SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
Commission File Number: 001-07791
McMoRan Exploration Co.
Incorporated in Delaware 72-1424200
(IRS Employer
Identification No.)
1615 Poydras Street, New Orleans, Louisiana 70112
Registrant's telephone number, including area code: (504) 582-4000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
On March 31, 1999, there were issued and outstanding 14,107,341
shares of the registrant's Common Stock, par value $0.01 per
share.
McMoRan Exploration Co.
TABLE OF CONTENTS
Page
Part I. Financial Information
Financial Statements:
Condensed Balance Sheets 3
Statements of Operations 4
Statements of Cash Flow 5
Notes to Financial Statements 6
Remarks 7
Report of Independent Public Accountants 8
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Part II. Other Information 15
Signature 16
Exhibit Index E-1
<PAGE> 2
McMoRan Exploration Co.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
<TABLE>
<CAPTION>
McMoRan EXPLORATION CO.
CONDENSED BALANCE SHEETS (Unaudited)
March 31, December 31,
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24,448 $ 17,816
Accounts receivable 28,519 32,076
Inventories 17,868 14,915
Deferred tax asset and prepaid expenses 7,340 4,762
--------- ---------
Total current assets 78,175 69,569
Property, plant and equipment, net 180,104 187,137
Deferred tax asset 29,359 31,834
Other assets including goodwill (net of
accumulated amortization of $294,000 and
$144,000, respectively) 31,184 31,848
--------- ---------
Total assets $ 318,822 $ 320,388
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 30,789 $ 27,549
Accrued liabilities 9,321 13,895
Current portion of reclamation and mine
shutdown and other reserves 11,575 7,145
--------- ---------
Total current liabilities 51,685 48,589
Reclamation and mine shutdown reserves 53,970 60,047
Other long-term liabilities 32,782 32,952
Stockholders' equity 180,385 178,800
--------- ---------
Total liabilities and stockholders' equity $ 318,822 $ 320,388
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
<TABLE>
<CAPTION>
McMoRan EXPLORATION CO.
STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
-------- -------
(In Thousands, Except
Per Share Amounts)
<S> <C> <C>
Revenues $ 62,111 $ 5,779
Costs and expenses:
Production and delivery 48,030 979
Depreciation and amortization 9,404 5,207
Exploration expenses 2,550 6,084
General and administrative expenses 3,322 930
Gain on sale of oil and gas property (3,090) -
-------- -------
Total costs and expenses 60,216 13,200
-------- -------
Operating income (loss) 1,895 (7,421)
Interest expense (58) -
Other income, net 196 401
-------- -------
Net income (loss) before income taxes 2,033 (7,020)
Provision for income taxes (719) -
-------- -------
Net income (loss) $ 1,314 $(7,020)
======== =======
Net income (loss) per share
of common stock
Basic $0.09 $(0.82)
===== ======
Diluted $0.09 $(0.82)
===== ======
Average common shares outstanding
Basic 14,094 8,554
====== =====
Diluted 14,209 8,554
====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
McMoRan EXPLORATION CO.
STATEMENTS OF CASH FLOW (Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 1,314 $ (7,020)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 9,404 5,207
Exploration expenses 2,550 6,084
Gain on sale of oil and gas property (3,090) -
Reclamation and mine shutdown expenditures (811) -
Utilization of deferred tax asset 707 -
Change in assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in working capital
Accounts receivable 1,110 (8,670)
Accounts payable and accrued liabilities 2,965 (447)
Inventories and prepaid expense (3,962) (210)
Other 65 1,068
-------- --------
Net cash provided by (used in) operating activities 10,252 (3,988)
-------- --------
Cash flow from investing activities:
Exploration, development and other
capital expenditures (17,241) (13,358)
Proceeds from disposition of assets, net 13,304 -
Other 254 -
-------- --------
Net cash used in investing activities (3,683) (13,358)
-------- --------
Cash flow from financing activities:
Proceeds from exercise of stock options and other 63 -
-------- --------
Net cash provided by financing activities 63 -
-------- --------
Net increase (decrease) in cash and cash equivalents 6,632 (17,346)
Cash and cash equivalents at beginning of year 17,816 29,149
-------- --------
Cash and cash equivalents at end of period $ 24,448 $ 11,803
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
McMoRan EXPLORATION CO.
NOTES TO FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
Background. McMoRan Exploration Co. (MMR), a Delaware
corporation, became a publicly traded entity on November 17, 1998
when McMoRan Oil & Gas Co. (MOXY) and Freeport-McMoRan Sulphur
Inc. (FSC) combined their respective operations (the Merger). In
the Merger, FSC's shareholders received 0.625 MMR common shares
for each FSC outstanding common share, or a total of 5.5 million
MMR shares, while MOXY's shareholders received 0.20 MMR common
shares for each MOXY outstanding common share, or a total of 8.6
million MMR common shares. MMR's Board of Directors and executive
management include former members of the Boards of Directors and
executive management of both MOXY and FSC.
Basis of Presentation. The Merger is reflected in the
accompanying financial statements using the purchase method of
accounting, with MOXY as the acquiring entity. Accordingly,
financial statements for any period prior to the Merger reflect
the historical assets, liabilities, revenues and expenses
attributable to MOXY as the predecessor of MMR. Operating
results of the acquired assets are included after November 17,
1998. The 1998 earnings per share and weighted average shares
outstanding amounts have been restated to reflect the effective
reverse stock split of MOXY's shares resulting from the Merger.
The assets acquired and liabilities assumed from FSC were
recorded at estimated fair values using independent appraisals
where available. For further detail discussion on the acquisition
of FSC see "Note 3. Acquisitions," to the Notes to Financial
Statements included in MMR's 1998 Annual Report on Form 10-K.
