Wildcatter Moffett’s Davy Jones Well Bet Tests Investors: Energy
“People call us pioneers. Well, that’s great, I guess, (though) some people say pioneers end up with arrows in their back.”
The speaker, in a tone that manages to be both self- deprecating and mildly defiant, is Jim Bob Moffett, chief executive officer of McMoRan Exploration Co. (MMR) -- serial wildcatter, incurable prospector, a man with a huge appetite for risks and an uncanny record of extracting big paydays from taking them.
Louisiana born and a geologist by training, Moffett in his salad days helped discover the Grasberg gold and copper mine in the jungles of Indonesia, to this day the largest gold and copper find on earth by reserves. He eventually parlayed those riches to steer his once modest mining venture, Freeport-McMoRan Inc. (FCX), into a 2007, $26 billion takeover of Phelps Dodge Corp. in one of the largest mining mergers ever.
His longtime Oil Patch buddy, billionaire T. Boone Pickens, says Moffett’s oilfield exploits rank him in “the top five of any list” of U.S. wildcatters. Others put him the same league as George Mitchell, the Texas nonagenarian credited with starting the shale-gas revolution. That’s some accolade considering where Moffett began: lugging pipe, unclogging pumps and digging ditches as a bottom-rung roustabout in the rough- and-tumble Louisiana oil fields.
He does better than that now. Last year, Moffett earned more than $35 million in total compensation through his various corporate roles, according to company filings.
Moffett made his arrows-in-the-back remark in the midst of a conference call with analysts to explain why his latest risk- taking venture, a drill-down-to-hell well in the near-shore waters of the Gulf of Mexico called Davy Jones, is going to be another pioneering move that pays off. Begun in June of 2009, Davy Jones No. 1 has plumbed virtually unchartered depths of 29,000 feet, probing for what he says is a Grasberg-scale equivalent natural gas field amid unprecedented temperatures of more than 400 degrees Fahrenheit and pressures that would crush a diving bell.
Moffett believes there could be trillions of cubic feet of gas down there. Investors and would-be production partners are waiting “with bated breath” to see if there is validation, he told analysts in the Oct. 19 call. “And when we do, all hell’s going to break loose.”
Hell has begun to break loose, and not in the way Moffett had hoped. On Nov. 26, the company announced yet again that a flow test on the well meant to confirm vast reserves proved inconclusive, a report that carved away a third of the company’s market value in two days as shares plunged.
It’s one thing to find the gas. It’s another altogether to produce it with the heat and pressure generated at Davy Jones’s depth. The problem, according to the company, seems to be barite, a compound used to thicken drilling mud to keep pressure on the bore hole. The barite has clogged the well, making an accurate flow test impossible. So far, McMoRan’s efforts at high-pressure plumbing have failed. If the company can’t resolve the issue, the well may have to be written off.
It would be a costly failure. To date, McMoRan has poured almost a billion dollars into developing Davy Jones on a 20,000- acre lease about 12 miles off the Louisiana coast in 20 feet of water. Moffett’s geological thinking, according to his friend Pickens, borders on “profound.” He’s postulating that below the near-shore Gulf of Mexico -- one of the most explored oil and gas regions on earth -- that vast reserves lie untapped in formations 25,000 to 30,000 feet deep.
The drilling to date has been on wells 10,000 to 12,000 feet deep. Thus, Davy Jones, in lore the ghost of a sailor presiding over the riches of the salty deep, has the potential to unlock a whole other frontier of Gulf shelf exploration, said Leo Mariani, an analyst at RBC Capital Markets in Austin, Texas. A bust, however, likely puts the company in play.
As partners and investors grow restless, Moffett, who declined to be interviewed for this story, has maintained a buoyant public face, speaking in his Texas twang of his well as if it were a celebrity. “Everywhere I go people want to know about Davy Jones, people I know casually or even people I have never met before,” Moffett said in a March letter to shareholders. “Everyone asks, ‘How is Davy Jones?’”
His answer, even after repeated setbacks, is that Davy Jones will come out just fine.
James Robert Moffett didn’t have the kind of start in life that presaged a legendary rise through the world’s energy and mining ranks. Born in 1938 in Houma, Louisiana, a drowsy Cajun town inhabited by oyster fisherman and sugar cane farmers, Moffett was the son of an oilfield worker and stay-at-home mom. His parents divorced when he was a child and he moved to Houston with his mother and sister. Money was tight.
