Is McMoRan Exploration’s Stock a Sell Now?

With shares of McMoRan Exploration (NYSE:MMR) trading at around $8.48 is MMR an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

It’s not often that we see a stock move down 30% in one week, but it does happen. One of the most recent victims was McMoRan Exploration. This had everything to do with Davey Jones No. 1, which needed unclogging with a solvent injection. If you look at this situation on the surface, McMoRan has done nothing but make excuses for one problem after another over the past year. Then we had a JPMorgan (NYSE:JPM) analyst say that the stock was worth zero. In addition to that, the company is burning through cash at a rapid rate. These might all be reasons to sell, but let’s look a little deeper.

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In regards to Davey Jones No.1, they know the oil is there, it’s just a matter of getting to it. If you knew there was a substantial amount of gold buried deep in your backyard, would you do everything in your power to get to it, even if it took several years? In regards to the JPMorgan analyst, the stock should be trading lower off that call. It actually shows strength that MMR has buoyed. When it comes to burning through cash, that’s not much of an issue since McMoRan Exploration has attracted some of the biggest investors in the industry. This is also a positive sign for future potential.

Other important points include that most analysts are on the Buy side, there are other projects, and McMoRan Exploration now owns and controls 951 oil and gas leases in the Gulf of Mexico. Based on these facts, it would be difficult to see the stock going to zero.

E = Equity to Debt Ratio is Normal

The debt-to-equity ratio for McMoRan Exploration is fine. However, the balance sheet could be a little stronger. While comparing McMoRan Exploration to Chevron Corporation (AMEX:CVR) isn’t exactly comparing apples-to-apples, it’s a good barometer. For more of an apples-to-apples comparison, Forest Oil Corporation (NYSE:FST) has been included.   

Debt-To-Equity

Cash

Long-Term Debt

MMR

.35

$191.93 Million

$556.78 Million

CVX

.09

$21.58 Billion

$12.34 Billion

FST

8.62

$39.17 Million

$2.09 Billion

 

T = Technicals on the Stock Chart Are Poor

McMoRan Exploration might be a relatively new company searching for a big find, and that means investors should be patient, but the last year has been brutal.

1 Month

Year-To-Date

1 Year

3 Year

MMR

-30.26%

-41.86%

-46.69%

23.14%

CVX

-3.01%

1.24%

5.93%

47.65%

FST

-16.67%

-55.17%

-62.19%

-68.11%

 

At $8.48, McMoRan Exploration is currently trading significantly lower than its 50-day SMA of $11.54. It’s also trading significantly lower than its 100-day SMA of $12.32. And it’s trading lower than its 200-day SMA of $11.57.

 E = Earnings and Revenue Are Sporadic

This is normal for an Independent Oil & Gas company. Investors aren’t overly concerned with current revenue or annual revenue patterns. They’re more concerned with the company reaching and extracting black gold.

2007

2008

2009

2010

2011

Revenue ($)in millions

481.17

1.572B

435.44

434.48

555.41

Diluted EPS ($)

-1.86

-3.88

-2.87

-2.08

-.37

 

Quarterly earnings and revenue have also been sporadic.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

138.18

121.92

110.65

90.30

91.78

Diluted EPS ($)

-.06

.18

-.03

-.47

-.40

 

T = Trends Do Not Support the Industry

Instead of looking at the trend in a real-world sense, let’s take a look at a trend for stocks. As you will see in the Technicals chart above, McMoRan Exploration and Forest Oil Corporation have performed poorly over the past year, especially in relation to Chevron Corporation. If you look at a max chart for McMoRan Exploration, it has underperformed Chevron Corporation by approximately 200%. The numbers for Exxon Mobil (NYSE:XOM) are nearly identical for the same timeframe. The point here is that you would have been better off investing in established Major Integrated Oil & Gas.

Conclusion

McMoRan Exploration has spent $1 billion on both Davey Jones wells. That’s quite an investment. The return better be extraordinary. That’s if the return ever comes. Considering there is a 23.10% short position on the stock, a lot of people are betting against MMR.

Looking at the positive side, big money usually won’t get involved in a project unless they think there is a light at the end of the tunnel. With so much invested already, no one involved is likely to give up anytime soon. Also, if McMoRan Exploration surprises with good news, the short squeeze will be enormous.

With so many positives and negatives, and without it being possible to really know what’s going on at Davey Jones No. 1, this is a WAIT AND SEE. There is tremendous risk here, but the potential rewards are also enormous. It would be wise to own a steady Eddie like Chevron Corporation or Exxon Mobil and have a smaller position in McMoRan Exploration as a speculative play.

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