2. EARNING PER SHARE
The earnings per share (EPS) data for 1998 has been restated to
reflect the effective reverse stock split resulting from the
Merger. Basic net income (loss) per share of common stock was
calculated by dividing net income or net loss applicable to
common stock by the weighted-average number of common shares
outstanding during the periods presented. MMR's first-quarter
1999 diluted net income per share was calculated by dividing net
income by the weighted-average number of common shares
outstanding during the quarter plus dilutive stock options, which
represented approximately 115,000 shares. MMR had approximately
157,000 options outstanding in the first quarter of 1998 that
would otherwise be included in the calculation of diluted net
(loss) per share but were excluded as anti-dilutive considering
the losses incurred during the quarter.
Outstanding options to purchase 1,054,700 and 5,100 shares
of common stock at average exercise prices of $18.82 and $20.40
per share during the first quarters of 1999 and 1998,
respectively, were not included in the computation of diluted EPS
because the exercise prices were greater than the average market
price during the periods presented.
3. FINANCIAL INSTRUMENTS AND CONTRACTS
MMR currently does not hedge or otherwise enter into price
protection contracts for its principal products, although in
April 1998 FSC entered into a price protection program for its
anticipated 1998 natural gas purchase requirements. Under the
terms of the contract, commencing in May 1998 MMR began
purchasing 450,000 million British thermal units (mmbtu) of
natural gas per month (representing approximately 75 percent of
Main Pass' natural gas purchases) for $2.175 per mmbtu. The
contract also granted the supplier the option to put 450,000
mmbtu per month to MMR at a price of $2.175 per mmbtu during
1999. The estimated fair market value of this contract was
approximately $(0.7) million at March 31, 1999 and is included in
accrued liabilities. This liability, adjusted for any subsequent
changes in fair market value, will be recognized as a reduction
in production costs during 1999.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting
standards that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
in the balance sheet as either an asset or liability measured at
its fair value. SFAS 133 is effective for fiscal years beginning
after June 15, 1999, with earlier application permitted. MMR has
not adopted SFAS 133 and its adoption is expected to have little
or no impact on its future financial position or results of
operations.
<PAGE> 6
4. BUSINESS SEGMENTS
MMR has adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which requires that
companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring
their performance. MMR had only one operating segment, Oil and
Gas, until the Merger, when it acquired FSC's sulphur assets.
MMR's oil and gas are produced offshore in the Gulf of Mexico and
include MMR's facilities at Vermilion Blocks 160 and 159, West
Cameron Block 616 and, until March 3, 1999, Vermilion Block 410.
MMR also produces oil at Main Pass, which is included in the oil
and gas segment, from the same geologic formation containing the
deposit's sulphur. Frasch sulphur is produced at the Main Pass
mine located 32 miles offshore Louisiana and the Culberson mine
in west Texas, which is anticipated to cease production
permanently by the end of the second quarter of 1999. The sulphur
business segment includes purchasing recovered sulphur and the
transporting and terminaling of sulphur, both mined and
purchased, utilizing its extensive logistics network of sulphur
terminaling and transportation assets in the Gulf Coast region.
MMR's segment data for the first quarter of 1999 is shown below.
<TABLE>
<CAPTION>
Eliminations
Sulphur Oil & Gas and Other Total
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
1999
Revenues $ 51,035 $ 11,076 $ - $ 62,111
Production and delivery 44,856 3,174 - 48,030
Depreciation and amortization 1,181 8,223 - 9,404
Exploration expenses - 2,550 - 2,550
General and administrative expenses 1,776 738 808 3,322
Gain on sale of property - (3,090) - (3,090)
--------- --------- -------- ---------
Operating income (loss) 3,222 (519) (808) 1,895
Interest expense (49) (9) - (58)
Interest and other income 151 45 - 196
Income tax provision - (12) (707) (719)
--------- --------- -------- ---------
Net income (loss) $ 3,324 $ (495) $ (1,515) $ 1,314
========= ========= ======== =========
Capital expenditures $ 6,588 $ 10,653 $ - $ 17,241
========= ========= ======== =========
Total assets $ 189,172 $ 90,716 $ 38,934a $ 318,822
========= ========= ======== =========
</TABLE>
(a) Represents assets held by the parent company, the most significant
of which include MMR's deferred tax assets and certain prepaid pension
benefits.
-----------------
Remarks
The information furnished herein should be read in conjunction
with MMR's financial statements contained in its 1998 Annual
Report on Form 10-K. The information furnished herein reflects
all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the periods.
All such adjustments are, in the opinion of management, of a
normal recurring nature.
<PAGE> 7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of McMoRan Exploration Co.:
We have reviewed the accompanying condensed balance sheet of
McMoRan Exploration Co. (a Delaware corporation) as of March 31,
1999, and the related statements of operations and cash flow for
the three-month periods ended March 31, 1999 and 1998. These
financial statements are the responsibility of the company's
management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of McMoRan Exploration Co.
as of December 31, 1998, and the related statements of
operations, stockholders' equity and cash flow for the year then
ended (not presented herein), and, in our report dated January
19, 1999, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1998, is
fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
/s/ ARTHUR ANDERSEN LLP
New Orleans, Louisiana
April 20, 1999
<PAGE> 8
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
McMoRan Exploration Co. (MMR) engages in the exploration,
development and production of oil and gas offshore in the Gulf of
Mexico (Gulf) and onshore in the Gulf Coast region and in the
mining, purchasing, transporting, terminaling and marketing of
sulphur. On November 17, 1998, McMoRan Oil & Gas Co. (MOXY) and
Freeport-McMoRan Sulphur Inc. (FSC) became wholly owned
subsidiaries and operating segments of MMR. The Merger was
recorded as a purchase with MOXY as the acquiring entity (see
Note 1). All following references to MMR for any period prior to
the Merger are to activities or operations originally conducted
by MOXY.