His mother took a job as a department store credit clerk and as soon as he could, Moffett went to work, bagging groceries, slinging newspapers, pumping gas and selling shoes, according to his biography on the website of the Horatio Alger Association of Distinguished Americans. He also found time to join the Boy Scouts.
As a student he showed great promise in science and math. His high school football skills and place on the rolls of the National Honor Society earned him a full football scholarship to the University of Texas, where he played for two years under the legendary Longhorn Coach Darrell Royal. Royal, who died earlier this month, would become a longtime mentor.
In a team photo from 1959, Moffett is a rangy man with a chiseled jaw, a lean, muscled physique, a crew cut and a look that makes you think he could hold his own in a bar fight. Ed Padgett, a Longhorn teammate, said he and Moffett played both sides of the ball, as tackles on offense and guards on defense.
Playing for Royal was “kind of like being in the Army,” he said, and he and Moffett bonded over the grueling practice regimen. Padgett lived across the hall from Moffett in an athletic dorm, and recalls even then how hooked Jim Bob was on geology. “I walked by his room many a time when the door was open,” recalls Padgett, “and he had all of his geology buddies in there, looking at maps and core samples and stuff.”
Moffett, who married his high-school sweetheart, Louise, graduated in 1961 with honors in geology. They lived in a garage apartment that rented for $75 a month, utilities included. “He wasn’t always flying high,” said Padgett. “He started out from the bottom and worked his way up.”
By 1969, the wildcatting bug had bitten him and he formed an exploration company with two partners, W.K. McWilliams Jr., a geologist who had once worked for reclusive billionaire Howard Hughes, and B.M. Rankin Jr., who had managed oil and gas leases for the legendary oilman H.L. Hunt. They took the first two letters of each last named and called it the McMoRan Oil & Gas Co.
The company, trading on Moffett’s and McWilliams’ geology instincts and Rankin’s shrewd deal-making, quickly gained a reputation as a lean, aggressive explorer that could find lots of oil and gas and drill and develop the fields economically. One partner in these projects was Freeport Minerals Co. It had begun life as developer of a lucrative south Louisiana sulfur mine and later branched out into oil and gas, gold, copper and other mining efforts.
In 1981, Moffett merged McMoRan with Freeport to form Freeport-McMoRan Inc. with himself as chairman and CEO. It was around then that Freeport under Moffett began exploring in an area of Indonesia where the old Freeport Minerals Co. had developed a rich gold and copper mine in the 1960s.
They struck pay dirt in 1988 with the Grasberg mine, which Moffett once described as “a volcano that’s been decapitated by nature, and we’re mining the esophagus, if you will.”
The smart money said Freeport could never develop the remote property, in the highlands of the rugged Sudirman Mountains, without bringing in a bigger mining partner -- or being forced, when it ran out of capital, to sell out.
“Everywhere we went, people said, ‘Well, it’s just a matter of time before somebody comes in here and takes you over,’” Moffett told analysts recently as he was explaining why people need to remain optimistic about McMoRan’s ability to bring in the Davy Jones well.
To date, Grasberg has produced more than 42 million ounces of gold and 26 billion pounds of copper. Five years ago, McMoRan, flush with Grasberg cash, bought out Phelps Dodge in the biggest mining industry acquisition to that time, forming Freeport-McMoRan Copper & Gold Inc. Moffett serves as chairman.
In some quarters, Moffett is just as famous for the mine that didn’t work out. In early 1997, a small Canadian mining company called Bre-X electrified the world with an announcement that it had found a 50-million ounce Indonesian gold field with a pedigree similar to the Grasberg. Though many big mining companies were lining up, Freeport emerged as Bre-X’s pick for a partner to develop the mine, with Moffett himself flying in to close the deal.
Moffett flew to the region to oversee independent tests of the mine. The results showed no commercially developable gold in the field. By one account, Moffett phoned Toronto, where Bre-X officials were being celebrated for their discovery at a mining convention, and ordered them back to Indonesia to explain. Lead Bre-X geologist, Michael de Guzman, jumped to his apparent death from a helicopter over the jungle as he was heading for his meeting with Moffett.
Moffett later recounted his reaction in an interview with Fortune Magazine: “Man, it makes me sick every time I think about it. I’d had it with these guys. The thing that forced this thing out in the open was de Guzman jumping out of the goddamn helicopter.”
A day after Moffett blew the whistle on the bust -- Bre-X’s ore samples, he concluded, were fraudulent -- Bre-X stock cratered, losing $6 billion in value.
