Hurricane Ike Damage Update at McMoRan Exploration

(MoneyWatch) 

• The Company: McMoRan Exploration, an oil and gas explorer engaged in offshore production in the Gulf of Mexico.
• The Filing: FORM 8-K filed with the SEC on October 20, 2008.
• The Finding: McMoRan's exploration strategy focuses on the deep gas plays, drilling to depths of 15,000 to 25,000 feet in the shallow waters of the Gulf of Mexico and Gulf Coast area, and on ultra-deep gas plays below 25,000 feet. Drilling in deep water is not without risk, however, as assessments following Hurricane Ike identified several platforms with significant structural damage. Based on current information, McMoran currently expects fourth-quarter production to average approximately 180 MMcfe per day, down from a production average of about 296 MMcfe/d in July and August.

The Upshot: Co-Chairman of the Board, Richard Adkerson, said on the company's third-quarter 2008 earnings call that McMoRan production is now at 140 MMcfe a day, with the drop off in production mostly due to repairs necessary in getting third-party pipeline facilities and refineries back online, for its damaged platforms comprised only three percent of daily operations. The company expects production to return to pre-hurricane levels sometime in first half 2009.

Adkerson explained why the company was willing to assume the hurricane risk associated with drilling for hydrocarbons in the Gulf of Mexico shelf and in deep water: "There is no place else on shore where you can find these reservoirs that are conventional reservoirs that are what we call soft rock. They don't have to be frac [fractured]. They don't have to do any abnormal stimulation. And the recovery from those sands can be drawn from areas because you don't have to reach out with horizontal wells and track and do some of the things you have to do in a tight gas play."

Design improvements made to both new and existing structures in the Gulf of Mexico following the disastrous 2005 hurricane season has increased platform survivability. Adkerson said most of the damage done to its drilling platforms was in deeper waters, where underwater currents caused an "undertow rip tide."

Financial results for the third-quarter ended September 30 reflected charges of $152.6 million related to hurricane Ike, including about $22 million to reduce the net book value of property damaged in the storm and approximately $124 million to adjust future abandonment costs associated with the damaged structure and well abandonment. The company should recover substantially all its hurricane-related costs -- less $50 million in deductibles -- under existing insurance programs.

The Question: Going forward, when insurance companies are done tallying their hurricane-related losses for 2008, will offshore drilling companies and operators pay larger premiums -- with higher deductibles -- for their coverage?