MMR and its predecessors have conducted oil and gas
exploration, development and production operations offshore in
the Gulf and onshore in the Gulf Coast region and other areas for
more than 25 years, which has provided it with an extensive
geological and geophysical database and significant technical and
operational expertise. MMR expects to continue to concentrate its
efforts in this selected geographic area where its management
team has significant exploration experience. MMR believes the
opportunities to discover meaningful oil and gas reserves are
significant and that these opportunities can best be achieved
through the use of advanced 3-D seismic technology, applied in
conjunction with selective exploration and acquisition
activities.
The assets acquired from FSC include two operating sulphur mines:
Main Pass 299, in which FSC owns an 83.3 percent interest,
located offshore Louisiana and the wholly owned Culberson mine,
located in west Texas, which is expected to cease production
permanently by the end of the second quarter of 1999. Other
sulphur assets include five sulphur terminals located across the
Gulf Coast and various marine and rail transportation assets. MMR
also acquired FSC's 83.3 percent interest in the Main Pass oil
operations, which involves producing oil from the same geologic
formation containing the deposit's sulphur.
OPERATIONAL ACTIVITIES
The following significant operational activities
occurred during 1999.
Oil and Gas
- -----------
. On January 18, 1999, MMR, as operator, commenced production
from the Vermilion Block 160 #4 sidetrack well and the
Vermilion Block 159 #3 well. Current combined gross
sustainable daily production at these properties total
approximately 50 million cubic feet (MMCF) of gas and 1,600
barrels of oil and condensate. MMR has an approximate 58.4
percent net revenue interests in the Vermilion Block 160 #4
sidetrack well, subject to an approximate 12.7 percent net
profits interest, and an approximate 38.6 percent net revenue
interest in the Vermilion Block 159 #3 well. Both wells are
located in approximately 100 feet of water, 42 miles offshore
Louisiana.
. During the first quarter of 1999, MMR completed the
consolidation of its net revenue interest in the Vermilion
Block 160 field unit and the Vermilion Block 159 #3 well.
Including the approximate 11.6 percent and 6 percent net
revenue interests purchased in these respective properties in
December 1998, MMR acquired a total of approximately 19.4
percent and 10 percent of additional net revenue interests in
these respective properties by the end of January 1999. In
March 1999, MMR sold approximately 9.1 percent and 5.2
percent of net revenue interests in the Vermilion Block 160
field unit and Vermilion Block 159 #3 well, respectively, to
its exploration program partners and other joint interest
partners on the same terms as it had purchased them. MMR also
acquired the lease rights associated with Vermilion Blocks
144 and 159, as well as a production platform, which could be
used in future operations if additional reserves are
discovered at these locations.
. On March 15, 1999, MMR, as operator, commenced production at
West Cameron Block 616 from five well completions. These
wells initially produced at a gross daily rate of
approximately 75 MMCF of gas. Current gross sustainable daily
production is approximately 40 MMCF of gas. One well
completion has been lost due to a gravel pack failure, and
the remaining four completions are being produced at
conservative rates. Production is being carefully controlled
and monitored in order to maximize the total reserves to be
recovered from the field. MMR has an approximate 50 percent
working interest and and an approximate 38 percent net
revenue interest in West Cameron Block 616, located in
approximately 300 feet of water, 130 miles offshore
Louisiana.
. On March 3, 1999, MMR sold its approximate 28 percent net
revenue interest in Vermilion Blocks 389, 409, and 410 and
East Cameron Block 162 (collectively the "Vermilion Block 410
field"). The sale resulted in MMR recognizing an approximate
$3.1 million gain during the quarter. See "Results of
Operations" below.
<PAGE> 9
. During the first quarter of 1999, MMR farmed-out its previous
discovery at West Cameron Block 617, retaining a net profits
interest that will escalate from approximately 2.4 percent to
7.2 percent depending upon attainment of certain cost and
production volume levels.
. MMR farmed-in Vermilion Block 162 in January 1999 and drilled
the #5 exploratory well to a total depth of 12,700 feet. The
well was subsequently plugged and abandoned, resulting in an
approximate $1.4 million charge to earnings during the
quarter.
Sulphur
- -------
. During the first quarter of 1999, MMR completed replacement
drilling of the nine producing wells lost during Hurricane
Georges in September 1998. MMR had drilled four of the wells
prior to year end and redrilled the remaining replacement
wells during the first quarter of 1999. As a result, Main
Pass' average daily production has increased 39 percent from
year end levels.
. MMR has ceased drilling operations at the Culberson mine,
located in west Texas, with production anticipated to cease
permanently by the end of the second quarter of 1999.
<TABLE>
<CAPTION>
March 31,
-----------------------
1999 1998 a
--------- ---------
(Dollars in thousands,
except for realized prices)
<S> <C> <C>
FINANCIAL DATA:
Oil and gas
Revenues $ 11,076 $ 5,779
Operating loss (519) (7,421)
Net loss (495) (7,020)
Sulphur
Revenues 51,035 -
Operating income 3,222 -
Net income 3,324 -
OPERATING DATA:
Sales Volumes
Gas (thousand cubic feet, or MCF) 3,787,500 2,581,300
Oil (barrels) 396,500 34,700
Sulphur (long tons) 780,100 -
Average Realization
Gas (per MCF) $ 1.80 $ 2.14
Oil (per barrel) 10.51 16.08
Sulphur (per long ton) 64.95 -
</TABLE>
a. MOXY's net ownership interest in Vermilion Block 160 field
unit revenues was reduced during the 1998 first quarter as a
result of a redetermination of participants' interest in the
unit. First quarter 1998 production quantities shown above
reflect MOXY's adjusted net revenue interest for the period.