People who know Moffett well tend to like him, though throughout most of his adult life, he and controversy have never been strangers. He’s famous for his sharp sense of humor and, more than once at parties, for breaking out into an Elvis imitation.
Back in the 1980s, in between trips to Indonesia, he’d hunt ducks with pals at a camp in Chauvin, Louisiana, south of his hometown of Houma. There Moffett was considered “just one of the guys,” said Marty J. Chabert, whose late father, Leonard Chabert owned the camp that Moffett frequented.
“He’d set out the decoys and pluck the ducks like everybody else,” recalls Chabert, who was present at a lot of these hunts. “Of course, we knew who he was. My dad would say, ‘this man works hard, give him some space.’”
Moffett, a good wing shot, would hunt in the morning and then retire upstairs in the afternoon to pore over mail special- delivered from his New Orleans office and practice a foreign language.
“Mostly, though, he was there for the camaraderie of the camp. That’s really what he loved,” said Chabert, a Baton Rouge businessman.
In New Orleans, an oil-friendly town where Moffett once headed a local business council and gives generously to the Boy Scouts, he is considered something of a folk hero -- and Davy Jones really is a celebrity. “In New Orleans, I think everybody with two nickels to rub together owns a little McMoRan” stock, said Peter Ricchiuti, a finance professor at Tulane University who has followed Moffett’s career. “You like the Saints and you got a little McMoRan for your kids.”
This is partly about “the mystique of Jim Bob Moffett,” he said, and Moffett’s career-long penchant for taking big gambles and fooling experts who “routinely thought he’d lost his mind.” But then come the oil wells and gold mines that prove Moffett right. “The stock has become kind of a bet on Jim Bob,” said Ricchiuti.
Moffett understands he won’t be getting that kind of admiration everywhere. As he told The Wall Street Journal in 1998, “Am I ever going to be anything other than a geologist who is finding all these horrible mines, to the people who don’t want mines to be found? No!”
Grasberg, for all that it’s enriched the company, has been linked by the World Wildlife Fund and other green groups to deforestation and contamination of local rivers and lakes from mine tailings. Conflicts with indigenous people over pollution and lack of local jobs have been a staple of Grasberg’s history and, in fairness, a widespread criticism of the mining industry in general. Last year, a union strike paralyzed the mine for three months.
Freeport-McMoRan says the Grasberg has been a major economic asset to Indonesia and that it operates the mine with appropriate environmental safeguards. Moffett, an inductee of the Horatio Alger Association whose members are honored for their achievements, says on the group’s website that Freeport Copper & Gold has been generous in its support of “educational, healthcare and social development programs worldwide.”
Even his giving has sometimes backfired. In the mid-1990s, Moffett donated $2 million to his Texas alma mater to go toward the building of a $28 million science center. A high-ranking University of Texas official, who happened to sit on Freeport’s board, convinced the school to honor Moffett and his wife. Long before the Louise and James Robert Moffett Molecular Biology Building opened in 1997, the naming had caused an uproar among faculty and students critical of Freeport’s Indonesian environmental record.
“There were quite a few of us pretty distressed that Jim Bob Moffett would be honored in any way on the UT campus,” said Karen Hadden, executive director of the Sustainable Energy and Economic Development Coalition in Austin.
The scorn over the science building lingers, in part because Moffett and Louise have since divorced even while their union remains enshrined in stone. His new wife, Lauree, is a native of Baton Rouge and they maintain a home in Austin, according to a biography on the website of a Texas non-profit organization for which Lauree Moffett serves as a board member.
Expensive as the Davy Jones project has been, its success would provide a prototype that would allow McMoRan to drill follow-up wells cheaper and faster. It already has drilled a second well that awaits testing. Profit margins are also better on gas produced a dozen miles from shore than on gas from deep- water drilling rigs more than 50 miles out in the Gulf.
Even a massive gas find, though, may not be the road to riches. Moffett’s friend Pickens, founder of investor group BP Capital, is concerned about a gas play in a nation already awash in the fuel, with U.S. prices about a third of what they were four years ago.
“I hate to see him make a big find and look at a $3 (per thousand cubic feet) gas market,” said Pickens. “He needs a better price for the gas.”
That said, Pickens has faith that Moffett’s wildcatter instincts are still intact.
“You judge a trapper by his pelts, and ole Jim Bob’s got a lot of pelts,” he said.
To contact the editor responsible for this story: Susan Warren at email@example.com