Markets

Hurricanes â€" Albatross About Neck of Mariner Energy

By David Phillips

Updated on: September 12, 2008 / 12:52 AM EDT / MoneyWatch

The Company: Mariner Energy, an independent oil and gas explorer.
The Filing: Form 10-Q filed with the SEC on August 11, 2008.
The Finding: Mariner Energy is a case profile in the risk and rewards to be had by drilling in the Gulf of Mexico. Approximately 280 million cubic feet of natural gas equivalent per day (MMcfe/d), or 75 percent of daily production, comes from its offshore production. Although the company experienced no significant damage from Hurricane Gustav, the Houston-based driller might not be so lucky with Hurricane Ike.

The Upshot: Mariner has rapidly expanded exploration beyond the Permian Basin in West Texas, focusing on deepwater and shelf exploration programs in the Gulf of Mexico. Approximately 67 percent of proved and probably reserves, or 1.2 trillion cubic feet equivalents (Tcfe), are located offshore. Active drilling prospects hold an additional 5 Tcfe in potential new reserves. Since 2006, Mariner's shelf assets have created more than $300 million in excess cash flow.

However, going after these assets and returns is not without risk. It took the company more than a 1Â½ years to repair the devastating damage caused by Hurricane Rita and Hurricane Katrina in 2005.

With sustained winds of more than 100 miles per hour, Ike has the potential of being upgraded to a Category 3 hurricane (winds 110 - 130 miles per hour) in the next 24 hours, according to the National Hurricane Center. If computer models hold, the path of the storm could cross many of Mariner's offshore drilling properties, resulting in substantial shut-in and delayed production.

Against a backdrop of falling oil and natural gas prices, fields going offline would not be welcome news at the company. Average unit cost per Mmcfe has more than doubled in the last three years to $3.88 for the six-months ended June 30.

The Question: If insurers suffer catastrophic losses due to the storm, will insurance premiums become cost prohibitive for mid-tier offshore operators?