Additionally, first-quarter 1998 revenues include reductions to
MOXY's share of production volumes recorded prior to 1998
(150,400 mcf of gas and 6,200 barrels of oil). These volume
adjustments are not reflected in the table above.
MMR's oil and gas revenues increased to $11.1 million for
the first quarter of 1999 compared with $5.8 million during the
first quarter of 1998. The increase reflects the inclusion of
$3.1 million in revenues from Main Pass 299, which was acquired
in the Merger, and the increased production volumes associated
with the commencement of operations at the Vermilion Block 160 #4
sidetrack well and Vermilion Block 159 #3 well during January
1999 and at West Cameron Block 616 during March 1999.
Additionally, revenues were positively affected by the
approximate 10.3 percent and 4.8 percent increase in MMR's net
revenue interests in the Vermilion Block 160 field unit and the
Vermilion Block 159 #3 well, respectively, (see "Oil and Gas
Operational Activities" above). The increases were offset in
part by lower average realizations during the first quarter of
1999 and the sale of Vermilion Block 410 field in early March
1999. During the first quarter of 1998, as a result of a
redetermination of ownership interest in the Vermilion Block 160
field unit, revenues were reduced approximately $486,000 for
production volumes recorded prior to 1998.
<PAGE> 10
Sulphur operations had revenues of $51.0 million and
operating income of $3.2 million during the first quarter of
1999. Sulphur's operating income benefited from the receipt of
approximately $2.3 million in business interruption insurance
proceeds related to Hurricane Georges, of which $1.8 million were
recorded as a reduction of production costs, (see "Capital
Resources and Liquidity" below). A significant portion of the
sulphur produced or purchased by MMR is sold to the IMC-Agrico
Joint Venture (IMC-Agrico), a phosphate fertilizer producer,
under a long-term supply contract that extends for as long as
IMC-Agrico has a requirement for sulphur. Sales to IMC-Agrico
during the first quarter of 1999 totaled 57.8 percent of MMR's
total revenues and 70.9 percent of its sulphur sales. In the
fourth quarter of 1998, IMC-Agrico requested that MMR engage in
good faith negotiations with respect to the pricing terms of the
Sulphur Supply Agreement. The Sulphur Supply Agreement requires
renegotiation if a party's performance under the agreement has
been rendered "commercially impracticable" or " grossly
inequitable" as a result of fundamental changes in the party's
operations or the sulphur and sulphur transportation markets.
Representatives of MMR and IMC-Agrico have met to discuss the
pricing terms of the agreement, and MMR has advised IMC-Agrico
that it does not believe that the conditions warranting
renegotiation have occurred.
Depreciation and amortization expense for the first quarter
of 1999 totaled $9.4 million, versus $5.2 million during the
first quarter of 1998. During the first quarter of 1999 oil and
gas depreciation increased to $8.2 million compared with $5.2
million during the first quarter of 1998. This increase is
consistent with the higher production volumes associated with the
commencement of operations discussed above, together with
increased depreciable capitalized costs incurred since the 1998
first quarter. Sulphur depreciation totaled $1.2 million during
the first quarter of 1999, which includes goodwill amortization
of $0.2 million.
Production and delivery expense for the first quarter of
1999 totaled $48.0 million compared to $0.9 million for the first
quarter of 1998. This significant increase is primarily the
result of the inclusion of $44.8 million of production and
delivery costs associated with MMR's acquired sulphur operations.
During the first quarter of 1999, MMR's sulphur operations
capitalized approximately $4.6 million of drilling costs incurred
relating to the replacement of wells lost during Hurricane
Georges, see "Capital Resources and Liquidity" below. Future
sulphur drilling costs will be charged to production costs as
incurred. Oil and gas production and delivery expense totaled
$3.2 million during the first quarter of 1999 compared to $0.9
million during the same period last year. The increase reflects
higher production volumes associated with the commencement of
operations at the facilities discussed above, together with $2.5
million of costs associated with production from the acquired
Main Pass oil facilities. First-quarter 1999 production and
delivery expenses for the oil and gas operations were generally
affected positively by MMR's ability to obtain supplies and
services on more economically favorable terms than during the
1998 period.
MMR's exploration expenses fluctuate from period to period
based on the level, results and costs of exploratory drilling
projects and the volume of and extent to which seismic data are
acquired and interpreted. The first quarter of 1999 includes
approximately $1.4 million of exploratory drilling costs
associated with the farm-in of Vermilion Block 162 and the
drilling of the #5 exploratory well in January. MMR's other
exploration expenses totaled approximately $1.2 million for
geological and geophysical costs including the purchase of
seismic data. During the first quarter of 1998, MMR expensed
$4.5 million of drilling and leasehold costs associated with the
unsuccessful West Cameron Block 157 # 1 exploratory well and
other exploration expenses totaling $1.6 million.
As a result of anticipated future exploration expenditures,
MMR may report operating losses in future periods.
CAPITAL RESOURCES AND LIQUIDITY
Operating activities provided net cash of $10.8 million
during the first quarter of 1999 while using $4.0 million during
the first quarter of 1998. The increase can be attributed to
additional revenues generated primarily by the sulphur assets
acquired in the Merger and from MMR's initial production from the
Vermilion Block 160 #4 sidetrack well, the Vermilion Block 159 #3
well and West Cameron Block 616. Increased accounts receivable
collections and timing of accounts payable also benefited first
quarter 1999 operating cash flows. These increases were partially
offset by $0.8 million in mine shutdown and reclamation
expenditures and by increased sulphur inventory.
