production - through deep water wells, ultradeep drilling on land, and high-potential ventures in the Marcellus Shale and the Rockies.
Our Tulane students in Burkenroad Reports were impressed enough to rate it a "market outperform" last spring, predicting a 12-month stock-price appreciation of about one third, from $34 to $45. The stock has since slipped back by about 30 percent; yet, considering how strong a year it has been for the company -- and the potential that exists for an even better year ahead -- $45 remains an ambitious but possible target for some time within the next 12 months.
In seeking to profit from the likely energy boom ahead, some investors will reflexively seek out the giants, notwithstanding the fact that they have played a lamentably small role in some of the most exciting developments to date and even though, as the case of BP all too vividly demonstrates, giants can turn out more risky than they look. For those open to investing in "stocks under rocks," these companies provide investors two different ways to participate in the ultradeep. Investors with a high tolerance for risk will tend more to McMoRan Exploration; those more risk-averse may opt for Stone Energy. In either event, both companies represent daring American entrepreneurship at its best.
Peter Ricchiuti has taught finance for 25 years and is an assistant dean at the A.B. Freeman School of Business at Tulane University. His views are his own, not Tulane's, and his partiality to "stocks under rocks" may not be appropriate for all investors. His weekly radio show with Kathy Finn, "Out to Lunch," featuring interviews with the area's top entrepreneurs, can be accessed at www.itsneworleans.com.
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