<PAGE> 11
Net cash used in investing activities totaled $4.2 million
in the first quarter of 1999 compared with $13.4 million during
the first quarter of 1998. During the first quarter of 1999, MMR
incurred $17.2 million of exploration, development and other
capital expenditures. Oil and gas exploration and development
expenditures totaled $10.6 million, which included capitalized
oil and gas drilling costs of $8.0 million primarily for the
development of West Cameron Block 616 and the Vermilion Block 160
#4 sidetrack well, geological and geophysical and other
exploration expenses of $1.2 million and expensed drilling costs
of $1.4 million associated with the Vermilion Block 162 #5
exploratory well. Additionally, MMR's sulphur operations incurred
$4.8 million of capitalized costs primarily associated with
redrilling the replacement wells resulting from Hurricane
Georges (see "Sulphur Operational Activities" above) and the
approximate $1.8 million purchase of certain sulphur rail cars
that had previously been leased. MMR's sulphur segment
received $7.5 million in connection with an agreement to sell and
leaseback approximately 270 of its sulphur rail cars. MMR's oil
and gas operations provided $5.7 of net proceeds from the sale of
a portion of the purchased additional net revenue interests in
the Vermilion Block 160 field unit and the Vermilion Block 159 #3
well (see "Oil and Gas Operating Activities" above) and the
sale of its 28 percent net revenue interest in the Vermilion
Block 410 field. During the first quarter of 1998 MMR incurred
$7.7 million of capitalized drilling costs primarily for
exploration and development at West Cameron Block 616, $4.5
million in expensed drilling and leasehold cost primarily for the
West Cameron Block 157 #1 exploratory well and $1.2 million in
geological and geophysical and other exploration expenses.
Financing activities provided cash of $0.1 million during
the first quarter of 1999 primarily from the exercise of stock
options.
Based on current projections, management believes that MMR's
existing cash balances and its expected cash flow from operations
will be sufficient to fund its ongoing working capital
requirements, reclamation costs, and projected capital
expenditures for the foreseeable future. Despite recent
improvement, current market prices for both oil and natural gas
have created an environment in which numerous farm-in,
acquisition and other opportunities are becoming available for
exploration prospects and producing properties. Drilling and
service costs have also decreased from 1997 and early 1998
levels, reflecting less demand for rigs and related services.
MMR, because of the Merger and its resulting improved financial
position, has the capital resources and liquidity it believes are
necessary to pursue opportunities offered by the current oil and
gas environment. At March 31, 1999, MMR had no debt and had cash
and bank credit availability of approximately $100 million.
MMR has received an initial $2.3 million in insurance
proceeds representing a partial settlement of the insurance claim
filed during the first quarter of 1999 covering the estimated
damages and lost production from the Main Pass sulphur mine
resulting from the effects of Hurricane Georges in September
1998. MMR recorded the insurance proceeds that related to lost
production prior to the Merger as a purchase price adjustment to
Goodwill ($0.5 million) and the remainder was recorded as a
reduction of production costs. Additional insurance proceeds will
be recorded only at the time MMR has a firm settlement commitment
from the insurance underwriter.
In May 1999, MMR's Board of Directors authorized an open
market share purchase program for up to 1 million shares of its
common stock, representing approximately 7 percent of its 14.1
million outstanding common shares. The timing of the purchases
is dependent upon many factors, including the price of MMR's
common stock, MMR's operating results, cash flows and financial
position, and general economic and market conditions.
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 (Y2K) issue is the result of computerized
systems being written to store and process the year portion of
dates using two digits rather than four. Date-aware systems,
(i.e., any system or component that performs calculations,
comparisons, sequencing, or other operations involving dates) may
fail or produce erroneous results on or before January 1, 2000
because the year 2000 will be interpreted as the year 1900.
MMR's State of Readiness. MMR has been pursuing a strategy to
ensure all of its significant computer systems will be able to
process dates from and after January 1, 2000, including leap
years, without mission-critical system failure (Y2K Compliance or
Y2K Compliant). Computerized systems are integral to the
operations of MMR, particularly for various engineering systems
used for exploration, reserve, production and modeling functions
as well as for plant and equipment process control at its Gulf of
<PAGE> 12
Mexico production facilities. Certain computerized business
systems and related services are provided by FM Services Company
(FMS), which is responsible for ensuring Y2K Compliance for the
systems it manages. FMS has separately prepared a plan for its
Y2K Compliance. Progress of the Y2K plan is being monitored by
MMR executive management and reported to the Audit Committee of
the MMR Board of Directors. In addition, the independent
accounting firm functioning as MMR's internal auditors is
assisting management in monitoring the progress of the Y2K plan.
MMR believes all critical components of the plan are on schedule
for completion by the end of the second quarter of 1999. Like
other companies, MMR cannot, however, make Y2K Compliance
certifications because the ability of any organization's systems
to operate reliably after midnight on December 31, 1999 is
dependent upon factors that may be outside the control of, or
unknown to, the organization.
The majority of computerized date-sensitive hardware and
software components used by MMR or FMS are covered by maintenance
contracts with the vendors who originally implemented them. All
of these vendors have already been contacted regarding Y2K
Compliance of their products. Where necessary, software
modifications to ensure compliance will be provided by the
appropriate vendors under their maintenance contracts.
Information Technology (IT) Systems - The bulk of MMR oil and gas
specific processing is provided through third party software
licensed by MMR. The Y2K Compliant version of this software was
implemented in the fourth quarter of 1998. The remaining
business processing is provided by FMS. With the exception of
testing interfaces to computerized disbursement systems provided
by its primary bank, FMS has completed Y2K remediation and
testing work for critical systems it provides to MMR. Testing of
the banking interfaces is scheduled for the second quarter of
1999 after the bank completes its own internal Y2K testing.
Non-IT Systems - Systems used for exploration, reserve,
production and modeling functions are integral to the operations
of MMR. Y2K remediation and testing work has been completed for
these systems. MMR also utilizes process control systems in the
operation of its offshore facilities. In the fourth quarter of
1998, MMR engaged an engineering firm to complete assessment and
testing of the compliance of these systems. Results from this
work indicate no outstanding issues. MMR contracted with a third
party to conduct a Y2K Compliance review for the Main Pass
process control system. The results of this third-party review
also indicate no significant problems. Recommendations stemming
from this review have been implemented.
Third Party Risks - As is the case with most oil and gas
exploration companies, MMR relies extensively on third party
contractors for a significant portion of its operating functions.
MMR has completed an assessment of Y2K external risk that may
arise from the failure of critical suppliers and customers to
become Y2K Compliant. This assessment indicates that MMR's
business partners are well aware of the Y2K problem and are
themselves aggressively seeking resolution of any outstanding
issues. Contingency plans are being outlined and are due to be
completed by the third quarter of 1999. The Y2K risk that could
have the largest potential business impact would probably be a
short-term shutdown of Main Pass sulphur operations caused by a
disruption of key materials from suppliers, especially natural
gas.
The Costs to Address MMR's Y2K Issues. Expenditures for the
necessary Y2K related modifications will largely be funded by
routine software and hardware maintenance fees paid by MMR or FMS
to the related software providers. Based on current information,
MMR believes that the incremental cost of Y2K Compliance not
covered by routine software and hardware maintenance fees will
not exceed $0.3 million, most of which is expected to be
incurred in 1999. If the software modifications and conversions
referred to above are not made, or are delayed, the Y2K issue
could have a material impact on MMR's operations. Additionally,
current estimates are based on management's best assessment,
which was derived using numerous assumptions of future events
including the continued availability of certain resources, third
party modification plans and other factors. There can be no
assurance that these estimates will be achieved, and actual
results could differ materially from these plans. There also can
be no assurance that the systems of other companies will be
converted on a timely basis or that failure to convert will not
have a material adverse effect on MMR.
The Risks of MMR's Y2K Issues. Based on detailed risk assessment
work conducted thus far, MMR believes the most likely Y2K-related
failures would probably be temporary disruption in certain
materials and services provided by third parties, which would not
be expected to have a material adverse effect on MMR's financial
<PAGE> 13
condition or results of operations. MMR believes that these
third-party risks will be mitigated through close monitoring of
compliance by third parties that are important to its operations.
MMR's Contingency Plans. Although MMR believes the likelihood of
any or all of the above risks occurring to be low, specific
contingency plans to address certain risk areas are being
developed. While there can be no assurance that MMR will not be
materially adversely affected by Y2K problems, it is committed to
ensuring that it is fully Y2K ready and believes its plans
adequately address the above-mentioned risks.
CAUTIONARY STATEMENT
Management's Discussion and Analysis of Financial Condition
and Results of Operations contain forward-looking statements.
All statements other than statements of historical fact included
in this report, including, without limitation, statements
regarding plans and objectives of MMR's management for future
operations and MMR's exploration and development activities are
forward-looking statements.
Important factors that could cause actual oil and gas
operations results to differ materially from MMR's expectations
include, without limitation, drilling results, unanticipated
fluctuations in flow rates of producing wells, depletion rates,
economic and business conditions, Y2K compliance, general
development risks and hazards and risks inherent with the
production of oil and gas, such as fires, natural disasters,
blowouts and the encountering of formations with abnormal
pressures, changes in laws or regulations and other factors, many
of which are beyond the control of MMR. Important factors that
could affect the future results of MMR's sulphur operations
include without limitation reserve expectations, demand for
sulphur, the availability of financing, the ability to satisfy
future cash obligations and environmental costs, the reliance on
IMC-Agrico as a customer, the seasonality and volatility of
sulphur markets, competition and environmental issues. Further
information regarding these and other factors that may cause
MMR's future performance to differ from that projected in the
forward-lookinsttaatteemmeents are described in more detail under
"Cautionary Statements" in MMR's 1998 Annual Report on Form 10-K.
_________________________
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
<PAGE> 14
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
-------------------
IMC Global Inc. and Phosphate Resource Partners Limited
Partnership vs. James R. Moffett, Richard C. Adkerson, B. M.
Rankin, Henry A. Kissinger and McMoRan Oil & Gas Co., Civ. Act.
Noo. 16387-NC (Del. Ch. filed May 18, 1998). In the first quarter
of 1999, IMC Global Inc. (IGL) and Phosphate Resource Partners
Limited Partnership (PLP) filed an amended complaint against MOXY
and four former directors of Freeport-McMoRan Inc. (FTX). The
plaintiffs allege that the individual defendants and FTX acted in
bad faith and breached their fiduciary duties to FTX stockholders
and PLP and its unitholders by causing PLP to enter into the
exploration program with MOXY. The suit also alleges that MOXY
conspired with the individual defendants and FTX and aided and
abetted their alleged breaches of fiduciary duties. The
plaintiffs seek unspecified monetary damages and recision of the
program agreement. MMR believes that this suit is without merit,
and intends to vigorously defend itself and enforce its contract
rights. Currently PLP continues to participate in the
exploration program pursuant to its contractual agreements and is
current on payments due on its joint interest billings.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
a) The Annual Meeting of Stockholders of the Company was held
May 6, 1999 (the Annual Meeting). Proxies were solicited
pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended.
b) At the Annual Meeting, Gerald J. Ford and Robert M. Wohleber
were elected to serve until the 2002 Annual Meeting of
Stockholders. In addition to the directors elected at the
Annual Meeting, the terms of the following directors
continued after the Annual Meeting: Richard C. Adkerson,
Robert A. Day, Rene L. Latiolais, James R. Moffett and B.M.
Rankin, Jr.
c) At the Annual Meeting, holders of the Company's Stock
elected two directors with the number of votes cast for or
withheld from the nominee as follows:
Name For Withheld
- ------------------ ---------- --------
Gerald J. Ford 12,894,964 83,211
Robert M. Wohleber 12,895,017 83,158
With respect to the election of directors, there were no
abstentions or broker non-votes.
At the Annual Meeting, the stockholders voted on and
approved a proposal to ratify the appointment of Arthur Andersen
LLP to act as the independent auditors to audit the financial
statements of the Company and its subsidiaries for the year 1999.
Holders of 12,937,343 shares voted for, holders of 23,286 shares
voted against and holders of 17,546 shares abstained from voting
on, such proposal. There were no broker non-votes with respect
to such proposal.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) The exhibits to this report are listed in the Exhibit Index
appearing on page E-1 hereof.
(b) During the period covered by this Quarterly Report on Form 10-Q
the registrant filed one Current Report on Form 8-K reporting an
event under Item 5 on February 12, 1999.
<PAGE> 15
McMoRan Exploration Co.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
McMoRan Exploration Co.
By: /s/ C. Donald Whitmire Jr.
___________________________
C. Donald Whitmire, Jr.
Vice President and Controller
Financial Reporting
(authorized signatory and
Principal Accounting Office
Date: May 14, 1999
<PAGE> 16
McMoRan Exploration Co.
Exhibit Index
Exhibit Number
2.1 Agreement and Plan of Mergers dated
as of August 1, 1998. (Incorporated by reference to
Annex A to MMR's Registration Statement on Form S-4
(Registration No. 333-61171) filed with the SEC on
October 6, 1998 (the MMR S-4)).
3.1 Amended and Restated Certificate of Incorporation of
MMR. (Incorporated by reference to Exhibit 3.1 to
MMR's 1998 Annual Report on Form 10-K (the MMR 1998
Form 10-K).
3.2 By-laws of MMR as amended effective February 11, 1999.
(Incorporated by reference to Exhibit 3.2 to the MMR
1998 Form 10-K).
4.1 Form of Certificate of MMR Common Stock. (Incorporated
by reference to Exhibit 4.1 of the MMR S-4).
4.2 Rights Agreement dated as of November 13, 1998.
(Incorporated by reference to Exhibit 4.2 to MMR 1998
Form 10-K).
4.3 Amendment to Rights Agreement dated December 28, 1998.
(Incorporated by reference to Exhibit 4.3 to MMR 1998
Form 10-K).
10.1 MMR Adjusted Stock Award Plan. (Incorporated by
reference to Exhibit 10.1 of the MMR S-4).
10.2 MMR 1998 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 10.2 of the MMR
S-4).
10.3 MMR 1998 Stock Option Plan. (Incorporated by reference
to Annex D to the MMR S-4).
10.4 Stock Bonus Plan (Incorporated by reference from MMR's
Registration Statement on Form S-8 (Registration No.
333-67963) filed with the SEC on November 25, 1998.
10.5 Master Agreement dated July 14, 1997 between MOXY and
Freeport-McMoRan Resource Partners, Limited
Partnership, now named Phosphate Resource Partners
Limited Partnership ("PLP"). (Incorporated by
reference to Exhibit 10.1 to the Current Report on Form
8-K filed by MOXY dated July 14, 1997 (the "MOXY July
14, 1997 8-K")).
10.6 Purchase and Sale Agreement dated July 11, 1997 by and
among PLP, MCNIC Oil & Gas Properties, Inc., MCN
Investment Corporation and MOXY. (Incorporated by
reference to Exhibit 10.4 of the MOXY July 14, 1997 8-K).
10.7 Agreement for Purchase and Sale dated as of August 1,
1997 between FM Properties Operating Co. and MOXY.
(Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by MOXY dated as of
September 2, 1997).
10.8 Participation Agreement between MOXY and PLP dated as
of April 1, 1997. (Incorporated by reference to
Exhibit 10.4 to MOXY's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (the "MOXY
1997 10-K")).
10.9 Amendment to Participation Agreement between MOXY and
PLP dated as of December 15, 1997. (Incorporated by
reference to Exhibit 10.5 to the MOXY 1997 10-K).
10.10 Participation Agreement between MOXY
and Gerald J. Ford dated as of December 15, 1997.
(Incorporated by reference to Exhibit 10.6 to the MOXY
1997 10-K).
<PAGE> E-1
10.11 Services Agreement dated as of
November 17, 1998 between MMR and FM Services Company.
(Incorporated by reference to Exhibit 10.11 to MMR 1998
Form 10-K).
10.12 Exploration Agreement effective July
1, 1996, between MOXY and PLP. (Incorporated by
reference to Exhibit 10.1 to MOXY's Quarterly Report on
Form 10-Q for the quarter ending June 30, 1996).
10.13 MMR Financial Counseling and Tax
Return Preparation and Certification Program, effective
September 30, 1998. (Incorporated by reference to
Exhibit 10.13 to MMR 1998 Form 10-K).
10.14 Employee Benefits Agreement by and
between Freeport-McMoRan Inc. ("FTX" ) and FSC.
(Incorporated by reference to Exhibit 10.1 to FSC's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "FSC 1997 10-K" )).
10.15 Asset Sale Agreement for Main Pass
Block 299 between Freeport-McMoRan Resource Partners,
Limited Partnership ("FRP" ) and Chevron USA, Inc.
dated as of May 2, 1990. (Incorporated by reference to
Exhibit 10.2 to FSC's Registration Statement on Form S-
1 (Registration No. 333-40375) filed with the SEC on
November 17, 1997 (the "FSC S-1" )).
10.16 Main Pass 299 Sulphur and Salt Lease,
effective May 1, 1988. (Incorporated by reference to
Exhibit 10.3 to the FSC S-1).
10.17 Joint Operating Agreement by and
between FRP, IMC-Fertilizer, Inc. and Felmont Oil
Corporation, dated as of June 5, 1990. (Incorporated by
reference to Exhibit 10.4 to the FSC S-1).
10.18 MMR Performance Incentive Awards
Program as amended effective February 1, 1999.
(Incorporated by reference to Exhibit 10.18 to MMR 1998
Form 10-K).
10.19 Joint Operating Agreement by and
between FRP, IMC-Fertilizer, Inc. and Felmont Oil
Corporation, dated as of May 1, 1988. (Incorporated by
reference to Exhibit 10.5 to the FSC S-1).
10.20 Agreement to Coordinate Operating Agreements by
and between FRP, IMC-Fertilizer and Felmont Oil
Corporation, dated as of May 1, 1988. (Incorporated by
reference to Exhibit 10.6 to the FSC S-1).
10.21 Asset Purchase Agreement between FRP
and Pennzoil Company dated as of October 22, 1994 (the
"Asset Purchase Agreement" ). (Incorporated by
reference to Exhibit 10.7 to the FSC S-1).
10.22 Amendment No. 1 to the Asset Purchase
Agreement dated as of January 3, 1995. (Incorporated by
reference to Exhibit 10.8 to the FSC S-1).
10.23 Agreement for Sulphur Supply, as
amended, dated as of July 1, 1993 among FRP, IMC
Fertilizer and IMC-Agrico Company (the "Sulphur Supply
Agreement"). (Incorporated by reference to Exhibit
10.9 to the FSC S-1).
10.24 Side letter with IGL regarding the
Sulphur Supply Agreement. (Incorporated by reference to
Exhibit 10.10 to the FSC S-1).
10.25 Processing and Marketing Agreement
between the FSC (a division of FRP) and Felmont Oil
Corporation dated as of June 19, 1990 (the "Processing
Agreement"). (Incorporated by reference to Exhibit
10.11 to the FSC S-1).
<PAGE> E-2
10.26 Amendment Number 1 to the Processing
Agreement. (Incorporated by reference to Exhibit 10.12
to the FSC S-1).
10.27 Amendment Number 2 to the Processing
Agreement. (Incorporated by reference to Exhibit 10.13
to the FSC S-1).
10.28 Credit Agreement dated as of December
12, 1997 among FSC, as borrower, the financial
institutions party thereto, the Chase Manhattan Bank,
as administrative agent and documentary agent, and
Hibernia National Bank, as co-agent. (Incorporated by
reference to Exhibit 10.15 to the FSC 1997 10-K).
10.29 Amended and Restated Credit Agreement
dated November 17, 1998 among Freeport-McMoRan Sulphur
Inc., as borrower, MMR, as Guarantor and, the financial
institutions party thereto. (Incorporated by reference
to Exhibit 10.29 to MMR 1998 Form 10-K.)
10.30 Letter Agreement dated December 22,
1997 between FMS and Rene L. Latiolais. (Incorporated
by reference to Exhibit 10.19 to FSC 1997 10-K).
10.31 Supplemental Letter Agreement between
FMS and Rene L. Latiolais effective as of January 1,
1999. (Incorporated by reference to Exhibit 10.31 to
MMR 1998 Form 10-K).
10.32 Agreement for Consulting Services
between FTX and B. M. Rankin, Jr. effective as of
January 1, 1991)(assigned to FMS as of January 1,
1996); as amended on December 15, 1997 and on December
7, 1998. (Incorporated by reference to Exhibit 10.32
to MMR 1998 Form 10-K).
15.1 Letter dated April 20, 1999 from Arthur Andersen LLP
regarding the unaudited financial statements.
27.1 MMR Financial Data Schedule.
<PAGE> E-3
Exhibit 15.1
April 20, 1999
McMoRan Exploration Co.
1615 Poydras St.
New Orleans, LA 70112
Gentlemen:
We are aware that McMoRan Exploration Co. has incorporated by
reference in its Registration Statements (File Nos. 333-
61171, 333-67485, 333-67963 and 001-07791 and McMoRan Oil &
Gas Co.'s Registration Statements File Nos. 33-82866, 33-
80369, 33-80371, 333-44561 and 333-52469) its Form 10-Q for
the quarter ended March 31, 1999, which includes our report
dated April 20, 1999 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C of
the Securities Act of 1933 (the Act), this report is not
considered a part of the registration statements prepared or
certified by our firm or a report prepared or certified by
our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the McMoRan
Exploration Co.'s financial statements at March 31, 1999 and the three months
then ended, and is qualified in its entirety by reference to such statements.
Ths earnings per share (EPS) data shown was prepared in accordance with SFAS
128, "Earning Per Share" with basic and diluted EPS replacing the captions
primary and fully diluted.
</LEGEND>
<CIK> 0000064279
<NAME> MCMORAN EXPLORATION CO.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 24,448
<SECURITIES> 0
<RECEIVABLES> 23,844
<ALLOWANCES> 0
<INVENTORY> 17,868
<CURRENT-ASSETS> 78,175
<PP&E> 200,104
<DEPRECIATION> 20,000
<TOTAL-ASSETS> 318,822
<CURRENT-LIABILITIES> 51,865
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 180,244
<TOTAL-LIABILITY-AND-EQUITY> 318,822
<SALES> 62,111
<TOTAL-REVENUES> 62,111
<CGS> 57,434
<TOTAL-COSTS> 57,434
<OTHER-EXPENSES> 2,550
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<INCOME-CONTINUING> 1,314
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<EPS-PRIMARY> 0.09
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</TABLE>
